Canada Takes on the Oil Giants

We look forward to a decade of unprecedented growth in the oil and gas industry in Canada," announced Marc Lalonde, Canadian minister of energy, mines and resources in November. "The growth will be widely shared with foreign investors and more adequately shared by Canadian investors. It will be good for both foreign and Canadian investors. And it will be good for Canada."

Lalonde's optimism is not shared by the bulk of the indigenous Canadian oil companies, and certainly not by the petroleum multinationals-the largest being Exxon, Gulf, Texaco, Shell, Amoco and Mobil-that dominate the country's energy industry.

The industry's bearish prognosis has nothing to do with a shortage of resources: Canada is an energy rich nation in the midst of a production and exploration boom. Rather, it's a shift in government policy that has the oil giants threatening to move their exploration dollars into the United States, where the election of Ronald Reagan has insured a warm political climate.

The sudden change in the industry's position on Canada was caused by the government's October announcement of a new National Energy Program. The program contains a sweeping set of proposals to increase both public and private Canadian ownership of the industry and to achieve energy self-sufficiency by 1990.

The government program has several major aims, primarily to free Canada from reliance both on OPEC and foreign oil companies-and by so doing to enhance national pride. "Energy can be a major force, both economically and politically, to unite us and make us prosper," the program declares. "By ignoring the problem of foreign ownership in the past, Canadians have lost a significant share of the benefits of having a strong resource base. If we fail to act now, Canadians will lose once again."

Through a hailstorm of threats by the multinationals, Canadian oil firms and the energy-producing western provinces, and a sudden drop in the value of Canadian oil and gas stocks, the government has stood firm.

"We know what we are doing," says Lalonde defiantly. "I must emphasize that we are prepared to face the short term consequences of a long-term policy for which there is no alternative."

Currently, 17 of the 25 largest petroleum firms operating in Canada are foreign controlled. Canadians own less than, 30 percent of the industry. Under the plan, the government aims to increase that to 50 percent, in part through purchases of private businesses by the federal government. The government would also have the right to take an automatic 25 percent share of any oil or gas found on federal property. "I, doubt that Americans would tolerate anything like 50 percent foreign ownership in any major industry-let alone a vital, basic industry like oil and gas," Lalonde said in November. "And to tolerate it at a time when that industry is claiming an enormous and ever-rising share of the national wealth is simply unthinkable."

Tax and lease incentives are also provided to enhance the role of Canadian companies. Leases to explore on federal land could be given only to applicants that are at least 50 percent Canadian-owned. An as of yet undetermined percentage of goods and services used toward federal land exploration and drilling would have to be purchased from Canadian sources. And the current depletion allowance would be replaced with tax incentives constructed to favor Canadian firms.

To raise revenue for the federal government, a new tax would be implemented on natural gas, starting at 30 cents per thousand cubic feet, and rising to 75 cents by 1983. The petroleum industry would also be taxed eight percent of operating revenue-a tax not deductible from its federal tax bill. The government hopes this will encourage the companies to put money back into Canada, since reinvestment is considered a business expense and lowers the firms' overall tax bill.

Canada is also aiming, through the program, to achieve energy self-sufficiency by 1990. Though a net exporter of energy commodities, Canada currently imports 25 percent of its oil. The plan puts particular emphasis on conservation, accelerating the development of alternative energy sources, and providing tax incentives for conversions from oil to other fuels.

For Prime Minister Pierre Trudeau's government, the policy serves several ends. It is the fulfillment of the liberals' long-standing activist energy policy, that has included controls keeping the wellhead price of oil to about $17 per barrel as compared to a per barrel price of U.S. $40 below the border, equal to about $45 in Canada. Trudeau has strongly supported PetroCanada, the public oil corporation, and successfully made a campaign issue out of the conservative Clark government's attempt to dismantle it.

Increasing government participation in the highly profitable energy business will also, of course, increase government revenues-a point not to be ignored at a time when the federal government is running an annual deficit of $14 billion.

"Oil is the fastest way to make a lot of money and the government needs a lot of money ," says Elliot Feldman, a research associate at the Harvard Center for International Affairs.

To carry out the policy, the government will rely heavily on PetroCan, the state-owned oil firm established in 1975. With the 1979 purchase of the Canadian .subsidiary of Phillips Petroleum, PetroCan became a fully integrated producer. It is now the largest Canadian oil company and the seventh largest oil firm overall in Canada; operating service stations from coast to coast with the popular maple leaf logo. In addition, the government recently announced plans to establish a PetroCan subsidiary to promote renewable energy sources and conservation.

So far, PetroCan has primarily been used to stimulate exploration in frontier areas, primarily through joint enterprises with private firms in such areas as the far northern frontier. But the government has indicated that PetroCan will be significantly expanded through additional acquisitions. Some oil company executives believe that the program announced this fall is only the first step in a long-range plan to make PetroCan the dominant force in the Canadian market.

Not surprisingly, the oil companies have greeted that prospect with little enthusiasm. They've taken the National Energy Program as nothing less than a declaration of war.

Loudly, and publicly, the multinationals are reassessing their plans for long-term investments in Canada, including exploration in the Arctic Circle and off the Newfoundland shore, deposits crucial to Canada's hopes to control its energy future. The firms have complained that the increased taxes and revised participation requirements have substantially reduced their incentive to. drill in Canada-especially at a time when the new U.S. government is talking about trying to remove the "windfall profits" tax on oil production.

"We should ask ourselves if we can invest in long-term projects when we fear the government can pull the rug out from under us again," said Gulf Canada President John Stoik.

After the plan was issued, Gulf announced that it would scale down its 1981 budget for Canadian investment from $779 million to $568 million. Though Gulf is cutting its budget essentially across the board, the steepest cuts are coming in exploration and development of the northern frontier, Alberta tar sands and Saskatchewan heavy oil. Amoco has announced plans to cut its Canadian exploration budget in half.

The plans have not been well received by much of the Canadian oil industry either-one sector that was supposed to be a major beneficiary of the changes. Some firms simply remain resistant to public sector participation in the industry, preferring instead to work with the multinationals.

"I don't like discrimination against multinationals firms because they have done great things for this country and they will continue to do great things for this country," asserted Jim Gray, executive vice-president for Canadian Hunter Exploration Ltd.

But there are economic forces behind their unhappiness too. Particularly distressing to the companies is the eight percent production tax. Canadian Hunter has redeployed all its discretionary exploration budget for 1981 to the U.S., claiming that the new program would reduce its cash flow by 25 percent.

The program has also intensified the acrimony between the federal government and the oil producing provinces, which have bitterly feuded with Ottawa over the control of energy resources. The federal government expects to earn $34 billion via the new taxes through 1983 and rebate $5 billion to the producing provinces. Alberta Premier Peter Lougheed has refused to grant exploration permits until Ottawa drops the new tax proposals and he has threatened to cut back production.

Newfoundland Premier Brian Peckford continues to fight Ottawa over whether the province or the federal government will control the development of-and the revenue from-the promising oil finds off Labrador. Alberta, the wealthiest province, opposed the tax because it fears the multinationals will cut back production in its borders. But, like the Canadian oil companies, it is mostly displeased because under the proposal more of the revenue from oil production will end up in the federal government's treasury.

The U.S. government has joined in the protests against the new program. A delegation of U.S. officials-led by Assistant Secretary of State Duane Hinton and Assistant Secretary of Energy Leslie Goldman-flew to Ottawa in early November to inform the Canadian government that the U.S. thinks the program will reduce energy exploration and development in Canada. More pointedly, the officials expressed concern that the plans to increase Canadian ownership to 50 percent of the industry could reduce the value of the U.S. corporations operating in Canada, and that the requirements for use of Canadian goods and services could violate international trade agreements.

After being assured that Canada had no plans to violate any international agreements, the delegation returned to Washington. But they have scheduled further talks, and can be expected to protest the moves even more vigorously once the new administration takes office.

If history is any guide foreign firms will not withdraw their Canadian investments for long. When other nations have restricted their activities, the petroleum multinationals have complained, but continued to invest in the countries as long as it was profitable-even if the level of profit dropped.

"At this point, with the oil shortages in the world, no one is going to run away from anything if it is profitable," says Michael Tanzer, an oil industry analyst and author. "[Oil companies] like to get a billion, but half a billion is still good."

The multinationals have faced similar government shifts before, not only in, the Third World. Over the past decade, many western industrial nations have restricted foreign investment in the energy industry, set up (or expanded) state oil firms, and given advantages to domestic firms. Even with the new taxes and restrictions in Canada, the terms there will be better for the oil companies there than, for example, in Britain or Norway, where taxes are higher and state-owned companies can lay claim to 50 percent or more of a find.

The Canadian government expects the companies to return also because there is just so much oil and gas to be found in the country.

John McNicholas, manager of economics for PetroCan, points out that while the U.S. supply continues to contract, most of Canada's reserves lie largely untouched. He argues that while the rate of return is higher in the U.S., the competition is tougher, with about ten times as many rigs operating in the U.S. as in Canada.

Buttressing McNicholas' observa-tions is the emerging pattern of oil company flight from Canada. Many of the rigs heading for the U.S., he says, are from the western provinces, while the government believes most future Canadian development will take place in the northern frontier and the east coast.

To stem the flight of oil investment to the United States and to gain cooperation from the provincial governments, the federal government may find it has to modify its tax proposals. Britain, for example, has changed its tax rate several times in the 1970s depending on the fluctuations in the world oil market.

If PetroCan is forced to divert resources to the western provinces-to pick up the slack left by fleeing companies-it may be difficult for it to find the money for additional acquisitions. But the government can be expected to push for more buy-outs quickly-if not with PetroCan than with a new national oil company-since it expects the cost of acquisition to rise rapidly in the next year and a half, as the world oil price increases and major new discoveries are made in Canada.

"I'll leave it to you to imagine what it would cost to buy one of the multinationals in 1990," Lalonde has told reporters.

Despite the initial burst of industry calumny, the situation in Canada re-, mains fluid. Most participants in the oil and gas industry are waiting to see what form the program finally takes when Parliament is through with it, and how the provinces react, before they commit themselves to a course of action-where and how much to in. vest.

Historically, the provinces have controlled their own resource development. But Ottawa can play what might be the ultimate trump card by declaring a national emergency and ordering production. If the provinces wished to carry the fight further, their only resort might be a new wave of separatism.