February 12, 2012 / 3:37 PM / in 6 years

Western Canada oil sands opportunity knocks in East

CALGARY, Alberta (Reuters) - Oak Point Energy Ltd is an Alberta start-up looking to make its mark in the booming oil sands sector, and Ontario figures big in its plans.

Oak Point, founded by two Alberta energy veterans, has developed an innovative modular system to produce bitumen from the oil sands, an off-the-shelf product offering some protection against cost inflation that’s creeping back into new projects.

Tapping Eastern Canada’s manufacturing sector to build the gear for the West’s booming energy industry is one way to beat back cost pressures while allowing other parts of Canada to cash in on the opportunity, said Ken James, privately held Oak Point’s co-president and chief executive.

The two regions of the country have long been bitter economic rivals, and have also moved in different directions. In the West, energy lifted the Albertan economy, while the high Canadian dollar, global recession and downturn in the auto industry hit Ontario, Eastern Canada’s manufacturing heartland.

“Our thinking is we want to use the existing infrastructure, existing stable workforce of Eastern Canada,” said James, whose company is also developing oil sands leases and planning for an eventual initial public offering.

“They know how to build things for Canadian climatic conditions, they speak the same language, and we also believe that there is great merit in getting political alignment and sharing the benefits of the resources of Alberta.”

It’s been a tough run in Ontario, the country’s most populous province. In the last year alone, its once-mighty manufacturing sector shed 32,000 jobs, according to Statistics Canada.

Just last week, Caterpillar Inc (CAT.N) shut its Electro-Motive locomotive plant in London, Ontario, after failing to force through deep wage cuts. At least 450 people lost their jobs.

Meanwhile, Alberta’s skilled labor pool is becoming stretched as high oil prices fuel a spate of new oil sands developments. Producers, aware that surging costs in the last decade pushed a few projects off the table, are seeking new ideas on making projects as efficient as possible to avoid painful overruns and delays.

The design of Oak Point’s scalable units - 4 meter by 21 meter (14-foot by 70-foot) modules that integrate steam injection for producing bitumen and the facilities to process it - allows the company to build them anywhere and ship them back to Alberta, James said.

Fabrication shops he has visited in southern Ontario are operating at 50 percent to 60 percent of capacity, and offer fixed-price bids, while Alberta shops struggle to keep up with their workloads.

C$55 BILLION OPPORTUNITY

A study by the Canadian Energy Research Institute, conducted in 2009 as the recession dragged on, estimated that the oil and gas industry would invest C$1.07 trillion over 25 years.

The lion’s share will come in Alberta, whose tar sands are the world’s third-largest crude deposit. But the study pegged demand for oil sands technology, products and services from Ontario suppliers at C$55 billion over that time frame, and other provinces like British Columbia will share the bounty.

The Canadian Association of Petroleum Producers provided a list with 255 Ontario companies, from Accolade Reaction in Ottawa to Zesta Engineering in Mississauga, that supply pressure vessels, pumps, valves, high-tech gear, engineering services and a host of other things to the oil sands business.

The roster includes some of the biggest international corporate names, including the Canadian divisions of General Electric Co (GE.N), Hewlett Packard Co (HPQ.N) and Ingersoll Rand Plc (IR.N).

Now, even more manufacturers are looking West, wagering that developers are looking East to help meet an industry-wide target of doubling oil sands production by the end of this decade without busting the budget. Those already doing such work are picking up more, said Jayson Myers, chief executive of Ottawa-based Canadian Manufacturers and Exporters.

“We’ve seen a lot of companies that over the past five or six years, who, as a result of their business in the oil sands, have gone from being exclusive suppliers to the auto industry, to the point where a larger part of their manufacturing in Ontario is now supplying the oil sands or other energy projects,” said Myers.

However, he points to a few roadblocks, including a requirement for an Alberta certification for welding as well as differences in interprovincial standards for transportation.

“All of these issues have to be dealt with, and sometimes just the logistics costs in moving sometimes very heavy pieces of equipment across the country are going to be a limiting factor as well,” he said.

Imperial Oil Ltd (IMO.TO) and Exxon Mobil Corp XOM.TO have dealt with that issue over the past two years, as they slogged immense pieces of Asian-built oil sands equipment along highways in Idaho and Montana for their Kearl project, facing court challenges and route changes along the way.

($1=$1 Canadian)

Reporting by Jeffrey Jones; Editing by Janet Guttsman

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