Canadian Building Trades Conference (May 2010)

• Other Speeches

• Rothesay Netherwood School Presentation (May 2010)

  Speaker: Dale Cooper, Manager of Processing, Irving Oil Refinery

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• Canadian Oil Heat Association Annual Conference (June 2010)

  Speaker: Gary Bischof, General Manager, Irving Oil Commercial

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Speaker: Mark Sherman, General Manager, Irving Oil Refinery
It’s great to be here and I’m honored to be able to speak today at the Canadian Building Trades’ conference about Irving Oil and the relationships we share with many of you in this room.

When it comes to partners and suppliers, we’ve always believed that the longer you work together, and the better you know one another, the more value you can create for each other. And I think that’s why we’re here today - to share our experiences so that we can continue to move forward together successfully and continue to create that mutual value.

For those of you in the room that are not familiar with our company, Irving Oil is a private refining and marketing company, operating the largest refinery in not only Canada, but also along the Eastern seaboard for the past 50 years.

It has a capacity to process more than 300,000 barrels per day, and much of that is turned into clean gasoline, low-sulphur diesel, butane, propane, and other products. We market our products through the 800 retails sites we have throughout the Maritimes, Quebec and in New England. And 75 per cent of our refinery’s gasoline production goes to the United States. To give you some perspective on this, one out of every six cars in Boston runs on fuel produced at our refinery in Saint John, New Brunswick.

These are interesting and challenging times for all of us, and the theme of ‘taking it back’ is a timely subject, no matter what industry you find yourself in these days. I’m sure many of you in this room are aware already of how the oil industry has been losing market share in recent times, but in case you’re not, I want to share a bit of information on the situation the refining industry is facing.

I know that often, the information that comes through media or analysts seems to be conflicting or gives mixed messages and it can be hard to decipher what’s really happening in the oil industry. I guess the simple answer is that it’s complicated.

25 years ago, in Canada, there used to be 48 refineries. Anyone know how many exist today? There’s 11, and I’d be surprised if that number doesn’t continue to shrink. But the bulk of those closures aren’t from the difficult economic times we’re facing today. Many refineries closed 15-20 years ago when the industry went from a very regional business model to a national one.

Originally, refineries served only the market where they existed, so many refineries were small, 30,000 - 40,000 barrels per day facilities. Economies of scale prevailed and soon the benefits of consolidating many of these refineries were realized as smaller refineries were shut down and larger facilities were built in key locations; typically near large economic centres like southern Ontario or Edmonton.

Supporting this transformation was the development of interprovincial pipelines and international shipping routes that made it easy to transport refined product beyond traditional regional borders.

So, up until several years ago, refinery closures were happening ironically at a time when demand was on the rise. But it was about consolidating and adapting to take advantage of economies of scale. Today, however, refinery closures are generally about poor economics. And it all starts with the price of crude oil and shrinking demand.
 
Oil is a commodity where its price fluctuates with market conditions. And when you’re a refining and marketing company, such as Irving Oil, you’re not in the business of pulling oil out of the ground - you’re buying it in order to refine it. When market conditions push crude oil prices up to $100 a barrel, $140 a barrel, and we’re a 300,000 barrel per day facility, well suffice to say that we feel it.

Compounding this is the declining demand for fuel. It’s widely believed that reduced fuel demand is now built into the structure of North American society, and as such, some experts believe that gasoline consumption peaked in 2007 and will never reach that level again.

What’s driving this? Well, for one, there are higher fuel-efficiency standards for cars (By 2016, average fuel economy will be 35.5 miles per gallon, up 40% from today’s 25 mpg average). This alone will reduce consumption by almost 2 billion barrels over a 4 – year period.

Another significant reason behind the decline in demand is the legislative requirements for blended fuels, such as adding ethanol or biodiesel to our gasoline or diesel products. Some regulations are as high as 15 per cent for some blends, so right off the bat, there is a 15 per cent reduction in demand for our product.

While this is positive in terms of reducing carbon footprints and our dependence on oil, the consequences for refiners are strongly negative. We in our industry have had to take steps to protect our future by understanding the implications and developing new strategies to survive. Survival may seem like a strong word, but it is our reality.

Already, there have been more than 20 refinery closures within the last two years alone. To look at that another way, a typical refinery employs a range of 500 to 1000 people, so we’re talking about at least 15,000 - 20,000 jobs already gone.

Even with these cuts, there’s too much capacity; current industry capacity in North America is around 18 million barrels per day. It’s estimated that 4 million barrels per day needs to come out of that supply in the next three years, just to keep the supply and demand in balance.

Implications of this are huge, and the human cost of shutting down refineries is high. Refineries provide steady, highly compensated work at a time when such jobs are scarce, they’re often the largest employer in their communities, and they’re a significant pillar of the local tax base.

No new refineries have been built in North America in 30 years.  Not only because there is going to be less and less oil to refine, but also because of the surplus in capacity given the outlook for demand.

I’m talking a lot about the situation in North America, but it’s worth mentioning that the world market is experiencing flux as well. In Europe, declining demand is also their reality. Transportation is mostly all fueled by diesel now, and as result, many European countries have a surplus of gasoline they no longer have use for.

Yet on the flip side, one country bucking the trend is China. In China, huge refinery growth is anticipated.  I’ll give you one example why: in North America, there’s 800 cars for every 1000 people. In China, there are only 20 cars for every 1000 people. There’s a massive population poised to get behind the wheel in the next decade, and the demand that alone will create for fuel is expected to see multiple refineries built in that country. It’s a very different situation from what North American and European refiners are experiencing.

In short, we understand what it means to be facing a shrinking market. It’s a reality that all oil companies, including Irving Oil, are facing. It’s one of the reasons why I’ve been invited here to talk a bit about our company and about the relationships we share with the building trades. As a partner, we’d like to offer some perspective on what we think the future could hold for your organizations. But before I get to that, let me give you an idea of our relationship with the building trades.

On any given day, Irving Oil Refining has 1200 people on site, approximately 600 of those individuals are building trades members.

In spite of our size, our company is and remains very much a family company.

Irving Oil was founded by K.C. Irving in 1924, and his values of hard work, keeping a promise and treating every individual with respect are as foundational to our company today as they were over three quarters of a century ago.

Every individual that works at our refinery, and that includes Irving Oil employees and contractor employees, are treated according to these values. We pride ourselves on this. It is fundamental to who we are, and it’s one of the main reasons why we’re still here today.

I want to give you some examples of this. As I mentioned, we have around 600 people on our site every day doing maintenance through our long-term strategic partner Jacobs. In addition to this, there are a couple hundred more building trades workers brought in and out on a weekly or monthly basis for specific projects.

Together, we’ve implemented a number of initiatives that are mutually beneficial and unique. Some of these include:

• Encouraging a collaborative environment on work process improvement
• Employee and contractor engagement of 84 per cent. (brown paper seminars / bi-annual survey which includes all employees and contractors reveals we continue to have high levels of engagement, best in class)
• Job Security (for those considered to be in our base maintenance work force; a commitment to no layoffs)
• Supporting a philosophy of ‘one team’ (top-notch locker room, same coveralls = same standard for all who work at the refinery. We continue to improve upon this.)
• Financial support for apprentices going to school (EI top up payments. This is a common practice for companies, but policy often excludes contractors. We don’t exclude our contractors.)
• Human Resource practices that are family friendly and progressive (encourage a work/life balance, paid vacation & participation in our annual performance bonus program)

Some of our competitors have asked us ‘why do you do it?’ It’s quite simple - it’s our values. It’s the right thing to do. Why would we treat our employees and contractors different from each other? When Irving Oil first decided to go with a contract maintenance model in the early 1990s, it didn’t mean we decided we would treat a contractor any differently than we would an Irving Oil employee.  

And as the saying goes, the proof is in the pudding. We’ve seen greater collaboration between Irving Oil employees and contract workers, we’ve seen better flexibility – especially around work scope, and a huge decrease in absenteeism.

We’re also fortunate to have low turnover and long tenure. It is not unusual for employees to have 30-plus years of service with our company.  That includes workers from our maintenance partner Jacobs. Some of them have spent their entire career with our company. And also with Jacobs, we have an almost unheard of attrition level of 1-2 per cent.

In our recent $220 million dollar turnaround, our company had no difficulty in attracting the 1200 workers we needed for the project.

At the end of the day, what does this mean for our company? It means increased productivity, efficiencies and lower operating costs.

These are key performance indicators that directionally make us more competitive.

This is not an accident, this is not luck. We’ve worked for this success. Because in the end, we’re a business and staying competitive and winning is exactly what our company has to do to stay in business, so that we don’t end up on that hit list of closed refineries that you saw earlier.

Which brings me back to why we’re all here, and why your members have gathered to discuss how to ‘take it back’. You’ve invited our company to be here today to hear our advice on getting market share back, and it’s a privilege to be able to share some of the insight we’ve collected over the years through our challenges and successes.

How can you ‘take it back’? How can you be the best, especially in these changing times? Like us, you’re facing many challenges and while you have different measures of success, the fundamentals are the same. The way I see it is that as an organization, you need to figure how to win it back, So instead of focusing on ‘taking it back’, I want to talk about winning it back, because it wasn’t taken from you, it was earned by your competition.

And just like any business, in order to survive and succeed, you need to understand who your competition is nowadays. It’s not just the small, non-union shop down the street who is winning the contracts. More recently, it’s not just the large non-union contractors in North America winning the contracts. It’s the shops in India, in China and elsewhere that are also winning the contracts.

Why they’re able to win these contracts? Well, the simple reality is that welders in these countries are making a $1 hour. So when you think about being competitive, you can’t think only about how to be competitive in Fort McMurray or Saint John. Your competition is now global in scale – no different than us.

And to successfully compete in this environment, just like our company, you need a plan, a long-term strategy that considers all of these factors. And there’s two key stakeholders that need to be considered when generating a strategy - leadership and general membership.

In any good business strategy, there’s always a large chunk that lies with leadership, and it includes tactical approaches towards leading, mentoring, influencing and accountability. And I want to do a quick side step here, given what our own company has been facing, to illustrate what I mean when I talk about accountability.

So the point of sharing that with you is to illustrate that leadership can’t do it alone, and you need to get your membership to understand the reality of your organization’s situation.

Does leadership feel personally accountable for the challenges they’re facing, and what are they going to do about it?  And when you consider the other stakeholder - your membership - do THEY feel personally accountable for the success of your organization?

Effectively communicating the challenge your organizations are facing with your membership should be a priority for leadership. It certainly has been an important one for our company. You need to ensure everyone understands the situation you’re in.

When you’re putting together your strategy, remember that your very business is providing top-notch, skilled labour when needed, so capitalize on that. Be nimble, adapt, be proactive and plan for what’s coming next. Understand your competition. Anticipate what your customers’ are going to need and give it to them.

Specifically, the quality of workers you’re sending out has to be second to none. On top of their technical skill set, they need to be showing up on site with a great attitude and a level of productivity and professionalism that are unmatched by your competitors. Above all, your workers must be willing to work with your potential employers with increased flexibility.

Like any other business in this day and age, the landscape has changed and the ‘right to work’ has evolved into the ‘right to compete’ for work. And I know you realize that, and I commend you for being here today to talk about taking it back, but it’s only the start.

It was that wise old guy, Winston Churchill, who once said that the key to unlocking our potential is not strength or intelligence, it’s continuous effort.

Any business trying to stay successful and win customers’ is putting in a relentless, continuous effort. Irving Oil was founded by KC Irving on the premise that you never take your customer for granted, and every employee understood we had to work together towards beating the competition. And the only way to beat your competition is to ensure the customer always chooses you.

It’s a continuous effort to earn business, rather than to expect it….it’s a continuous effort to produce workers that have superior training, a superior work ethic and a code of conduct that makes your organization an easy choice for your customers.

It’s a privilege to come here and offer my comments based on the experiences I’ve weathered while making a career in the oil industry. But maybe you’re wondering whether it may be of any value. I’ve already explained to you the challenges the oil industry has been facing. It’s been a very tough few years.

What I didn’t tell you was that in spite of all those challenges, we were one of the only oil companies in North America last year that experienced growth and improved our earnings per barrel, beating our competition – which by the way, include all the major oil companies (but I won’t name names) located along the eastern seaboard.

We did it like any successful business would – we had a strategy, we paid attention to what our competitors were doing, and we stayed true to our foundational values of hard work, respect for our employees - including contractors - and keeping our promises. And it is a continuous effort. I hold our company up as an example solely to illustrate that with a good plan, you can ‘win it back’ in spite of the challenges you’re facing.

In closing, there’s the saying that ‘if a business is not changing, it’s dying’. There’s truth in this. If you don’t figure out how to win it back, you won’t be able to take it back.

These are challenging times, and we’re fortunate to have a good relationship with the building trades that are here today, so that we can share our ideas and our thoughts on how to take it back. The more we know each other, the better we can create value for each other and move forward successfully.

We wish you nothing but success as you work through these tough times. But as difficult as they may be for your leadership and your membership, we know you’re more than capable of being successful. I’m confident you have the capability to respond to the challenges before you. The trick will be turning capability into action.