Canada’s oil business needs Fort McMurray to rebuild

Fort McMurray and the oilsands encampments haven’t always had an easy relationship, but they need each other more than ever

Burned out homes in the Abasand area of Fort McMurray

Burned out homes in the Abasand area of Fort McMurray on May 9, after wildfire forced the evacuation of the town. (Chris Wattie/AFP/Getty)

The resilience of Canada’s oilsands industry over the past few weeks has been something to behold. Despite the massive (and, at the time of this writing, unextinguished) forest fire that ravaged parts of Fort McMurray, Alta., forced the evacuation of 90,000 residents and took an estimated 1.2 million barrels of daily capacity—1.4% of the global supply—offline, it has been quick to resume operations, even while the town remains deserted. Still, producers need the town to rebuild in order to operate effectively for the long term. Given the dire conditions facing the oil industry right now, that’s anything but certain.

Shell Canada partially restarted its Albian Sands operation on May 9, just six days after shutting down. Enbridge Inc., the largest pipeline operator out of the Athabasca oilsands region, resumed operations on May 11, after a seven-day hiatus. Suncor Energy re-established some operations a few days later (only to evacuate again when the fire moved north). Canadian Natural Resources’ huge Horizon mine never shut down in the first place.

None of this would have been possible a decade ago. Back then, investment in the oilsands was nearing its peak, and oil producers had a huge human resources headache. It was encapsulated in a paper by Deloitte entitled “The Producers’ Dilemma.” These companies had, on the one hand, a seemingly insatiable global demand for their product. On the other, they had a practically inexhaustible resource.

The problem was that a bottleneck—or, as some industry executives liked to put it, a door one shoulder-width wide—lay between the two. That door was the town of Fort McMurray. Though it was a fast-growing boom town, it was isolated and could hold only so many workers and contractors. If too many projects ramped up at the same time, wage rates and costs snowballed, schedules went to pieces and project economics evaporated.

In the years to follow, companies found ways around that door. They built or leased work camps capable of housing some 15,000 individuals near their job sites outside the city. They laid down their own airstrips where they could land Boeing 737s filled with crews from as far away as the Maritimes for two-weeks-on, two-weeks-off shifts. Rather than build on-site, they bought components for their plants from suppliers in Asia, barged them in modules up the Mackenzie and Columbia river systems and shored up highways to haul the huge pieces the last few hundred kilometres to the work site.

The town and the camps had an occasionally uneasy relationship. The camp dwellers sometimes depended on amenities in the town—police, medical services, recreational facilities—without being home-owning taxpayers. They didn’t have ties to schools or churches or amateur sports teams. Their most common reason to drive into town was to hit the bars. It’s not surprising that CNRL’s Horizon kept operating through the evacuation—it relies on local labour for less than a quarter of its workforce.

Nonetheless, these workarounds by the oil companies played a critical role in the recent conflagration, both in safely evacuating Fort McMurray residents and in enabling producers to quickly ramp up again. “Broadly speaking, we have enough camps in place to be able to start the operations up,” Suncor CEO Steve Williams said at a press conference following the May 10 meeting between Premier Rachel Notley and executives representing 15 companies. Restarting quickly is an important achievement, before competing oil supplies cut into the supply chains of the producers’ refining customers. But that doesn’t mean the industry is out of the smouldering woods.

Whether or not their homes were among the 2,400 buildings that have burned, residents who had been laid off or whose business was slow prior to the fire are likely to use the evacuation as their cue to start fresh somewhere else, says Joseph Doucet, dean of the University of Alberta School of Business. “The rebuilding of the town will be a function of the economic activity and prospects of Fort McMurray,” he says. Even before the fire, those prospects didn’t look bright. High-cost basins like the oilsands don’t thrive in low-oil-price environments. The Canadian Association of Petroleum Producers had forecast just $20 billion in capital expenditures in the oilsands this year, down from $35.7 billion in 2015 (which itself represented a 30% decline from the previous year). As of April, unemployment in the surrounding Wood Buffalo–Cold Lake region stood at 10.2%.

While the oilsands producers have demonstrated their ability to keep running even without Fort McMurray, the town’s revival does matter to them. “The camps were designed for the construction crews,” Doucet notes. Because of the drop-off in investment, that category of workers is expected to decline by 10,305 positions between now and 2020, according to a report released in April by Petroleum Labour Market Information, a division of industry training body Enform. At the same time, PetroLMI projects a need for 9,870 more people to operate and maintain existing plants, mines and well pads—jobs traditionally (and most cost-effectively) performed by local employees, who take care of their own room, board and transportation.

Should many Fort McMurray residents and small businesses fail to return, higher costs could show up in other ways too. “Bitumen facilities rely on local businesses for fixing, hauling, maintaining and other logistics,” wrote Jackie Forrest, vice-president of energy research at Arc Financial, in a commentary on May 10. “While reliance on new service providers is not likely to impede restarting production, lack of services in close proximity could increase the costs for producers who were already struggling to make the books balance at low oil prices.”

Though oilsands producers got through this disaster mostly unscathed, their future competitiveness depends in no small measure on Fort McMurray getting back on its feet.