How Ottawa perked up energy

The power of governmental policy changes has been demonstrated clearly in Canada's oil industry. The 1981 National Energy Program (NEP) of the former Liberal government accomplished much of one basic goal -- the Canadianization of the nation's oil and gas industry.

Through a different energy policy, Canada's new Progressive Conservative federal government has achieved its major aim -- the revival of Canada's oil industry. It agreed last March with the provinces of Alberta, Saskatchewan, and British Columbia on a plan for deregulating oil prices and reducing oil and gas taxation. This deal, called the Western Accord, has dramatically boosted Canadian oil exploration.

In the United States, the number of wells drilled last year declined by 20 percent, to something more than 52,000. In fact, exploration and drilling have dropped off in much of the world.

By contrast, drilling stepped up some 23 percent in Canada last year, to around 12,000 wells.

Moreover, in two or three weeks the Alberta government expects to move negotiations into the ``final stage'' with the Syncrude consortium for a $4.5 billion expansion of its oil sands operation. At that point, says Myron Kanik, associate deputy minister in Alberta's Department of Energy and Natural Resources, the consortium partners must make their final decision whether to go ahead.

The expansion will add 70,000 barrels per day to the existing 130,000 barrels per day now being produced.

The deal has hung to a considerable extent on the consortium's receiving favorable tax and royalty treatment. Also crucial is the consortium's expectations for the long-run price of oil. The cost of extracting crude from oil sands runs between $12.75 and $15 (US). Thus, Syncrude must be confident of oil's price remaining enough above $15 to meet capital amortization costs, pay royalties, and make a profit.

Another development was the announcements in mid-December of two more heavy-oil projects in the Primrose air weapons range in northeastern Alberta. Dome Petroleum Ltd. and Suncor Inc. will spend around $500 million (Canadian) each to extract 25,000 barrels per day each. The oil, too viscous to flow up a well by itself, must be heated by the injection of steam to make it more fluid. Dome Petroleum also got approval last month for expansion of a heavy-oil and bitumen project at Lindbergh, Alberta, to 15,000 barrels per day.

The basic reason almost 500 rigs were drilling in western Canada just before Christmas is that finding oil there is relatively cheap. A study by Barry C. Good, an analyst with Morgan Stanley & Co., a New York investment banking firm, finds that the multinationals' cost of finding new oil has been running an average $5.52 (US) per barrel in Canada, some 44 percent below the average $9.76 per barrel experienced in the US.

Canada's oil reserves amounted to some 7.5 billion barrels at the end of 1984, compared with around 34 billion in the US. Net production in Canada in 1984 was 550 million barrels.

Mr. Good, after noting that the ``onerous provisions'' of the old National Energy Program have been either abandoned or substantially modified with the Western Accord, calculates that the cash flow of the Canadian oil companies should rise at least 30 percent by the end of the decade and earnings by some 80 percent.

``This prospect,'' he says, ``has revived interest in Canada's multitude of geologically compelling hydrocarbon basins.'' He expects the revival of oil and gas exploration and development to lead to higher production.

Bernard F. Isautier, chairman of the Canadian Petroleum Association, calls the Conservative government's energy policy ``quite satisfactory.'' He likes it because it is based more on free-market principles, it involves less government intervention, it makes taxes more sensitive to profits, and there is no discrimination against foreign companies in frontier exploration.

The Liberals hoped with their NEP to boost Canadian ownership of oil and gas production to 50 percent, to increase the share of the oil and gas sector owned by the Canadian government, and to have Canadian control of a significant number of the larger oil and gas companies. In 1978, foreign firms (mostly American, British, and French) owned 64 percent of the Canadian industry.

With this goal in mind, state-owned Petro-Canada acquired Petrofina Canada for $1.4 billion Canadian ($1 billion US) in 1981. Later it acquired the downstream assets (gasoline stations, etc.) of BP Canada and more recently the refining and marketing properties of Gulf Canada.

A measure less popular with the oil industry was 1982 legislation giving the government the right to 25 percent ownership of a frontier oil play at the time a company asks to convert an exploration license to a production permit -- at no cost. It said such frontier activities should be at least 50 percent Canadian owned. Also, the NEP further stacked the deck in Canada's favor by a ``Petroleum Incentives Program,'' giving Canadian oil companies only direct cash payments for exploration and development in ``frontier areas.'' A number of American oil companies bailed out of Canada, selling their property to Canadian companies because of this discrimination.

Combined with continued regulation of oil and gas prices, a tax system that disregarded oil company costs, and a high royalty level, the NEP prompted a sharp downturn in oil and gas activity for a few years.

Whether or not it does it fairly, the Conservative government will not reverse the Canadianization so far achieved in the Canadian oil and gas industry. ``The pendulum simply will not swing so sharply from nationalism to continentalism,'' notes Morgan Stanley's Mr. Good.

The government removed the 25 percent ``back-in'' provision of the NEP. But it has reafirmed the 50 percent Canadian ownership of frontier properties prior to development. Nor was the government unhappy when the Reichmann family's Olympia & York Enterprises Ltd. bought control of Gulf Canada Ltd. last year for some $2.8 billion ($2.1 billion US). That purchase moved Canadian ownership of the oil and gas industry to 47 percent -- almost to the magic 50 percent number.