BUSINESS

The oil war is the first war

Confrontation is part of the package as Marc Lalonde chases his vision

Ian Anderson April 27 1981
BUSINESS

The oil war is the first war

Confrontation is part of the package as Marc Lalonde chases his vision

Ian Anderson April 27 1981

The oil war is the first war

BUSINESS

Confrontation is part of the package as Marc Lalonde chases his vision

Ian Anderson

As Canada’s warring energy lords were raising cautious hopes last week for a price in our time, Alex Lemmens flew from Calgary to Houston and laid plans to move more Peter Bawden Drilling Ltd. rigs out of Alberta. In Winnipeg, the two farmers’ sons become energy ministers, Marc Lalonde and Merv Leitch, agreed to little more than to meet again next month, yet that in itself was considered a step forward in the smouldering relations between Alberta and Ottawa. But by then, Alex Lemmens will have moved another idle Bawden rig south to Texas, stacked on 60 flatbed trucks. While the pricing war has cut drilling activity in Canada by nearly a third, demand for rigs is so hot in Texas that Lemmens can get his customers to foot much of the $400,000 moving bill. “We had 17 rigs in Alberta before the NEP [National Energy Program],” says Brian Lange, contracts manager for Bawden Drilling. “We’ve moved out five and I’m negotiating contracts for two more. That’s the effect of the NEP.”

The tune is different in Ottawa, where hawkish bureaucrats who helped draft Lalonde’s program argue that it’s the price of having a national energy policy. The energy war has evolved far beyond a simple dispute over high and low energy prices. In fact, the two governments appear to be quietly in accord now on the need for a staged rise to near world prices, with a special incentive price for new oil discoveries. After all, the consumer price for oil is already about 50-per-cent higher now than when Lalonde stepped in 14 months ago.

The broader view for top Liberal strategists is to regard the NEP as a kind of acid test for a new style of economic leadership—leadership of both business and national economic planning. Pierre Trudeau touched on it briefly in a New York Times interview this month when he referred to his government “conceiving the kind of Canada which will go into the 21st century.” Gone from federal parlance with this new style of leadership is the “consensus” style of politics. As one of the cabinet’s key players, Marc Lalonde recalls the chilling feeling he had after the Conservative victory when he looked back at a decade of Liberal government for which he was hard pressed to name a single lasting economic achievement. “It was quite clear in our minds that if we came back it would have to mean something,” the energy minister told Maclean’s in a recent interview. “We wouldn’t waste time trying to get everybody [business, labor, the provinces] on side. We got nickeled and dimed to death between ’74 and ’79, and we would not make the same mistake.” The Liberals, Lalonde believes, “had spent too much time with the establishment.” There would be a new theory of national leadership: “You may convert just as many people by standing your own ground.”

So began the new age of confrontation politics, with Lalonde in the centre of it and still mystified by the “strange psychology” of his irrational fellow Canadians who don’t like federal-provincial conflict but do want Ottawa to provide leadership. Provincial contributions to health and welfare and to the RCMP would be among the early skirmishes. A distant thunder could be heard over Ottawa’s intention to see the country’s vast pool of pension capital channelled into key industrial sectors. For Lalonde, the constitutional battle is “not that important objectively, but it’s a vicious circle that keeps on coming back to you. It’s important more for its nuisance value.” First and foremost in importance was energy, the key to Ottawa’s emerging economic and political strategies for dealing with the provinces and with business. Dominated by foreign owners, the petroleum business is central to economic development by virtue of the $200 billion that will be spent on new mega-projects by 1990. And in energy is the problem of regional disparities writ large.

Lalonde’s first move was to turn up the heat. In last summer’s showdown with Alberta over prices, he offered Merv Leitch a package worth considerably less than the Clark cabinet had before negotiations broke off with the defeat of their government. Since world oil prices had jumped $9 a barrel in the interim, Alberta predictably and angrily turned it down. A federal cabinet briefing paper of last July forecast the breakdown: “Mid-July: PM sees Lougheed, puts offer. Assume rejected.” As the briefing paper accurately forecast, Lougheed turned the heat up another notch by halting development of two oil sands plants and bumping oil prices up slightly. Then, with the October release of the energy program, the premier announced a three-stage cutback in provincial oil production totalling 15 per cent by Sept. 1, 1981. The heat rose for another six months before the governments sat down again last week.

Lalonde was also putting heat on the industry. Squeezed by higher taxes and the new Canadian ownership regulations, the cream of the Oil Patch trooped through Ottawa all winter demanding, pleading and threatening. Lalonde sent them back to Calgary unpacified by admitting two governments were to blame for their cash flow problems. The breakthrough came in January when Dome Petroleum, the crown jewel in a tiara of Calgary success stories, submitted to Lalonde’s new incentive system and agreed to Canadianize its Beaufort Sea drilling operations. At the last moment Dome threatened to pull out unless Lalonde softened the deal. From an airport telephone Lalonde refused. An aide reached him minutes later on the plane with news that Dome had relented. It was the breakthrough Lalonde badly needed to legitimize the program. And a blow for confrontation over consensus.

The intransigence from the industry has come from the one place Ottawa did not expect it, the Independent Petroleum Association of Canada (IPAC)— representing those same Canadian companies the NEP hoped to boost. “Even small Canadian firms will be nervous and may react negatively,” the energy department warned the cabinet in July. There was no allowance for outright hostility from IPAC, however—a measure of how badly Ottawa miscalculated the effect of the NEP’s new taxes. Ottawa’s hotshot young economists still have trouble understanding why Calgary’s high-rolling oil wildcatters don’t welcome a helping hand from the federal government. It’s a philosophical bridge that only time and higher oil prices will help the oilmen cross.

It’s the kind of combative situation Lalonde appears to like. He can afford to since he enjoys a startling invulnerability to public opinion. “Why should I spend time selling myself?” he asks. “I don’t want to be prime minister, and it’s not humility that makes me say that. Whatever I do next, I won’t have to be loved by society to do it.” He has never in his 14 years in the capital treated Ottawa as anything more than an office. His wife, Claire, and family stay in Montreal and his closest friends do not talk politics. “He’s still a shy farmer,” suggests one former aide. “He hides himself. In a way, Ile Perrot is his window on the world—the rest is documents.” He left the family farm on He Perrot, just south of Montreal Island, at age 11, destined for eight years as a boarding student at St-Laurent College in Montreal. He was the youngest son of Albert Lalonde and the first he could afford to educate fully. What separated him from the herd was a mind that one close associate describes as a “fantastically programmed computer.” That and a certain clumsiness in personal relations that still makes him seem, at times, like a hick. Too busy to attend the recent prissy ceremony in Ottawa approving the engagement of Prince Charles, Lalonde later joked about the folly of it all. “I was going to go and say I knew a Jewish girl who would be perfect for him.”

People easily forget that Lalonde has been close to the centre of power in Canada for longer than any contemporary politician except Allan MacEachen. As policy adviser to Lester Pearson, he ran the Prime Minister’s Office for nearly two years before throwing his support and, tacitly, Pearson’s, to the leadership ambitions of his old Montreal friend Pierre Trudeau. In the first months after Trudeau’s election, it was Lalonde who guided the new prime minister. Their relationship is not so much one of friends as of allies. “Fundamentally we’re two strongly religious people, with strong ethical norms,” Lalonde explains. He describes Trudeau as a “very introverted man, a very personal man.” They never discussed the breakup of Trudeau’s marriage and never, in Margaret’s days at 24 Sussex, did the Lalondes and the Trudeaus sit down to dinner together. It was common sentiment over Quebec’s place in Canada that defined the first and lasting political bond between the two men: “We have to show our people they have a role to play in Canada, if they want to play it,” says Lalonde. While Trudeau was a product of the coldly logical teaching of Jesuit priests, Lalonde was their lawyer. It amuses him to recount this as “the highest testimony from them, to hire someone they hadn’t trained.” To protect himself, and the Quebec Liberal machine, from the ravages of Lalonde’s logic, Consumer and Corporate Affairs Minister André Ouellet got a written protocol outlining the political responsibilities in the Liberal stronghold (Lalonde) and the organizational ones (Ouellet). Shaking his head with amusement, a Lalonde associate recalls a frequent scene in the minister’s public life. “When he’s speaking to a crowd he’ll give a technically perfect argument, flawless in its logic. He can never understand why the people aren’t seduced.” And never has he faced a tougher audience than he does with Peter Loughheed’s Alberta cabinet.

With Lalonde apparently ready to bend toward Lougheed’s need for a sharper price escalation than the NEP proposed, the loftier problem has emerged of how to cushion the blow for those regions least capable of taking it. A confidential finance department assessment puts Alberta’s “fiscal capacity” at four times that of the Atlantic provinces. (That is, Alberta’s provincial government can raise four times more tax revenue per Albertan than can those in the East.) John Helliwell, the noted University of British Columbia economist, estimates the annual resources income of an Albertan is about 11 times that of Canadians in other provinces. And while Lougheed maintains this phenomenon is temporary, Helliwell argues that Ottawa’s ability to maintain an equalization system in the country is near a breaking point.

The concern over artificially low prices does not stop with Alberta and the Oil Patch. David Brooks, one of the country’s leading energy economists, argues that pricing is really a question of “replacement cost—replacing one unit of energy consumed today with another consumed tomorrow.” But what you get out of those higher prices, Brooks says, is conservation. Before a recent parliamentary committee, Brooks argued that 70 per cent of Canada’s new available energy derives from new supply, while 30 per cent is from conservation. “In Europe, the comparable figure is 95 per cent from conservation and five per cent from new supply. The key difference, of course, is price.” Ottawa has become more “Brooksian” since the U.S. move to world prices has, in the words of a senior finance department official, been a “massive reaffirmation that prices work.” U.S. oil imports dropped by 20 per cent last year and gasoline consumption fell six per cent. Canadians used one per cent more gasoline in 1980 than they did a year earlier. But the federal government still faces the same problem with “sharing,” a problem solved in part by keeping oil prices at half the world price last year. One member of Lalonde’s inner council says Ottawa’s control of the price “is the one element the feds have to seek a solution equitable to all the partners. To hold price hostage until we settle the whole issue is not all that uncomfortable for us.”

Helliwell’s proposal is to ask Alberta to make direct contributions to other provinces, rather than negotiate a larger, but more bitterly given, share for Ottawa. This interprovincial revenuesharing system would, Helliwell says, provide Alberta “with long-run insurance akin to its own Heritage Fund. Alberta revenues would dominate in the first few years, but those from other provinces’ resources would take up the burden later.” This “two-tier” equalization system was rejected by Alberta in previous negotiations, Lougheed maintaining the equalization issue has nothing to do with oil prices. But energy department sources suggest Ottawa could back well away from any form of direct taxation of Alberta resource revenues—which Lougheed deems unconstitutional—if Ottawa could negotiate a new equalization formula based on either natural resources or provincial revenues. So far Alberta insists Ottawa take its oil money out of company profits only, leaving Lougheed with his jealously guarded resource taxation. Ottawa demurs, having seen the 25-percent share of oil revenues it thought it had won five years ago dwindle to 6.6 per cent in 1980 as oil companies ploughed their profits back into the Western sedimentary basin and spudded more oil royalties for Alberta.

In Texas it’s all so much simpler, of course. There is no dispute over jurisdictions, Washington could simply order oil prices raised to world levels, then skim off 90 per cent of the windfall profits and redistribute them through federal programs. Aside from the jurisdictional dilemma, Canada also faces huge energy investments while it still imports 60 per cent of its machinery. (The U.S. imports 10 per cent.) Preparing Canadian manufacturers to meet the boom will be a preoccupation for a country whose standard of living has fallen in recent years. Never having made life easy for themselves, Canadian politicians can only smile whimsically at the advice to double oil prices given President Samuel Doe of Liberia. “You don’t sign this paper,” the African leader was reportedly told, “country go blooey.”