Business

Dome, oil and the Arctic: tales of a true believer

Peter Brimelow June 27 1977
Business

Dome, oil and the Arctic: tales of a true believer

Peter Brimelow June 27 1977

Dome, oil and the Arctic: tales of a true believer

Business

Peter Brimelow

It’s like watching a dog on the operating table licking the hand of its vivesector. Jack Gallagher, chairman and chief executive of Dome Petroleum Ltd., has just finished proving conclusively to a Tory conference that Canada must have the oil and gas his company is totally committed to finding under the Beaufort Sea, both for energy and balance of payments reasons. But here is John Crosbie (PC-St. John’s West), symbol and symptom of his political tormentors, a big, fleshy man who admits with a certain air of discontent to being the Progressive Conservatives’ energy critic, still saying vaguely that “well, the decision has yet to be made” about the party’s attitude to the Berger commission’s proposed 10-year delay on the Mackenzie Valley pipeline. And he is trying to edge away.

Gallagher believes the pipeline is essential for his Beaufort project. His blue eyes beg for belief. His hand hovers, evidently considering its habitual capture of a potential convert’s elbow. Instinctively translating his concerns into those of his listeners, he tries to convey the strategic advantage to the Tories of simultaneously championing economic growth, jobs and the interests of all Canadians, not just a few thousand northern natives. Later, Crosbie will shrug at the alleged economic urgency, and say that Berger has killed the Mackenzie Valley route—“the right wing would build a pipeline across this room.” But now he just looks past Gallagher, and mutters about the environment. “We’ve got to get this point across about tankers,” Gallagher says earnestly. He is referring to Dome’s ingenious contention that if oil isn’t piped from the Arctic, it logically will have to be shipped in, at greater risk, by sea.

Politics not logic impresses Crosbie, and he is soon gone. Gallagher looks around, and exclaims to himself when he sees that the 300 copies of his speech, complete with maps and diagrams, were not distributed to the audience as promised. He smiles, as he does at almost everything. Later in the afternoon, he can be seen moving around the room with a stack in his arms, doing the job himself.

Ignored amid the thunderous breastbeating that greeted the Berger report, Canada’s oil industry is entering a quiet crisis. In the past 16 years, more than $800 million has been spent searching for oil and gas in the Arctic. It was an act of almost irrational faith by the companies. Without a pipeline, they had no way of extracting any discoveries. Even the basic issue of profitability was a mystery, dependent on

Ottawa’s Northern Land Regulations, arbitrarily withdrawn seven years ago for a revision which has been promised from month to month ever since. But now poor results have made them despair. Shell, Mobil and Gulf all recently gave up. The Beaufort is regarded as the last chance of an “elephant”—a major find—but hope is fading. And without discoveries, Canada faces a future of either costly imports or shortages sharp enough to convince even city-dwelling environmentalists that oil does not just come out of a gas pump.

All of which makes no impression on Gallagher and Dome Petroleum. Without strong nerves, he could not have built the company from a one-man operation (himself, part-time) in 27 tumultuous years to its present 900-employee, $875-million assets status. Now he has taken the corporate finance equivalent of a deep breath, borrowed to the hilt and staked $230 million on his long-held, almost obsessive conviction that in the Arctic, which he first saw more than 40 years ago as a student assistant on the Canadian Geological Survey,

there are “mini-Middle Easts—one, two, maybe many of them.”

If the gamble comes off, Gallagher will have created in Canada an internationally ranked oil company. He will have justified his admirers’ hailing him as Canada’s greatest entrepreneur, and will enter the Oil Hall of Fame presided over by the reptilian John D. Rockefeller. If it fails, Gallagher’s lifework could be endangered—to say nothing of his top executives pension funds, which all have chosen to channel into Dome stock in breathtaking disregard of prudent trusteeship. And, incidentally, Canada’s economic future will be that much bleaker.

John Edward Patrick Gallagher will be 61 in July. He is a tall, slim, striking figure, so unnaturally youthful that you expect to find a covered picture aging evilly in his office. With his carefully coiffed silver hair, moustache and polished courtesy, he seems distinctly aristocratic, despite a tendency to nouveau-riche dress, such as white shoes. Closer study reveals the snubber facial features of the Irish immigrant railroad worker’s son. But there is no sign of the strain he must feel (“You have to be an optimist”) or of what must be an unyielding will. His eyes shine, his open countenance radiates nothing more than the obvious intention to agree with whatever you say.

Gallagher was born in Winnipeg, and went directly into the oil industry after graduating in geology from the University of Manitoba in 1937. He had a brilliant 13year career with Standard Oil Company of New Jersey. He worked in 12 countries including the Middle East and Latin America, learning some Arabic and Spanish, and becoming vice-president at an unusually early age. But by 1950, a mutual decision seems to have been reached that he had become too independent to fit the corporate mold. He joined Dome, which was being started with $250,000 equity and $7.5 million debt by a group of U.S. investors, including the endowment funds of Harvard, M.I.T., Princeton universities, led by Clifford Michel of the New York investment bankers Loeb, Rhoades & Co., Inc. (Dome’s 11 million shares are now widely spread. More than 60% are held in Canada. With 218,000, Gallagher himself is the largest individual stockholder, and Dome’s management group appears to have effective control, although Loeb, Rhoades still votes a total of some 490,000. Dome recently qualified as a fully Canadian company under Foreign Investment Review Agency rules by the surreal but ef-

fective method of acquiring control of and thus Canadianizing its own principal shareholder, Dome Mines Ltd.)

The Americans were conservative investors. But Gallagher won their confidence when Dome’s first two wild-cat wells struck oil. (He denies the story that he was able to arrange this through a knowledge of others’ nearby drilling results.) None of Gallagher’s directors had technical backgrounds, and, reportedly aided by a consummate diplomacy which minimized their contacts with others in the company, he seems to have quickly gained a free hand. Given Gallagher’s style, this was essential. Like Napoleon, he combines bold, almost visionary and sometimes ridiculous ideas with great caution and skill in execution, and an attention to detail which until recently might have resulted in even the lowliest employee finding Gallagher peering over his shoulder.

Exploring for oil and gas is an affair of variegated, complex and continuously shifting alliances. Dome has shown a remarkable ability to use others’ money— mainly U.S. and German—to drill in successively fashionable areas such as the Zama Lake in Alberta and the High Arctic. Dome stock has always been exciting, although the company has never actually made a major discovery, and has built up its oil and gas reserves largely by clever land dealing. But Dome has an undeniably solid achievement in its simultaneous diversification into the production and marketing of natural gas liquids, and into the Alberta petrochemical development.

These are providing its current huge surge in income, essential if it is to play the tax shelter game frontier drilling has become. (Dome’s massive exploration in the conventional areas of western Canada is partly due to the need to feed these operations.) It looked like a big risk to the rest of the industry. Dome has made mistakes. The Steelman, Saskatchewan, plant was technically in default for several years. However, Gallagher proved to have a natural talent for soothing bond holders. And the huge rise in hydrocarbon prices has now overwhelmed any problems.

Nevertheless, the fact remains that Dome has undertaken to at least double its 1975 size by expanding, even apart from the Beaufort Sea, into areas that are new to it, mainly financed by bank debt, which now exceeds $30 a share. (Loeb, Rhoades is organizing a $ 150-million private placement restructuring.) Paying the interest could be embarrassing if one income source gets sick. And the industry is prone to disease. Moreover, there has been speculation that Dome is having problems finding partners for the Beaufort, and might even have to spend its own money there. Its arrangement with Hunt International has been stormy. Finally, Dome has consistently favored less conservative accounting practices. When Dan Dorfman pointed this out in The Wall Street Journal in 1973, the stock staggered badly. Some analysts believe the company’s treatment of its Beaufort investment has maximized reported income and thus understates the financial impact if the venture fails.

These doubts have not penetrated Dome’s new downtown Calgary tower. Morale is high, and carefully tended. A lapsed Catholic, Gallagher is effectively high priest of a Dome religion, complete with a few junior heretics worried about the Beaufort doctrine. The men at the top of Dome have been there for years, periodically rearranged as he sees fit. His influence shows. Bill Richards, Dome’s jovial president, is heralded as a bluff, outspoken extrovert, but even while speaking out bluffly he scrutinizes his interviewer’s face for reaction with the familiar minute care. There are allegations that this old guard are courtiers rather than executives, shutting out younger rivals, and that Gallagher’s success is just luck in finding a booming industry. But both allegations are denied elsewhere, and both are probably somewhat universal. There are accusations of a personality cult, and Gallagher admits that Dome is not generous with the traditional publicity for staff changes. He says it can cause internal friction, and that a high profile often strains interindustry relations. Certainly his wincing at personal questions, manfully controlled because he has adapted to the press, is unfeigned.

Gallagher’s teeth-baring smile is a monument in Calgary, where he is gleefully referred to as “Smiling Jack.” But it is not the whole story. The standard Dome answer when questioned about his temper

Where the oil is... maybe

is “I’ve never heard him raise his voice.” In the endless haggling that goes on between oil companies, he has a reputation for ruthless cunning (which he depreciates) and he is even said to have intervened personally to overturn subordinates’ deals, in violation of industry protocol. This may explain why he has been unable to manouevre an irritated Petro-Canada into supporting him in the Beaufort Sea, despite his personal contacts within the government oil company, which he seems to have originally greeted with the wolfs enthusiasm for the newborn lamb. Gallagher enforces a tight discipline within Dome on such questions as work hours and vacations, albeit with deceptively mild hints. He is said to find colleagues who put on weight or have unorthodox private lives distressing. His own life is simple, even modest for a man whose Dome stock alone is currently worth more than eight million dollars. He socializes little, puts in nominal appearances at industry functions (“just enough to let you know he’s there”) and only rarely escapes to join his wife at their property in Southern California. He doesn’t smoke, drinks infrequently, and has a special diet lunch (toasted chicken sandwich, canned fruit, cottage cheese) named after him at Calgary’s Petroleum Club.

Gallagher is above all a salesman, and his very smoothness can alienate. He prefers compliments to confrontation. “Berger has done an excellent, thorough job on one segment of the problem ...” he begins, and is only reluctantly brought to admit that the central conclusion is anathema to Dome. His willingness to oversimplify for an ignorant audience, even when lovingly explaining geological technicalities, is possibly why he himself is sometimes said to be weak on the subject. In Calgary’s closeknit oil community, Gallagher is a lone wolf. He is suspected of putting Dome’s interests before the solidarity the industry

prizes as its only defense against rapacious governments, just as he broke ranks by joining the Canadian Development Corporation board at the height of its unpopularity with business. It is even darkly whispered that he prefers the company of Easterners.

This may be true. “We’re not interested in return on investment, we’re in it because we want to do something for Canada,” he once said about the Beaufort Sea in a moment of enthusiasm. When they hear of this, financial analysts choke on their soup and look uneasy, as if they may be called upon to explain the facts of life. Actually, it seems clear that Gallagher has become bilingual, not in the sense that the two of his three sons are who finished school in Switzerland, but in the sense that he can talk to both political and financial communities. He had just slipped into the more moralistic Ottawa language, in which he can go on to present Arctic oil as a sort of confederal trough which the Quebec pig will not want to leave.

Twenty-five years ago, Gallagher was flying into Calgary covered in mud from inspecting drill sites, changing into a suit at the airport, and traveling on without sleep through the night to a 10 a m. directors’ meeting in Toronto, where Dome was headquartered until 1958. But now there are new problems, as he learned while waiting five years for approval of the Cochin pipeline, watching the cost rise 300%. Dome has had to learn to argue about the environment, and how to rally support among Northern natives. Gallagher had adjusted, aided by his personal progressivism—he was a member of the World Peace Foundation and once intended to retire at 50 to work for the United Nations—and what he claims is an understanding that Dome’s motives are not just crassly commercial. Senior bureaucrats are unmistakably impressed by Gallagher’s

periodic attacks of altruistic idealism, such as his 1972 scheme to solve the Middle East dispute by irrigating the Sinai. And Gallagher does have a certain genteel distaste for commercial chatter. “We’re not going to make money on it,” he says, improbably, of his personal interest in the Eau Claire office and residential development in downtown Calgary. He prefers to discuss its architectural merits. Still, Gallagher is no doubt quite sincere. Only a love of risk for its own sake could have committed Dome to the gamble of the Beaufort Sea.

Gallagher’s Ottawa contacts are rumored to include Donald Macdonald, Jean Chrétien, and possibly even Trudeau himself. He is often said to be a “secret Liberal,” although he denies it and says he has not given up the idea of starting a brand new party to represent Western primary producers (Maclean’s September, 1974). Dome’s only political contribution in 1975 was an insignificant $2,500 to the federal Liberals.

Gallagher is utterly convinced that the Mackenzie Valley pipeline will be built. Given the noises presently emerging from politicians and the press, this is incredible. But Gallagher knew he would be given permission to drill in the Beaufort this year, despite the North Sea blowout and continuous environmental protests. There have been other signs.

Astonishment still tinges the voice of one member of the Beaufort Users’ Association, the group of permit holders organized by Union Gas, when he recalls how in the midst of agonizing negotiations with Ottawa they were abruptly informed that Dome had been granted permission to drill in preference to them. Dome had no plans to compare with theirs, he recalls, and had never previously appeared to be a rival: “It was naked political power.”

For a time, it looked as if Gallagher had outsmarted himself. Although Dome had permission to drill, it had no land in the Beaufort. It had to strike deals with the permit-holders, and they were able to arrange that Dome’s drilling would count against the obligations they had to meet to satisfy Ottawa and keep their rights. They felt no need to volunteer to share expenses,, particularly as disillusion about Arctic prospects grew. Hence the fear that Dome might have to drill with its own money. But now it is becoming clear how dramatic were the tax concessions made in the last federal budget to frontier wells costing more than five million dollars (which effectively means in the Beaufort, and possibly off] Labrador). Given the peculiar terms of the concessions and the fact Dome is drilling through a subsidiary, the company can virtually cover its expenses drilling dry holes. It may be able to get along without partners completely. Some experts are confident that despite appearances the government is so determined to find out what is under the Beaufort that Dome will be rescued no matter what pitfall it may walk into next.