Title: Exporting “picks and shovels” to global energy players

Sub-title: Increasing global demand for energy is boosting the need for equipment to explore, extract, process and transport it. Canadian companies have been quick to get on the bandwagon.

 

Business lore has it that during the gold rush, the suppliers of picks and shovels often made more money than did miners. The same thing was said of IT hardware suppliers in the mid-to-late 1990s, when they were thought to have more upside potential than many of the E-Commerce sites then on-line. These days, a comparable situation may be occurring in some sectors of the energy industry.

 

“Oil has been at near record levels for quite some time and demand for natural gas has been increasing world wide despite the temporary overhand we now have here in Alberta,” says Rod McPike, president of Calgary-based Propak Systems Limited, which provides engineering, shop fabrication and field construction services to energy companies. “As a result, capital spending by oil and gas producers is continuing at relatively high rates and that increases demand for our services.”

 

A fast growing industry

Propak isn’t alone. Canadian suppliers of services, equipment, and expertise to international energy firms, have been among the biggest winners from the skyrocketing demand for new oil and gas supplies. Canadian exports of oil and gas machinery and equipment have close to doubled during the past five years, to $1.2 billion during 2006, and are expected to continue to grow.

 

The success of those companies should come as no surprise. Energy is on everybody’s minds these days. Geopolitical turmoil in oil rich countries, questions about reserve levels and spiraling demand from emerging Asian economies such as China and India, are driving up prices and spurring the exploration and development of new sources.

 

Much of Propak’s work is done internationally. “In many areas that we specialize in, such as gas compression, oil and gas separation and gas dehydration, demand has been quite strong in recent years,” says McPike. “The United States has been a key market. But we are doing quite a bit of quite a bit of business in China, South America, the Ukraine and Kazakhstan.” 

 

Building on a strong domestic base

The increased focus on finding and developing new energy sources is good news for the Canadian companies that supply the industry’s “picks and shovels,” many of which have substantial competitive advantages says one expert. “The Canadian market has long been very active,” says Michael Willmott, a trade commissioner at the Department of Foreign Affairs and International Trade’s Alberta regional office. “There is a lot of drilling and exploration going on here and that has led to the development of a whole series of local suppliers.”

 

Though Canada is one of the world’s most energy rich nations, getting at those reserves has been tough. The most easily recoverable oil has already been extracted from Canadian fields and what’s left requires more drilling and increasingly sophisticated technology to get out. It’s a challenge that many other energy producing nations are also facing, most notably Saudi Arabia at its Ghawar field, which generates much of the country’s most lucrative output.

 

The good news is that after cutting their teeth on the challenges of their domestic energy industry (such as developing and implementing processes to squeeze oil out of Alberta’s Tar Sands) Canadian suppliers that compete internationally can often demonstrate a long list of significant accomplishments.

 

Specialized technologies

Propak isn’t the only company that has been doing well during the recent demand surge. Enerflex, a Calgary-based provider of natural gas compression, power generation, process equipment, instrumentation and field services, has also seen a substantial surge in its international business.

 

“Natural gas prices have fallen back a bit recently here, so we have been focusing more on other markets,” says Al Wahlstrom, the company’s managing director.  “Canada is a big player in terms of both natural gas reserves and production, so when we tell people where we are from, they listen to us.”

 

Natural gas extraction requires more drilling than does oil extraction, so suppliers to the industry, like Enerflex, tend to get a lot of repeat business opportunities. Furthermore, many jurisdictions are introducing legislation that encourages the capture and recovery of associated gas (natural gas byproducts) that emerges when wells are drilled. Countries are also setting limits on how long energy companies can burn off the excess gas that often spews out when drilling is done.  These trends are also creating new opportunities for Enerflex, which can provide assistance in both areas.

 

Stepping out onto the international stage

In fact technical assistance and in-service training are two key areas that Canadian oil and gas industry suppliers do quite well in says one expert. “The know-how of Canadian companies in the oil and gas sector is excellent,” says Benigno Rojas-Moreno, a senior trade director with the Alberta government in a telephone interview just prior to a trade mission that he took to Brazil that included several Canadian pipeline sector providers. “Not only can they help energy companies profitably exploit deposits that they may have previously thought to be unrecoverable, they also can show them how to do so in an environmentally friendly way.

 

That said, Canadian energy industry suppliers have not even come close to reaching their potential. The global oil & gas equipment and services market, which is dominated by several key players such as Halliburton Company, Schlumberger and Baker Hughes Incorporated, has been growing in the double digits during the past five years and reached $124.3 billion during 2006. And demand is expected to grow by close to 4% a year during the coming years.

 

Right now one of the key export markets for Canadian oil and gas equipment and services providers is right next door: in the United States. Demand for unconventional natural gas south of the border, where a large number of fields are depleting rapidly, is expected to continue to increase, a trend that will stimulate demand for drilling, production optimization and other technologically advanced services. But the United States is hardly alone. Just about every country that has potential energy resources is now looking at ways to exploit them.

 

The high dollar and the nationalization of energy companies

That said, the oil and gas equipment and sub-serves industry is not without its challenges. The spiraling loonie, which has traded at above parity levels relative to the greenback has hurt Canadian firms’ competitiveness not just south of the border, but also in many international markets too, because energy industry contracts tend to be negotiated in U.S. dollars.

 

The nationalization of oil companies in countries such as Russia and Venezuela is creating its own set of headaches. Many nationalized companies (which control about 70 percent of the world’s production) do not have clear reinvestment strategies. Others are uncertain as to just how much work they are willing to outsource to foreign companies.

 

That said, many Canadian companies remain in a solid position says Propak’s McPike. “The good news is that the technologies that we have are in broad demand. And many developing countries simply cannot easily replicate those capabilities themselves,” said McPike. “We do have a fairly strong order backlog right now. But we have to be vigilant and to adjust ourselves carefully to the existing market.”

 

Peter Diekmeyer (peter@peterdiekmeyer) is a Montreal-based business and economics writer.

 

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