The day they turn it off

If the storm clouds don’t blow over, there could be economic civil war

Robert Lewis March 2 1981

The day they turn it off

If the storm clouds don’t blow over, there could be economic civil war

Robert Lewis March 2 1981

The day they turn it off


If the storm clouds don’t blow over, there could be economic civil war

Robert Lewis

The thin cover of windswept snow on the flat land southwest of Edmonton is a vivid carpet of contrast for the black pumps, their broad beams and pointed heads bobbing in slow motion like giraffes around an oasis. Here, in Arabia West, the lust goes on to suck Alberta crude oil up a mile-long straw at the Leduc-Woodbend field. With 1,200 wells ranging over 19 km at the longest stretch, the field is neither the biggest nor the most productive of the 300 that serve as a cellar for all Alberta. But it is one of the most famous. On Feb. 13, 1947, Imperial brought in Leduc No. 1, the first big commercial find in Western Canada and the gusher that began transforming Alberta into the richest—and now most defiantmember of the federation.

Leduc No. 1 is silent now, the newly painted pump merely a monument to history—and testimony to the dwindling reserves of conventional oil.* While earthly pressure and man’s ingenuity could continue the flow from the rest of the field into the next century, storm clouds with political seeds are gathering over Leduc and the rest of Alberta’s Oil Patch. If they don’t blow over, the resulting destruction could amount to an economic civil war between West and East.

Next week, barring a totally unexpected breakthrough in the yearlong impasse over oil prices, operators of two Leduc pools—and 440 others in the province—will slow the rate of the oil flow from the fields to the refineries. They will do so under cabinet order from the provincial government, which regulates every step of the industry in Alberta, from geological

*When shut down in 197b, Leduc No. 1 had produced 318,000 barrels of oil (11 million gallons) and 32b million cubic feet of natural gas (the equivalent of 1,9bb thousand gallons of fuel oil). Alberta production last year: b82 million barrels of conventional oil (70 per cent of Canadian needs) and 2.3 t rillion cubic feet of gas.

survey to pipelines (see story, page 22). The mechanism is an intricate web of agencies and laws that enables Alberta—and a half-dozen men in Premier Peter Lougheed’s inner circle—to control oil from the time it comes out of the ground until it reaches the pipeline terminals in Edmonton, for shipment to

refineries in the rest of the nation (see map).

There will be no fanfare to mark the cutback, not even a big valve to close. The oil-gathering system, in fact, is an intricate network of pipes leading from wellheads to processing plants. At each of the 400 fields involved in the cuts, the flow can be controlled from computerized panels kilometres from the pumps with the push of a button. The total cut-


VOL. 94 NO. 9

back is prorated among the various fields.

The cutback, which takes place March 1, is Alberta’s response to the federal budget and National Energy Program announced last October (Maclean's, Nov. 10). The first phase will amount to about 100,000 barrels a day (b/d) and forces Ottawa’s National Energy Board to allocate supplies in Ontario and Quebec. Refineries will probably supply their plants in Ontario with crude on hand, bringing imports into Montreal through the pipeline from Portland, Me. (see story, page 22). But Lougheed threatens added cuts in two further stages, up to 180,000 b/d by year’s end, unless Ottawa agrees to his terms—which so far have been rejected.

At the other end of the pipelines to Ontario and Quebec—B.C. is exempted—there is no immediate panic. Over-all, the three-part cut is only 15 per cent of Alberta production. Refiners in Sarnia, Oakville and Montreal do not expect shortages for now, since the companies keep a 90-day reserve under international agreement. But even a cut of 60,000 Alberta barrels will send them onto world markets to make up the shortfall. With OPECset prices now more than double the Canadian price of $17.75 per barrel, the scramble for imported crude will cost taxpayers an extra $1.5 million a day—the amount the federal treasury will pay refineries under the Oil Import Compensation Program, which subsidizes the purchase of world crude for the East at Canadian prices. (The cost for compensation in 1980 was $3.2 billion.)

The federal cabinet meets this week in Ottawa to decide how to raise the additional funds, albeit a small percentage of national expenditures. One option is to pay refineries out of general revenues, which ministers may reject as unpalatable given the federal deficit of $13 billion and the possible tab of $500 million for a year—and more, if the cutbacks accelerate. The other course that Energy Minister Marc Lalonde planned to place on the table is an increase in

taxes at the pump. To cover the extra compensation on 60,000 imported barrels, for example, gasoline would have to rise about two cents per gallon— more if refiners have to start paying spot prices above the going rate.

Any new levy would be one of the most controversial since compensation first started in 1974. It would apply at all pumps—and fuel oil meters—across the land. Ottawa would portray the tax as the direct result of Alberta’s cuts— Lougheed’s Levy, in effect. Albertans, already resentful about their image in Eastern Canada as greedy petrosheiks, could become targets for further abuse. That, in turn, could provoke Lougheed to escalate his push for “moderate independence” from Ottawa and give the separatists a needed boost at a time when their cause seems stymied.

The long-term prospects are ugly. As Alberta escalates the rate of cutbacks, driving up the cost for more imports, Ottawa might be pressured by Central Canadian constituents to step in and effectively wrest control of oil delivery from Alberta. Since part of Lougheed’s counteroffensive is also a hold on approval of two major oil sands plants in northeastern Alberta—they offer hope for replacing conventional oil sources after 1990—and the companies insist on a decision by summer, Ottawa might act unilaterally to get the projects going. That scenario, warns a level-headed Edmonton businessman, could lead to sab-

otage of pipelines and other facilities.

It is a time for cool heads, but a period of hot passions. The issue is money and power—$400 billion in petroleum revenues over the next decade. In Ottawa, born-again Prime Minister Pierre Trudeau warns of “a very drastic decentralization” of power and asserts: “I think it should be arrested.” Oil, Ottawa argues, is too special for the proceeds to fall so overwhelmingly to one province. Fully 55 per cent of Alberta revenues come from resources, and 30 per cent is channelled into the Heritage Fund, now at $8 billion.

Lalonde is fond of noting that, in 1979, per capita income from resource revenue was $1,900 in Alberta, and $18 in Ontario. That same year, oil industry profits were $4.7 billion, an increase of 54 per cent in one year. Accordingly, Ottawa proposes to increase its share of oil revenues from 10 to at least 24 per cent, to reduce industry’s take to 33 per cent from 45 and Alberta’s to 43 per cent from 45. Through the National Energy Program (NEP) Ottawa also wants to increase Canadian ownership, now only 30 per cent, to 50 per cent by 1990 and to encourage exploration in federal lands in the Arctic, over which Ottawa claims jurisdiction.

Lougheed sees the scheme—with an eight-per-cent tax—as nothing less than an attempt to spoil the industry for Canadian take-over bids and an assault on provincial ownership of resources. He charges that “a small select group in Ottawa” seeks to derail Alberta as “the economic engine” for the nation. He acknowledges that in the industry “some will bleed,” but admonishes his people to “weather the storm.”

The clash is more than a divergence of two views of the country. It also is rooted in two conflicting political ideologies—on the one hand, Ottawa’s Galbraithian intervention and, on the oth-

er, the Alberta government’s innate conservatism and free enterprise symbiosis with the oil industry. Starting with Imperial’s Turner Valley discoveries in the early 1900s, oil and gas conservation regulations borrowed

from Texas, even the technology of measuring oil quality which was imported from the U.S., Alberta’s bias has been to help the industry, not to dictate. The industry, and its sprawling work force, responds in kind. In Alberta these days, including the editorial pages, there is an almost singular demand to be “with us or against us.” Edmonton publisher Mel Hurtig frets that his lonely but voluble support for Trudeau’s constitutional package may endanger his deal with the Alberta government to produce a new Canadian encyclopedia using Heritage Fund money.

So far, Lougheed seems to have rallied the voters. At times an eastern visitor has the sense of a people already separated psychologically. A PetroCanada official calls an official in Edmonton and is informed that he is “out of the country”—in fact, doing business in Saskatchewan. Yet, with the dimensions of the conflict looming, doubts are creeping in. Increasingly, folks grumble that it’s time for both sides to sit down and talk turkey. There are also cracks in the industry’s wall of resistance. Bob Blair, president of Nova Corp., tangled with Lougheed after the premier rebuked Blair for his qualified support of the NEP. Robert Brawn, president of Turbo Resources Ltd., which is integrated from wellhead to retail pump, concedes that once the NEP is in place oilmen will of course live by the rules which, he did not say, are more severe in other parts of the globe. Chieftain Development Co. Ltd. even sought to increase its Canadian ownership by asking Edmonton to invest $30 million from the Heritage Fund—but the bid was rejected because the province doesn’t want to relieve any pain induced by Ottawa.

There is no doubt that the NEP is having an adverse effect, that thousands of jobs are threatened along with future energy security. Drilling rigs are being moved to the U.S. where prices are deregulated, although the trend began before the NEP because of big reserves of national gas shut in for lack of markets.

The reason many oilmen have taken things so personally is that it is so personal. The NEP threatens their very way of life—one that is full of evident and ulcer-causing risks and plays, but one replete with huge financial rewards and

personal career highs. The reaction, at times, borders on the hysterical. There are Petroleum Club denizens, for example, who are convinced that agents of Pierre Trudeau have been running around Calgary bookstores scooping up copies of his Federalism and the French Canadians because (they say) the 13year-old tome reveals Pierre Trudeau’s secret plan to turn Canada into a socialist state—Trudeau, whose family fortune rests on his dad’s sale of service stations to Imperial for $1.4 million in 1933. At the Mayfair Golf and Country Club in Edmonton, a senior businessman is asked what he thinks should

be done. “Well,” he responds, “somebody could shoot Pierre Trudeau.” In fact, when Lalonde paid a recent visit to Cold Lake’s oil sands development, where a receptive crowd surprised Alberta government “spies,” security was reportedly tighter than ever.

Short of the craziness, however, there is a long-simmering sense of western grievance against the East—the conviction, as Lougheed puts it, that the feds “recognize they have to cater to Quebec and Ontario to stay in office.” From Lougheed, who watched the disappearance of his family’s fortune as a boy, and Energy Minister Merv Leitch, whose folks literally were blown off the Saskatchewan plains during the Dust Bowl, to Wayne Minion, head of the allpervasive Alberta Petroleum Marketing Commission (APMC), there is a resolve that the fruits of today’s resources—even those invested at low

yields in Eastern Canada—will be saved for tomorrow’s children. It is probably only coincidence that several key players have big families. Minion, himself the father of seven , is an MIT grad and opted to return to Alberta after a stint in Brazil with Brascan. Reflecting on the history of give-and-take in energy pricing, he insists: “This time,

the East will have to accommodate. Besides, if the government doesn’t hang in and fight, the people of Alberta will turf them out.” Does Lougheed worry about reaction outside Alberta? “The majority of Canadians,” replied the premier, “would say: ‘Our energy situation is in a mess, Mr. Ottawa. What are you going to do about it?’ ” "v?