One Man, Immeasurable Impact

How J. Howard Pew's intense and unwavering belief in the oil sands created an industry.

This article appears in the August issue of Oilsands Review 

By Peter McKenzie-Brown

If he is remembered at all, Americans interested in business history think of J. Howard Pew as an industrialist who created what was once one of the world’s largest energy companies. For Canadians, though, he was the legendary force behind the harnessing of the oilsands. Though his efforts in the oilsands sector were a cash drain for his company – at the time, one of the 20 largest in the United States – for this country he created an industry.

The thumbnail sketch of his life is this: Born in 1882, J. Howard Pew graduated from high school at age 14, from university at 18 and became president of Sun Oil at age 30. With his brother Joseph he transformed Sun (founded by his father; now called Sunoco) by introducing new refining, marketing, and distribution techniques. He was astute. During the First World War he responded to the war-time demand for crude by building a navy of tankers. That fleet became one of Sun’s most profitable businesses.

A publication celebrating Sun Oil’s centenary in 1986 described the man, who had died in 1971. “Tall and broad-shouldered, with bushy eyebrows, he was often seen clutching an enormous cigar in his fingers as he moved about Sun’s corridors. He was intense, sure of himself and deliberate in his speech even in old age.”

The Venerable Pew: An extreme conservative in his religious and political views, Pew was passionate about his work. “Working for Sun Company these years has been not merely a job,” he said in 1956. “It has been participation in an exciting adventure – a way of life providing satisfaction in the accomplishment of our goals. So our people have become a great team, welded together by great ideals and purposes accepted by each of us.”

In the 1940s the venerable Pew took a serious interest in the oilsands, in part because of an investigation of potential crude oil sources Sun undertook during the Second World War. In the early 1950s, George Dunlap had a remarkable interview with Pew before moving to Calgary to set up Sun’s Canadian exploration and production operations.

“I have one area that I am interested in and would like to share with you my interest,” Pew told him. He went to a cabinet to pull out a thick file marked “Athabasca Tar Sands,” then shared his vision of the future importance of the oilsands. He told Dunlap to ensure that “Sun Oil always has a ‘significant position’ in the Athabasca Tar Sands area!”

The venture was called Great Canadian Oil Sands Limited (now the Suncor plant), and in 1962 the Oil and Gas Conservation Board (today the ERCB) granted approval for the company to proceed with a 31,500 barrel-per-day, $122 million plant, but imposed severe environmental restrictions on the plant. The partners had serious concerns about economies of scale for such a small project. Costs began to rise and financial difficulties ensued. By 1964 it was clear that a company with deep pockets – not Canadian Oil Sands Ltd. – was needed to lead GCOS. Sun took on that responsibility. The capacity of the proposed plant increased to 45,000 barrels per day and the cost escalated from $122 to $190 million.

The larger plant received approval in 1964, partly because Pew wrote a letter to the Petroleum Resources Conservation Board (now the ERCB) saying “I believe in the future of this project and I will put up my own money without reservations if the permit is approved.” Read aloud at a meeting of the Conservation Board, that letter carried the day. By the time GCOS reached completion in 1967, costs had risen to $235 million.

Building the Plant: The contractor for the project was Bechtel of Canada, and the engineer representing Sun during construction was Robert (Bob) McClements, Jr., who later became chairman and CEO of Sun Oil. McClements described Pew as “one of the strongest influences on my life.”

Pew would visit the construction site and “we would have engineering (and other) discussions. He would ask ‘How much does it cost to feed a man an average twelve hours on a shift?’ He was very, very detailed. I still remember: it was six to eight pounds of food per person per day and a little less than $2.00 per person to feed a construction worker… Anyway, there was a side of J. Howard that I don’t think has really been widely recognized. I think many people would describe him first perhaps as an industrialist. He was certainly known as the leader of a large corporation. Sun was always in the top 20 of the Forbes list of companies. It was a huge company. But there was also a spiritual side to him. He was a very religious individual. His conversations often included two words: faith and freedom, and they were welded together….”

The Sun Company McClements joined in the 1960s was much different from those in today’s oilpatch. “There was no retirement plan, there was no healthcare plan, there was no sick plan. When you were sick, you took your own time off….You would pay for that time. When you retired – and nobody quit and nobody was ever fired at the Sun Company – you retired at 50% of your pay. There were no documents explaining this in those days.”

McClements described the only meeting he attended between Pew and Premier Ernest Manning. “I’m telling you I’ve never been in a business meeting in my life like that. It was like you and me sitting here talking. There were no hard specifics. (There) was a feeling of absolute trust between the two of them. And I remember when I went back to the plant, somebody asked me about it. Without thinking, I said ‘Those two men just reeked with honesty.’ The relationship they had was unbelievable, exactly the same wavelength.”

McClements served as master of ceremonies at the official GCOS opening. A Sun Company publication commemorating the event quoted him as saying “synthetic crude is a natural for petrochemicals. I see no reason why the stretch along the Athabasca (river) cannot become an industrial valley in time.”

McClements vividly remembered the official opening. “It was the end of September in 1967 at the dedication of the plant. Pouring rain, not a very good day at all.” Premier Ernest Manning and Pew (then 85 years old) both addressed the audience of about 200.

According to Manning, “no other event in Canada’s centennial year is more important or significant.… It is fitting that we are gathered here today to dedicate this plant not merely to the production of oil but to the continual progress and enrichment of mankind.” For his part, Pew told the assembly that “No nation can long be secure in this atomic age unless it be amply supplied with petroleum. It is the considered opinion of our group that if the North American continent is to produce the oil to meet its requirements in the years ahead, oil from the Athabasca area must of necessity play an important role.”

McClements, who was the first plant manager for GCOS, recalled a tour he gave Pew once production had begun. “We had visited the mine and were in the refining section of the plant (when he) asked to see a sample of what we were running and I asked an engineer to pull a sample of the product we were making at the moment. Mr. Pew took the bottle and held it up to the light. It was water white. He unscrewed the cap, held one nostril and sniffed the oil again. Finally, he stuck his finger in the bottle and tasted the oil. When he did, you could just see his face beam.”

A broad view of the GCOS story comes from Paul Chastko, a renowned oilsands historian. “When Great Canadian Oil Sands began production in 1968, it represented a remarkable achievement,” he wrote: “a Canadian company, backed by the investment capital of a U.S. multinational corporation, used a separation process researched and developed by scientists funded by the governments of Canada and Alberta to produce a synthetic oil capable of competing against conventional Saudi crude in world oil markets.” All true, but the energy behind this effort was the vision of J. Howard Pew. The impact on the oilsands of this one man has been immeasurable.

Contractor Survival

The infrastructure business shifts as the economy reels

This article appears in the March 2009 issue of Oilsands Review; photo from here.

By Peter McKenzie-Brown

Infrastructure reflects the times in which it is created. In Alberta, a literally off-the-wall example can be found in the control panels at the Turner Valley Gas Plant – a mothballed facility now being prepared for restoration as a historic site. Made in Germany during the 1930s, its control panels sport swastikas welded into the steel – a reflection of the political turmoil of the day.

The network of firms that create and maintain roads and industrial facilities make up the infrastructure business. Combined, they represent a huge segment of the modern economy. In Alberta in recent years, this business has been increasingly dominated by efforts to develop oilsands infrastructure, but since the beginning of the global financial crisis that has changed.

Infrastructure firms with contracts to design, engineer and construct massive projects like Petro-Canada’s postponed Fort Hills project have led to layoffs in professions where, a year ago, the demand was almost desperate. However, these cases have not yet been large. Indeed, many companies sense a need to rebalance the sector. Once that’s done, they say, demand for new and revitalized infrastructure will remain strong. Indeed, there is even a sense among some firms that both the province and the oilsands industry itself can benefit from the breathing room the slowdown is providing. Perhaps the irrational exuberance of the last few years really needed a pause for serious contemplation.

Spider webs and feeding chains: The infrastructure business consists of a spider web of design, engineering, manufacturing and contracting firms working with owners to build and install roads, pipes, wires, vessels and related technology. And in recent decades, the business has changed in dramatic ways. For example, said Bernie McAffrey, “It used to be that electrical and instrumentation was maybe 10 percent of the cost of a compressor station, say. Today that part of the equation I would guess is over 23 percent. A typical project now needs more than twice as much automation technology as it did a couple of decades ago.”

McAffrey founded Ber-Mac Electrical and Instrumentation in 1981. As last year wound down, a largely unnoticed item in the news – the acquisition of Calgary-based Ber-Mac by Swiss multinational ABB – received regulatory approval to proceed. More than three times larger than ABB’s previous western Canadian operation (built up through a combination of organic growth and small acquisitions), the new entity is an especially big player in the oil patch. McAffrey is now a vice president of ABB Ber-Mac, which employs about 750 technical and field people in the three western provinces, including 715 in Alberta.

Even though the financial crisis became apparent while the acquisition was in the works, ABB did not pause in its efforts to acquire the Canadian firm. According to ABB Ber-Mac’s new vice president and general manager, Marcus Toffolo, “This acquisition was not for cost-cutting but for growth. Long term, we may take skills out of Alberta to the rest of the world but that’s not feasible just yet because of regional demand.” He added, “When we looked at this acquisition (we were impressed with Ber-Mac’s) basic business model of vendor neutrality, regional distribution, customer satisfaction. We don’t want to change that.”

In broad terms, the infrastructure business applies technical and scientific knowledge and uses resources to build systems that benefit the economy. It employs a feeding chain that begins with minnows – firms of just a few technical staff – but ranges up to large multinationals like Zurich-based ABB. That global giant has more than 100,000 employees and annual revenues in the tens of billions of dollars.

McAffrey, whose company has successfully risen from the bottom toward the top of the feeding chain, has seen huge changes in the entire business since he set up his firm. “The amount of installed technology in Alberta has grown by leaps and bounds. In the beginning there were only two oil sands plants. In terms of magnitude and sophistication (infrastructure in Alberta) has grown dramatically.” The good news for the business is that these huge amounts of installed infrastructure have to be maintained and continually upgraded. Nowhere is this truer than in the oilsands.

Colleaux Engineering vice president Al Striga sketches out the size of the challenges. “It’s very unusual to see so many huge facilities packed into such a small area as (the Fort MacMurray area). If you throw in the need for cold weather operation, you don’t see anything else like this anywhere in the world. You have to specify cold-weather compatible equipment, instrumentation and metallurgy. Enormous pieces of equipment have to move at temperatures ranging from -40 to +30, and everything has to be reliable. The challenges are huge.”

His company is one of the minnows at the bottom of the feeding chain, but has done some oilsands work. “Large firms get the project. We get involved as subcontractors to the big firms. We get awarded a module or component of a facility.” Like other firms, Colleaux Engineering has been hit by the postponement of oil sands projects. “Within 72 hours of the time Fort Hills went down, we got a call saying our part of the action was all over.”

Like everyone else interviewed for this article, the principals at Colleaux Engineering are optimistic about Alberta’s medium-term outlook. “We’re hearing everything from doom and gloom to an optimum environment,” said Striga’s sidekick and the company president, Steve Colleaux. “We aren’t too worried about the future. We’re in an interesting part of the market. We don’t need a lot of work to stay busy. A company with a thousand people needs 200 hours per person per month. That's a lot of hours.” His 20-year-old company only employs ten technical staff.

What’s hot, what’s not:Although many oilsands projects are disappearing into the black holes of indeterminate postponement, opportunities for the infrastructure business in Alberta still abound. The amount of effort needed for infrastructure maintenance is vast. Consequently, there will be a rebalancing of the infrastructure industry in the province, with the slack from project cancellations being shifted toward these other areas.

The construction of new oil sands projects is an area of disappearing opportunity, and the business is alive with reports of large-scale oil-sands related layoffs. Some projects are staying the course, however – notably Imperial Oil’s Kearl project.

According to a source who requested anonymity, “Kearl is going ahead like crazy…. Rather than scaling back their efforts, (the project team at Imperial) are doing the opposite. They are spending about $1.5 million dollars per day on more than 1,000 engineers to engineer the hell out of it right now while contract engineers are cheaper. (Because of parent ExxonMobil’s strong cash position), they have the option to be greedy when others are frightened and frightened when others are greedy. In a couple of years when the competition is just starting to re-examine their preliminary plans, they will be digging holes and welding steel based on contracts formed in a down market.”

Despite the cancellation or downsizing of some projects (notably two Enbridge proposals to take bitumen to US markets via Ontario and Quebec), transmission is still a solid area of growth. So is the creation of new infrastructure in areas where oilsands operations are strong.

Asked how the shifting sands of the bitumen business have affected his business, Mark Wrightson – president of Whaler Industrial Contracting – was direct and to the point. “We submitted a proposal (for a SAGD project) to Connacher Oil and Gas in the fall. Just prior to the contract being awarded, the project was shelved. When Petro-Canada postponed Fort Hills, half a dozen projects fell off our project board.” However, he said, “our primary focus is on transmission – pump stations primarily. Eighty percent of the work we are doing is in transmission infrastructure, and Enbridge, TCPL, Husky and others have projects to take away bitumen. There is such an infrastructure deficit in take-away capacity that we expect these projects to remain strong.” The downside, such as it is, is that “there will be a lot more competition for that kind of work.”

Similarly, built-up infrastructure needs to be maintained, and basic oilsands maintenance presents tremendous opportunities. According to Pinal Gandhi, a project manager with Whaler, “It’s not going to stop. Syncrude and Suncor have old plants. They have a tremendous need for maintenance. They will cut down on the expansion side, but they will continue to put a lot of money into maintenance.” His enthusiasm is infectious. “Until recently (Suncor’s) upgrader was operating at 150 percent of capacity. Pumps were worn out” and so was a lot of other equipment. The company “wanted production. They didn’t care about the cost. The downturn is an opportunity to slow down on production but put money into maintenance.”

He adds that “Fort MacMurray itself has a huge need for infrastructure. They need (highway) flyovers, all kinds of supporting facilities. Anyone who works outside of the city has to spend a minimum of three hours per day to commute to work.” Again, he believes that the slowdown in oilsands development provides the opportunity for the infrastructure business to work with the city and the province to upgrade roads and develop other infrastructure. Wrightson concurs: “It’s embarrassing how little has been invested in infrastructure at Fort MacMurray.”

A construction manager with the Trotter and Morton group of companies, Mike Dickson has the ironic motto that during construction “contractors are merely an inconvenience to someone else making money.” In today’s environment, he says, “long-term projects that are three to four years out are being cancelled. (That is why our company) sees opportunity and is more interested in the smaller projects involving the necessary infrastructure maintenance and not mega-expansion.”

In general, newer infrastructure employs fewer people than the systems it replaces. According to Colleaux Engineering’s Al Striga, it develops in a virtuous cycle. “The more automation you implement, the lower the cost becomes, and the more automation you want.”

An oilsands automation engineer with one of North America’s largest engineering firms (he requested anonymity) discussed the potential of recent breakthroughs. “Digital automation has been around forever and a day, but the fact remains that if you go to any plant anywhere in the world, you will find that 80 percent of the loops are on manual. So we are not doing our job correctly. Ideally, you should have a plant that operates on automatic 100 percent of the time. We’re missing the boat somewhere, and I just can’t put my finger on why. If we can put more loops on automatic, we can approach that Holy Grail.”

As beguiling as such a development sounds, it’s going to be a long time coming. As Steve Colleaux acknowledges, automation (one of his firm’s specialties) controls processes better than people. “In a perfect world, automation can do everything. However, in the real world things aren’t like that. The system may come up with an alarm that says ‘We have a malfunctioning pressure transmitter. We can’t see what’s happening in this vessel.’ You need operators around to deal with those real-life problems.”

There are other problems in the wind. According to Trotter and Morton’s Mike Dickson construction used to be founded on the “three-legged stool of owner, engineer and contractor.” That changed, he says, with the advent of engineering, construction and procurement (EPC) teams serving as project managers. “Contractors are now the labour, which really means the risk.”

He believes relationships between owners and contractors may become strained in the emerging marketplace. “The sustainable win/win contract philosophy we have been experiencing (which was based upon the owner’s need to woo contractors and the contractors’ need to see repeat or possibly evergreen contracts) has given way to the more win/lose style of heads-up construction.” This, he says, may result in a more litigious environment.

What will mark the infrastructure development of the next few years? Nothing like the swastika in the gas plant – that much is for sure. Perhaps the mark of infrastructure during the next few years will be welded instead on the bottom line. “In the boom,” said Whaler Industrial’s Mark Wrightson, “just-in-time construction didn’t work at all – in fact, it rarely works well at the best of times. You couldn’t get deliverables on time. Everything was delayed. But today you can get turbines and gensets (electrical generators combined with engines). They are now being manufactured for a smaller market. A lot has changed.”

For the infrastructure business, perhaps the real mark of this changed era will be slower-paced, lower-cost, more orderly development. Surely that isn’t all bad.