Big government vs. big oil

Ian Anderson November 10 1980

Big government vs. big oil

Ian Anderson November 10 1980

Big government vs. big oil

Ian Anderson

Some firms may regard the new conditions as unsatisfactory. The government of Canada is a willing buyer, at fair and reasonable prices.

—The National Energy Program

"We worked on that a lot," Marc Lalonde remarked last week. "We wanted the mes-

sage to get across quite clearly.” It took several tries but the energy department finally got it the way the minister wanted it. Blunt. In the most sweeping government intervention into Canadian industry since the Second World War, the Trudeau cabinet has gambled it can finesse control of the petroleum industry out of the hands of the multinationals. The gamble is that Ottawa can do it without sacrificing future self-suf-

ficiency. With a war kindling in the Middle East and Eastern Canada at the mercy of imported oil, the stakes are high—too high, Lalonde feels, to let anyone think he’s only bluffing.

The man Lalonde has cast as the white knight of Canadianization is the stumpy, fast-talking president of PetroCanada, Bill Hopper. The day after the double-barrelled energy program and budget, Hopper had soothing words for the multinationals: no immediate takeovers. “The minister has got to understand,” says Hopper, “that if we can’t make a take-over at a reasonable price, with a reasonable premium, then we can’t make a take-over. Then the government will have to re-evaluate its strategies on Canadianization.” That was before Hopper received Lalonde’s letter. There will be a major take-over, it said. Ottawa will choose the target, Hopper will make suggestions. Lalonde would like Petrocan to be as large as Canada’s largest oil company, Imperial Oil (70-per-cent owned by Exxon Corp. of New York). He and Hopper know Petrocan’s debts are already too high to buy anything major, but the budget of Finance Minister Allan MacEachen made provisions for a special tax on consumers to fund a take-over. With diplomatic restraint, neither MacEachen nor Lalonde informed the public that the tax would have to be used, and used imminently, applied first to natural gas. Then, as much as 15 cents could be added to a gallon of gasoline at the pump.

Although oil companies don’t come cheaply since the Iranian revolution, the government has already gone a long way toward helping itself out. In the stock market bloodletting that followed Tuesday’s budget, feverishly high oil shares thudded back to reality. For one possible take-over target, Gulf Canada, the market value dropped $1.3 billion in two days. The paper loss on the Toronto Stock Exchange was nearly $3 billion, and a bemused Lalonde monitored the slide. He and his senior officials seemed confused, however, by the extent to which Canadian companies were hit. At week’s end, a stream of flushed executives clutching computer printouts of the damage they thought Lalonde had done to their balance sheets was still flooding into Ottawa. There, the pokerplaying oilmen got a poker-faced reception. “You can’t expect me to cry because they’re going to get less,” said Lalonde. “That’s what we intended.” MacEachen had creamed $1.4 billion a year off the top of industry revenues. More dramatic, Lalonde cut industry’s share to a third of the pie from 44 per cent, a simple gesture that cost it nearly

$2 billion for 1981. Always quick to react shrilly, the oilmen found they had lost credence this time, particularly with the mandarins. “You give those guys any indication you’ll bend,” said one taciturn energy official, “and they’ll walk all over you.”

“Smiling Jack” Gallagher, founder of Canada’s third-largest oil company, Dome Petroleum, lived up to his nickname. After two days of market panic, his own personal stock was worth $16 million less, but he said he was still optimistic: “We feel the budget is still open for discussion.” Dome is first among a handful of Canadian companies Lalonde counts on to carry the ball with Petrocan, but Gallagher reckons MacEachen’s squeeze was such that his exploration program must be cut back simply to meet payments on Dome’s $2.3 billion in debts—incurred mainly in two spectacular acquisitions of foreign-owned oil companies.

Dome’s mammoth debt is indicative of the Canadian side of the industry. The multinationals finance their exploration with profits, the Canadians

mainly through borrowing—a function of relative size and age. Although the gap is closing, Canadians still own just over a third of the industry’s assets and just under a third of all petroleum production. The 17 largest foreign-owned companies control 70 per cent of all Ca-

nadian oil and natural gas sales. The cost of borrowing money to play catchup means the Canadians make lower profits from their investments: 14 per cent in 1979 compared with 22.6 per cent for foreign-controlled firms. It is a far higher return than any other sector,

‘Give those guys any indication you’ll bend, and they’ll walk all over you’

with manufacturing, for example, getting 12.6 per cent. In short, it means the energy sector now accounts for 22 per cent of corporate profit in Canada, almost double its level in 1970, and therein lies the nub of Ottawa’s concern. “In 10 years’ time they would have been so wealthy it would have been impossible for Canadians to buy them,” says Lalonde. “They would unavoidably have expanded into other areas of the economy unless we allowed them to repatriate their profits, and that creates another major problem.”

That exponential growth was actually abetted by Ottawa’s tax scheme. Because of their dominance in oil production, the foreign-owned companies

collected about 80 per cent of the millions Ottawa paid yearly in “depletion allowances” on their resources. The figure is nearly as high for tax writeoffs given them for investing in such megaprojects as the $2.2-billion Syncrude oil sands consortium. It did not make economic sense for Canadians to invest heavily if their lower profits meant they could not make full use of the tax writeoffs. One senior finance department official describes the multinationals as “massively favored” by the Canadian system. The result is that of the two oil sands plants now built, and the two seeking government approval, none is more than 50-per-cent Canadianowned, yet those plants will produce about a third of Alberta’s oil by 1990. In another case, the Hibernia oil strike off Newfoundland was in large part made because Standard Oil Co. of California has leased an off-shore drilling rig that lay unused. It was, in effect, more expensive for the company to let the rig sit idle than to take advantage of Ottawa’s lucrative tax breaks and write off 90 per cent of the cost against taxes on its Alberta production.

The new rules will provoke some juggling in the ownership of such major projects. Ottawa is dropping tax incentives and replacing them with a grant

system expressly to aid the younger, lower-profit Canadians. But to maximize the federal grants, a project must be at least 75-per-cent Canadian. Lalonde expects the new system will also tap pools of Canadian money in pension funds and other industries which formerly could not avail themselves of the tax writeoffs. If it works, it means an increasingly larger proportion of Alberta’s oil wealth will be owned in the urban centres of Canadian banking and industry, Toronto and Montreal.

For the Canadians who run the foreign-owned subsidiaries, Lalonde’s message is hard to swallow. “The policy suggests I would make decisions that are not in the national interest,” said William Daniel, president of Shell Canada. Shell’s 12-member board has 10 Canadian directors. Like most multinationals, Shell Canada reinvests nearly all its profits in order to take full advantage of the tax breaks. But the country’s senior oilman probably answers closer to the bottom line than Daniel. Jack Armstrong of Imperial Oil protested unsuccessfully to Exxon when it diverted oil destined for Canada during the Iranian revolution. “If the shareholders don’t like what Armstrong’s doing, they can get rid of him pretty quickly,” Armstrong says.

It is Lalonde’s gamble that he has left just enough carrot for the multinationals to make them live with the stick, after appropriate howling. “We need the big boys; the government needs the big boys,” reasons Edward Battle, president of Norcen Energy Resources in Toronto. Hopper says the U.S. companies need a place to invest their brimming coffers after two record years. “What country with major prospects do they want to invest their money in?” asks one Petrocan executive. “Iraq? The Soviet Union?” Armstrong and other oilmen described as the “gravest shock” Lalonde’s decision to let Petrocan take a 25-per-cent slice of any major discovery off-shore or on federal land in the North. The minister has little sympathy. In most cases, at least 90 per cent of the exploration cost was borne by the taxpayer. “Your perception on this depends on where you come from,” Hopper says. “If you spend all your time in Canada, you find a lot of things unbelievable. If you come from Norway,

where they take a 50-per-cent interest, 25 per cent doesn’t look too bad.”

Lalonde expects a short cutback in exploration spending. The feeling is that the more inflexible he is, the shorter the “tantrum” will be. Dubbed “the cardinal” by his fellow Quebec MPs for the imperious manner in which he defends his opinions, Lalonde is now defending something he believes in with a passion. Hardening his resolve is his feeling that the Liberals had lost direction and became “too cautious” before they lost the 1979 federal election. There is no political risk in bashing the multinationals.

Even William Daniel says it would take 100 years to change public perceptions about their loyalty to Canada. The risk is in not preparing as rapidly as possible for any future disruption in the fragile stream of Middle East oil which meets one-quarter of Canadian needs. Self-sufficiency under any scenario is not possible until the late 1980s: the mega-projects needed—the off-shore wells and oil sands plants—will take at least five years and billions of dollars to develop. “The results of the bet are 10 years down the road,” said one oilman last, week. “The tragedy is that if we lose, it’ll be five years too late to do anything about it.”

With files from Carol Bruman in Toronto.

Carol Bruman