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Lougheed won a seat in Alberta’s Legislature in 1967,
the year the doors opened on the Great Canadian Oil Sands (now Suncor) mine
and upgrader; he became premier four years later. During 14 years at the
helm, he took an active role in oilsands
development. “It was obvious that the oil sands were owned by the
people of Alberta,” he says. “We consistently and constantly made
sure that the industry understood that the Government of Alberta was the
owner and we weren’t just there in a supervisory or regulatory way. We
were extensively involved because we were the owners.”
Fast-forward to 1974, when the province’s resource ownership and its
commitment to play an active role in development helped revive Syncrude during a near-death experience.
The project had received regulatory approval in 1968, but by 1974 the
projected cost of the plant had more than doubled to $2 billion. At year-end
Atlantic Richfield Corporation, which was developing its Prudhoe Bay assets,
sent its partners a telegram saying that effective January 1st they were
pulling out. The remaining participants – Cities Service Canada,
Imperial Oil and Gulf Canada – were paying $666 per minute for an
increasingly dicey-looking project.
Energy Shock and Energy War
The world’s first energy shock was in high gear. During the previous
three years, global oil prices had more than tripled to $11.50 per barrel.
While this should have created an energy boom, in Canada it didn’t.
The environment in 1973 was one of high inflation and rising oil prices, and
in September Prime Minister Pierre Trudeau asked the western provinces to
agree to a voluntary freeze on domestic prices. Nine days later, his
government imposed a $0.40 tax on every barrel of exported oil. The tax equalled the difference between domestic and
international prices, and the revenues were used to subsidize imports for
refiners in eastern Canada.
Outraged that Ottawa would tax a provincial resource, Alberta retaliated in
early October. The province cancelled the Alberta Oil Revenue and Royalty
Plan effective at yearend, eliminated maximum royalty provisions in all
leases and introduced a price-related royalty system. Days later came the
Arab/Israeli Yom Kippur War and an embargo by Arab states on oil deliveries
to the US and Western Europe. As international prices skyrocketed, so did
Ottawa’s export tax. For the rest of the 1970s, OPEC sat in the oil
price driver’s seat.
In December Trudeau announced a National Oil Policy “designed to reach
Canadian self-sufficiency in oil and oil products before the end of this
decade.” Among other measures, this policy added fuel to the crude oil
firestorm by making royalties a non-deductible expense for corporate income
tax calculations and putting price caps – euphemistically called
“made-in-Canada prices” – on oil production for domestic
use. Alberta responded with plans to implement a 65% surroyalty
on oil. The 1974 Liberal budget made some concessions but retained in
principle the right of the federal government to tax provincial royalties.
As Canadians worried about the country “running out of oil,” the
producing provinces felt hoodwinked and betrayed. In effect, they argued, the
feds were arrogating the fiscal benefits of rising oil prices unto themselves
and encroaching on provincial resource ownership. These moves precipitated
the bitterest intergovernmental conflicts in Canadian history. The first of
two political wars had begun, and battles would rage for a decade.
The political environment was toxic, and it remained so during the Syncrude crisis. According to Hans Maciej,
who at the time was the Canadian Petroleum Association’s technical
director, “The first energy war did not end until the end of 1975 after
the federal government introduced price increases for crude oil and natural
gas and, most importantly, recognized the role of royalties paid prior to the
price upheaval as a legitimate business expense.”
An Early Thaw
At the beginning of the Syncrude crisis, the
consortium created two management teams – one team of executives to
plan ways to deep-six the project; another to find ways to keep it alive. In
addition to two top executives from each of the three partners, the
life-support team included an executive vice president from Cities Services,
Calgary-based Bill Mooney. According to Lougheed,
“Everybody knew Bill and he just had a way with him of getting people
involved and he’s one of the funniest guys I’ve ever met. Mooney
played a major behind-the-scenes role in getting people together.”
Though the political environment was toxic, these men had the task of getting
government participation in the Syncrude project.
Absent other industry partners, public money was the only alternative to a
shutdown. The team of seven made a dozen cross-country trips in 17 days. One
breakthrough came toward the end of January, when Mooney walked unannounced
into Minister of Energy, Mines and Resources Donald Macdonald’s office
suite. Hearing that Macdonald was too busy to see him (meetings all day),
Mooney decided to wait him out.
When Macdonald returned from Cabinet, Mooney accosted him: “I’ve
got to see you.” During a brief meeting the minister outlined the
concessions the federal government was willing to make. As Mooney was
leaving, Macdonald said “If you tell anyone about this I’ll call
you a goddamned liar.”
The Winnipeg Agreement of February 3, 1975 was the outcome of the Syncrude rescue team’s countless phone calls and
meetings, and it represented an early thaw in the political climate. The
participants in the 12-hour session convened to reach consensus included many
of Canada’s key decision-makers. The chairmen of Cities Service,
Imperial, Gulf and Shell were there, along with other executives from their
companies. Three provincial ministers accompanied premier Lougheed:
energy minister Bill Dickie, intergovernmental
affairs minister Don Getty and attorney general Merv
Leitch. Ontario Premier Bill Davis also brought key ministers to the
negotiations. Federal players included Macdonald and Jean Chretien, president
of the Treasury Board.
There was give-and-take from everyone except the Shell delegation, which
stormed out of the meetings after an hour. They would have considered taking
an equity stake in the project, but CEO Bill Daniel first wanted a
government-guaranteed base price for production. His team went home
empty-handed.
Many people remember the Winnipeg Agreement as a successful effort to replace
with government money the 30% equity vacuum created by the departure of
Atlantic Richfield: Ottawa took 15%, Alberta 10% and Ontario 5%. The private
partners agreed to take a $1.4 billion interest in the project, but Cities
Service and Gulf gave Alberta the option to convert a $200 million loan into
equity. The province also agreed to construct a pipeline and a power plant,
which were risk-free.
Particularly innovative was a royalty structure reflecting technological
risks. “When Syncrude came along and we got
into the negotiations,” according to Lougheed,
“it was clear we could not approach (royalties) from a gross-revenue
point of view. It wasn’t really fair because of the risk element
involved in such a new process.”
It took eighteen months to prepare legal documentation for the Winnipeg
Agreement, and signing took two days. The second day of signing, for
dignitaries, was planned for the Saskatchewan Room in Edmonton’s Westin
Plaza hotel. For the occasion, Bill Mooney used a pair of table knives to pry
off the room’s nameplate. He replaced it with the one that said The
Alberta Room.
Peter McKenzie-Brown
Language Instinct
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