BUSINESS/ECONOMY

A gathering frontier storm

MARK NICHOLS July 7 1986
BUSINESS/ECONOMY

A gathering frontier storm

MARK NICHOLS July 7 1986

A gathering frontier storm

BUSINESS/ECONOMY

The announcement was a longawaited sign of hope amid a climate of despair that was gathering over Canada’s offshore megaprojects. Last week in St. John’s, the seven members of the joint Canada-Newfoundland Offshore Petroleum Board said that they had approved a detailed plan by Mobil Oil Canada Ltd. and its four partners to develop the 500-million barrel Hibernia oilfield lying 314 km southeast of the provincial capital. Newfoundland Energy Minister William Marshall added that he hoped the oil would be flowing ashore as early as 1992.

But last week the future of the Hibernia field still hinged on tough negotiations under way between the oil companies and the federal and Newfoundland governments. At issue was how heavily the crude would be taxed. With low oil prices squeezing profits, other Canadian and foreign-owned oil companies operating off Canada’s east coast and in the Arctic were threatening to delay longawaited megaprojects if they did not receive more generous exploration and development incentives.

The new pressure by energy companies for government relief emerged only a year after the Conservatives accepted industry recommendations to lighten energy taxes and deregulate prices by dismantling the former Liberal government’s National Energy Program (NEP). But in signing the so-called Western Accord with the oil-producing provinces and the Atlantic Accord with Newfoundland, federal Energy Minister Pat Carney also ended the generous Petroleum Incentive Program (PIP). Under that program

Ottawa paid energy firms up to 90 per cent of the cost of exploring for undersea oil and gas. She replaced the grant program with a less generous measure. Since then, falling prices have rendered high-cost offshore oil and gas uneconomical with-

out the support of PIP grants. As companies cancelled exploration projects they also laid off highly-trained workers.

Industry analysts say that oil prices should rise again by the early 1990s, making offshore reserves viable again. But by then, said Alan Ruffman, president of Geomarine Associates of Halifax, an oil industry service firm, many smaller Canadian-owned companies will have lost much of their capacity

“to explore for oil in deep and coldwater frontier environments.”

Exploration activity has already fallen off dramatically. The number of drill rigs at work in Canada’s Atlantic waters has dropped to just six from a record high of 13 a year ago. That decline is partly the result of poor drilling results from the Venture gas find off Nova Scotia’s Sable Island. Two weeks ago the joint venture between Calgary-based Husky Oil Operations and Bow Valley Industries announced that at the end of July it would tie up three supply ships and a drilling rig currently working off the Nova Scotia coast, leaving 254 employees out of work. Said Larry Prather, East Coast manager of the Husky/ Bow Valley consortium: “By the end of the year I will be surprised if there are two rigs operating off the east coast.” But even work in proven fields is in jeopardy. Husky/Bow Valley executives said that if the federal government did not provide more generous funding, it would stop drilling in its Ben Nevis oilfield off Newfoundland next July. With the new Exploration Tax Credit, a company can obtain a tax credit of 25 per cent on wells that cost more than $5 million, enabling some companies to deduct up to 60 per cent with the aid of other tax credits. Declared Geoffrey Tooton, president of the St. John’s Board of Trade: “Unless Ottawa provides a better arrangement, there will be no exploration industry in Newfoundland by next summer.”

As well, late last month executives of Calgary-based Gulf Canada Ltd. said that the company might pull out of the Beaufort Sea unless it, too, re-

ceives additional government assistance.

Earlier this year Gulf announced that its huge Amauligak field 75 km north of Tuktoyaktuk could contain up to 800 million barrels of oilmore than enough to justify the $2-billion cost of a pipeline from Tuktoyaktuk to the existing network in northern Alberta.

But Gulf says that it must drill three more exploratory wells, at an estimated cost of $180 million, to define the limits of the Amauligak field. The company has demanded that Carney fund the wells under terms similar to the old PIP program, which ended last March. As well, Gulf wants more generous incentives that would allow its cashpoor partners—including Bow Valley and Husky Oil—to participate in the high cost of Arctic oil production. Declared Gulf vice-president of development Michael Bregazzi: “There is not a hope in hell of partners joining us under existing financial arrangements.”

So far, Carney has resisted renewed lobbying by the oil companies for further tax concessions. In signing the Western Accord last year, Ottawa cut the total 1986 tax on energy companies by $1.3 billion. The only remaining special levy on energy firms is the Petroleum Gas and Revenue Tax (PGRT), which could take in up to $500 million this year and will be eliminated completely in 1988. Said Carney last week: “You cannot resolve the problems of the downturns in oil prices by throwing money at them through government programs. That was attempted under the National Energy Program and it did not work.”

Indeed, between 1981 and 1985 the federal government distributed $5.8 billion in PIP grants for offshore exploration. But according to Ian Doig, a Calgary-based energy analyst who publishes Doig's Digest, an industry newsletter, two-thirds of the oil discovered in Canada’s frontiers in the past 20 years was found before the

government began handing out those grants. That exploration effort, between 1965 and 1980, cost the oil companies $4.6 billion. But the remaining third of total frontier discoveries, made since 1980, cost $8.6 billion to find—and over 70 per cent of that came from taxpayers.

Instead of creating new federal grant programs, Carney says that if further major concessions are needed, the provinces should cut their own royalty and tax levies on energy companies. The energy minister is now locked in negotiations with her provincial counterparts and oil companies over who will bear the costs and reap the rewards. Last April, Ottawa introduced the small proli ducer tax credit, which ! allowed small oil companies to escape the PGRT completely. Carney is under pressure from Alberta Premier Donald Getty to eliminate the remainder of the PGRT immediately. Carney was scheduled to meet with Alberta Energy Minister Neil Webber in Vancouver last weekend to discuss that and other measures to help Alberta’s hard-pressed oil industry.

On the East Coast, the Newfoundland government of Brian Peckford is publicly deflecting efforts by Mobil and its four partners—Gulf Canada,

Petro-Canada, Columbia Gas Development and Chevron Canada Ltd.—to gain significant tax concessions before proceeding with Hibernia. Early last month Peckford said, “The oil companies are being more pessimistic and less realistic than really they should be.” Added Newfoundland Energy Minister Marshall last week: “We

anticipated a certain amount of posturing.”

But Geomarine’s Ruffman told Maclean's that industry observers feel that the Mobil consortium is prepared to halt its activities at Hibernia if it does not receive a satisfactory tax arrangement. Last April the St. John’s Board of Trade and three other business groups representing offshore industries, alarmed by the prospect of the collapse of the East Coast drilling, urged the province and Ottawa to come up with a new and richer program of exploration incentives. They said that 200 Newfoundland companies could fail—resulting in 4,800 lost jobs—as exploration spending falls to a projected $100 million next year from $450 million this year.

The economic prospects are equally grim in the Northwest Territories where local leaders say that a pullout by Gulf would have a devastating impact not only on local communities— where 600 northerners work directly in the oil industry—but on all of Canada. In Nova Scotia the decline in drilling activity has already caused the province’s economic growth rate to fall to 3.6 per cent—below the national average of 4.4 per cent. The major problem is that energy companies have failed to find the two trillion cubic feet of reserves necessary to justify commercial production in the Venture gas project. Still, the Tory government of John Buchanan, which is currently renegotiating a 1982 revenue-sharing agreement with Ottawa, is counting on improved terms for offshore operators—coupled with a modest upturn in prices—to encourage energy firms to continue exploration. Warned Buchanan last month: “It could be very difficult to get the level of activity offshore back to where it was in the absence of new tax incentives.”

A measure of compromise by both levels of government may be necessary to save jobs and maintain development of Canada’s frontier energy finds. The main spur to finding a solution is the possibility that another dramatic rise in the world price of oil could suddenly make frontier oil not only affordable but critical.

JOHN HOWSE

DOUG EARL

MARC CLARK

CHRIS WOOD

PAT ROCHE

MARK NICHOLS with JOHN HOWSE in Calgary, DOUG EARL in Yellowknife,

MARC CLARK in Ottawa, CHRIS WOOD in Halifax and PAT ROCHE in St. John’s