Surviving the ride
- Published: June 2, 2016
Managing energy market ups and downs
The crisis Canada’s oil and gas sector has been enduring for the past couple of years as oil prices remain seriously depressed is one of the worst the industry has ever faced. The effect on the national economy has been devastating.
“From 2014 to 2015 we saw the record largest decline in capital investment in the oil and gas industry, at 62 per cent,” says Chelsie Klassen, manager, media relations, for the Canadian Association of Petroleum Producers (CAPP). “It’s equivalent to Canada losing both the mining and aerospace industries, or the entire forestry sector, or three-quarters of its automotive manufacturing.”
In all, 44,000 jobs in oil and gas have been lost, a figure that balloons to 110,000 when you factor in losses in the supply chain and in dependent sectors like services and hospitality. It doesn’t sound like a very good time to consider becoming a supplier to the industry. That said, there are positive measures that could improve the picture.
“Something CAPP has been driving home is market access,” Klassen says. “People usually frame that as building pipelines, but it’s more than that. It’s also about building rail and marine transportation capacity.” Better transportation capacity would mean improved access to markets in Canada and abroad.
Long-term suppliers to the sector have learned that the key to survival lies in being efficient and adaptable.
“This is a very cyclical environment,” says Jason Greene, VP, sales and marketing for Alberta-based Bilton Welding & Manufacturing Ltd., a custom manufacturer that works in the oil and gas sector (Bilton is profiled on page 17 in this issue). “Oil tends to fluctuate. Typically every decade or so, it does a major correction and the industry turns upside down.”
Greene says one way companies like Bilton weather the cycles is by continually squeezing costs out of their operations, in good times and bad. When the sector hits turbulence and oil and gas companies press suppliers for price reductions, companies that have done their homework are better able to respond.
Another way is to constantly develop new skills. “We’re dynamic with how we approach projects,” Greene says. “Our facility is more multifaceted than a typical manufacturer that we compete with. A lot of our competitors will build one type of product, whereas we build sometimes five or six. We adapt to the market as required.”
While oil and gas is by far the biggest energy sector in Canada, there is growing opportunity in alternative energy. Partly to reduce too narrow a dependency on one kind of energy, but even more as a response to the threat of global warming, governments in Canada are moving heavily into sources such as solar and wind power. Provinces have taken the lead in announcing alternative energy initiatives.
“When I started at CanWEA in 2003, there were 300 megawatts of installed wind energy capacity in Canada,” says Robert Hornung, president of the Canadian Wind Energy Association (CanWEA). “We’re now at over 11,000. For the last several years we’ve been in the top six markets in the world for new investment, and we’re the seventh largest producer of wind energy in the world.”
While electricity generated by alternative sources like wind power may once have carried a cost premium, Hornung says that today it has become cost-competitive with most other forms of generation.
For Hornung, electricity generation from alternative sources offers three avenues of opportunity. The first is in replacing fossil fuels as governments in Canada get more serious about climate change. The second is the reduction of greenhouse gas emissions in the US. Coal-based power still plays a huge role there, and Canadian energy suppliers have an opportunity to export clean energy south of the border.
The third area of opportunity? “Scientists say we need to reduce greenhouse gas emissions by 80 per cent from today’s levels by 2050,” Hornung says. “Cleaning up the electricity grid alone isn’t going to do that. The only way is through increased electrification, using electricity in other sectors to replace fossil fuels, whether it’s electric vehicles, electric heating and cooling instead of natural gas, increased electricity use in industrial processes.”
So it could be a good time to get in on the ground floor with customers in the alternative energy sector. While the sector is looking to use new materials for some applications, there is going to be continued demand for metal components, which bodes well given the robust growth rates. It’s also worth remembering that oil and gas companies are also investing heavily in wind and solar power.
“The wind towers are concrete or steel – that’s not going to change,” Hornung says. “And for the electrical equipment, generators, gears, all of that, we’ll continue to rely very heavily on metals.” SMT