What’s so Great about Construction?

Alex_Carrick_347635081
Its Focus on the Future

The Canadian economy pulled off a remarkable achievement in employment last year. An additional 300,000 jobs were created nationwide. Almost all of them were full-time positions.

It’s usually a good year when the net gain in employment is 200,000 to 250,000.

While most of the new jobs came in the services sector, it’s instructive to consider that the two provinces with the lowest unemployment rates were Alberta (4.5 per cent) and Saskatchewan (4.6 per cent). It’s no coincidence that both those provinces are largely focused on resource sector development.

I’ve always been enthusiastic about my career as an economist in the construction sector. The industry, by its nature, is almost exclusively forward looking. Even demolition work is most often aimed at clearing space for something fresh.

It’s exciting to contemplate upcoming projects that might set new standards in architectural or engineering excellence. The accompanying new jobs will revitalize an industry or a region.

Canada’s construction outlook at this time – as it has so often been in the past – is largely tied to resource sector projects. Dominating this category of work are energy projects.

Prominent last year were start-ups on more mega oil sands projects in Alberta. These included the Jackfish 3 project for Devon NEC Corporation valued at $1.2 billion and the Narrows Lake SAGD project for Cenovus Energy, with an estimated cost of $2.4 billion.

These add to a long list of mega projects that have already been built in the province or are under construction. Sales of Alberta heavy oil – at the Western Canada Select (WCS) price – are not earning the high return they should be. WCS is as much as $40 U.S. per barrel lower than West Texas Intermediate (WTI), which in turn is sitting about $20 below the Brent price. About 50 per cent of oil trades world-wide are conducted at the Brent (North Sea) benchmark price. It governs purchases in Europe, Japan and in the emerging market economies such as China and India. 

Thanks to the current boom in shale rock fossil fuel extraction, the U.S. has been greatly expanding its reserves of oil. Hence the lower price for WTI crude versus Brent. Canadian producers are burdened with an additional handicap. They have limited access to coastal refineries. Most of their product is shipped to inland terminals such as at Cushing, Oklahoma.

Since such terminals already have a glut of crude, the price they’re offering for additional supplies is further reduced, explaining the extra discount on WCS oil.
Product that can reach coastal refineries can be shipped to customers willing to pay the Brent benchmark.  

The need for additional pipeline capacity to the coasts is clear and pressing. It’s the prime motivation for TransCanada’s XL expansion. The southern portion of that project, from the hub at Cushing to the Gulf Coast, will be complete this year.

The more northerly portion is awaiting U.S. federal government approval. Within America, Washington must have the final say because the project will cross the border with Canada.

The company earlier received a negative ruling on its plans. In response to the criticism, TransCanada is now proposing a revised route that will circle, to the east, an environmentally sensitive aquifer in Nebraska. Legislators in that state are re-considering their stand on the project. They now seem more eager to see it proceed. It will provide thousands of jobs.

Canada must find additional customers for its energy products. The greatest potential lies in Asia.

To facilitate such a shift, there is Enbridge’s Northern Gateway pipeline proposal to take Alberta bitumen to B.C.’s coast, plus Kinder Morgan’s proposed expansion of its TransMountain line to Burnaby. Environmental hearings for both projects are underway.

Just as significant are several proposals to transport natural gas from the B.C. northeast interior to the coast near Prince Rupert, for storage in terminals, then shipment across the ocean. These will compete with giant liquefied natural gas (LNG) projects in Australia and the Middle East. Shell and Petronas are two of the larger companies with LNG plans for B.C.

The price differential between WSC, WIT and Brent crude has also caused the railroads to spot the potential in their alternative delivery systems. Greater volumes of crude are being shipped by rail. Both the energy companies and the railroads are investing large sums in terminal facilities along railroad tracks.

Delivery dates for new tanker car orders have been extended out two years.

The advantages of oil transport by mostly existing rail routes are obvious. They can take oil to refineries in built-up urban centres where approvals for additional pipeline capacity would be difficult to obtain and the cost would be prohibitive.

Additions to oil-carrying capacity by rail can be achieved in smaller increments. The reach of the railroads is almost unlimited.

While the likelihood of spills on railcars is a good deal higher than for pipelines, the volumes are lower and the damage can be more easily contained.  

So far, we’ve just scratched the surface of upcoming energy projects. Another mega project will be the multi-billion dollar Hebron offshore oil project in Newfoundland and Labrador. ExxonMobil is the lead partner (36 per cent), with Chevron (26.7 per cent) and Petro Canada (22.7 per cent) also holding major equity positions. Statoil and Nalcor have small stakes. Hebron will complement Hibernia, Terra Nova and White Rose as the province’s fourth offshore oil field.

Other forms of energy should not be overlooked. Newfoundland is about to begin work on the Muskrat Falls hydroelectric project on the Lower Churchill River in Labrador. This will provide power by means of an underwater cable, to Nova Scotia and possibly New Brunswick and New England. The estimated cost will be $6.2 billion. Manitoba and British Columbia are two other provinces with major hydroelectric power projects on the drawing boards.

Moving beyond energy projects are other resource projects. Last year’s largest project start was the $3.3 billion aluminum smelter modernization in Kitimat, B.C., for Rio Tinto Alcan. Quebec will also see significant aluminum work once global growth raises the metal’s price to a sufficient degree.

Quebec’s largest project start last year was the $1.4 billion Mont-Wright iron ore project for Arcelor-Mittal Inc. The province has more large iron ore projects upcoming, to be situated in the north of the province. These will provide product to steelmakers in China and Europe. Where is the money to come from for these investments? Much of it will be foreign-based.

Companies in emerging nations are taking an increasing interest in acquiring ownership positions in Canada’s natural resource sector. They’re not necessarily waiting for commodity prices to rise. They want to get in early. 

To keep up with the rest of the world, our country needs the investment and the jobs. Understandably, Ottawa wants to make sure these acquisitions provide a net benefit for Canada. Many foreign firms are state-owned. They may not have the same standards of corporate transparency, environmental sensitivity and/or workplace safety as industrialized-world firms.

Ottawa has been diligent in making sure these issues have been addressed in the most recent cases – CNOOC’s (China National Offshore Oil Corporation) acquisition of the assets of Nexen Inc. and the purchase by Malaysia’s Petronas (Petroliam National Bhd) of Progress Energy.

The source of the foreign funding is showing a good deal of diversity. For example, Australian-based BHP Billiton Ltd. is building a $14 billion Jansen potash mine in Saskatchewan.

Chinese or Indian interests are believed to be interested in acquiring partnership positions with at least one smaller producer in Saskatchewan to build more potash mining capacity.

Outside the resource sector, a showcase project will be the new $1 billion bridge being fast-tracked between Windsor and Detroit. The citizens of Michigan recently voted 60 per cent to 40 per cent in favor of work getting underway. It will proceed in the face of strong opposition from the private owners of the Ambassador Bridge.

Canada will provide the financing, with Michigan’s share of the cost to be recovered by a toll collected on the American side of the crossing. Highway access to the new bridge in Windsor will circumvent a tangle of traffic lights that is currently causing trucking tie-ups and delays. The potential for increased trade and job creation is enormous.

As the foregoing projects proceed, they will transform the economic landscape of the country, providing a new framework in which we and our children will live and work for decades to come.

Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit www.dailycommercialnews.com/features/economy. Mr. Carrick’s lifestyle blog is at www.alexcarrick.com and he would welcome a follow on Twitter (Alex_Carrick) or Facebook. www.alexcarrick.com

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