CANADA

Ottawa strikes a deal

MICHAEL ROSE November 10 1986
CANADA

Ottawa strikes a deal

MICHAEL ROSE November 10 1986

Ottawa strikes a deal

CANADA

The back-to-back announcements should have been cause for mutual congratulation. On Wednesday Alberta Energy Minister Neil Webber unveiled a long-awaited $l-billion aid package for the province’s hardpressed oil and gas industry. The next day federal Energy Minister Marcel Masse announced in Calgary that the two Conservative governments had met a Nov. 1 deadline for agreement on a year-old proposal to deregulate natural gas sales.

One possible effect: a decline in gas prices in Eastern Canada.

But last week’s good news was tempered by evidence of bitter backroom battles between Ottawa and Edmonton over the nation’s energy policy. Indeed, the atmosphere in recent weeks has been so heated that it reminded some observers of the feuding between the Alberta Tories and the Liberal government of Pierre Trudeau. Observed one veteran oil industry lobbyist in Ottawa: “Just because you wear the same political colors doesn’t mean you’ll get along on oil and gas policy in this country.”

The volatile relations between the two governments on energy matters contrasted sharply with the cozy situation of 19 months ago, when thenenergy minister Pat Carney proudly unveiled the Western Accord. That abolished most of the controversial oilpricing and taxation provisions of the former Liberal government’s National Energy Program and proposed development of a market-sensitive pricing formula for natural gas. But last spring’s collapse of world petroleum prices soured the accord, sparking demands from Alberta for a better deal. Webber made repeated requests for more federal assistance to the industry. And he balked at accepting important provisions in the transitional agreement

struck a year ago between Ottawa and Edmonton on natural gas pricing.

Masse agreed last September to eliminate the Petroleum and Gas Revenue Tax (PGRT), 28 months ahead of the schedule outlined in the Western Accord. But he subsequently refused Webber’s demand for a costly stabilization fund for small oil producers and resisted Alberta’s conditions for a substantially revised gas deregulation agreement. Insiders said that a fundamental difference of opinion has developed about how much help each government can afford to give to the beleaguered industry. The situation is politically complicated because measures that help the oil industry tend to penalize energy consumers in Eastern Canada.

The generous package announced by Webber for Alberta’s energy industry last week included deep cuts in provincial royalties on petroleum production. Oil and gas discovered before 1974 will get a four-per-cent royalty § break, and so-called á > ÉÉHÍ “new oil’” discovered after 1974, will earn a 12-per-cent reduction. The package also provided a five-year royalty holiday for wells started over the next 12 months and an enriched royalty taxcredit program. However, Webber insisted that Ottawa should provide still further aid. “We’re looking for the federal government to do much more,” he said. Canada, he added, had been insulated from $50 to $60 billion worth when prices were high.

But further federal aid appeared unlikely. Masse’s September announcement of an early end to the PGRT will cost Ottawa approximately $1 billion in forgone tax revenues, and insiders said that Masse waged a tough fight in cabinet to get the costly measure approved. Said a senior federal energy department official: “They have no sales tax, no gasoline tax and low in-

come taxes, so there is a limit to what you can tell the country about what you are going to do for Alberta.” Indeed, despite Webber’s statements to the contrary last week, federal offi-

cials told Maclean’s that Masse had privately insisted on decisive action by Alberta on royalties as a quid pro quo for the removal of the PGRT. Masse’s linking of the two issues in a speech last August angered Alberta, prompting Conservative Premier Don Getty to suggest that Western sepa-

ratism was on the rise again.

Alberta was also upset by Masse’s rejection of its proposal for a $5-billion stabilization fund. In an Oct. 7 letter to Webber, Masse labelled the plan—in effect, a new floor price for small oil producers in the form of loan guarantees 80-per-cent financed by Ottawa— “complex and interventionist.” Said a senior aide to Masse: “They want to go back to a floor price, now that they are victims of the free market they adored so much in the past.” Still, Masse acknowledged last week that the situation in the Canadian oil industry is “catastrophic.” And he has called a

conference of energy ministers in January to discuss national solutions.

The hard bargaining that led to last week’s announcement on gas deregulation underscored the tensions between the two governments on energy policy. The October, 1985, transitional agreement committed Ottawa and the petro-

leum-producing provinces to a “market-oriented” pricing system, which would allow flexible pricing and direct contracts between producers of gas and the distribution companies or industrial customers in Eastern Canada. A final deal was to be hammered out by November 1, 1986. A central part of the interim agreement was a commitment by Ottawa to review the so-called “surplus test,” which is used to determine how much Canadian natural gas could be exported to the United States. As a result, the National Energy Board substantially relaxed its surplus test last May—designating anything over a 15-year domestic supply to be an exportable surplus. But the Alberta government said that the new level still prevented producers from taking full advantage of sales prospects in the U.S. market.

At the same time, Alberta insisted on changes to the “adjacent border test,” under which Ottawa endorsed the principle that Canadian consumers would never pay more for gas than Americans living in adjacent regions.

Said one federal participant: “Alberta was determined that on this one, fat-cat Ontario was not going to be the winner again.”

In the end, Ottawa agreed to most of Alberta’s demands. In the crowded Macleod Room of Calgary’s Convention Centre,

Masse declared that Ottawa and the producing provinces would “withdraw from administering interprovincial natural gas prices,” meaning that the free market will now determine the rates for buyers and sellers. The export surplus test, he said, would be reviewed once again by the National Energy Board in light of “significant changes” in the Canadian gas market, and the border test would be abandoned in favor of after-sales monitoring to ensure that Canadian consumers “are not placed at a disadvantage” in relation to U.S. buyers.

Sources on both sides acknowledged, however, that the talks threatened to collapse until the very last moment. Alberta angered federal officials by temporarily refusing to grant routine gas-removal permits to distributors as part of its bargaining strategy. And the attitude of some Alberta officials, Masse told Maclean's in an interview

last week, was affected by “the leftover milieu of 15 years of bitterness and mistrust.” In fact, senior advisers to Masse had to dissuade him earlier this autumn from delivering a hardhitting speech that would have denounced the “scare tactics” being used by Alberta. However, after last week’s announcements, both sides downplayed the differences that almost scuttled it. As one well-placed Calgary Tory said, the Alberta government leaders had “done a lot of gratuitous fed-bashing lately.”

Still, the contentious deregulation arrangements promised to spark further problems. Ontario’s Energy Minister Vince Kerrio said even before the announcement that he did not agree with changes that might penalize Eastern gas consumers. For his part, federal Liberal energy critic Russell MacLellan predicted that natural gas deregulation would be “a colossal disaster.” Said MacLellan: “They’re just going to give our surplus gas away to the U.S. market, and household consumers in Canada won’t get any break.”

There was more agreement on the likely impact of Alberta’s royalty reductions. Analysts were particularly pleased with the size and scope of the royalty cuts, but others warned that a drop of just 80 cents (U.S.) a barrel in world oil prices—now hovering around $15 a barrel — 8 would wipe out its ef| fects. Said Bob Price g of Calgary-based Pe| ters & Co. Ltd.: “It’s definitely positive, and it will at least result in jobs being retained—maybe not created, but at least being retained.”

The fundamental question last week was how much longer the industry could weather the slump in world oil prices. With a cash-flow reduction of about $4.5 billion this year, and more than 40,000 jobs lost, Ian Smyth, managing director of the Canadian Petroleum Association, maintained that “we’ve only seen the beginning of the shake-out.” In fact, it was increasingly clear that the only durable solution to the woes of the Canadian oil industry—and to the conflict over energy policy—was a sustained increase in the world price of oil.

JOHN HOWSE

— MICHAEL ROSE in Ottawa with JOHN HOWSE in Calgary