Changing Landscape in Alberta

Within Alberta and indeed North America there is a defaulting business model that says large Oil and Gas companies need large EPC companies. Doesn’t matter which EPC company really, they all operate on the same basis. Their methods of achieving the goals are similar and often interchangeable. There are always exceptions to the rule but it is a common perception from the ground floor.

These global-brand EPC companies for the most part have not changed their business model in response to the economic crisis of the last year; they expect to carry on as before. However, the last year has created an opportunity for many Oil and Gas operators to close down or stall major capital projects on their books. The shock wave was felt throughout Alberta. While for some people the green shoots of recovery are evident, the hard lessons remain for many suppliers, contractors, engineers, designers and shareholders. Shareholders of the oil and gas operators will demand prudence and will not want to see the old customary dance of the mega-project routine repeated.

Now is a perfect time for engineers to collaborate and create a new business model. Engineers should not sit passively on the sideline waiting for crumbs of work from the big EPC companies, finding their way back into the big business. Shareholders will demand prudence, performance and confidence so the likelihood of the oil and gas operators to experiment with lumpsum contracts is high. This will open the flood gate of Alberta industry to international competition. One thing became starkly clear from the last year. Alberta cannot compete on the open market for work elsewhere. Engineers often have many years global experience of working in the Oil and Gas sector and we know the current Albertan strategy is not ideal or competitive. While the Albertan government will accept corporate royalties and help bring foreign labour and trade investment to the patch, they do little to support the grassroot expertise of engineers in Alberta and export it. At this time, we cannot expect help to come from the federal government to promote Alberta as an industrial centre of excellence, they have left that responsibility to market forces and the whim of major EPC companies.

Some of the current crop of EPC companies knows how to break themselves into smaller business units (thinking small) to operate and compete in the new market but are likely to find them marginalized as the major players frustrate the experience for clients and bring the loci back to traditional ways. The culture of Lumpsum contracts requires engineering excellence and experience, minimum numbers of managerial positions, higher productivity and good teamwork. This is a fertile breeding ground for excellent engineering but is the change welcome in Alberta?

So what would a new business model look like?

The best analogy I can offer is Air Canada and Westjet. Air Canada is a tradition with a worldwide reputation and considered a major player in providing national and international air transportation. They have a multitude of options, destinations, a complex fare structure and extensive customer service facility. Since the demise of Canadian Airlines and its absorption into Air Canada, there have been several attempts by the likes of Jetsgo, Harmony, Roots Air and Canjet to take on the scheduled air dominance of Air Canada. Sadly, none of them succeeded. WestJet, on the other hand, has not only survived but seems to be emerging as a challenger to Air Canada.

WestJet started as a low cost regional carrier focused on the west but they have moved into the high density markets of Toronto, Montreal, Ottawa and Halifax where they are meeting with considerable success in what has traditionally been Air Canada territory. WestJet is now flying in the USA and the Caribbean. These markets were dominated by Air Canada, who had a significant market share advantage over their upstart rival. However, Air Canada can no longer ignore the new competitive reality they find themselves in – the days of WestJet being a niche domestic player are over. Westjet’s business model is based on the European experiences and they did not duplicate any of Air Canada’s ways of doing business. Westjet are still expanding their and no one doubts their ability to expand further. As a frequent commuter between Ottawa and Calgary, I know the Westjet business model provides the cheapest and reliable way for me to fly from Calgary to Ottawa, and in eighteen months I have only been late once, by 20 minutes.

The Westjet price is the same for everybody, is cheaper, always on time, comfortable, fast check-in, no fuss and there is free satellite tv. The friendly Westjet personnel from the pilot to the cabin crew and ticket counter, all work together to clean the plane, as you are deplaning.

The present economic downturn has been particularly tough for Air Canada as well as most other major carriers and this has resulted in the usual cost-cutting measures, downsizing staff and cutting routes. WestJet has certainly not been spared by our present economic hardships but, rather than pull back, they are taking advantage of the situation and continuing their expansion plans. On international routes, Air Canada is still a major power and WestJet has barely scratched the surface. Air Canada’s powerful frequent flier program, well respected website, membership in the Star Alliance and worldwide perception as “Canada’s airline” are formidable competitive assets.  No one douts, airline competition is good for the consumer. In the short term, the heated rivalry over USA and the Caribbean markets result in significant price wars. And so it goes on. The story continues. Competition is most certainly intensifying and Air Canada will not give up its dominance without a fight, so for the consumer this can only be a good thing. Bring it on!

When we as consumers pay Air Canada fares, they in turn have to pay a lot more people than Westjet, to cover their management, support teams, shareholders and advertising. Westjet has a smaller pyramid of management, do not pay for cleaning, foods, tiered booking programs and also minimize and standardize their advertising. We pay for different things. I will bank on Westjet every time for my travel needs in Canada and the USA and look forward to their international ambitions.

Now substitute “global EPC companies” for Air Canada and “Collaborating group of Engineers” for Westjet and re-read the narrative. While it reads like a David and Goliath story, there is more to it. Let’s call the Collaborating group of Engineers, Collage Inc. This is essentially a team of say, three or four engineers with many years experience and expertise in the Oilsand business.

As a team they approach the client with their proposal for design work and demonstrate what they can bring to the table and how much it costs and they save. If the clients are familiar with their experience and ability, they will find it hard to beat the bottom line of engineers in the frontline. If there is a deal agreed, then Collage Inc. will be able to recruit from their network the engineers and designer they need to execute the job, paying them top market rates and integrating them into the teamwork culture. Collage Inc will also use profit share with all participating team players, vendors and contractors who contribute to the success. Collage can propose a similar challenge, as Westjet does to Air Canada, to the way engineering solutions are provided to the client.

As a team, they will likely have intimate knowledge of the client project and know of a multitude of ways to improve the design to save on material, schedules and costs. The client saves money because they are paying engineers directly, without the baggage of management of the traditional EPC companies. Why does it make a difference?

Traditional EPC firms invest in technology and management to deliver the project. The expensive investment in technology requires continual training of designers, diluting the experienced engineering pool through budgetary challenges. The management also seeks to deploy workshare options, diluting further the resources for engineers locally. More and more engineering decisions are being made by management and when they don’t work, as they manifest on site, the engineers are blamed. Productivity is more important than the right solution and even this cannot be managed. Only in Alberta will you hear designers and engineers say, “There’s no time. The site team will sort it out”. Cost and schedule overruns are common. The contracts are commonly cost-reimbursable and do not include incentives for improved designs or schedule completion.

Collage Inc invests in engineers with experience. Productivity does not require expensive technology but will flow from experience. A central tenet of the company is team-building, communication, training and enthusiasm. As collaborating engineers, they will pride themselves on delivering quality solutions at great savings and within budgets. Scheduling and the management of the schedule will follow from the engineering path agreed. All work is executed locally and achieved to meet the deadlines. Productivity is achieved through good standards, good details, good communication, teamwork and repetition. This culture will bring in the opportunity for cost-savings incentives.

The tagline for Collage Inc. would read something like, “We are engineers who manage the project, not managers who engineer the project.”

The decisions and market conditions that framed the mega-projects of pre-2008 economic restructuring have changed considerably. Many projects were ‘first’ in size, scope, schedule and concept but the recent economic and market conditions have changed the landscape substantially.

Now, Oil and gas Operators have an opportunity to benefit from the collective of the best engineers available in Alberta, directly. These are engineers with long experiences as engineers, managers and site experiences to major Oilsands project. So if you have fifteen to twenty years experience in the Oil and Gas industry, a reputation you are proud of, long service to a particular client and you know a few other engineers who think as you do then it is time, it is your time to step up to the plate and help keep the green shoots of recovery faster. Collaborate and talk. Clients will listen. If the idea is strong enough, all else will follow. Maybe then, we can get the Alberta government to help engineers with the grant writing. Be warned though the extraordinary length the major EPC companies will go to protect their business, which would include operating at a loss.

It may appear naive to many engineers and managers but we do live in changing times. The seeds of the future are in the hands of the few. We either wait for the corporations or the inspirations. I know what I am looking.

Advertisement