THE LONG ROAD BACK
Clobbered by weak prices, oil companies have slashed spending and jobs over the past year in a bid to stem huge losses. Now an out-of-control fire has knocked a quarter of Canada's oil production off line, raising big questions about how the industry and the Alberta economy will rebuild
The first night the fires raged in Fort McMurray, Marty Giles bedded down in his truck while about 30 of his employees and other evacuees slept amongst the display vehicles in his Fort McKay dealership, just north of the city.
The next morning they siphoned gas from the cars and trucks in the lot before making the drive back through Fort McMurray, and then further south, away from the fire zone. The Fort McMurray-based owner of Northstar Ford Group has since heard conflicting reports about whether his two dealerships in the city are still standing. But he knows his family's home was lost.
Before the fire hit, Mr. Giles was already coping with Alberta's difficult economic conditions. His business, in the heart of oil sands country, was facing the fallout from low crude prices. Customers had far less cash to spend on new vehicles, which squeezed Northstar Ford's revenue and forced the layoff of several members of what was once a 250-person staff in Fort McMurray.
Now, his world has been flipped upside down – as it has for everyone in the Fort McMurray area. Mr. Giles is housing evacuees at his Lac La Biche cottage and helping to co-ordinate emergency truckloads of food, clothing and other supplies to hot spots in Northern Alberta. He has also sent his 210 remaining Fort McMurray employees two weeks' pay.
"What happens after two weeks, I have no idea, because I'm not really sure what's going to happen this afternoon," he said in an interview on Friday.
The flames that continue to sweep through Fort McMurray, taking down at least 1,600 houses and buildings have dealt the city, the oil sands industry, and the Alberta economy a powerful blow.
Just two years ago, as oil prices galloped along over $100 (U.S.) a barrel, there would have been little doubt about rebuilding the city, even in the face of one of the country's worst-ever natural disasters. But Fort McMurray today is a much different place. The city, along with the province, has been grappling with more than 20 months of far-lower oil prices – resulting in a steep drop in corporate revenue, tens of thousands of job losses and pay cuts, and worrisome uncertainty about future growth.
"I would sure like to have the problems that we talked about in 2007 and 2014 again," Mr. Giles said. "Oh, gee, I can't believe we can't get into a restaurant again. Oh, I can't believe how much housing is going up. What would we give right now to turn back the clock."
This past week, Suncor Energy Inc., Syncrude Canada Ltd., Imperial Oil Ltd., Royal Dutch Shell PLC and a host of other companies halted oil sands activity or reduced output. On Friday, there were no reports of damage to facilities, but the operations were affected by a stew of factors, including the shutdown of pipelines to and from the plants and the need to free up Fort McMurray-based employees so they could evacuate the city with their families as the flames bore down on houses.
As much as one million barrels a day of production, roughly a quarter of Canada's total oil output, has been taken off-line for an indefinite period.
On Friday, the fire was at the gates of Nexen Energy's Long Lake oil sands facility south of Fort McMurray, which had been shut down earlier as a precaution. Luckily for the company, which is owned by China's CNOOC Ltd., the wind was pushing the flames away from the operation, Alberta wildfire official Chad Morrison said. Mr. Morrison praised the company's emergency planning, but warned that conditions could still shift against the operation.
"We feel that the next couple of days will be very good for that Long Lake facility. But again, I'll reiterate, this is a dynamic, challenging extreme fire, so you know, many things can happen," he said.
Even before the extreme fire began, both the energy sector and the province were under severe pressure.
Current and future oil sands activity has shrunk with the crude price collapse, forcing energy companies and firms that provide services to shed workers by the thousands. On Friday, Statistics Canada reported that almost 21,000 more jobs in the province were lost in April, on top of tens of thousands of Alberta jobs that have already disappeared. For the first time since the economic crisis was felt in 2009, Alberta is losing more people to other provinces than it is receiving. The economic troubles have come on top of years of criticism of the oil sands by environmental groups, as well as struggles to build new pipelines.
Tens of billions of dollars' worth of planned oil sands development has been shelved as the industry was forced to rethink business plans predicated on oil selling for at least twice the current price. Alberta's recent budget showed the impact of the collapse in energy markets, with bitumen royalties plunging to $656-million (Canadian) from more than $5-billion two years earlier. The provincial government, once flush with energy revenues, predicted a deficit in the 2016-17 fiscal year of more than $10-billion.
However, the global energy industry is notoriously cyclical and market conditions could again change quickly to support an increase in activities in the oil sands again. And even with the downturn, the importance of the northeastern Alberta region and its main industry to Canada cannot be underestimated.
RBC estimates that if the production outages persist for just two weeks, half a percentage point would be shaved from Canada's May GDP. "Although the loss of oil production is likely to be the largest factor impacting monthly GDP data, the absence of evacuated residents will also limit retail sales and hours worked outside of the oil and gas production sector," the bank said.
Thousands of workers are needed to power the oil sands as an economic machine. And although much of the oil sands work force lives in camps and comes into the region on a fly-in/fly-out basis, Fort McMurray itself is home for many employees – and businesses that provide services to both oil sands producers and the people of the region itself. A major question now will be the ability of the companies to reattract employees that had left the region after being laid off, or now face having to find accommodations in a city where large parts of neighbourhoods have been destroyed.
Right now, oil companies are scrambling to move employees to where they need to be. They have flown thousands of displaced residents and non-essential employees out of the region since Monday, and have returned with essential supplies such as toiletries, water and food.
"In addition to our own fleet of four airplanes, we have chartered four airplanes from WestJet to help with evacuation efforts," said Paul Newmarch, a spokesman with Suncor Energy, Canada's biggest oil producer. "We've transported numerous pets, including dogs, cats, ferrets, tree frogs and chinchillas."
MCpl VanPutten/Handout/DND/Canadian Press
One big unknown is whether the multitude of smaller businesses that provide services to the oil sands – from truckers to welders to caterers – will survive a double-whammy of industry downturn and natural disaster.
"It may be that some service companies that are pretty key to the oil sands in the Fort McMurray area are not there any more," said Jackie Forrest, vice-president at ARC Financial in Calgary.
"But there's so much motivation to get these plants running again; I would think they could get services from other regions like Lac la Biche or Edmonton. It may cost more, but they will still try to get their oil sands plants up and running with those higher costs because the economics of not running will probably be worse."
Even if oil sands operations remain untouched by fire, facilities will need to be restarted, and the number of displaced and homeless people will lead to a major disruption to the work force – for weeks, months or years.
There are about 54,000 workers directly employed in on-site construction, maintenance and operations in the oil sands sector, according to Enform, the industry's occupational-safety arm, which also tracks employment trends.
"Until the fire is contained and we know how much damage has been caused, how much production will be shut in for and for how long, it is very difficult to say what the impacts will be on the work force," said Cameron MacGillivray, Enform's CEO. "When each company has done a full assessment they will have a better sense of when employees can return safely to their work sites."
Joseph Doucet, dean of the University of Alberta's business school and chair of the Premier's economic advisory committee, said "the oil sands firms and other service firms are going to have to figure out how to continue to operate as their employees figure out how they house their families and so on. And so, there will be a lot of juggling." In all of the calculus about the the economy and production, Dr. Doucet said it will be key to remember the human side.
"If you're an operator and your family has been moved to Edmonton, St. Paul or Calgary, you're happy they are safe, but that's not a stable situation and the firms are going to have to manage that. They're going to have to manage the emotional impact on all the employees."
Jason Franson/The Canadian Press
Shutting down an oil sands operation is no simple task.
Jason George, the utilities and telecommunications manager at Catch Engineering in Calgary, watched in real time on Wednesday as power generated by major oil sands facilities began to ebb. That signalled companies were starting to shut down turbines used to run extraction sites, underscoring spreading impacts of the wildfires beyond crude oil production. The units, which resemble jet engines, inject massive amounts of electricity onto Alberta's grid, a byproduct of generating steam.
Glued to a live data stream provided by Alberta's system operator, Mr. George saw that at 6:22 p.m. on Wednesday, power generated at Nexen's steam-driven Long Lake plant suddenly dipped. The facility is located about 36 kilometres southeast of Fort McMurray near the hamlet of Anzac, which was evacuated on Thursday as fires moved south. From around 160 megawatts, Nexen's electricity output fell by nearly half in the span of 10 minutes. Around 10:20 p.m., the load dropped to zero. "That's basically when you can guess they turned it off," Mr. George said on Thursday in an interview. "If you're turning off pumps, you need less power."
By mid-day on Friday, some oil sands plants were generating a fraction of their overall capacity, according to data from the Alberta Electricity System Operator. Suncor's MacKay River plant, shut down by the company because of related pipeline outages, was generating a single megawatt of power out of a total capacity of 197, for instance. Imperial Oil Ltd.'s Kearl bitumen mine, where production was curtailed, was injecting less than half of what it normally does into the grid.
No damage had been reported at oil sands plants. Atco Group, the main utility for the northern region, had shut off all residential natural gas services in the city, it said on Thursday. A company official said on Friday the extent of any damage to its industrial facilities was unknown.
Any needed restoration work could take weeks. Large power lines in the region follow the same corridors as major pipelines and fibre-optic cables, traversing vast patches of swampy muskeg that are largely impassable in warmer weather. Some industrial transformers potentially at risk in the blaze could take up to a year to replace due to backlogs at manufacturers, Mr. George said. "Diesel is the old standby," he said. But generators only go so far. "You can run the base stuff, the critical pumps, your control system, but you're not going to run any industrial processes," he said.
There will be no certainty for Fort McMurray or oil sands operations until the flames cease. Even if the fire burns itself out, tinder-dry conditions mean the elevated fire risk could continue through the rest of year.
For the city of Fort McMurray itself – a city which sits in the middle of the Boreal forest, surrounded by trees and neighbouring dozens of oil sand projects – the outlook is opaque. Already, unemployment and the vacancy rate had leaped. Average residential housing prices dropped more than 20 per cent between March, 2015, and March of this year.
Now, faced with the potential losses of homes and businesses, alongside the daunting challenge of a massive rebuild of a medium-sized city, even some municipal leaders have their doubts about what will happen once the fires end and the smoke clears. Many questions will likely not be answered any time soon, such as how much of the city will be rebuilt, how many people will come back, and where they will all live as the rebuilding takes place.
Colleen Tatum, who was born and raised in Fort McMurray and is now a business owner and councillor, said the expanding fallout from the disaster is heaping more stress on people already coping with the sharp downturn in the economy. Some families may never return to the northern city, hampering efforts to rebuild a community gutted by the blaze.
"If you own a business in town, you might not have a business. If it's not burnt down, there's no insurance necessarily to cover you in the meantime. I'm not going to have revenue coming in for I don't know how long. Can I pay my rent? Do I have money for employees? I have no idea at this point."
Still, Ms. Tatum said the city is resilient. Many displaced residents are eager to rebuild. "It's going to take a lot of strength. It's going to take a lot of energy, and it's going to take a lot of bootstrapping. But that's nothing new to Fort McMurray."
But not everyone on council is so optimistic. From his evacuation outpost in Wandering River, Alta., Coun. Allan Vinni – another resident who believes his home has been lost in the fire – says it is unclear what kind of community will be left to return to. He says the massive set of challenges that Fort McMurray now faces is unlike anything another town or city has ever confronted.
"I don't think it's a problem that anybody has any experience with," Mr. Vinni says. "I just think about how complicated it's going to be."
The city is hundreds of kilometres from any other major centres. Even for those whose homes are still standing, basic services like natural gas and water will have to be restarted. The process to get people back into their homes will "be measured in months. Not days or weeks," he said.
"It wasn't good times in McMurray before the fire," Mr. Vinni said, adding "we're not sure how many people are going to sign onto a five or 10-year project to rebuild a town."
Just last month, Mr. Vinni was leading the push in favour of fewer fly-in/fly-out employees in the region in a bid to improve and stabilize Fort McMurray's economy. He is now worried that is the only kind of oil sands work that will remain when everything settles.
"Maybe the town never re-opens? I don't know. All bets are off," he said.
"The damn fire isn't even out yet."