Business

Black gold and rough diamonds

Suzanne Zwarun November 26 1979
Business

Black gold and rough diamonds

Suzanne Zwarun November 26 1979

Black gold and rough diamonds

Business

Suzanne Zwarun

Tuktoyaktuk clings so closely to the shores of the Arctic Ocean that the sea has swallowed chunks of the tiny settlement and people there have had to scurry inland, building anew as they go. Whaling was already in decline when the Hudson’s Bay Company arrived in 1934; when trading, in turn, tapered off, the community was revived by the establishment of a Distant Early Warning (DEW) Line station in the 1950s. But Tuk’s timeless, top-of-theworld aura is deceptive because, in yet another economic transformation, it has, most lately, become the staging area for oil and gas exploration in that part of tîie Arctic Ocean known as the Beaufort Sea. During summer’s perpetual light, 60-odd planes a day land at the DEW Line airstrip, disgorging roughnecks and oil executives, geologists and sailors, ship designers and computer repairmen. And once a year if he’s lucky—too occasionally, for his taste—Jack Gallagher himself escapes his luxurious executive suite on the 33rd floor of the Dome Tower in downtown Calgary, 1,550 miles to the south, and arrives to take a firsthand look at his particular vision of Canada’s energy future.

John P. Gallagher, 63, Dome Petroleum’s founder, chairman and chief executive officer, has hooked his hopes to geology. As he has been pointing out for years, two-thirds of the world’s oil and gas reserves are located in the relatively young Tertiary age sediments in the deltas of the great rivers of the world: the Mississippi Delta off-shore Louisiana, the Niger Delta off-shore Nigeria, the Orinoco off Venezuela, the delta of the Tigris and Euphrates in the Persian Gulf. And Canada’s Mackenzie River has a delta just like the others.

As things now stand, Canada supplies most of its own oil, but falls short by about one-fifth of the total required. This amount, which has to be imported, is growing every year and, by 1990, is expected to reach one million barrels a day unless a major new Canadian oil discovery comes to the rescue. That, says Gallagher, is where the North comes in: “It has the potential to supply

Canada’s energy needs for a number of decades.” Smilin’ Jack, as Gallagher has been dubbed in honor of his toothsomeness, hasn’t hit pay dirt so far. But speculators truly want to believe his single-minded vision of an energy-sufficient Canada. When Dome announced this fall that its Kopanoar M-13 well could be capable of sustained production exceeding 12,000 barrels of oil a day, oil-patch experts instantly predicted it would be a billion-barrel discovery, the biggest Canadian discovery ever, and the stock market went, as a broker put it, “absolutely wild.” It was the third consecutive year that speculative frenzy centred on Dome and, as in

previous years, the fever collapsed with the subsequent disappointing announcement that Dome’s find wasn’t commercial. In spite of all Dome’s drilling activity in the Beaufort—amply supported by tax-sheltered drilling funds supplied by private investors—no operating oil well has yet been tapped. And, with Arctic operations due to shut down next week for the winter, it will not be until next May before hope springs again in the land of the midnight sun. In spite of that, Dome continues to dominate the Canadian oil and gas scene as a golden-haired corporate star. One of the few completely Canadian-owned oil companies in a field dominated by foreign corporations, Dome last week announced its nine-month earnings are up 44 per cent over 1978.

The man behind Dome, the man who turned it from a one-man show to a corporation with assets in excess of $2 billion, was a University of Manitoba geology student who signed on with a Canadian Geological Survey team in 1936 and swiftly became infected by a lifelong love of the North and of risk-tak-

ing on the last frontier. In 1938, he struck out for wider horizons, hunting oil and gas in a dozen different countries while working for Standard Oil of New Jersey (now Exxon Corp.). A Jeep accident in the Andes left him with a broken collarbone that troubles him still, but his travels netted him, he says, world oil experience that was rare among Canadians then and put him in a position to be noticed by people “with some money and a desire to get into the oil business in Western Canada.” The people doing the noticing were from Dome Mines Ltd. of Toronto and the company Gallagher was invited to launch became Dome Petroleum, formed in 1950 with a capitalization of $250,000 in equity and $7.5-million in debt, most of it advanced by Dome Mines and the endowment funds of Princeton, Harvard and the Massachusetts Institute of Technology. In the decade between 1955 and 1965, more than 200 little oil companies were launched, many with more money than Dome; none survives intact today, except Dome.

Its first successful wildcat came in 1951, in the East Drumheller field, enabling Dome to sell 500,000 shares on the stock market for $5 million. Gallagher went on to build a solid base on the accessible, and less expensive oil and gas in Alberta and British Columbia until Dome became Canada’s largest producer and marketer of natural gas liquids. That provided a cash flow, Gallagher provided the vision and the determination to plow all the cash back into new, riskier ventures. (Dome has never paid a dividend.) Gallagher’s vision—the North—was, in the 1950s, never-never land to the rest of the oil industry, which believed that the energy glut would last forever. Gallagher thought otherwise and, in 1959, Dome filed on permits in the Arctic islands that no one else particularly wanted. Dome kept cornering the North, until it now holds working interests in about 24 million acres of oil and gas rights and

royalties in another 14 million acres.

Gallagher readily admits he would have made a poor corporate cog and he has used his small-organization freedom to do things that don’t make “dollars and sense” to the multinationals. Dome’s latest brain wave—a drill ship that revolves around its drill stem like a weathervane—is now up for tender. And Dome’s $25-million, Class 4 icebreaker (half again as efficient as the John A. Macdonald, 2xk times cheaper than the new smaller Canadian Coast Guard icebreakers) is now at work in the Beaufort and has surprised even company officials with its icebreaking abilities. With the John A., Dome has extended its drilling season from Oct. 20 to Nov. 5; this year, with the Class 4 icebreaker, Dome has been able to keep going until late November and finish testing all four started wells.

Dome sees eventually a $4-billion system that would have oil moving out of the Beaufort by icebreaker tankers year-round, the advantage being that tankers could economically move onetenth the oil that is necessary to make a pipeline worthwhile.

Gallagher has set 1985 as the target date to begin moving Beaufort oil to East Coast ports and, these days, his dream is anything but solitary. Dome’s drilling subsidiary, Canadian Marine Drilling Ltd. (Canmar), has been joined by such participant partners as Gulf, Petro-Canada, Hunt Petroleum and Norcen, thanks, in part, to federal government assistance engineered by Gallagher. “Gallagher has the facility to dream and to infect others with that dream,” as one financial analyst puts it. More practically, Gallagher has been able to beat the government at its own game, a fact that is only now becoming clear to the government. Because of “Gallagher’s Amendment,” as the oil industry dubbed the federal Frontier Exploration Allowance created at his instigation, some investors and companies can make a profit through tax returns alone by putting money into Canmar. Dome, itself, using all the tax incentives and tax manoeuvres possible to maximize its cash flow, managed, according to some analysts, to have Canadian taxpayers footing $130 to $140 million of the $150 million it spent in the Beaufort last year, and the 1979 figure could be greater. By not using its own money, these analysts say, the company has funds on hand to help with such projects as Dome’s recent $411-million, 49-per-cent purchase of TransCanada PipeLines Ltd. Next week Dome’s vicepresident, John Beddome, becomes TCPL’s chairman while R. R. Latimer— another Gallagher ally—takes over as president. Then there’s also Dome’s $400-million take-over of 76 per cent of Siebens Oil & Gas and its half-share of the $640-million purchase of Mesa Petroleum Company’s Canadian assets.

Dome executives point out that without the tax incentives drilling in the Beaufort would still not be possible, while the former Liberal government, which introduced the super depletion allowance, simply had to find out whether there was a secure, Canadian supply of oil in the Beaufort. After all, Dome took the risks, says President Bill Richards. The drilling system might not have worked in the Beaufort either because of the climate, or because of the limitations of drilling technology.

The man who took the risks, who engineered others into helping pay for them, who might, finally, see his 20year gamble pay off, claims disinterest in the moneymaking aspects of it all. “I’m in it for the fun of doing something worthwhile for Canada,” says Gallagher. Only when Kopanoar and its sister wells are proved will Dome’s full role become known. But Gallagher, whose lean, elegant looks often prompt people to compare with him a highly bred racehorse, may yet win the Triple Crown of the energy crunch. £>