The play for eastern oil

Michael Clugston September 28 1981

The play for eastern oil

Michael Clugston September 28 1981

The play for eastern oil


Michael Clugston

Early in 1964 Premier Joey Small-wood of Newfoundland sent two deep-sea divers precisely 200 miles out to sea, the limits of Canada’s exclusive economic zone. There, on the edge of the vast undersea plateau of the Grand Banks, they deposited a plaque on the ocean floor to mark the province’s claim to the riches in the water and in the land below—a symbol of grand aspiration. Seventeen years later that symbol has become a focal point, an auspicious, if troubled, convergence of aspiration and reality that even Smallwood may have been incapable of imagining.

Hundreds of metres below the sea bottom, curving from Cape Cod north to Baffin Island, lies an enormous series of oil and natural gas pockets, percolated over millions of years from the sedimentary remains of an ancient ocean. Tantalized by geological hints, oil company engineers and drillers tried since the mid-’60s to pinpoint the deposits. Some gave up in disgust, like Shell,

which in 1977 had only 47 useless boreholes to show for eight years of drilling and an expenditure of $125 million. But a consortium of companies, including Mobil Oil of Canada Ltd. and Chevron Standard, pressed ahead and, starting with the gas and oil finds off Labrador

and the Grand Banks in 1978, a series of discoveries followed in a wink of geological time: Hibernia 0-15, the centrepiece of the East Coast “play,” in 1979; Hebron 1-13 in 1981—the same year that Sable Island’s well-known gas reserves were shown almost certainly to be commercially viable. Quite suddenly, the nation’s pauper, Atlantic Canada, found it had inherited a quarter of the country’s oil reserves and half its natural gas—with millions of acres of ocean yet to be explored.

Conversions into “real” terms followed quickly: Hibernia by itself was no panacea, but three wells that size could bring in as much as $22 billion for Newfoundland, depending on the revenue split with the federal government, and Sable Island gas could bring billions more for Nova

Scotia. If the East became self-sufficient in oil, the federal government would save the annual $1.7-billion subsidy for imported crude oil: hundreds of millions more dollars would be saved in equalization payments if the region became prosperous. A heady prospect.

ZBut the emerging age of eastern oil has already brought with it a number of sharp conflicts. Next week, federal government officials sit down with their counterparts from Newfoundland and Nova Scotia to try to settle once and for all which government should manage the off-shore development, how the revenues should be split and who, after all, owns the resources (see box, page 32). Already there are cracks in the Newfoundland lineup. Premier Brian Peckford is now busily trying to find a replacement for Leo Barry, his energy minister and forceful lieutenant in the resources campaigns, who resigned recently after Peckford curbed his negotiating powers. There are cracks on the provincial front as well. In Nova Scotia, where Premier John Buchanan is favored to win re-election early next month, the government is already gearing up to fight with Newfoundland for the spillovers—the lucrative off-shore oil business.

Peckford and Buchanan may have a

common cause against the federal government, but that hasn’t prevented a strong sense of competition. Peckford’s recent Newfoundlanders-first hiring regulations have aggravated provincial jealousies first fired up by fishing disputes. “It’s getting ridiculous,” says Nova Scotia Captain Winston Thurlow. “Pretty soon they’ll have us changing crews halfway between Sydney and Port aux Basques.” The competition between Halifax and St. John’s came into the open last spring with a cheeky advertisement placed by the Port of Halifax in a Calgary-based oil industry

magazine. The ad promised that “working in the off-shore industry doesn’t mean you’re destined to live in the boondocks,” and then sang the praises of the city’s theatres, universities and other amenities. Halifax already has the edge in attracting oil executives with its international airport and extensive hotel space. But as Mark Shrimpton, the research and economics director for the city of St. John’s, says: “All the task forces in the world aren’t going to move Hibernia closer to Halifax—and a helicopter can’t fly that distance. They have to go from St. John’s.”

The oilfields’ locations will automatically give St. John’s some servicing and repairing spin-offs, but work in engineering, design, research and testing is up for grabs between the two centres. And even within Nova Scotia itself there is some rivalry over the estimated $6 billion and 18,000 jobs that Sable Island could put into the economy by the end of the decade if the find proves commercially viable. In Sydney, an old naval base is being set aside for offshore-related businesses. In Port Hawkesbury, at the so-called “Canso Superport,” there’s hope that the mothballed deep-water port might become an off-shore service and supply depot. Similar thoughts are entertained in the Halifax-Dartmouth area.

It takes something of a mental wrench to think of the East—especially Newfoundland (see box, page 30) —having such wealth to argue over. But the region has not always been down and out. Toward the end of the last century, if a Canadian economist had been asked to pick the future industrial heartland of the country, the odds are he would have said Nova Scotia—with its im-

mense coal and iron reserves, and an accumulation of business acumen befitting the world’s fourth-largest marine trading centre. Newfoundland, supplier of salt cod to most of the world’s consumers, later discovered hydroelectric resources that could have charged up an industrial country with tens of millions of people. But instead of thriving, the region’s economy became a metaphor for depression—a degeneration that, particularly in Nova Scotia, is laid squarely at the feet of federal policies which gave Central Canada the edge in trade. Now that Atlantic Canada—especially Newfoundland and Nova Scotia—has a spectacular chance to catch up, the negotiations with Ottawa will be made all the more touchy by the provinces’ strong proprietary sense rooted in a deep conviction of historical grievance.

The rift between Newfoundland and the federal government widened dramatically in 1977, a year before Nova Scotia took its own independent stand on the offshore. At that time, Ottawa tried to establish a memorandum of agreement with the four Atlantic premiers on sharing the off-shore wealth under a formula that would give the provinces the healthy end of a 25/75 per cent split. But Newfoundland Premier Frank Moores refused to attend the meeting. With the support of such party-resource-conscious scrappers as Peckford and Barry, he launched his claim to full ownership of oil based on the argument that Newfoundland did not surrender its ownership when it joined Canada in 1949. As for Nova Scotia, Buchanan came to power in October, 1978, and quickly revoked the province’s participation on the grounds that

the fine print could whittle the provincial share down to nothing.

Peckford and Buchanan had almost won a complete victory on ownership when the Clark interregnum was abruptly ended and the promised transfer of off-shore control to the provinces could not be completed. From then on Peckford’s shrill assertiveness as the self-styled “René Lévesque of the East” solidified his “bad-boy” image across the country, even though Buchanan had also taken some hard stands. Last May he told Prime Minister Pierre Trudeau that he would simply ignore Bill C-48, the federal claim to the offshore, if the bill is passed. Peckford said he was not about to sacrifice the province’s “heritage and our future.” Neither province has given much public attention to the fact that it was federal tax credits that first attracted the drilling rigs by reducing exploration costs.

Peckford’s proprietary emphasis extends well beyond his strident personal style. As energy minister in 1977, he spearheaded legislation to shepherd as many of the benefits of oil as possible to the island (by demanding local hiring and buying of supplies whenever possible) and to control all phases of oil production and distribution. The interventionist legislation had its roots in a recurring Newfoundland nightmare. As Steve Millan, director of the province’s Petroleum Directorate, says: “There is a scenario in which everything that’s put out there on the oilfield is floated there from somewhere else [other than Newfoundland]. And then all the product is put in a tanker and taken somewhere else. Then where would the great benefits for this province be?”

To make sure the nightmare doesn’t come true, Peckford’s government

wants Hibernia oil transported to the island by shuttle tankers or a pipeline. However, Mobil, acting as a spokesman for the consortium, has warned that a pipeline would almost certainly be ruptured by an iceberg; it wants to be able to ship the oil by tankers—to wherever the company likes. “At some point we’ll have to get right down on the mat and wrestle with them,” says Dory Little, president of Mobil Oil Canada. Peckford’s difficulty will be that he cannot force Mobil to build a pipeline and that Mobil is not alone in believing there is serious danger to a submerged pipeline. Since Peckford considers himself a “fishing premier, not an oil premier,” and since he is determined that Newfoundland will emerge from the age of oil with its fisheries intact, he will have to take special care to reduce the chances of serious pollution.

While Nova Scotia has passed legislation similar to Newfoundland’s to control oil development, it has not been necessary so far to implement the regulations. Nova Scotia is not as preoccupied about off-shore development as Newfoundland is and is therefore more willing to compromise with the oil companies. The reason is that off-shore oil is just one of several bright prospects for fuel self-sufficiency. Nova Scotia’s dependence on foreign oil may be cut as early as the mid-1980s when natural gas is piped in from Western Canada, massive reserves of coal are used to generate electricity and Sable Island gas comes on stream. Later in the century, the province may be supplied with liquid natural gas from the Arctic, with tidal power and coal liquefaction possibly adding to the power grid. Newfoundland’s only major energy alternative is to develop the Gull Island and

Muskrat Falls hydroelectric sites on the lower Churchill River. But as long as its feud with Quebec continues over an earlier power contract, transmission of power to outside markets is unlikely.

Planners in both provinces are looking beyond an economy that will lurch to life in the age of oil development only to slump back into its familiar somnolence when the oil “play” has ended. Hence the overriding concern that the development be paced slowly enough to give local companies time to gear up.

For Nova Scotia Development Minister Roland Thornhill the challenge is clear enough: “In the next 10 years there’s going to be $50 billion worth of hardware required on the Atlantic

coast. At the present time only a very small proportion of that equipment is manufactured or capable of being manufactured in Atlantic Canada.” To fill the gap, St. John’s is establishing a first-rank centre for cold-ocean technology and development. In Dartmouth, N.S., bulldozers are clearing ground for a $35-million ocean-industries industrial park. Vocational training programs are being tailored to produce operators for oil rigs and marine diesel rigs, while the Technical University of Nova Scotia is starting up the country’s second degree program in petroleum engineering. Scores of joint venture companies have been formed in St. John’s and Halifax, linking local experience with outside knowledge of oil. But this is still a time of preparation. “The impact won’t really hit here until the development stage when all the heavy construction begins,” says Harold Giddens, chairman of the oil and gas committee of the Halifax Board of Trade. “And that won’t come for another four or five years.”

Nonetheless, the region is coming alive with anticipation at the same time that it is trying to guard against unrealistically high hopes. For their part, Prince Edward Island and New Brunswick stand to benefit through related industries such as the Saint John shipyard. Especially important to those provinces will be access to a dependable fuel supply, immune to the vagaries of the international oil markets. For Peckford, oil is Newfoundland’s “last chance”; for Buchanan, it is part of an exciting range of new energy sources. And for the country as a whole, oil from the East offers a chance for renewed strength that always comes with self-reliance.