Oil sands riches slow to a trickle: Recession catches up to Canada mining meccaExpansion projects will go forward, said David Podratz, manager of the Murphy Oil refinery in Superior.
By: By Rick Barrett, Milwaukee Journal Sentinel, Superior Telegram
The global economic slowdown has caught up with the desolate oil sands region in northwest Canada, which has been sending a torrent of money flowing through Wisconsin.
Known for fostering a boomtown in Fort McMurray, Alberta, the region has seen roughly $90 billion worth of oil production projects deferred or canceled during the recession. The result has been a slowdown in sales for some Wisconsin manufacturers who supply equipment to the region, although existing oil sands projects are keeping some others as busy as ever.
Huge electric mining shovels, made in Milwaukee, have provided the muscle behind the Gold Rush-style boom as oil companies tap the riches of dirt containing a tarlike grade of petroleum.
Shovels and trucks still run day and night in vast open-pit mines that resemble an industrial version of the Grand Canyon. They're built to keep going even when the temperature falls to 40 degrees below zero and ground becomes as hard as concrete.
Most of the synthetic crude from the region is used to make gasoline, jet fuel or home heating oil. It flows through a network of pipelines to refineries across North America, including Wisconsin's only refinery, in Superior.
Wisconsin companies that have benefited from the oil sands include shovel builders Bucyrus International Inc. of South Milwaukee and P&H Mining Equipment Co. of Milwaukee, as well as Rockwell Automation Inc., Manitowoc Co. and Falk Corp.
When falling petroleum prices cooled off the Canadian oil sands boom, Manitowoc Co. felt it through fewer sales of construction cranes.
"It's pretty slow for us there now," company CEO Glen Tellock said last week. "There are a lot of projects that will go forward, but not at the pace people had anticipated."
Some oil sands expansions costing tens of billions of dollars came to an abrupt end when petroleum prices fell to $40 a barrel earlier this year -- extracting oil from tar sands becomes profitable only above about $35 a barrel.
The price drop affected sales of Rockwell Automation process-controls equipment used in the refineries.
"A number of projects that we were tracking either were delayed or canceled. But one or two of them have continued, and we have had success with those," said Byron Black, Rockwell Automation's territory sales manager in Calgary, Alberta.
P&H and Bucyrus say they haven't seen much of a slowdown in their oil sands equipment business.
While billions of dollars' worth of development projects have been shelved, activity has continued in the existing mines, said Mike Sutherlin, president and CEO of Joy Global Inc., the Milwaukee parent of P&H Mining Equipment.
"We aren't going to see a lot of negatives there. The question is the rate of improvement," Sutherlin said.
Mine operators have upgraded their existing sites to get more from them before starting new projects.
It's a different scenario than even 18 months ago when some criticized the oil sands regions for its frantic pace of growth.
"We went through a period, particularly in 2007 and 2008, where people were aggressively throwing money at expansion projects," Sutherlin said. "A number of projects were re-evaluated and put on the back burner because costs had gone through the roof."
Now there's a more sensible approach, according to Sutherlin.
"We are seeing the major oil companies look at the oil sands as an area where they can develop proven reserves. We feel pretty good about the sensibility of the growth rates that make costs steadier and more predictable," he said.
Chance to catch up
Billions of dollars have been spent on improving oil sands refineries. The slowdown in mining expansion projects has given refinery operators a chance to catch up on ways to become more efficient.
"Oil companies, out of necessity, are finding efficiencies that they couldn't even begin to look for in a boom period. When you are running 100 miles per hour, you can't afford to slow down and reflect on processes and costs," said Russell Thomas, spokesman for Keyano College, a Fort McMurray school with mining technology programs.
Bucyrus and P&H are the only manufacturers of mining shovels used in the oil sands. The region's potential could not be realized without the behemoth shovels that can lift more than 100 tons in a single scoop.
Existing oil sands mines continue to fuel equipment sales, including parts and service work.
"We aren't seeing any pullback," said Tim Sullivan, president and CEO of Bucyrus.
"The oil sands are going to represent a higher percentage of our business as we move through 2010 and into 2011," Sullivan said.
But while business remains steady at existing mining operations, some Fort McMurray residents say they're glad to see a cooling off in new projects that had fueled runaway inflation and created many problems.
In 2006, big paychecks were standard practice in the city that had become a magnet for people wanting a piece of prosperity.
The city's growing pains included a lack of affordable housing, with some people paying $300,000 to buy a mobile home. In the summer, at least, some people lived outdoors along the Athabasca River or in the thick woods surrounding the city of 60,000 residents.
There's much less of that now, said Thomas, with Keyano College.
"On many different levels there's been a silver lining to the economic slowdown," he said. "Our quality of life has actually gone up" as longtime residents don't have to compete with as many transient residents for basic necessities.
The slowdown has been welcomed by environmentalists who say open-pit mining has ruined the area's ecology and increased the world's dependency on fossil fuels.
"It would be encouraging if our world leaders took the slowdown as an opportunity to phase out the tar sands," said Mike Hudema, a Greenpeace Canada climate and energy campaign coordinator.
Canada is the largest oil supplier to the United States, and its oil sands reserves remain largely untapped.
Expansion projects will go forward, said David Podratz, manager of the Murphy Oil refinery in Superior.
"I think you are going to see oil come from that part of the world for a long time to come," Podratz said. "We were looking at expanding the refinery to take advantage of some additional production that might come from the oil sands."
Canada's oil sands may seem especially attractive as petroleum companies run into political turmoil in other parts of the world. Although it takes a lot of energy to produce synthetic crude from the gooey dirt, the process can still be highly profitable.
Technological advances have made the Canadian oil sands the second largest recoverable oil reserves in the world, after Saudi Arabia, according to IHS Cambridge Energy Research Associates.
-- Copyright (c) 2009, Milwaukee Journal Sentinel/Distributed by McClatchy-Tribune Information Services.