THE PIPELINE UPROAR: How much smoke? How much fire?

Not since the CPR gamble has there been as much public outcry and private ignorance over an industrial adventure. Here is what is known about gas pipeline profits and political tie-ins—and the tough questions still to be answered

BLAIR FRASER July 5 1958

THE PIPELINE UPROAR: How much smoke? How much fire?

Not since the CPR gamble has there been as much public outcry and private ignorance over an industrial adventure. Here is what is known about gas pipeline profits and political tie-ins—and the tough questions still to be answered

BLAIR FRASER July 5 1958

THE PIPELINE UPROAR: How much smoke? How much fire?

Not since the CPR gamble has there been as much public outcry and private ignorance over an industrial adventure. Here is what is known about gas pipeline profits and political tie-ins—and the tough questions still to be answered


From time to time in the past nine years, since Canada’s great wealth in natural gas began to be realized, Canadians have been puzzled by angry debates over something few of us have ever seen —pipelines. Especially after the memorable battle in parliament in 1956. the very word pipeline raises a whole set of irate questions in the average citizen's mind:

Is Canada getting the benefit of its natural-gas resources, or are we being robbed by “Texas buccaneers"?

*¡Jí Have insiders made fantastic profits on small investments in gas pipelines? Have some been protected against risk by government guarantees?

sfc Gravest of all: have politicians been in league wdth profiteers, trading valuable pipeline franchises for a share in the gravy?

Behind these suspicious and sophisticated questions, though, are other much simpler ones. How' much natural gas has Canada got, anyway? Where is it? Who owns it? What's it worth? What, in short, is all the fuss about? One reason for the prevalence of dark suspicion is that even these apparently simple queries have long, complicated answers that few' people seem to understand.

To begin with, nobody can tell how much natural gas Canada has. The highest guess at the moment is fifteen times as big as the lowest. However, one major oil company that is actively exploring for gas, in its brief to the Borden Royal Commission on Energy, estimated Canada's total gas reserve at three hundred trillion cubic feet. That would be enough for all Canadian needs and all foreseeable export demand until long past the time ot every man, woman and child now living. At current prices, its value would be equal to the whole national product of Canada last year — about thirty billion dollars.

Yet up to now, in the years since oil and gas were first discovered in western Canada, some three trillion cubic feet have been “flared off” — burned as waste. With continued on page 53

past year because they bought too soon and too cheap, and sold too late and too dear, their stock in the Northern Ontario Natural Gas Company. This is a distributing firm that buys gas from TransCanada Pipelines and retails it to three

dozen communities between Kenora and Orillia.

The president of this company. Ralph k. Farris, paid three hundred dollars for his 37,500 shares, or four fifths of a cent per share. The stock was offered to

The pipeline uproar continued from page 13

“The investment runs into billions . . . they can make or break rich men”

pipelines to carry it to market, gas is a national treasure; without them it's a mere nuisance.

Canada's natural gas is scattered all over the west. Some is in central and southern Alberta, some up north in the Peace River district, more is being found each year in Saskatchewan and the Northwest Territories. Most of it. like most oil, belonged originally to the province where it is discovered, and the province gets a royalty on gas and oil production. But when companies lease oil or gas properties for development, they become owners of the gas they find— they can sell it or, if they think the price too low, they can refuse to sell. Some are doing that right now.

Moving gas to market takes three different kinds of pipeline, usually owned by three different groups of people —a gathering system to bring it to a central point, then a transmission system to carry it to the cities and towns that will use it, thirdly a distribution system to deliver it to homes and factories. All these need permits from at least one government, and some from several — provincial authority where the gas originates and where it is consumed, lederal authority for interprovincial or international transmission.

Building these pipelines over long distances requires a great deal of money. Already the investment in Canada is running into the billions, and development has only begun. But since a pipeline is a natural monopoly, and since it is also a means of making a great deal of money, a pipeline franchise is something for which men will risk very big stakes.

Evidently, Canadian pipelines in the twentieth century are like Canadian railways in the nineteenth. They too can turn dormant resources into fabulous wealth, and add new dimensions to Canada. They too can make or break rich men. They too have been built in a faint aroma of scandal and political chicanery, in which governments fall, ministers resign, and citiz.ens don t know whether they should point with pride or view with alarm.

Tike railways, pipelines have forced Canada to choose between immediate cash advantage and national development. It was economic folly to build the CTR; the cheap way west was through the United States and then north again, by-passing the empty wilderness. The same logic would have sent Canada s natural gas south of the border as quickly as possible, where a mass market is ready for it. Canada made the same choice both times. The TransCanada Pipeline across the prairies and through northwestern Ontario, the Westcoast Transmission line through the rugged interior of B. C.. arc binding and building Canada as the CPR did.

But railways also appear in the history books in other, less edifying passages. None of the harsh language in various pipeline debates can equal the brutal impact of Sir John A. Macdonalds telegram to Sir Hugh Allan, the original promoter of the CPR; "1 must have anothei ten thousand" — six words that set off the Pacific Scandal of 1873. Nothing comparable to that has happened yet in any pipeline deal. However, there have been some things that raised eyebrows.

Two ministers of the Leslie Frost Government in Ontario have resigned in the

the public at ten dollars, has sold as high as twenty-eight, and is now around thirteen. When it was offered for public sale on the Toronto Stock Exchange. Farris had disposed of 20.000 but still held 17.500 shares. That's about a quarter of a million dollars at current rates.

One of the very early buyers of this company's stock was Philip Kelly, then Ontario's minister of mines. Kelly's nephew. Gordon K. McLean, had been one of the five charter shareholders and was able to buy 105.750 shares at five cents apiece. Kelly bought some of this

ficen his nephew, giving “twice what he had paid for it” but nevertheless making “a great deal of money.” Kelly resigned from the Ontario cabinet a year ago, but it was only in May of this year that he revealed the reason for his departure.

His colleague William Griesinger, former minister of public works, did not become a shareholder of Northern Ontario Natural Gas until November 1956, eight months before the stock was formally offered to the public but more than two years after the company was formed. Shares had then been available “over the counter” with Toronto brokers for some time. However, Griesinger held on to his stock for two months after Premier Leslie Frost had warned all his ministers, most explicitly, not to buy or retain any interest in gas companies with which any Ontario government agency might have to deal. When Griesinger’s belated shareholding was publicized in May, he had an interview with Premier Frost and then resigned.

Loud opposition cries

Neither Kelly nor Griesinger had anything directly to do with the Ontario Fuel Board, which authorized the operations of Northern Ontario Natural Gas Company, or with the thirty-odd municipal councils that have given it franchises. However, their early association with the company aroused loud cries from the opposition in the Ontario legislature, and rude questions about what became of some 315,000 shares that were sold before the stock was listed last year. All the stock transactions of Northern Ontario Natural Gas are now under investigation, both by the Ontario Securities Commission and by a special board of inquiry appointed by Ontario Attorney-General Kelso Roberts.

Two other pipeline companies similarly in the news of late are Westcoast Transmission and its subsidiary, Inland Natural Gas. They have not involved any public men in their dealings, but have drawn some exasperated public attention on other counts.

These are the companies that bring gas from Peace River to the communities of interior British Columbia, to Vancouver, and also for sale in a wholesale lot to northwestern states of the U. S. A. They have made cheaper, cleaner fuel available to all these customers, fuel that would otherwise have stayed in the ground in the Peace River district instead of providing a new industry there. However, there are a couple of flies in this ointment.

One is the variety of prices at which the companies sell gas in British Columbia and the U. S. A big American buyer, Pacific Northwest Pipeline Corporation, gets Canadian gas at the border for twenty-two cents a thousand cubic feet. At the same spot the British Columbia Electric Company, which supplies Vancouver, is paying thirty-two cents. There are reasons for the disparity, but they do not appease B. C. consumers who see only that they are paying more for their own gas than Americans pay.

To these critics the companies’ short answer is that they had to sign a hard bargain with the American customer, or go broke. This reply is almost certainly true. Westcoast Transmission at that time had spent about fourteen million dollars, half of it borrowed from the banks and the rest put up by millionaire Frank McMahon, the chief promoter of Westcoast. and by an oil company that he controls. Without the American contract this investment would have been a dead loss, and B. C. would have no pipeline.

But the force of this argument with

the general public has been somewhat impaired by the facts about Westcoast Transmission’s financing. McMahon, his two brothers and some other associates got their stock at five cents a share. It was later offered to the public at five dollars, and now sells for about twenty dollars a share. The original allotment of 625,000 founders’ shares, sold for $31,250, would thus be worth over twelve million dollars at today’s prices. To the ordinary man who doesn’t think in millions, this looks like a very large reward for the risk run by Frank McMahon and company.

And what of the Trans-Canada Pipeline Company, the daddy of them all, the subject of the historic pipeline debate that did so much to overthrow the Liberal government of Louis St. Laurent and C. D. Howe? Here are some of the remarks made about Trans-Canada and its officers by the present prime minister, speaking as Leader of the Opposition only sixteen months ago:

“What risk did these buccaneers take?” And on being challenged for applying the word to pipeline officials: “A buccaneer is one who reaps a piratical profit without any danger to himself. It is in that sense I use the expression.”

Small wonder that the average Canadian tends to look upon pipelines as deeply suspect, their franchises the prey of Bay Street profiteers and the commodity of crooked politicians. The facts are not quite that simple.

Trans-Canada will complete by the end of this year the longest pipeline in the world, twenty-three hundred miles through some cruelly difficult country, without exceeding the cost estimate that it made three years ago. It has already repaid with interest the government loan that was one of the bitterest issues in the pipeline debate of 1956. It pays a stiff rental for use of the crown-owned line from Manitoba to Kapuskasing, Ont., and will soon start buying that section from the crown at cost plus interest. It has signed thirteen contracts with ten different distributors to deliver gas at prices that compete with oil and imported coal, and will go lower as the use of gas increases.

Even among Liberals, there are few who try nowadays to defend the way the Liberal government handled the pipeline deal in 1956, or the abuse of closure by which it was rammed down parliament’s throat. But however ill-managed it may have been in parliament, the deal itself has not cost the Canadian taxpayer a penny.

Trans-Canada sold no five-cent stock, either. The “buccaneers” of the Diefenbaker speech made their “piratical profit” through options to buy Trans-Canada Pipeline stock at eight dollars a share. This stock was offered to the public at ten dollars. It now sells at about twentyfive dollars and has sold at over forty.

It is true that option holders ran little or no risk of losing their money. The government undertaking to build the wilderness section of the line, plus the eighty-million-dollar government loan to get the prairie section started, was almost a guarantee that the stock wouldn't fall below eight dollars. Anyway, option holders didn’t need to buy while the stock was low, and some of the options are still outstanding. At any time up to next March, they can be used to buy up the allotted number of shares at eight dollars apiece, whatever the market price may be.

The principal option holders were Nathan Tanner, then president, and Charles S. Coates, then executive vicepresident, of Trans-Canada Pipeline Company. It’s a safe bet that both men

have made a million dollars apiece, at least on paper, from Trans-Canada stock options.

Both of them, for different reasons, were considered indispensable to the success of the project. Tanner was the one man acceptable to both of the mutually hostile governments, and all the mutually hostile financiers, who were involved in getting the pipeline launched in the first place. Coates is a technical expert who has built thousands of miles of pipeline in the U. S., and at the outset was the only man in the Trans-Canada group who really knew how to do it.

Both men were securely established. Tanner, a former Alberta minister of mines, was getting thirty-seven thousand dollars a year as president of Merrill Petroleums in Calgary. Coates was a senior vice-president of Tennessee Gas, and a likely candidate for the presidency of that giant utility company. Neither would come for the salary alone that Trans-Canada offered. It was the stock option, with its chance for a tax-free capital gain, that tempted them out of their safe havens into what was then still a speculation.

The man who lost

Westcoast Transmission, Frank McMahon’s venture, was a speculation too and a much more precarious one. McMahon had the clearest proof at the very outset that men can go broke trying to start pipelines. His own rival for the franchise to the Pacific, a company called Northwest Natural Gas, spent $750,000 on prospecting and on legal costs, and lost it all when McMahon won. Their geologist, the late Faison Dixon, went into the fight a well-to-do citizen, came out of it relatively poor and died soon afterward, a broken man.

McMahon won because he was offering to bring Canadian gas to Canadians first. The Dixon group wanted to take gas out of southern Alberta to the U. S., sell it to Spokane and Seattle and other U. S. centres all along its length, and finally deliver gas at the end of the line to Vancouver alone. The interior of B. C. would have got none. McMahon offered to take the gas from Peace River,

for which no other market was in sight, pipe it through the mountainous interior of B. C. to a dozen small but growing comrrninities, and then sell the bulk of it in the U. S., after Canadians were served.

But although McMahon won in Canada, he lost in the United States. In Washington the Federal Power Commission refused his application for the rich market of the Pacific northwest, and awarded it instead to an American company then controlled by a hard-fisted Texan named Ray C. Fish. With the FPC commission in his pocket, the cold Fish drove a cold-hearted bargain — McMahon could sell gas to him at twenty-two cents, or not at all. It was no more than a break-even price, if that, but the alternative was to drop the whole scheme. The B. C. market alone simply would not support a seven-hundred-mile pipeline through the mountains. Rather than go broke, McMahon signed.

Canadian customers have to pay a higher unit price for Canadian gas, it's true. What's not so clearly realized, though, is that no Canadian buyer could afford the kind of contract that the U. S. buyer has made. The contract is for three hundred million cubic feet a day, and the buyer will pay for at least ninety percent of that quantity every day of the year. Only a big wholesaler with a huge industrial market could do it. B. C. towns and cities, which need five or ten times as much gas on a cold winter day as they do in summer, would be bankrupt if they had to pay for ninety percent of their peak load all the time. Even in such developed centres as Calgary and Edmonton the average consumption of gas, over the whole year, is less than half what's needed on the peak day. It is this “load factor" that determines the cost of gas to the consumer—the bigger the year-round industrial use, the higher the “load factor” and the lower the price.

The men who won

Some of the smaller communities in B. C.. notably Prince George, have fought bitterly against the McMahon companies and tried to get better prices. So far, though, none has convinced the B. C. Public Utilities Commission that it has a good case.

In the territory of the Northern Ontario Natural Gas Company there has been no serious wrangling about price— not in public, anyway. The communities that have signed with the company and its subsidiary. Twin City Gas Company, appear to be content with their bargain.

Northern Ontario Natural Gas owes its prosperity to a change of route by the Trans-Canada Pipeline Company. As originally approved by the Board of Transport Commissioners in Ottawa, the Trans-Canada line would have followed the CPR along the north shore of Lake Superior. This is the shortest route, but not the cheapest. Farther north is a way through the "clay belt" that calls for less blasting through granite, offers more customers, and has a motor highway nearby on which to move up materials.

Ralph Farris, Gordon McLean and the other promoters of Northern Ontario Natural Gas realized this fact long before anyone else did. In lining up customers in northwestern Ontario they gambled on their judgment that the route would be changed, and they were fight. The change was one of the first major decisions of C. S. Coates, the pipeline expert, after he joined Trans-Canada.

Whether this shrewd judgment deserves such a lavish reward as a profit of some

fourteen-hundredfold is a different question. The Ontario government takes the view that this is solely the investors' affair.

“We don't owe the investor a damn thing except full disclosure of information," said one Ontario spokesman. “All the facts about this company’s financing are in its prospectus, as the law requires. If the investor wants to buy watered stock, it's his business.”

What the Ontario government would regard seriously, if it should be revealed by the inquiries now in progress, is any hint that cheap founders’ stock had been distributed among municipal officials to encourage them to grant franchises to the Northern Ontario Natural Gas Company. Various rumors to this effect have circulated in recent weeks but none has been substantiated.

One source of confusion is the fact that municipal officials were invited to buy. and many of them did buy. Northern Ontario stock and debentures after it had been offered for public sale. They bought at the market price. So did many MLAs, including the leader of the Liberal opposition. John Wintermeyer. Some might argue against the propriety of public men owning stock in a public utility at any time, but the argument would be fairly academic. There was certainly nothing secret, at any rate, about these later stock transactions. If any scandal is unearthed, it will be in the disposal of stock at bargain prices before the public sale.

To many Canadians who don't consider themselves socialists, the mere aura of privilege and gain that surrounds a franchised monopoly is reason enough to keep such monopolies out of' private hands. Where you have a franchise, they say, you always have a temptation and you always have suspicion. Therefore all natural monopolies should be publicly owned and publicly operated. These people may be right (personally, I think they are) but they have some hard questions to answer in the particular case of gas pipelines:

Which government should operate this monopoly? Federal (which controls traffic between the provinces and for export). provincial (which controls sale within the province), municipal (which is closest to the consumer) or a combination of all three?

How does a government agency strike the balance between one group of citizentaxpayers who are selling the gas, and want to get the highest price, and another group who are buying the gas, and want to pay the lowest?

Should a government agency own two competing sources of energy, gas and hydro-electric power? If so, should the gas authority be free from taxation, like provincial hydro commissions? And in that case, what about the taxpaying oil or coal dealer who must try to compete with the tax-free gas?

Finally, how does a provincial or municipal authority raise the money to go into the costly business of pipelines? Ontario, for example, must plan already to borrow more than eleven billion dollars during the next twenty years, for needs that are already in sight—roads, schools, hospitals and so on. That means an average of about six hundred million dollars a year, or twice as much as Ontario has been borrowing up to now. Can even wealthy Ontario sell enough bonds to finance a billion-dollar gas distribution system too?

These questions are not unanswerable. They've all been answered, one way and another, in various parts of the world. But neither are they easy. Apparently there are no easy answers to the problem of pipelines. ★