BUSINESS

THE OILMEN HIT A GUSHER

DESPITE FALLING OIL PRICES, GOVERNMENT AID HAS STRENGTHENED CANADA'S TROUBLED OIL INDUSTRY

October 10 1988
BUSINESS

THE OILMEN HIT A GUSHER

DESPITE FALLING OIL PRICES, GOVERNMENT AID HAS STRENGTHENED CANADA'S TROUBLED OIL INDUSTRY

October 10 1988

THE OILMEN HIT A GUSHER

BUSINESS

DESPITE FALLING OIL PRICES, GOVERNMENT AID HAS STRENGTHENED CANADA'S TROUBLED OIL INDUSTRY

Overproduction by the deeply divided Organization of Petroleum Exporting Countries (OPEC), pushed oil prices to a two-year low of $16.15 a barrel last week. But many Canadian oilmen and politicians were expressing longterm confidence in the energy sector. The reason: in a series of pre-election handouts, Ottawa and the provinces pumped more than $3 billion into four controversial energy megaprojects costing $10.5 billion. And even more cash is on the way. Energy Minister Marcel Masse said last week in Ottawa that the federal government will largely maintain the $300-million program of drilling incentives for small oil firms that it began in 1987, potentially saving 7,500 industry jobs. If oil prices do not rebound, some analysts say that Canadian taxpayers will likely have to put even more money into both large oil projects and small conventional fields.

If oil prices climb back to their pre-1986 levels of $36 a barrel, the industry would invest in new oil production without the government’s help. But if prices stay between $18 and $29 a barrel, some analysts predict that Canadian production will slowly decrease and be replaced by imports of cheap foreign oil. As a result, if Canada is to continue pumping 1.6 million barrels of oil a day for , the remainder of the century, new sources of supply, including large heavy-oil projects and

low-cost conventional reserves, will have to come on stream quickly. Federal energy officials may even have visited Calgary privately last week to discuss expanding production at Shell Canada Ltd.’s heavy-oil project in Alberta’s Peace River region and at Suncor Inc.’s oil sands operation in Fort McMurray, Alta.

Ottawa is spending $750 million to develop the Hibernia oilfield off Newfoundland, and last month, Alberta and Saskatchewan joined

Ottawa to channel $950 million into the development of a heavy-oil upgrader in the Alberta-Saskatchewan border city of Lloydminster. Nova Corp. chairman and chief executive officer Robert Blair had argued for construction of the upgrader for almost five years.

In another development, two weeks ago, Ottawa announced that it would give $1 billion to OSLO (Other Six Lease Operators), a six-company consortium, to develop a $4-billion heavy-oil-sands refinery and another $700 million to build a natural-gas pipeline to Vancouver Island. Said First Marathon Securities Ltd. vice-president James Doak: “Even the absence of customers did not stop the pipeline.”

But executives with Canada’s smaller oil firms say that Ottawa’s incentives do not make economic sense. The oil megaprojects,

they claim, will not attain the break-even threshold until oil prices reach $24 to $30 a barrel—a level that may not be scaled until the end of the century. And despite the early economic spin-offs from the construction of the large projects as they enter the design and development stage, senior officials with the smaller, so-called independent oil firms say that they would ultimately create far more jobs than billion-dollar investments in megaprojects.

One man who has expressed particular concern is Narayan Goswami, president of Narayan Consultants Ltd., a small Calgarybased oil and gas company. Goswami said that Ottawa’s emphasis on megaprojects has angered conventional producers. “The government is wasting money on these monster projects,” said Goswami. He added that exploring for conventional oil is less expensive than developing heavy oil, and that from an economic development point of view, small companies create most of the drilling and related jobs in the energy sector. And another Calgary oil executive criticized the federal government’s proposal to build a natural-gas pipeline to Vancouver Island. He said that the project was not economically viable when oil was trading at $28 a barrel. And now that oil is even cheaper, he said it is less likely that customers will switch to

natural gas from the new pipeline.

But last week, senior federal energy officials hastened to defend Ottawa’s investment in the large projects. One of them involves Alberta, Ottawa and six oil companies that plan to build a $4.1-billion oil sands plant that could produce 77,000 barrels of oil a day, using technology that those same partners developed at their 20-year-old Syncrude Canada plant at Fort McMurray. Ronald Erdmann, director general of the federal energy department’s financial and market analysis branch, said that because of the world oil

surplus, “major energy projects just do not go ahead in the private environment in Canada.” He added that new sources of production are needed if Canada is to continue producing oil at current rates.

But some analysts say that executives with both small and major oil firms alike may find that even Ottawa’s financial contributions are not enough to overcome the low profit levels caused by falling international prices. Several speakers at a recent Calgary conference on global oil prices predicted that low prices will continue into the next century. With new supplies constantly being discovered, and energy-conservation technology improving, low rates are expected to continue. Charles Maxwell, vice-chairman of C. J. Lawrence Morgan Grenfell Inc. of New York City, predicts that oil will only reach $20.50 a barrel in 1990. And he added that, with inflation taken account of, that figure would be the equivalent of only $18.75 a barrel in current dollars.

In an attempt to set a price floor, OPEC is scheduled to meet in two weeks in an attempt to stabilize production by cutting prices. But so far, the organization’s efforts have failed because some of its economically weak member nations have to increase production to produce larger incomes. Although analysts say that a united OPEC has the capability to push prices up, they note it appears that none of its 13 members wants to take the first step.

Meanwhile, the profit squeeze on many small oil producers is so severe that some say they would like to get out of the business altogether. Said Calgary oilman Hilton Westmore, president of Enchant Resources Ltd.: “Low prices have taken away the excitement—if it was up to me, I would shut my oil and gas wells until prices improved. These big projects are for the major companies. They are just to buy votes in the next federal election.”

But it appears that even a forecast of a long period of low prices has not dampened Ottawa’s pre-election enthusiasm for heavyand upgraded-oil projects. As Energy Minister Masse, quoting Napoleon, put it, before committing $1 billion in federal funds and loan guarantees for the OSLO project: “The art of sometimes being very audacious and sometimes being very prudent is the art of success.”

JOHN HOWSE in Calgary