Calgary’s bitter spring

MICHAEL SALTER March 31 1986

Calgary’s bitter spring

MICHAEL SALTER March 31 1986

Calgary’s bitter spring


The facade of optimism has faded. Through the deep winter months of January and February, as prices on Alberta oil futures contracts skidded down to $17.50 a barrel, many of Calgary’s political and business leaders publicly maintained a cautious attitude, waiting for the price of oil to stabilize. Then, by late last week, with oil futures trading at about $18—down 50 per cent from late December—it was clear that international events had ended the city’s short-lived economic recovery. Now, among Calgary’s 625,000 citizens—80 per cent of whom earn income from the energy industry— the oil price collapse has led to a deep sense of unease. Said Maciej Blach, a 28-year-old attendant in a downtown parking lot: “I talk to people every day, and they are frightened about their jobs.”

Throughout last week evidence of a worsening economic slowdown accumulated. Speaking to reporters in Ottawa, Bank of Canada Gov. Gerald Bouey said that, although the drop in world prices was good for Canada as a whole, the slump would be a “severe burden” for the country’s oilproducing areas—particularly Alberta. In Calgary the steady stream of layoff notices continued—an estimated 1,000 people have lost their jobs since early February—as companies slashed their budgets for oil exploration and postponed development projects. And Alberta Premier Donald Getty opened direct communications with Saudi Arabian Oil Minister Sheik Ahmed Zaki Yamani.

Oil industry leaders also held talks in Ottawa last week with federal Energy Minister Pat Carney, urging her to move forward the schedule for ending federal taxes on oil production that was announced under last year’s Western Accord. That move would put more

cash into the industry’s hands. Declared Ian Seph, head of the natural resources committee of the Calgary Chamber of Commerce: “We have acknowledged that the price collapse has had a major impact on the city.”

Getty caused consternation in Otta-

wa when he took the highly unusual step of telephoning Yamani and advising him that his province would consider helping restore international price stability. In a 15-minute conversation last week with Yamani, who was attending a week-long meeting of the 13-nation Organization of Petroleum Exporting Countries (OPEC) in Geneva, Getty said that Alberta would consider a token cutback in its output if asked to do so by OPEC.

Getty later said that Alberta might cut back production by about 20,000 barrels a day, or roughly 10 per cent of the province’s daily exports of 200,000 barrels. Alberta produces nearly three per cent of the world’s output. Said Getty: “It is a gesture to OPEC that we are working together.” But in Ottawa External Affairs Minister Joe Clark told the Commons: “Premier Getty fully under-

stands that the government of Canada speaks for Canada on international questions.”

Meanwhile, in Geneva OPEC struggled to stop the three-month price slide. After several years of lowering its own output in an unsuccessful at-

tempt to prop up gradually falling prices, Saudi Arabia caused the price collapse by dramatically increasing its production last fall and flooding the market with unwanted oil. The Saudi’s strategy was to force other OPEC members to limit their production in order to restore prices. Late last week OPEC members agreed to try to defend a price of $28 (U.S.) a barrel, but they still had not agreed on how to share the cutbacks.

In Alberta the shock waves of the falling prices radiate outward from the centre of the energy industry— Calgary. After a decade of prosperity during the oil boom of the 1970s, Calgary was affected more severely than most cities by the worldwide recession that began in 1981. When other parts of Canada were enjoying renewed growth in 1983, the city was still struggling with the effects of a dev-

astated real estate market. Then, last year, despite a slight decline in oil prices, the first signs of a late recovery percolated through the city. There was an upsurge in drilling activity in the oilfields, and construction cranes were once again visible on the skyline.

Some of the ambitious projects are still proceeding. Trizec Corp. Ltd. is moving ahead with the first phase of a $300million office tower project in the city’s core. And the organizing committee for the 15th Olympic Winter Games, to be held in Calgary in 1988, will spend $400 million over the next two years—much of it to upgrade the city’s existing sports facilities and build new ones. But the city’s leaders acknowledge that Calgary is still a one-industry town. Said the Chamber of Commerce’s Seph:

“If there was no oil and gas industry, there would be no Calgary.”

Most Calgarians say that they are convinced that the city’s downturn will become even more severe. There is currently a record amount of exploration activity under way because oil companies rushed to apply for the last of the grants available under federal and provincial petroleum incentive programs, which will expire at the end of March. Without those grants to offset the cost of exploration, drilling activity is expected to plummet.

A survey by the Independent Petroleum Association of Canada—whose members operate 55 per cent of Alberta’s oil and gas wells—showed that they plan to cut their 1986 budgets by 50 per cent, or $1.5 billion.

Many companies have already announced mass layoffs of employees working in Calgary head offices and elsewhere in the province. One of the companies most affected: Husky Oil Ltd., which is laying off 300 of its 1,900 employees. Said Davis Swan, the provincial NDP’s energy critic and a geophysicist with Gulf Canada Corp.: “The rest of the layoffs will not be spectacular—just 20 or 30 people at a time losing

their jobs when smaller firms -

go under.”

The coming economic slowdown, however, is not expected to hurt Calgary as badly as the recession did. Energy companies have struggled to reduce their debts and they are still operating on tight budgets—a fact

that lessens the threat of another outbreak of bankruptcies. Said Thomas Cumming, a senior vicepresident with the Bank of Nova Scotia in Calgary: “Most companies are now in a lean position and able to survive a tough period without

further major failures.”

But industry experts expect a rash of takeovers as richer companies seize control of the oil and gas holdings

of smaller companies—assets made cheaper by the price decline. Said Peter Maynes, manager of corporate affairs for Calgary-based Asamera Inc.: “This is a good time to take advantage of the vulture syndrome.”

Still, the wrenching impact of fall-

ing prices also reopened the perennial debate over regional disparities. Swan said that the federal government should introduce a minimum price for oil, using a provision in the Western Accord that allows it to regulate oil prices. He added: “Why should Alberta

take it on the chin when times are bad? The rest of Canada was helped when times were good and prices were rising.” Another Calgarian, Edward Wernick, president of Wernick & Co., a Calgary real estate consulting firm, blamed the weakness of the real estate market partly on nervousness by large institutional buyers from Eastern Canada. Although Calgary has $650 million in scheduled construction, because of the oil price drop “the decisions to buy are just not being made,” said Wernick. “Calgarians feel the the situation can be controlled, but the easterners are calling things off.”

The price collapse also refocused concern about the province’s dependence on the energy industry. The NDP’s Swan said that despite the $12.6-billion Alberta Heritage Savings Trust Fund, the province is “no

better prepared than we were after the first oil price shock in 1973.” Added Swan: “It is really a case of lost opportunity.” Calgary Mayor

Ralph Klein said that “the city is doing all it can to diversify the economy” in order to avoid the ups and downs of the cyclical energy industry.

Katie Macmillan, an economist with the Canada West Foundation, a Calgary-based research organization, said that Alberta’s lack of diversification cannot be entirely blamed on the government. A small population and large distances from major markets are also major drawbacks, she said. Another problem, Macmillan pointed out, is that “oil workers are paid very well. You can’t just set up a textile mill and pay barely the minimum wage when someone without Grade 12 can cross the street to an oil company and make $45,000 on the rigs.” But for the growing number of un-

employed in Calgary last week, the chance of finding a good-paying job on the rigs seemed increasingly remote.