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FMI Quarterly/September 2014/September 1, 2014

Alberta’s Market Powered by Oil and Gas

Industry17_imageContinued development of Alberta’s natural resources will not only expand the local economy, but will also result in further demand for construction services.

Generating more than $87 billion annually in construction put in place, Alberta is projected to be the largest provincial market for construction services in Canada, and it could grow even larger, depending on the development of several planned oil and gas pipeline projects in western Canada.

2014q3_alberta_ex1Oil and gas construction is expected to reach nearly $52 billion by 2017 and will be a significant driver of total construction spending throughout Alberta, as oil and gas construction represents roughly 55% of the province’s total construction market. Therefore, changes in natural resources (e.g., oil sands) investments have a strong influence on the entire market.

In 2013 some of the region’s oil sands producers either delayed proposed projects or dialed back planned investments in response to lower market prices. Oil prices were depressed due to problematic pipeline capacity. Increasing supply from U.S. oil and gas shale congested pipelines and placed further downward pressure on Canadian oil prices. See Exhibits 1 and 2.

Additional Capacity Needed

2014q3_alberta_ex2Right now, the approval of additional pipeline capacity is critical for the subsequent growth of Alberta’s construction industry. The approval and continued development of the Keystone XL, TransMountain and Northern Gateway pipeline projects alone could potentially unlock $1.2 trillion in additional economic activity through 2035 in Alberta and billions in royalties and revenue. This investment will increase provincial royalties and revenues as the product is exported to more competitive international markets (e.g., Asia).

Increased revenues and royalties will free up funding for capital investments (e.g., institutional), and oil-related development will create new jobs that will attract population growth and heighten demand for office space and investment in supporting infrastructure (e.g., power, highways and streets). Finally, new jobs will also increase consumer spending, spurring demand for the construction of commercial facilities.

A Myriad of Driving Factors

While oil sands investment is a primary driver of construction spending in Alberta, it is not the only factor. Flood reconstruction, record-high in-migration and a commercial building boom will also help to sustain construction activity in the province. The provincial government has pledged an additional $1 billion for flood reconstruction in response to the June 2013 floods. Demand for institutional construction will also be driven by the education segment, including new and modernization projects.

Alberta has introduced a public-private partnership vehicle to spur investment in its primary schools. The Alberta Schools Alternative Procurement (ASAP) initiative invites private companies to bid for the financing, design, construction and 30-year maintenance of public schools. Demand for new schools is driven by the growth of the school-aged population. Projected spending for health care construction, including hospitals and clinics, is also expected to increase. In 2015 health care spending in Alberta will be roughly $1 billion. In total, investment for the institutional construction market will be nearly $3 billion annually and should remain stable with the government’s decision that it will borrow money to maintain its capital-spending program.

Spurring New Growth

Between 2008 and 2010, the credit crisis and recession had a significant impact on the previously booming commercial market in Alberta. Since that time, commercial activity in the province has picked up. Private developers and large retailers (e.g., Target) are very active in Alberta and are striving to keep up with the province’s strong population growth, which continues to outpace the rest of Canada. For example, population growth in Alberta in 2012 was 2.5%, compared to 1.1% in Canada, making it the highest increase in the country.

In 2012 Alberta’s commercial building segment accounted for almost a quarter of all commercial spending in Canada. Over the next two years, Target expects to open 100 to 150 stores in Canada and plans to invest $200 million for construction in Alberta. Driven by shifting cultural preferences, development is concentrated in high-density urban areas, such as the East Village development in Calgary, which features residential, retail, office and cultural buildings. Growth is also projected in the commercial subsegments of warehousing, hotels and restaurants.

Tackling the Key Issues

In addition to a resolution to proposed pipeline projects, labor shortages are a key issue for the Canadian construction industry and must be addressed to meet projected demand. Strong population growth in Alberta continues to push the province’s infrastructure to the limits. For example, increased construction activity related to electricity generation and transmission is leading to increased need for qualified engineers. Expansion demand is expected to create an additional 16,000 jobs for engineers by 2020. Virtually all of these jobs will be west of Quebec, with the bulk of the positions open in Alberta and British Columbia.

When it comes to engineering program enrollments, Alberta has lagged behind national trends. While skilled training has remained very important, the domestic population growth will not provide an adequate supply of labor to fulfill industry needs. As a result, companies are focused on recruitment efforts internationally in areas such as Ireland and the U.S. (e.g., California). In addition to infrastructure-related construction, residential construction is expected to peak in 2018 and will result in employment growth of nearly 35%. Nonresidential construction employment is expected to increase by 20% during the same time span. This will continue to put a strain on the supply of skilled labor.

It is true that oil sands investment has been below the record pace of recent years, but the sector continues to be Alberta’s economic engine with GDP growth forecast at more than 3% in 2014 (compared to 2% in 2013). Oil-related investment increases provincial royalties and revenue and generates new jobs that support the growing demand for construction (e.g., retail, office, residential) services. In anticipation of the approval of the aforementioned pipeline projects, owners are moving forward with capital projects. Therefore, continued development of Alberta’s natural resources will not only expand the local economy, but will also result in further demand for construction services that could be even higher, depending on the outcome of the planned pipeline projects in the region.


Kevin Haynes is a senior consultant with FMI Corporation. He can be reached at 919.785.9275 or via email at khaynes@fminet.com.

 

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