Oilweek - March 2008

FEELING THE
PINCH
The impact of Alberta’s new royalty framework hasn’t really kicked in yet,
but most manufacturers are already adjusting to the slowdown

by Graham Chandler

When Alberta Premier Ed Stelmach announced his province’s new royalty framework last October, Les Larsson wasn’t overly concerned for his company. As a manufacturer of oilfield equipment ranging from blowout preventers and drilling spools to studded tees, Edmonton-based Academy Petroleum Industries has rolled with the punches.

“It hasn’t affected us much at all,” says Larsson, Academy’s general manager. “We haven’t really gained or lost. We’ve seen a slowdown, yes, but not caused by the royalty review. But then we don’t expect a good year like the last two either, with the smaller drilling companies now suffering.”

Larsson says Academy is sufficiently diversified to weather the downturn. “We do business with the oilsands operators as well and have seen absolutely no slowdown there.”

Academy is typical of many oilfield manufacturers: increased royalties slated for 2009 under the Framework have yet to seriously impact the sector. Diversification into oilfield sectors other than gas-related, or out-of-province business, has been the key so far.

For those who haven’t managed to diversify or shift markets however, it has been tough and the announced royalty changes loaded the last few bundles of straw on the camel’s back.

An official with one Edmonton-based company with 60 employees, requested anonymity for himself and his company described the situation: “My orders have just about stopped,” he says. “There are too many players in it for the amount of business right now.”

But for most, as long as they haven’t overextended or grown too fast on a diet of fat debts, it’s business as usual, albeit with a changed target market and product mix.

Gen Tex Oilfield Manufacturing Inc. of Red Deer has managed just fine by diversifying and pursuing out-of-province opportunities.

“We build for the seismic industry, completions and production side too,” says Garett Cupples, the firm’s president. “And about 50 per cent of our equipment goes outside of Canada— Wyoming, Oklahoma, Texas are all busy.”

Generally, however, it’s not Ed Stelmach’s royalty manipulations that are at the heart of the current industry downturn.

“It started slowing long before the royalty review—late winter [or] early spring last year,” says Cupples. “It doesn’t really have anything to do with royalties. Look at Alaska, for example. Their royalty rates are up to 65 per cent and they’re still busy.”