Canadian-Owned Oil on Thin Ice

GUELPH, Ontario-In Canada, the price of oil has plummeted by 60 percent in less than four months. Spurred on by a 10 percent world decrease in consumption and a 28 percent increase in production by non-OPEC producing countries, the world oversupply of oil could devastate the country's economy.

Canadian Finance Minister Michael Wilson recently told the Organization for Economic Cooperation and Development (OECD) that the plunge in oil prices had delivered "a major and sudden shock to our oil-producing provinces." But, he noted, that "it is likely to have an overall positive impact on the Canadian economy in the period ahead as a result of the direct benefits to the oil importing provinces, lowered interest rates, and the direct gain arising from improved economic activity among our trade partners."

This seemingly calm, measured response to the new oil crisis belies the major turmoil ahead for the Canadian economy. Serious political problems will arise from the economic disparity between the oil producing provinces of the west and east and the consuming provinces of central Canada. Energy conservation gains over the last ten years may he eroded. A wave of corporate activity-bankruptcies, reorganizations, restructurings, and mergers (voluntary or forced}--is building and most significantly, Canadian energy security will once again be challenged by foreign ownership.

Hardest hit will be Alberta. Unemployment offices in Calgary and Edmonton have been swamped as oil companies, large and small, trim their work forces. A jobless rate of 19 percent or 80,000 out of a workforce of 430,000 is predicted as early as this fall. If oil prices remain low, Alberta's population could be reduced by nearly two percent as thousands of residents may be forced to find work elsewhere, according to a study by Data Resources, a Toronto-based consulting firm.

Imperial Oil, owned by Exxon, is the country's largest oil and gas company and has already slashed its workforce by 12 percent, or 1,800 of 14,600 employees, through layoffs and early retirement packages. PetroCanada has let go two vice presidents and 100 Calgary employees and will probably follow Imperial Oil's overall 12 percent layoff. Dome Petroleum, Canada's largest domestically-owned company, is laying off 150 head office staff and cutting in half its capital spending program for the year in an attempt to gain approval from its lenders for short-term and permanent survival plans.

Only 42 drilling rigs are operating in Western Canada this month, down from 110 a year ago. Similarly, exploration is down with only 14 seismic crews at work compared to 31 a year ago.

The effect on revenues for the Alberta government has been dramatic. Oil and gas royalties provide over one third of its $6.8 billion income. A $1.37 billion deficit was estimated in the government's April budget, while last year there was a small surplus. Over the past decade Alberta has stashed away $9.3 billion in revenue from oil and gas royalties in their Alberta Heritage Fund. In the last two years, however, the interest has been spent and this year $1.4 billion of the principal will go into an aid package for farmers. If agriculture remains depressed and oil prices stay low, the Heritage Fund could be drained in four years.

0n the East Coast the situation is much the same, but less dramatic because the energy sector there was just gearing up for a big boom before the prices fell. Overall there has been a15 percent drop in investment in the oil and gas sector in the Atlantic region. Mobil Oil recently announced a delay of the $5 billion Hibernia Oil project. (See "Newfoundland's Oil Economy," Multinational Monitor, October 15, 1985.) Oil and gas exploration off Newfoundland has already declined to four operating rigs from eight last year.

"Just as we're ready to start on prosperity, away goes the oil price," said Newfoundland Premier Brian Peckford. "You can't win for losing. It's true for Newfoundland."

The drop in oil prices has nearly halved the expected revenue from the Federal Government's Petroleum and Gas Revenue Tax. Finance Minister Wilson's February budget based its revenue predictions on a $22.50 per barrel price. This was expected to bring in $830 million. At current prices, the best Ottawa can hope for is between $432 and $577 million. This drop in oil revenue comes at a time when revenues from wheat, forest products, and minerals are also declining. Plans to reduce the Federal deficit below $22 billion are quickly fading. As Carl Beigie, vice president of Dominion Securities Pitfield stressed in a speech to the Toronto Association of Business Economists, "Canada can no longer count on the resources sector to `bail out' the rest of the economy."

Overall, current oil prices have cut some $3 billion from oil company cash flow, which will lead to a cut of similar magnitude in exploration and development budgets. With more than one dollar in six invested in oil and gas in Canada, "it's very easy to get zero growth, even negative growth in the second, and even again in the third quarter of this year," said Lloyd Atkinson, senior vice president of the Bank of Montreal.

High cost production projects like the Cold Lake Oil Sands project and the Arctic Beaufort Sea projects may be jeopardized since a price of over $20 per barrel is needed to break even.

The most significant outcome of this latest oil crisis is the impact on Canadian control of its energy resources. As U.S. multinationals bid for the remains of Canadian owned companies that have been devastated by collapsing world oil prices, "Americanization" of the oil industry is once again a reality.

Over the last 20 years, under the former Liberal Government policy of "Canadianization" of the oil industry, foreign influence had been reduced. From 1981 to 1982 government National Energy Program incentives caused a flurry of takeovers. Unfortunately Canadian firms that bought foreign-owned companies did so at the worst possible time-as oil prices had peaked and interest rates were about to soar. In most cases it is these companies that are now in financial trouble and vulnerable to takeover.

Many potential takeovers are in the works. For example, CONOCO Inc., a division of du Pont de Nemours & Co. of Delaware is eyeing the Canadian giant Dome Petroleum Ltd. Texaco Canada Inc., which is 78 percent owned by Texaco Inc. of White Plains, N.Y., is after Sulpetro Ltd. of Calgary. Imperial Oil Ltd., owned by EXXON of N.Y. which represents the largest foreign presence in the Canadian energy sector, is said to be on the prowl for oil reserves. Likewise BP Canada Inc., owned 64 percent by British Petroleum Co., is also waiting with money in hand.

Canadian-owned oil companies, which had earlier called I for deregulation of the oil and gas industry so that they could benefit from world prices, are now rethinking this strategy as they face possible takeovers from foreign multinationals. Many of these independent oil companies are now calling for "new pricing arrangements." Richard Hillary, natural gas manager in the 200 company Independent Petroleum Association of Canada warned that "few in the independent sector will be able to survive" because "catastrophic" revenue losses are developing. "The largest oil and gas producer in Canada," he added, "may well become the Royal Bank of Canada," the industry's largest creditor and potential new manager of firms that go into receivership.

In the short term, it seems the Federal government can do very little to help the oil industry. Forecasts indicate that the average annual price for oil will be between $15 and $20 over the next two to three years. Any immediate help will have to come from royalty cuts by the Alberta and Saskatchewan governments. The federal government is waiting to see what happens to the beleaguered western grain farmers who are suffering from two consecutive years of drought and the effects of depressed world grain prices. If more money is needed for farmers there will be less for the oil industry.

But, any bailout package will probably be too little, too late. The Canadian oil patch is about to go through a major restructuring, which will have a significant impact on unemployment and the Canadian economy. When the dust settles, only one thing is certain-20 years of work to "Canadianize" the country's oil industry will have disappeared and foreign multinationals will once more be in control of Canada's energy supply.

Peter Cameron is the coordinator of the Ontario Public Interest Research Group in Guelph, Ontario.