In last week's column, we looked out on the horizon of time and pointed out a wave of capital expenditures coming toward Canada's oil and gas industry. Although we needed to squint for clarity, as there still is much uncertainty, we estimated that the spending crest could be as high as $16-billion a year within a few years.
When they arrive, most of these extraordinary dollars will be surging toward British Columbia's fledgling liquefied natural gas (LNG) industry, a province where the status quo is only $6-billion of annual oil and gas spending.
Early hints of the wave are already being felt on the coast, especially Prince Rupert and Kitimat. Hoping for an empty airplane seat beside you? Forget it. Needing a place to stay? "No Vacancy" signs are lit up at the motels. Eating out? Steak houses have beefy waiting lists.
And the big dollars haven't started to flow yet. That will happen when the head offices of leading multinational consortia rubber-stamp their final investment decisions (FIDs). One, possibly two of the FIDs may be forthcoming by 2015, assuming fiscal policies, environmental approvals and a myriad of other factors satisfy stakeholders on both sides of the wave.
Let's assume the surf's up. Here is how the swell will play out, in loose chronological order.
Competitive jockeying
Many of the 14 consortia will increase their preparatory spending over the next two years. Even in the absence of a single FID, the tally will be in the hundreds of millions of dollars. From the gas fields to the coast, there will be growing cadres of personnel – government relations, public relations, engineers and consultants of every stripe – handing out corporate swag. All will muscle up their presence as they try to figure out the logistics of how to execute the biggest infrastructure projects in Canadian history. It's going to get really crowded, like too many surfers on a small, rocky beach. These fierce competitors will be doing a lot of elbowing along major proposed pipeline routes from the gas fields to the coast. Each of them knows the importance of being first to market. Watch closely; too much elbowing and the locals won't allow anyone to surf.
Increasing Upstream Activity
These LNG projects constitute new enterprises across the gas supply chain. Entire manufacturing lines (drilling), supply delivery systems (pipelines) and sales outlets (coastal terminals) must be built, reconfigured or expanded. Appropriately, the wave starts upstream. Yet many consortia members appear short of natural gas to fulfill the 20 to 25 years of steady production they will need to fill the pipes. The first dollars to arrive will bump up drilling. Corporate and asset acquisition activity will have to pick up too.
Construction Scramble
The building of facilities and pipelines won't start until FIDs are granted. By 2016, the size of the wave should be fully visible as leading consortia begin pouring concrete and welding steel.
Market hype
Investors will be in love with anyone involved in the service industry, although service providers have a tendency to overbuild just as the wave starts to recede.
Wage Inflation
"If you build it, they will come," won't apply here. Thousands of skilled workers will be needed to come and build. Luring labour will cost top dollar. At the moment, resource workers in B.C. don't get paid as much in Alberta. But that is starting to change. Wages in B.C. are moving up. Skilled workers from across Canada will take note. And so will some of the consortia members who can't stomach the inflation.
Rationalization
This is a euphemism for dropouts and consolidation among the 14 consortia. There isn't room for all of them, nor is there enough labour. Rationalization will start to happen fairly early on, maybe even this year. By the time the peak of the crest hits, most of the 14 will have fallen off their boards, or gone tandem on someone else's.
LNG ahoy!
Publicly disclosed statements from various consortia projects suggest the most eager tankers may be sailing by 2017. That's not likely. The reality will be closer to 2020, long after the capital spending wave crests. By that time, the big ticket spending will be over and some semblance of calm will return to the capital pool.
That characterizes the corporate spending wave. But it's not realistic to slam a region with a multibillion-dollar wave of services, heavy equipment and skilled labour with all else being equal. Public infrastructure like roads, schools, fire stations, recreational facilities, medical care, regulatory bureaucracy, to name a few essential services, are needed to absorb and manage the influx. In fact, the propensity of LNG developers to remain interested in furthering their projects will depend on governments at all levels to invest in public works – preferably in anticipation of the wave. So in that context the adage, "If you build it, they will come," may well be appropriate.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
Peter Tertzakian