Boom and Bust in Alberta
An oil boom creates scores of multi-millionaires but then the party ends
“In the 1970s, Alberta was hit by a modern-day gold rush. Oil prices soared and adventurers flooded into the province in a frenzied hunt to strike it rich.
In 1973, a worldwide oil crisis ushered in
an Alberta oil boom. (Canada Science
and Technology Museum, Ottawa)
For geologist Jim Gray, these were the glory days in Alberta when the pioneer spirit was alive and well.
“Lets drill that well. Lets take that land. Lets not talk about this for the rest of the day. And lets not have a bloody committee. And if we fail, well fail big. But if we win, were gonna win big.”
Gray did win big. He and his partner, John Masters, discovered Elmworth Deep Basin, a gas field west of Grande Prairie, Alberta, which turned out to be the second largest in North America.
“It was a great moment of self-satisfaction, especially when you find it where everyone else said not to go,” said Gray, who formed the company Canadian Hunter.
Gray – a devout Mormon from Kirkland Lake, Ontario – quickly joined the wild pace of Calgarys oil world.
“There are over seven hundred oil and gas companies here,” Gray said. “Its heavy competition. Some people cant keep up with it. Weve got a high incidence of social stress. Divorce, drinking, suicide. But theres a lot of us who thrive on it.”
Imperial Oil lay claim to Alberta’s first big oil strike in 1947. But the oil frenzy more than two decades later would be touched off by an event half way around the world.
On October 6, 1973, Egyptian tanks crossed into Israeli-occupied territory and Syrian troops moved towards Jerusalem. Israel, backed by the United States, rebuffed the attack.
On October 16, there was a meeting in Kuwait at which Arab oil producers discussed the prospect of using their oil resources as leverage, hoping to get western nations to back away from their commitment to Israel. They cut production initially by 25 per cent, with plans for further cuts of 5 per cent a month until a Middle Eastern settlement could be reached.
The price of oil quickly soared; it had been selling for $3 (U.S.) a barrel, and it climbed to $15 almost overnight. By the end of the decade, the price was almost $40 a barrel as OPEC, the Organization of Petroleum Exporting Countries, maintained its quotas and Iran, a major oil exporter, erupted in civil war.
In Alberta, the oil boom was creating more multi-millionaires than anytime before in Canadian history. Albertas Bible belt image was replaced by the notion of oil wealth, with all its attendant perks and vices.
For a while, it seems as if money really did grow on trees. And everyone wanted a piece of the action.
During the 1970s, the provinces population increased by a third. Four thousand people a month flood into the province, looking for a share of this modern-day gold rush.
“We would work seven days a week, sixteen, twenty hours a day,” said oil rig worker Dwayne Mather. “I was young) and full of all kinds of ambition and it was great, a great time.”
The Alberta oil industry boomed, transforming the cities of Calgary and Edmonton
At the height of the boom, Calgary issued more than $1 billion worth of construction permits annually, more than Chicago or New York. Apartment vacancy rates approached zero as Ontarians and Maritimers arrived daily in search of high-paying jobs.
The housing market boomed, oil stocks rose, and an entrepreneurial spirit, once exclusive to businessmen, was awakened in professors, lawyers, and dentists, who began speculating in real estate and experimenting with oil ventures.
At Calgary’s Petroleum Club, new Canadian millionaires rubbed shoulders with American oil company presidents. The big players swap tales and make deals. Jim Gray thrived on the competition:
“Everybody wanted to be in a big building. Everybody wanted to have a corporate airplane. Young people with two or three or four years experience were getting together with some other friends and starting their own little oil and gas company.”
But the frenzied greed of the Alberta oil boom would take its toll. By the early 1980s, too rapid expansion and a world-wide economic recession hit the industry hard.
As unpredictably as it began, the Alberta oil boom was over.
In 1982, Dome Petroleum, the country’s largest oil company, avoided collapse with a last-minute bailout package with Ottawa and the banks.
Within two years, mirroring trends elsewhere in the country, unemployment in the province rose from 4 to 10 per cent. For the first time in more than a decade, Alberta had more people leaving the province than coming in. The province led the nation in housing foreclosures, bankruptcies and suicides.
The Calgary Heralds classified section bulged with homes for sale, sometimes including the contents and cars. The city had 2.3 million square metres of vacant office space, and its real estate speculators and oil investors had reverted to their former careers as teachers, dentists, and taxi drivers.
In 1986, Alberta received another economic blow when world oil price declined steeply.
Alberta’s economic woes began to turn around in the late 1980s. The provincial government used enormous royalty revenues generated from oil and gas sales to diversify into the forestry sector. By the mid-1990s, Alberta’s fortunes were on the rise again, thanks to the fiscally responsible Ralph Klein government and higher world prices for oil and natural gas.”
Stats, lies and crude oil
“Canadians love their energy myths. Pierre Trudeau destroyed the Alberta oil industry in the 1980s with the NEP (it had marginal effects — the real cause was a global recession and global crude price collapse). Ontario’s electricity costs are way out of line with our U.S. neighbours (actually, they’re much lower). The oilsands need a pipeline because our oil is so deeply discounted (it isn’t).
The media bears some responsibility for perpetrating these myths by failing to actually analyze the words coming out of our politicians’ mouths. But its the politicians themselves who ought to know better — they have entire government departments devoted to separating fact from fantasy. In the case of the “deep discount” myth we have to do the math ourselves, since governments are so reluctant to share.
The discount on Western Canada Select (the benchmark for oilsands heavy) to West Texas intermediate (WTI) represents a combination of both the quality difference and the transportation cost from Alberta to the trading hub at Cushing Oklahoma. The Gulf Coast heavy/light discount is roughly $8 per barrel today and is a good representation of the quality difference between WCS and WTI. It takes $7 per barrel to move a barrel of heavy from Alberta to Cushing on Keystone. So the discount we should see in Alberta is $15 per barrel based on world prices and transportation costs.
On October 14 the actual market discount in Alberta was only $14, just a dollar under the theoretical discount. So there is no discount to international prices; if anything, there’s a premium. This has been the case for many months, despite the misleading political rhetoric.
We can’t count on our politicians to counter the myths — they don’t want to argue with people’s beliefs, there’s no political upside to telling the truth. Often they find it pays to play up these energy myths, to tell people it really is all Ottawa’s fault.
But independent regulators like the National Energy Board (NEB) should be capable of providing us with unbiased information. That’s what they’re there for. That doesn’t seem to be the case today.
Ask yourself: Why would the NEB choose to warn of 1.2 million barrels a day moving by rail based on an unlikely price scenario?
On September 21, Chairman of the NEB Peter Watson, testifying before the Senate Committee on Transportation, provided two pieces of data in support of pipeline infrastructure that got widely reported. The first is that the NEB reference case forecast shows crude production growing by 56 per cent to 6.1 million barrels per day from 2014 to 2040. The second piece of information is that, in the absence of new pipelines, rail transport of oil will grow to 1.2 million barrels per day by 2040. This is based on the NEB’s “Canada’s Energy Future 2016” (EF2016) published earlier this year.
What Watson didn’t bother mentioning is that the NEB reference case is based on highly unrealistic crude prices — $60 per barrel this year, rising to $75 next year and up over $90 by 2025. Even the price forecast for this year is unrealistic.
In the NEB’s lower price case, the price for this year is $48, rising only to $64 by 2025 — much more in line with expectations based on U.S. fracking setting the ceiling price. Under that scenario, only already-developed oilsands projects proceed and new projects don’t start coming on until the late 2020s when prices have improved enough. That’s realistic.
Watson’s scary scenario — 1.2 million barrels a day of crude moving by rail — is also based on that high-price forecast. The production in the more plausible, low-price scenario posits only small amounts moving by rail until the late 2020’s — and even then it never gets close to the NEB’s numbers.
So ask yourself: Why would the NEB choose to warn of 1.2 million barrels a day moving by rail based on an unlikely price scenario? For one thing, it’s completely inconsistent with statements made by the Trudeau government — and the Harper government — on fossil fuel use in Canada.
Those government targets point to a 30 per cent reduction in fossil fuel consumption by 2030, or even a more realistic number like 15 per cent.
The head of the NEB testified before a Senate committee on the need for pipelines based on prices forecasts that don’t seem plausible, and carbon consumption rates that even the last government wanted to avoid. What conclusions are we supposed to reach from this?
Hopefully we’ll start seeing more of the unbiased, informative work that ought to expect from an independent regulatory authority. Otherwise we should all start questioning the NEB’s impartiality. And if it can’t be unbiased, it can at least be consistent.”
The Great Myth of Alberta Conservatism
“The NEP sealed an enmity between Alberta and Ottawa that continues nearly forty years later. The federal Liberals have never made any significant inroads in Alberta electorally since; various conservative parties have been the only ones trusted with the province’s interests. This, again, is more a matter of political myth than fact: Brian Mulroney was actually a great disappointment to the West, and Jean Chrétien was one of the greatest champions of the province’s oil sands.”
HISTORICAL OIL PRICES
History on Repeat: Alberta’s Coming Stand-off with Trudeau
The Prairie provinces have had a complicated relationship with the federal government. The source of the West’s traditionally stormy relations with Ottawa can nearly always be traced back to jurisdictional control over the West’s natural resources. In similar fashion to Quebec’s neuroticism over issues of cultural identity, federal incursion into Alberta’s energy affairs has irrevocably shaped its political consciousness. The evolution of this feud can be encapsulated by three separate episodes.
The seeds of this dispute were planted from the moment Alberta and Saskatchewan were established as provinces in 1905. Both provinces were given admission, but not before Ottawa enshrined a federal prerogative over both entrants’ mineral rights (this measure was also applied as a condition for Manitoba’s admission dating back to 1870). This stood in marked contrast to the formula applied for the “Founding Four” and British Columbia upon their establishment as provinces.
This point of contention between Ottawa and the Prairie provinces festered quietly until it came to a head in 1923 when Alberta’s Premier Brownlee enacted legislation to tax firms extracting federally-controlled mineral resources. Alberta’s move precipitated a constitutional crisis, which it tactically employed to rally support to its banners. The pressure continued to mount until the federal government finally relinquished control to the provinces in 1930.
Second, greater exploration would later uncover the true size of Alberta’s vast oil and gas endowment. As these reserves were progressively developed, Alberta’s newfound wealth did not go unnoticed in Ottawa. In 1949, Louis St. Laurent’s Liberal government passed the Federal Pipeline Act. The bill asserted federal control over all oil and gas pipelines that crossed either provincial or international borders. Alberta premier Ernest Manning’s saw the bill for what it really was: a stalking horse for expanded federal control over Alberta’s energy sector. If left unchecked, federally-controlled pipelines would be extended into Alberta’s gas fields. This infrastructure would then give Ottawa the ability to ship these resources direct to larger markets in Eastern Canada and the United States. Alberta moved to maintain control over pipelines that fell within its provincial boundaries, thus ensuring Albertans had first priority over gas purchases. In a clever move devised to head off federal encroachment, Manning’s government commissioned a private-public venture called the “Alberta Gas Trunk Line” (AGTL).
The AGTL network gave Alberta full control over the movement of its energy resources from wellhead to market. It was intended to permit the collection of natural gas from wells throughout the province. The gas could then shipped to either local market, or to shipping terminals destined for both national and international markets. At its height the network comprised over 3,000 km of pipe. The venture gave the province exclusive control over all oil and gas shipped within its boundaries.
The third and most topical example for assessing Alberta’s situation today dates to 1980. This was the year Pierre Trudeau unveiled the much-maligned National Energy Program (NEP). It was also during this period that the natural decline in American petroleum production, incipient Arab nationalism, and the Iranian Revolution combined to create a global energy crisis. The resulting price shock threatened the economic stability of most oil-importing economies. At the time, despite Alberta’s production, Canada was far from energy self-sufficiency forcing it to rely on energy imports from the United-States.
Pierre Trudeau, spotting an opportunity, used the crisis as a pretext to justify federal intervention into Alberta’s provincial affairs. Despite the province’s long hard-fought battle for control of its natural resources, the NEP would go on to subjugate and plunder Alberta’s energy wealth for Ottawa’s own ends. The officially account argues that the program was crafted to reduce Canada’s dependence on foreign energy imports, redistribute the proceeds of Alberta’s energy to benefit the federal government and Canadian consumers, and to increase Canadian ownership in its domestic energy industry.
A variety of initiatives where nested within the NEP. One of these sought to encourage energy development in remote parts of the country, specifically offshore and northern fields. Trudeau also hoped to strike a greater role for Canadian firms in the country’s burgeoning energy industry. To this end, the NEP created the Petroleum Incentives Program that paid up to 80% for the exploration costs accrued by Canadian companies operating in these federally controlled lands. Any of these new frontier ventures were required to provide Ottawa with a 25% ownership stake. Albertans perceived this as an attempt to poach scare capital that might otherwise have been invested in its oil fields.
To Albertans’ eyes the NEP’s greatest sin was the introduction of new federal taxes on the energy industry. Tax rates were increased on energy exports and on corporate revenue from oil and gas activity. The expanded federal take came at the expense of both private and provincial interests. Canadian consumers were a direct beneficiary of the program because it also instituted a national oil price and limited energy export permits, thereby artificially depressing energy prices paid by Canadians while maintaining the market rate for exported energy.
Federal proceeds from the NEP were partly channeled toward capitalizing the Crown-owned energy consortium known as Petro-Canada. This state-owned firm was created by an act of Parliament in 1976 (four year before the introduction of the NEP). The legislation was introduced by a minority Liberal Government at the behest of the NDP, whose support was crucial for the Liberals to hold on to power. Voters restored Trudeau’s Liberals to majority in 1980. Reinvigorated by their electoral success, the Government embarked on a renewed plan to aggressively expand both the size and the scope of Petro-Canada’s operations. Although Petro-Can fulfilled Ottawa’s aim to increase Canadian participation in its domestic energy industry, the firm’s aggressive expansion meant that the federal government had entered into direct competition with private, mostly American-owned, firms in Alberta’s oil sands.
The economic trauma the program imparted unto Albertans would be etched in their collective memory for generations. Premier Loughheed struck back by applying the brakes to the development of the oil sands. This move was meant to decrease the province’s oil production thwarting the proceeds Trudeau hoped to reap. Political tensions were somewhat relieved in 1981 when Trudeau and Lougheed signed an agreement revising the taxation rates. The agreement implemented a two tier national oil price while providing some relief for Alberta by lifting the reviled export tax. The agreement would see both the provincial and the federal governments’ share of revenue increase, this time solely at the expense of private interests.
Fortunately for Albertans, the legal challenge to the program rose to be heard before the Supreme Court. The year after the new intergovernmental agreement was inked, the Court ruled in the province’s favour finding that the federal government had overstepped its bounds in taxing provincially-controlled oil and gas wells. The ruling severely curtailed the scope of the NEP. The rump of the program was dealt a final knockout blow by Brian Mulroney’s Progressive Conservative government after it came to power in 1984.
In spite the progressive dismemberment of the NEP, Alberta still suffered a particularly harsh economic contraction during the 1980s. The material hardship most Westerners endured cemented the irrefutable link between the NEP and the recession in Canada’s energy industry. The bulk of Alberta’s economic woes were in actuality a direct result of the precipitous drop in the global price of oil. However, the NEP contributed nothing to fortify the industry’s resilience for weathering the ensuing storm. The program actively discouraged private investment in Alberta by creating direct competition between the government and private firms. It reduced the economic feasibility of privately-funded projects by levying new taxes on oil and gas activity. It also spawned a climate of regulatory uncertainty by introducing tectonic shift in the national energy policy.
Now history seems to be intent on repeating itself. There is an increasing likelihood that another Trudeau, armed with another overreaching policy, will square off against a fresh provincial, conservative government. Justin Trudeau’s proposed federal carbon tax strikes at the heart of Alberta’s energy industry mirroring his father’s NEP. In its current form, the proposed tax will apply to any province without a price equivalent to $10 per tonne of CO2e starting in 2018, and rising to $50 per tonne by 2022.
Alberta’s current NDP government has unilaterally enacted its own carbon tax in anticipation of the federal policy. The future of Alberta’s climate policy is uncertain given the widespread disaffection with both the Notley government and its interventionist climate agenda. Couple this with the increasing likelihood that Alberta’s NDP government will be facing a unified “free enterprise” party in the coming election. These two realities do not bode well for the NDP’s chances at electoral success come 2019. If a new unified, provincial conservative party is elected in 2019, Trudeau will be pitted against an opponent much the same as his father faced. Peter Lougheed’s fresh, insurgent Progressive Conservatives party injected a renewed vigor into Alberta politics after it unseated the tired Social Credit Government whose interventionist policy lost favour with Albertans.
So what recourse do we as Albertans have?
Well, a united conservative party could adopt the tactic of stalling energy production as employed by Premier Loughheed. However, this strategy would only serve to inflict pain with little or no effect on the carbon tax (being that the policy is intended to discourage carbon intensive development). The sensible option is to challenge the policy through the courts. A recent paper titled Response to Federal Carbon Pricing: Equalization Reform by Dr. Ted Morton at the Manning Institute advocates a two prong approach. He outlines two mechanisms for change:
“The first is to hold a provincial constitutional referendum in Alberta (and other provinces) to remove the equalization program from the Constitution….The second option is to seek a judicial opinion on the constitutional validity of the inclusion of mineral royalties in the current equalization formula. This was the tactic used successfully by Lougheed against the National Energy Program in 1980.”
Dr. Morton sums it up perfectly when he says, “Alberta has never got anything from Ottawa without fighting for it.”
The Birth and Death of the NEP
“The consensus of economists is that the NEP was not economic policy, it was a political document. . . . The energy policies hit the petroleum industry by the discriminatory measures that discouraged the investment of foreign capital; by the federal-provincial squabbles over revenue that squeezed the industry’s revenues; and by the “Canadianization” measures which wound up bankrupting the Canadian-owned firms they were intended to help.
It was more conflict in the Middle East that set the stage for the National Energy Program. The Iranian revolution that started in December 1978 overthrew the autocratic regime of Shah Muhammad Reza Pahlavi only to replace it with an even more oppressive theocratic regime. The effects of the revolution on the world of oil were, at least temporarily, as profound as the impact of the 1973 Israeli-Arab war. That earlier war had strengthened the rise of world, or OPEC, oil prices from $2.45 to $17 in 1973. Now, with production from the world’s second largest oil exporter slashed, the price zoomed to $26 in 1979 and nearly $45 in 1980. Once more, there was a great increase in the latent wealth of oil to argue about.
Despite this, a measure of peace prevailed in Canada with the May election of Joe Clark’s seven-month Conservative government. Even so, Energy, Mines and Resources’ Energy Policy sector was urging tough federal action. In a paper prepared for new energy minister Ray Hnatyshyn, Background to Energy Policy Choice, EMR argued once more that Alberta was getting too big a slice of the oil pie revenue while the federal government was getting only 10 percent. Big oil companies were holding up development of the oil sands. To increase Canadian oil supplies, even stronger direct federal government action was urged: the establishment of Petro-Canada, with a mandate to find more oil, was not enough.1
The advice mostly fell on deaf ears. The Conservatives reached an accord with Alberta to peg oil prices closer to the now much-higher OPEC price. It was sweet music to the ears of Alberta and the oil producers.
The notes sounded less harmonious, however, when Finance Minister John Crosbie brought down his ill-fated budget in December. Like the Liberals, the Conservatives too wanted a bigger federal slice of oil revenues, especially with the big increase in the controlled price. The export tax was to be abolished but replaced by an alternative tax on sales of crude oil to both American and Canadian refiners, plus an 18-cents-per-gallon ($6.30 per barrel) tax on gasoline and diesel fuel. None of it came to pass when the Conservative government fell on a budget vote on December 11.
Trudeau outlined the Liberals’ energy policy, and the main features in the coming National Energy Program, in an election speech in Halifax on January 25, halfway through the campaign. There would be a continuation of made-in-Canada oil prices, with lower rates for Canadian consumers and OPEC prices for American buyers; an expanded role for Petro-Canada; greater Canadian ownership of the petroleum industry; measures to promote energy conservation and substitution of oil with alternative forms of energy. It was politically sexy. The Liberals won the election, just 68 days after they had defeated Joe Clark’s government in the House.
The thrust of the Liberals’ more aggressive energy policies had been developed by a committee of Liberal members of Parliament headed by Marc Lalonde, assisted by researcher Barbara Zulzenko, a New York consumer advocate who had no qualifications as an economist or knowledge about the petroleum industry. When the Liberals were back in office, Marc Lalonde was energy minister, directing the development and drafting of the National Energy Program by EMR’s Energy Policy sector. Because it involved so many taxes, it was unveiled as part of Finance Minister Allan MacEachen’s October 28 budget. The two-price system and the oil export tax were re-confirmed. New taxes were designed to boost the federal share of oil and gas production revenue from nine percent to a projected 26 percent during the four-year period 1980 to 1983. Some $4.6 billion was budgeted for the PIPs, the Petroleum Incentive Payments under which Ottawa paid up to 80 percent of the cost of exploratory wells on its Canada Lands in the northern and offshore frontier areas and up to 35 percent of wildcats drilled in the West, the amount depending on the degree of Canadian ownership of the exploring company. The gas delivery pipeline from Alberta was to be extended from Montreal to Quebec City and the Maritime provinces. Natural gas prices were to be kept relatively low to encourage switching from fuel oil. Canadian ownership of the petroleum industry was to be increased from 27 percent to at least 50 percent by 1990. Petro-Canada was directed to acquire the Canadian assets of at least one foreign-controlled multinational oil company (in fact, it already had). Petro-Canada was given the right to acquire, prior to the start of production, a quarter interest in any oil or gas discoveries on the Canada Lands, without having to pay for any of the prior exploration costs.
The NEP was festooned with an array of acronyms that denoted both taxes and spending. On the taxing side, in addition to the PIPs, there was NORP, the New Oil Reference Price, to encourage development of the oil sands; IORT, the Incremental Oil Revenue Tax, an additional tax on oil company revenue which would apply if prices rose more rapidly than expected, which never happened; COS, the Canadian Ownership Charge, a tax later applied to gasoline sales to pay the $1.7 -billion cost of Petro-Canada’s purchase of Canadian Petrofina; and PCC, the Petroleum Compensation Charge that subsidized the cost of oil imports. On the spending side was COSP, the Canadian Oil Substitution Program; UOOP, the Utility Off-Oil Program; CHIP, the Canadian Home Insulation Program; and FIRE, the Forest Industry Renewable Energy program. Including Petro-Canada, the PIP grants, and all the other items, in the five-year period 1980-85, Ottawa spent $13 billion on its energy programs. Also related to the NEP was the Western Development Fund, established to return to the West, under federal control, a portion of the funds taken from the West by the NEP, and to help bolster Western support for the Liberals. Much of the fund was spent to help resolve railway transportation issues that had been a Western complaint for more than a century, frequently mentioned by Lougheed in his discontents about Confederation’s alleged Alberta discrimination.2
The first reaction of the oil companies to the NEP was that they would have to review their spending plans. B.C.’s energy minister, Bob McClelland, said it was all a “disaster” and “a betrayal of the West.” Lougheed’s response was more action than words and was swift in coming. Alberta began to cut its oil production by a planned 15 percent in three stages over the next year. Approval of further oil sands development was withheld. A legal challenge to Ottawa’s authority to impose an excise tax on natural gas sales was planned. But, as in the 1970s, the demands of reality compelled compromise and settlement. The country needed petroleum resources developed, not shut in. Ottawa needed money. Alberta could only suffer by cutting back its oil production.
Alberta’s production cutbacks and oil sands restraint were removed within a year by another agreement. In the five-year pricing and revenue sharing agreement signed by Lougheed and Trudeau on September 1, 1981, 10 months after the NEP announcement — with similar agreements signed with British Columbia on September 24 and with Saskatchewan on October 26 — there were dreams of gushing oil wealth for everyone. It was based on projections by the bureaucrats in Edmonton and Ottawa that world oil prices would keep climbing at a rate of 13 percent a year. The controlled price for Canadian oil would be capped at 85 percent of the world price. This would yield production revenues of precisely $212.8 billion during the five-year term of the agreement. The federal government would get 25.5 percent, Alberta would get 30.2 percent, and the oil companies would get 44.3 percent. “I regard the agreement as a triumph of the Canadian way,” Trudeau later wrote in his memoirs. “Lougheed and I toasted the agreement with champagne and publicly agreed that it was good for Alberta and good for Canada.”
They were dreaming in Technicolor. Even before Lougheed and Trudeau tasted their champagne, oil prices had started falling. In March, OPEC had cut its prices by $5 a barrel, and an increase in the price for Canadian oil scheduled for July had been cancelled.
“What became of the energy crisis?” the Petroleum Economist asked a month after the champagne celebration.3 Plenty. High prices, off-oil switching by consumers, and the worst recession to hit the Western world since the 1930s had reduced world oil demand by more than eight percent in two years. Large new oil supplies in the North Sea, Alaska, Mexico, and elsewhere had loosened OPEC’s monopoly grip and its ability to seemingly command what it wanted for its oil. Inventories of oil, bulked up because of jitters over possible further disruptions to Middle East oil supplies, were now being drawn down at rates up to four million barrels a day, adding more downward pressure on prices. Instead of climbing to $80 a barrel as bureaucrats, banks, and petroleum borrowers expected, the price of oil was on a steady eight-year skid from nearly $45 to $19 per barrel.
The price drop, Trudeau acknowledged in his memoirs, meant “we were underwriting subsidies to the Canadian oil companies and lower prices to the Canadian consumers with money we didn’t get.”
The death of the NEP
The National Energy Program lasted four years. It was killed by Brian Mulroney’s Conservative government, elected on September 4, 1984 with a market economy and free trade agenda fundamentally opposed to the decade of government petroleum engineering in the Trudeau era. The funeral director was Patricia Carney, the former business journalist and economic consultant who was Mulroney’s energy minister. The burial took place on March 28 the following year when Carney and the energy ministers of the Western provinces signed the Western accord. It abolished oil and gas price controls, effective June 1. Five federal NEP taxes were abolished immediately, while the annual 82.5-billion petroleum and gas revenue taxes were phased out over 3.5 years. No more PIP grants were to be issued, but those already approved were continued. Tax incentives to some extent replaced the PIP grants and ended the PIP discrimination against foreign investment and exploration expenditures in Western Canada. PetroCanada’s contentious 25-percent back-in privilege on Canada Lands was abolished. The changes were expected to cost the federal treasury half a billion dollars in 1985 but add $3 billion to oil company revenues. The industry gains didn’t last long: the following year, the now decontrolled benchmark price for Canadian oil, in step with world prices, collapsed by more than 40 percent (from $37 to $20).
A quarter of a century later, for many Albertans the National Energy Program remains the shorthand phrase for the cause of all the blows the province suffered in the 1970s and 1980s: the alleged theft of billions of dollars in public revenues that should have stayed in Alberta; the collapse of drilling activity as rigs headed south; the loss of jobs and savings; the corporate and personal bankruptcies. Estimates of what the NEP cost Alberta range from $50 billion to $134 billion, which Robert Mansell, University of Calgary dean of economics, calculates as the net withdrawal from the province to the federal treasury and petroleum consumers from 1978 to 1985, as measured in 1990 dollars.4 In fact, the NEP was only the climactic part of detested federal energy policies that began with the energy crisis in 1973 and didn’t end until 13 years later with the signing of the Western accord.
Those energy policies, however, were not entirely unique to Canada. Other countries with domestic oil production also capped their prices at less than OPEC prices in the 1970s, and applied taxes to capture rising oil revenue for the public sector. In the United States, the controlled prices for “old oil” –- oil produced from U. S. fields discovered prior to 1974 — were at times less than the prices Ottawa set for Canadian oil. Britain applied a schedule of taxes that took as much as 90 percent of the sales revenue from oil fields in its sector of the North Sea.5 The slump in industry expenditures for drilling for exploration was a function of supply and demand. Almost from the inception of the petroleum age, the cycle has swung from oil shortages causing prices too high to sustain economic prosperity to oil gluts with prices too low to sustain the search for and development of new supplies. The period of supply glut in the 1980s would have reduced industry activity regardless of the NEP; in fact, drilling continued to fall after the NEP was dead.
Regardless, the NEP and its predecessors had adverse economic consequences, and where they were not the cause of tough economic conditions, they made them worse. The consensus of economists is that the NEP was not economic policy, it was a political document. It “did not result in nor was it primarily intended to produce good economics,” political analysts Bruce Doern and Glen Toner concluded.” The energy policies hit the petroleum industry by the discriminatory measures that discouraged the investment of foreign capital; by the federal-provincial squabbles over revenue that squeezed the industry’s revenues; and by the “Canadianization” measures which wound up bankrupting the Canadian-owned firms they were intended to help.
- Foster, Sorcerer’s Apprentices.
- For more on the link between the National Energy Program and the Western Development Fund, see Doern and Toner, Politics of Energy.
- Petroleum Economist, Nov. 1981.
- Robert Bott, “Ten Years after the NEP,” CPA Review (Calgary: Canadian Petroleum Association, Nov. 1990).
- Petroleum Economist, “U.S. Prolongs Price Controls” (Jan. 1975), “PRT Rises to Boost Stake take” (Sept. 1978).
From The Great Canadian Oil Patch, pgs. 449 to 454, reprinted with kind permission of JuneWarren Publishing and Mr. Earle Gray”
National Energy Program
The 1980 National Energy Program (NEP) was an attempt by the federal government to gain greater control over the Canadian petroleum industry, secure Canadian oil supplies, and redistribute Alberta’s oil wealth to the rest of the country.
William Munsey, Past President of the Alberta Party, on Encana History: “I will be back to light-hearted punning shortly, but I’ve got to get something off my chest:
In light of its decision to leave Canada, it’s worth knowing Encana’s history. It was essentially a gift of mineral rights to Canadian Pacific Railways. It got it’s start for free, and has a long history of following the easiest money, selling assets… many of which were financed by the initial gift from the Government of Canada.
The following was plucked off Wikipedia. I’ve know the story for years so I knew what I was looking for. Don’t credit me for all the details.
“When the Canadian Pacific Railway was formed, the government of Sir John A. Macdonald compensated it for assuming the risk of developing the railroad with the subsurface rights for a checkerboard pattern of most of Alberta and part of Saskatchewan. These rights were later spun off to Encana’s predecessors.
Like Husky last week, Encana is not about anything but shareholders’ profit and finding it by cutting and selling.
Their move has little to do with any government (look at their history of selling assets). It has everything to do with them recognizing the trend away from investing in harder-to-get-at fossil fuels.
This move is not anti-Alberta or Anti-Trudeau or Anti-Notley. This move is about chasing ever diminishing profits to keep their heads above water. Ignoring that will be fatal for Albertans.
In 1883, Canadian Pacific Railway drilled for water near Medicine Hat, AB and discovered natural gas.
On July 3, 1958, Canadian Pacific created “Canadian Pacific Oil and Gas” to manage its oil and gas properties and its mineral rights.
In 1971, Canadian Pacific Oil and Gas merged with “Central-Del Rio Oils”, creating “Pan Canadian Petroleum Limited”.
In April 2002, PanCanadian Petroleum Ltd was spun out of Canadian Pacific Limited. It subsequently merged with Alberta Energy Corporation to form EnCana. Gwyn Morgan was named President and CEO.
In January 2007, the company sold its assets in Chad to China National Petroleum Corporation for $202.5 million.
In May 2007, the company sold its assets in the delta of the Mackenzie River.
In spring 2008, residents from Pavillion, Wyoming, approached the United States Environmental Protection Agency (EPA) about changes in water quality from their domestic wells. Encana was the primary natural gas producer in the area. In 2009, the EPA announced that it had found hydrocarbon contaminants in residents’ drinking water wells.
In November 2009, EnCana spun off its oil business into Cenovus Energy.
In November 2011, a potential buyer backed out of a $45 million deal to buy the company’s gas field in Pavillion, Wyoming.
In December 2011, the company sold the majority of its natural gas producing assets in the Barnett Shale.
In February 2012, Mitsubishi paid approximately C$2.9 billion for a 40% interest in the Cutbank Ridge Partnership with Encana, which involves 409,000 net acres of Montney Formation natural gas lands in northeast British Columbia. The company also sold its midstream assets in the Cutbank Ridge to Veresen for C$920 million.
In December 2012, Encana announced a US$2.1 billion joint venture with state-owned, Beijing-based PetroChina through which PetroChina received a 49.9% stake in Encana’s Duvernay Formation acreage in Alberta. This was in line with the rules that “favor minority stakes over takeovers” since Prime Minister Stephen Harper’s December 7, 2012 prohibition of purchases by state-owned enterprises seeking to invest in Canadian oil sands.
At the end of 2012, Encana’s staff had increased to 4,169 employees.
In November 2013, the company announced layoffs of 20% of its employees, closure of its office in Plano, Texas, and plans to sell assets and to found a separate company for its mineral rights and royalty interests across southern Alberta. It planned to invest 75% of its 2014 capital budget into 5 projects: Projects in the Montney Formation and the Duvernay Formation in Alberta, the San Juan Basin in New Mexico, Louisiana’s Tuscaloosa Marine Shale, and the Denver-Julesburg Basin (DJ Basin) in northeast Colorado, Wyoming, and Nebraska.
In June 2014, the company sold its Bighorn assets in Alberta to Jupiter Resources for US$1.8 billion.
In November 2014, Encana acquired Athlon Energy for $7.1 billion.
In May 2014, Jonah Energy LLC acquired Encana’s Jonah Field operations in Sublette County, Wyoming.
In June 2014, the company acquired assets in the Eagle Ford Group from Freeport-McMoRan for $3.1 billion.
In August 2015, the company sold its assets in the Haynesville Shale for $850 million to affiliates of GSO Capital Partners and GeoSouthern Energy.
In December 2015, the company significantly cut its dividend and capital expenditures budget after a fall in energy prices.
In July 2016, the company sold its assets in the Denver Basin for $900 million.
In June 2017, the company sold its assets in the Piceance Basin for $735 million.
In May 2018, the company permanently ceased production at Deep Panuke. The Deep Panuke project produced and processed natural gas 250 kilometers offshore southeast of Halifax, Nova Scotia.
In December 2018, the company sold its assets in the San Juan Basin for $480 million.
In February 2019, the company acquired Newfield Exploration.
In October 2019, the company announced its intentions of moving operations from Canada to the U.S.A. and changing its name to Ovintiv.”