BUSINESS/ECONOMY

Alberta’s uphill road to recovery

Andrew Nikiforuk July 1 1985
BUSINESS/ECONOMY

Alberta’s uphill road to recovery

Andrew Nikiforuk July 1 1985

Alberta’s uphill road to recovery

Andrew Nikiforuk

For Lavalin Services Ltd., a Calgary-based engineering firm, the recession struck with an unexpected suddenness at the end of 1981. In the next three years the company was forced to cut staff to 400 from about 700 as its major clients in the oil industry swiftly cancelled successive projects. But recently Lavalin has felt the first effects of corporate growth as Alberta begins a cautious recovery. With 428 workers last week, the company now plans to hire at least 25 more. Indeed, in a province in which just a year ago the unemployment rate soared to 11.2 per cent from four per cent in 1976, Lavalin is now “looking for staff and having trouble finding them,” according to president Arthur Smith.

In recent weeks economists and politicians have heralded the return of better times. And it is the province’s oil industry that is leading Alberta’s revival. Oil companies currently have 70 projects valued collectively at as much as $15 billion across the province. As well, there are other encouraging signs. Unemployment is down slightly to 10.6 per cent, and retail sales have picked up moderately. Meanwhile, in Calgary sales of homes in the first four months of 1985 were up by 41 per cent over the same period last year. And Premier Peter Lougheed has even predicted that by 1986 his once-proud province will again

lead the nation in economic growth.

Still, most observers concede that the revival is uneven and, in contrast to the boom years of 1973-81, tentative. The Conference Board of Canada predicts 2.1-per-cent annual growth—compared to 2.4 per cent nationally. Although that is well above the -.2 per cent the province experienced last year, it is well below the peak of 10.7 per cent reached

in 1979 during the boom. Explained University of Calgary economist Robert Mansell, who has spent seven years developing a statistical model of the Alberta economy: “This is not just a regular business cycle recovery but a readjustment for an economy geared toward boom-type growth.”

For the freewheeling Alberta business community, the transition has been a difficult one. Last year Shell Canada Ltd. trimmed 1,000 workers from its staff of 8,000, shut down its Toronto head office and merged that operation with the Calgary office. Said Douglas Stoneman, Shell’s senior vice-president for business development: “We have had to learn to do jobs more effectively and efficiently.” Declared Robert Price, an investment analyst with Calgary-based Peters & Co. Ltd.: “I see operators coming out of the recession more bread-andbutter-oriented and much less willing to take risks.”

For companies such as Franklin Supply Co. Ltd., a Calgary-based firm that is a major supplier of pipe, wrenches and other hardware for Alberta’s oil rigs, maintaining profitability has been a major challenge. In 1982 and 1983 Franklin’s sales dropped 12 per cent, forcing it to cut its payroll by 25 per cent. Last year sales increased by a modest five per cent over 1983 as drilling contractors again ordered new equipment. Douglas Scott, Franklin’s vicepresident, said that the recovery has been both slow and piecemeal. He added: “There are flurries of activity and then it is quiet. There does not seem to be anything sustained yet.”

But the resurgence of the oil industry has created mild optimism. According to analyst Price, there were 310 oil rigs operating in Alberta during the first five months of this year compared to 253 for the same period in 1984—a 22-percent increase. More importantly, bids for oil exploration rights on Crown lands have increased to $356 million from $263 million in the same time period. In northeastern Alberta new oil sands projects have already sparked “mini-booms” in Cold Lake, Lloydminster and Fort McMurray. Last month Lougheed said that a multibillion-dollar oil sands project would soon put the province “back to a major economic growth period before we realize it.” Analysts generally agree that the Western Accord between the federal and provincial governments provided the psychological lift that the industry needed. That key energy agreement, signed in late March, dismantled the 1980 National Energy Program, gave the oil industry an estimated extra $800 million in revenues this year and deregulated oil prices. Industry officials anticipated further breaks from the province this week, when Lougheed was expected to announce cuts in provincial oil and gas royalties in order to fulfil commitments made in the accord. Said Smith of the accord: “It has fostered investment confidence and has inspired greater activity in development.”

That confidence may be shaken if world oil prices suddenly drop. Last week Saudi Arabian oil minister Sheik Ahmed Zaki Yamani told other members of the Organization of Petroleum Exporting Countries (OPEC) that his country will no longer prop up world prices by cutting its own production. Yamani added that if the 12 other OPEC members do not agree at a July 5 meeting in Vienna to reduce their oil production in order to help offset a growing world surplus, Saudi Arabia will unleash its vast oil reserves, flooding the market and probably driving prices below $20 (U.S.) a barrel.

A reduction of that size would have dramatic effects on western Canadian oil producers. The current wellhead price for Alberta oil of $27.50 a barrel is expected to drop to about $26.50 next month. “If the price of oil drops to $25 or $24, our cash flow will remain at 1984 levels,” said Price. “We’ve got a bit of a cushion.” Added Mansell: “A modest decrease is not going to kill us.” But both analysts said that if the price drops below $20, recovery is unlikely.

The province’s tentative economic reawakening has been grossly uneven. Agriculture, which accounts for 7.5 per cent of all jobs in the province, remains in a precarious state because of sus-

tained drought and low commodity prices. And the province’s more than 40,000 farmers fear that their net income will decline again in 1985 for the fourth consecutive year. As for real estate, analysts expect that it will be a few years before the partially empty office buildings haunting Calgary and Edmonton will be completely occupied. Fully 20.3 per cent of the rental office space in Calgary remains empty, down from 23.8 per cent in 1984. And the high vacancy rates provide little promise to the construction industry, where employment dropped to 62,000 last year from 122,000

in 1981 and continues to fall.

Until the uncertainty clears, Alberta businessmen say they will continue their adjustment to steady but unspectacular growth. Efforts to diversify the province’s economic base into food processing, high technology and small manufacturing will also intensify, say business leaders. In the meantime, the slow growth is a radical prospect for investors accustomed to robust booms. Said Scott: “I would like to be able to say the dark days are behind us. But it is going to take time and there will be only small increments of growth.