Where The Royalty Review Has, And Will Take Us

As I sit in yet another airport awaiting a flight to Houston, I marvel at what the oil and gas industry has done for us. From enabling us to travel the globe relatively freely and quickly, to providing the raw materials to produce thousands of products, the industry of extracting and processing this valuable commodity really does drive the world. I feel a close affinity to the business of bitumen and firmly believe it to be Western Canadian, but I do realize it has been around for thousands of years. As a matter of fact, 5,000 years ago in Mesopotamia, bitumen, tar, and other oil products were already being “refined” and used for many diverse purposes from sealing boats to medical uses. I think a look back to the roots of our business is important to any discussion of royalties in Alberta.

The oil and gas industry in Canada, North America, and the rest of the world has fuelled a great deal of growth and continues to facilitate growth in many areas. Since the first commercial oil well in North America started producing in 1858 in Oil Springs, Ontario and Dingman Discovery No. 1 struck a reservoir of wet gas in Turner Valley, Alberta in 1914, the industry has had a storied and exciting history. Patent law turned David Young into a wealthy man (and philanthropist) and left Gerstner (the father of the oil and gas industry in Canada) to die penniless. The theft of technology and spying and lying have all contributed to our history. As evidenced by the recent election, the country wants change, and it’s time for us to have real change as well.

British American oil kicked the business off and grew exponentially until Gulf Oil set its sights on BA, which is more commonly known today as ConocoPhillips Canada. Since that time, our business has really been driven by American multinationals in one way or another. However, I’m here to talk about manufacturing and what I think we need to do to retain and increase sovereignty in this massive industry that, by some sources, accounts for 42% of the GDP of Alberta directly and indirectly.

I will freely admit to being somewhat of a protectionist and not a 100% free market economist, or ANY type of real economist for that matter! I do, however, have an understanding and appreciation for Canadian manufacturing and fabrication, as well as our wealth of engineering expertise and intelligence, and I feel we are too often minimized in the global view. Nobody knows how to engineer, design, and fabricate equipment for the WCSB better than a Canadian kid who grew up in Calgary, Fort McMurray, Winnipeg, or Newfoundland for that matter. We ALL need to look in the mirror and, however un-Canadian it is, acknowledge we are damn good at what we do! We do, however, need to improve our level of collaboration and move to a more consultative model between stakeholders, and that is being worked on.

In 1921, when the Turner Valley gas plant had to be rebuilt, a California engineering company named C F Braun, which was a world leader in the engineering business, supplied the absorption package at the heart of the plant. My father worked for C F Braun when the writer lived in Southern California, and I will say it was one of the most impressive engineering companies I have known. Their President, Karl Braun, started as a one-man show and was a visionary who built that company into a global power. But, that’s a story for another day. The absorption unit was one of the first “process packages” I am aware of to be engineered and built elsewhere and shipped to Canada, and it most certainly won’t be the last. That IS what this article is about! According to the CME, 57% of the products and work destined for the oil sands are fabricated outside of Canada. We need to get more of that business.

This royalty review is the perfect opportunity to ensure “Buy Canadian” doesn’t turn into Bye Canada! The solution to the problem lies in our own back yard.

What’s all this got to do with a royalty review, you ask? My answer is “quite a bit”. I wrote earlier of my protectionist views, but I should clarify we at Plains Fabrication are certainly not against competition. We DO want the quality standards and environmental stewardship rules applied equally to ALL bidders though. There is much talk about the royalty review and the political side of it, but I think we need a politically, agnostic view of the situation. Why not (as the CME has suggested) reward those companies who engineer and source equipment in Alberta with a different royalty structure than those who do not? Many other countries enforce and support such a buy with local strategy, so why don’t we? It could be fairly simply implemented and would promote continued investment in the industry overall as well as ensure a healthy and resilient manufacturing industry to support growth. We do not want to continue to erode our ability to manufacture and fabricate in Canada. Once it’s gone, it would cost millions, if not billions, to get back. This royalty review is an ideal opportunity for all Albertans to get involved in the decision, so please exercise your right to be heard, but be sure you get all the facts.

I believe the royalty review also presents an opportunity to ramp up the focus on the environment. We have done some very good things environmentally in the oil sands, including significantly reducing the amount of fresh water needed to produce a barrel of oil. However, I was saddened to read there were no US or Canadian CEO’s at the recent Paris oil and gas climate initiative. In the past, Canada was viewed globally as being an excellent steward of the environment and a nation that values the planet. If we continue to shun these types of conferences, we will only hurt ourselves. Why not include an environmental plank in the royalty review platform that encourages stewardship of the environment?

One of the things that impressed me about Plains Fabrication when I came on board was the strong commitment to reducing, reusing, and recycling everything from steel to k-cups to water. The company spent a great deal to build a water catchment system used for all irrigation and cooling water needs, and recycling is in plain view everywhere. Even the blast and coat booth is a technological marvel. We could blast every day in a year for 18 hours per day and put less than TWO pounds of dust into the environment. The blast media is captured, thoroughly cleaned, reused, and then, when completely spent, sold to a recycler. The painting and coating booth is amazingly clean as well, and the air quality is second to none. I bring this up because the very people who demand environmental stewardship will then use a much dirtier operation to blast and paint their equipment, because it may be a few dollars cheaper. Perhaps adding the environmental perspective into the royalty review can help fix this problem?

Plains Fabrication is focused on building truly collaborative and mutually beneficial relationships with both our suppliers and the groups we supply to. We ALL need to collaborate and fix the broken business model we currently work in to build and operate our oil and gas facilities and forge new, deeper, and trusting relationships that benefit all groups and disadvantage none. New rules in Mexico around oil and gas investments, U.S. tight oil plays, and the elimination of sanctions against Iran means we will need to get tooth and nail to retain, much less grow, our industry. It runs on investments that are focused on rates of return and capital efficiency. This royalty review is the perfect opportunity to ensure “Buy Canadian” doesn’t turn into Bye Canada! The solution to the problem lies in our own back yard. We simply need to think and behave differently to create a solution that works.

(With thanks to David Finch, Earle Grey, and the countless other sources who have contributed by studying and writing about the history of our industry.)