It was as if a lighted match had been tossed into the oil patch. The sweeping energy proposals announced in last week’s budget, which sounded “a lot like socialism” to executives such as David Mitchell, president of Alberta Energy Company Ltd., ignited a mass hysteria in the oil and gas industry. Typical of the panic was the reaction of the stock market. Waves of selling, in part from U.S. and foreign investors who had helped to send the market to record highs the week before, sent the value of the stocks in the Toronto Stock Exchange oil and gas index crashing by an unprecedented $2.3 billion in a mere three days. The response of investors was not entirely rational, as seen by the number of stocks that took a severe beating despite the fact that the companies concerned were far from sure about the ultimate impact of the budget on their bottom lines. Nonetheless, the blow to the industry, particularly the 70 per cent that is foreign-owned, was not imaginary.
Top on the list of industry complaints was that the energy changes announced in the budget, far from promoting the government’s stated goal of energy selfsufficiency by 1990, will actually discourage it. The increased exploration and development needed to build up Canada’s oil and gas reserves will not take place because, industry says, it will not have the money. Total cash flow, which had been projected before the budget to rise by 25 per cent, or $2 billion, in 1981, is now expected to be flat or slightly lower because of higher taxes. In addition, generous tax incentives will be phased out in favor of a series of exploration and development grants designed to reward Canadian ownership and to encourage frontier activity. But not all Canadian companies are pleased. Richard Harrop, senior vice-president of planning and production at Sulpetro Limited, a mediumsized Alberta petroleum producer, says: “The magnitude of tne grants is certainly not enough to overcome the negative impact of the rest of the budget.” The budgetary proposals to
strengthen Petrocan and to purchase foreign-owned assets through Crown agencies have predictably drawn much fire. Critics argue that the billions that would be needed to buy the foreign assets would be better spent on exploration. If the Canadianization schemes look suspiciously like nationalization, the proposal to cut Petrocan in on 25 per cent of activity conducted on federal land smacks of expropriation to companies involved in frontier activity. Hardest hit could be the foreign-owned partners with a 75-per-cent stake in the Hibernia oil field off the coast of Newfoundland. Petrocan has already angered the Newfoundland government by taking a 25-per-cent piece of the action. Under the new budget proposal, it is assumed that they will go for another 25 per cent of the remaining interest, bringing their total stake to 43.75 per cent. To the Newfoundland government, which itself would like to take a 40-percent interest in the field, this constitutes “a pretty massive grab at resource power,” said Steve Millan, head of the provincial Offshore Petroleum Directorate.
If the Canadian government really is,
as critics claim, attempting to run the multinationals out of the country, it has not succeeded yet. Says Arne Nielson, president of Canadian Superior Oil Ltd., a wholly owned subsidiary of Superior Oil: “We’ve been in this country since 1943. We’re not just going to up and run.” Ironically, it may be the Canadian companies who head for the United States, where higher prices, lower drilling costs and ready markets have already attracted an estimated $1 billion in Canadian investment. That kind of financially hard-nosed, but distinctly unpatriotic, behavior makes a mockery of the government’s nationalistic objectives, in the opinion of the multinationals who like to contrast their own strong record of reinvestment in Canada. Some foreign subsidiaries may decide to sell, but a more likely response would be for them to increase their Canadian ownership by issuing new shares or bringing more partners into exploration consortiums in order to qualify for the incentive grants.
Once the industry recovers from the initial shock and starts adapting to the new rules, parts of the budget may come to be viewed more favorably. The grant system will benefit Canadian companies in the long run, particularly the many junior exploration companies which could not take advantage of the old tax incentives. And a number of executives are optimistic that the budget is not the last word but merely a working paper from which companies may be negotiated. Says Rick Hallisey, an analyst for First Marathon Securities: “This madness will not last forever. The fight will last six months to a year, then we will all go back to making money. But in the meantime, this is all so unnecessary.” Gillian MacKay With files from Geoff Hunt in St. John’s
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