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March 1, 2007

LABOR

BEAUTY CONTEST IN THE OIL PATCHEnergy companies bring in workers by the truckload to mine the oil buried in the sticky Alberta tar sands. It's tough for metals companies to compete with the big salaries being offered.

 

The rush to extract oil from the tar sands of Western Canada has presented a vexing labor problem for metals companies: They must compete in the labor market with their customers—oil companies that are paying top dollar to lure workers to their projects.

The high oil prices of the past few years have sent oil producers to the tar-drenched soil of Alberta to extract crude oil in a process that wouldn’t have been economic when oil was $30 a barrel.

Alberta could find itself as the next Saudi Arabia. Its mineable regions in Athabasca, Cold Lake and Peace River are considered some of the world’s largest oil deposits, behind only the Saudi kingdom. In 2005, oil sands production in Canada surpassed 1.1 million barrels per day. By 2015, production is expected to almost triple to 3 million barrels a day, predicts a June 2006 report on Canada’s oil sands by the National Energy Board.

However, the oil is buried 200 feet down, making the production process labor-intensive and costly. “In situ” extraction, which pumps steam into the ground to push the bitumen up to the surface, is used to recover about 80% of Alberta’s potential oil sands deposits that are too deep to surface mine. Compared with conventional drilling, which costs from $6.75 to $8.50 (U.S.) a barrel, oil sands extraction requires several additional steps—thus additional workers—to upgrade the bitumen into synthetic crude oil. That raises production costs to $10 to $12.75 (U.S.) per barrel.

Energy companies active in the region, including Shell Canada Ltd., Suncor Energy Inc. and Syncrude Canada Ltd., are luring workers with rich salaries—as much as $72,000 (U.S.) for an average tradesperson which may reach as high as $100,000 (U.S.) with overtime and benefits—as well as perks such as signing bonuses and relocation allowances. Compensation in the metals industry is substantially lower. A 2005 wage and salary survey conducted by the Alberta provincial government shows metals workers earn about $49,100 (U.S.) annually as a welder and $48,440 as a millwright.

For metals companies in Western Canada, the result has been higher turnover and higher labor costs. Even with higher pay, it has been difficult for companies to maintain and expand a stable and skilled workforce.

Cathy Fraser, owner of Metals Supermarkets in Calgary, Alberta, estimates labor problems have reduced her margins by about 20%. Fraser has spent time training recruits that are often out the door in less than half a year.

“You don’t get any responses when you advertise, and the turnover rate has gone from an average of about two years to three or four months,” she says. Three years ago, Metal Supermarkets was paying a starting rate of $9.75 (U.S.) an hour for a sales/warehouse position. Today, those positions start at $12.30. In efforts to retain employees, Fraser accelerates bonuses. Most of her workers earn $13 (U.S.) after six months and about $14 after a year.

Adds Bruce Robb, branch manager for Russel Metals Inc. in Edmonton, Alberta, “We’ve had trouble expanding our workforce and putting on additional shifts. Trying to hire people becomes a full-time job. You’re interviewing, and then you’re hiring, and then you’re doing it all over again.”

The oil sands boom has created problems other than just driving up wage rates. The oil industry has consumed so much metal for drilling and production that it led to occasional steel shortages in 2004 and 2005 and higher prices that eased in the latter
half of 2006.

“The price of alloy plate is continuously going up with no reprieve at all,” says Rick Levers, Western Canada regional manager for Astralloy Steel Products Inc., in Edmonton, Alberta, which supplies abrasion plates to fabricators that make the steel hoppers in which oil sands are dumped to begin the extraction process.

VESSELS, REACTORS AND PUMPS

There’s no doubt that oil sands development has been a catalyst for the Canadian economy. “The oil sands industry is a very powerful force that has immense implications for Western Canada and will fundamentally alter the production landscape globally, starting with the demand for metals for building these complex structures, refiners and pipelines,” says Aron Gampel, deputy chief economist for Scotia Bank in Toronto. “Not only is it a boon for the Canadian goods economy, it’s a beacon for foreign investment.”

It also has benefited the metals industry in Western Canada. “When the price of oil skyrocketed in the last years, that’s had a tremendous benefit on the steel industry and those of us in making steel and tubular products,” says Marshall Hamilton, director of industrial relations–Canada, for IPSCO Inc., in neighboring Regina, Saskatchewan. The Regina mill produces more than 1 million tons of steel annually, including coil, plate and tubular products.

Steel vessels, reactors, tank piping and pumps are required for the more than $100 billion worth of announced oil sands projects, says Ramzi Fawaz, vice president for projects at Shell Canada Ltd., headquartered in Calgary, Alberta. The Athabasca Oil Sands Project (AOSP) alone—a joint venture of Shell Canada, Chevron Canada Ltd. and Western Oil Sands—will require about 350,000 metric tons of steel products.

SIGNING BONUSES AND A BASEBALL FIELD

While the demand for steel products promises an upswing in business for metals, the labor shortage in Western Canada threatens to eat up the resources the metals industry needs to offer competitive pay. Further, Western Canadian hubs such as Fort McMurray, Alberta, have become attractive free-agent markets, as workers jump from one company to another in the quest for higher salaries and attractive bonuses.

Construction and temporary project workers are wooed by oil company subcontractors, but the the real demand is for permanent workers who will run the plants and mines for the oil companies once they are in operation, Fawaz says. Shell has approximately 2,000 workers on the Athabasca project and expects to add another 700 people to its permanent workforce once expansion is complete. On top of that, an additional 6,000 to 7,000 laborers are needed to build the expansion from 2007 to 2010, Fawaz says.

In addition to offering a competitive salary and an annual bonus, Shell Canada offers a pension plan, health and dental plan, and vacation based on years of service to the industry, says Paul Hagel, a spokesman for Shell Canada’s oil sands operations and AOSP, also known as Albian Sands Energy Inc. Shell also offers professional development for all employees and supports continuing education.

Albian Sands also offers relocation packages. It pays a signing bonus, and allowances for housing, transportation and working continuous shifts. “Albian employees are driven to and from the work site each day by bus, and employees are paid for their time on the bus to and from work each day,” Hagel says.

Another enticement: Albian Sands is building a 115,000-square-foot residential facility north of Fort McMurray, to be completed by the end of 2007. The building will accommodate about 2,500 tradespeople and managers working on Shell’s AOSP upstream expansion project. After work, Albian employees can enjoy the gymnasium, running track, workout facility, lounge, lecture hall and dining area, as well as an outdoor ice hockey rink and baseball field.

FURTHER FROM HOME

Oil sands developers in Alberta not only are paying more, but also casting their lines further afield. “There isn’t enough skilled labor in the province of Alberta, so [energy companies] are starting to search outside the borders,” Hamilton says. Neighboring Saskatchewan is an obvious target.

Shell Canada needs to hire across borders and industries to supply the approximately 35,000 laborers required at the peak of development, Fawaz says. “Considering that Alberta is a small province of about 3 million inhabitants, and that the permanent average number of skilled laborers in Alberta ranges from 15,000 to 20,000, then there’s no doubt that the existing workforce [there] will not be sufficient to build those projects,” he says. IPSCO’s Hamilton says he’s seen a surge of recruiters at job fairs in Regina. “You’re starting to see companies in the [Alberta] area set up almost a military-type dormitory so that workers can fly in to work for a week and fly back out to their families,” he says. “They’re throwing some pretty good money in the offers for these people, and that’s a challenge we’re facing.”

Shell and Albian also have boosted their recruiting efforts among new graduates and college students across Canada through lectures and student competitions. “They’re going to come looking into industries like steel, pipe and mining, so all of the companies in provinces of Saskatchewan like IPSCO are at risk of losing skilled people to Alberta,” Hamilton says.

Working in Northeastern Alberta certainly has its drawbacks. “The high price of living in Fort McMurray is that the infrastructure has not been able to keep up,” Levers says. “Some workers are paying about $600 a month just to sleep on a couch.” Not to mention that the temperature can drop as low as 40 degrees below zero [Fahrenheit], and the shifts can go on and on.

That benefits companies such as IPSCO, which depends on a stable, local workforce.

AVOIDING A VICIOUS CYCLE

“Many of our employees have no interest in the grass at the other side of the fence,” Hamilton says, adding that even if oil sands developers are paying higher wages than other industries in the area, the wrong answer is to throw more money at the problem. “Even if we could afford it, it’s going to create a vicious cycle,” he adds. “If we’re paying $30 an hour for a tradesperson, and oil sands are willing to pay $40, and then if we increase our wages to $40, they will just go up to $50, creating a cycle of no winners.”

Nevertheless, IPSCO worries about losing millwrights and electricians to oil sands work because those skills are easily transferable between industries. In terms of demographic groups, IPSCO has seen more turnover among younger, less experienced workers in their 20s, “who have been with us for a year or two and haven’t put roots down yet.” On the other end, there is some turnover among near-retirees, or “those who have already spent most of his or her career with us, have a secure pension, with children on their own, and they are now looking to make a few extra dollars before they retire.”

IPSCO’s strategy is to hire and train local people who have ties to the community to keep them near mills in Regina. “Even though there might be more money to make elsewhere, people want to live near their families and where they grew up,” Hamilton says. “There is a wave going to Alberta now, but I believe there will be a wave coming back as people start to factor in the cost of living, lifestyle and family considerations.”

While mid-career workers often are most prized, the loss of younger workers could prove to be a problem later.

For Metal Supermarkets’ Fraser, who had to raise wages to stay competitive in the labor shortage, the younger, often post-graduate workers “tend to be better than the rest of the working pool because they learn fast.” That younger workers are easily drawn to the oil fields poses a long-term threat for metals companies, whose strategy of not overreacting may put them in jeopardy when they are at a loss for the skilled tradesmen 10 years down the line.