The Hon. Rick Orman, Minister of Energy, Province of Alberta
BRIDGES OF UNDERSTANDING
Chairman: Harold Roberts President
Our guest today is the Honourable Rick Orman, Minister of Energy for the Province of Alberta. As a third generation Calgarian, he is a true Westerner. Most of the people I know in Calgary are really Easterners gone west.
A few years ago during a previous oil crisis in Canada it was reported that someone in Calgary said: "Let the eastern ... (neighbours) freeze in the dark." I suspect that such a statement was made by a transplanted Easterner rather than a purebred Calgarian like Mr. Orman, as I know Westerners to be warm and gracious people.
At this time of year we are starting to think of a star in the East, but before our gaze is transfixed, I have the pleasure to present a star from the West.
Tamsin Carlisle of the Financial Post in September of 1987 described Mr. Orman:
Orman's rise through Alberta Tory ranks to the provincial government's inner cabinet has been striking. With working class roots, he romped home to victory in Calgary's blue-collar, largely ethnic Montrose riding in the 1986 provincial election. He was quickly appointed Minister of Career Development, then served a six-month stint in the Labour portfolio before being promoted to Energy last spring.
An accomplished fundraiser, who, in 1986, as president of a junior oil company, Nexus Resources Ltd., persuaded investors to pour $2.5 million into risky drilling ventures, Orman has leaned heavily on his oil-industry friends for contributions to Tory party coffers. For the provincial election in March, he raised more than $100,000 to spend on his campaign--the richest war chest of any provincial politician.
When I was approached about having Mr. Orman address The Empire Club it was suggested that he was the heir apparent to Premier Don Getty. Having read his profile and numerous newspaper articles on him, it occurred to me that, when Mr. Getty suffered illness earlier this year, I might indeed have been introducing the new premier of Alberta. However, as Minister of Energy, Mr. Orman comes to us as one of the most powerful men in Alberta's Cabinet.
I suspect that he comes as a salesman. In that same article referred to earlier Mr. Orman is quoted as saying, "I believe there is a role for the Energy Minister to go out and talk about investment... I can't make the deals, but I hope to trigger the investment." Having had to raise money myself, I understand the dynamics of this.
In our current recession, words of encouragement and optimism are needed. Sell! Rick, sell! Ladies and gentlemen, the Honourable Rick Orman, Minister of Energy for Alberta.
Good afternoon, ladies and gentleman. I am honoured to be here. Thank you Reverend Roberts for your invitation to speak to The Empire Club of Canada and for your introduction a few moments ago. Reverend Roberts, you said you hoped I would use this occasion to build a bridge of better understanding among Canadians--a goal which hopefully I can live up to this afternoon.
The temper of these times is such that bridge-building is needed. Events in our nation this past year sadly underscore the need for bridges that can bring Canadians together, bridges that can heal our wounded national spirit. Meech Lake, Oka, high interest rates, the GST have created disillusionment and mistrust in our country. The divisions are real and very deep.
Greater understanding and consensus-building are needed, as never before. Our national consciousness is in need of recommitment. If we are to be a country united in purpose, we must have the passion, the inspiration and the courage to create a national vision that all Canadians can accept, can share and can have pride in. Writing in Maclean's magazine nearly 20 years ago, poet Alden Nowlan said of Canadians: "The question is not 'who are we?' but 'what are we going to make of ourselves?'" The importance of that question, and answering it soon, has never been greater.
This is the first opportunity I have had to speak in Ontario since the election of Premier Bob Rae. I extend to Premier Rae and his government the goodwill of the people and Government of Alberta. I congratulate Mrs. Jenny Carter on her appointment as Ontario's new Minister of Energy. I welcome Mrs. Carter as a colleague and look forward to having a positive working relationship based on mutual respect. These are certainly interesting, if not demanding, times for Canada's energy ministers.
The unfolding hostilities in the Persian Gulf have again created world-wide concern about oil prices and security of energy supplies. These developments are dramatic reminders of just how important petroleum is to our economies and to everyday living. Energy ministers today are also confronted, as never before, with environment issues. One issue which has received a great deal of international attention is the impact of energy emissions on climate change. Discussions on this one issue alone have extremely far-reaching implications for the very way we live and work and for our relations with other countries.
Without doubt, these are important times for energy ministers. And it is a time for ministers to work cooperatively on the difficult and complex energy issues we face. It is an historical fact that Ontario and Alberta have had their share of differences on energy issues. My goal today is to build one of those very important bridges I referred to a few moments ago--a bridge of better understanding between Ontario and Alberta on energy matters. This objective provides the focus for my remarks to you today.
In 1972 the late Dr. John Deutsch, the respected Principal and Vice Chancellor of Queen's University in Kingston, chaired an advisory committee on energy for the Government of Ontario. In his report he noted--and I quote--that "Ontario finds itself in a rather unusual position of being one of North America's most energy intensive regions and yet one of North America's most energy deficient regions." He went on to say--and again I quote--that "in all respects the energy outlook points to the likelihood that energy costs and prices are going to increase steadily over the next decade." The decade that Dr. Deutsch was referring to ended eight years ago, yet his statements are as relevant today as they were in 1972.
I quote Dr. Deutsch because his comments underline two of the basic concerns that have driven Ontario's energy policy, not only over the past two decades, but for most of this century. I am referring, of course, to concern for supply and concern for price. And at no time in Ontario's history was the dual concern for price and supply greater than in the early 1970s. The events leading up to the 1973 Yom Kippur War and the associated oil embargo resulted in a flurry of examinations of Ontario's energy future.
An Ontario Ministry of Energy was recreated in 1973 and Darcy McKeough was appointed Energy Minister. Mr. McKeough had just completed a major study on energy which, among other things, looked at the security of supply and price issues. The McKeough report stated--and I quote--that "the energy problem is far bigger than the decision-making capacity of Ontario." The report also noted that the world energy situation had crucial relevance to Ontario's decision-making capacity. As is evidenced by the sequence of events which followed, the Ontario Government, working with Ottawa, moved to effectively broaden the decision-making capacity of Central Canada. It succeeded, but at the cost of considerable inter-provincial tension and the alienation of
Alberta. As we all know, Ontario opposed Alberta at every First Ministers' and Energy Ministers' meeting through the 1970s and first half of the 1980s.
The Trudeau Government did study after study, all of which effectively defined Alberta as little more than a caretaker of a "national" resource. A decade ago, on October 28, 1980, the Federal Government introduced the National Energy Program which became the new law of the land on energy matters. The NEP entrenched in law a set of policies that restrained oil and gas sales and prices, and in the process, transferred some $60 billion from Alberta to the Federal Government and the consuming regions. It is not my intention this afternoon to relive yesterday's energy battles, or to appear unduly partisan before this audience. As I said earlier, I seek today to build a bridge of understanding, but from Alberta's perspective, to understand today it is necessary to be aware of the events of yesterday. The energy policies and the attitudes from 1973 to 1984 damaged not only Alberta, but our entire nation.
Those policies planted dragon's teeth that created a persisting anger and sense of injustice in Alberta. In the principal consuming regions, especially Ontario, they engendered a belief that it was acceptable to use raw political power to appropriate resources to which the claimants morally, if not constitutionally, had no possible claim. The policies of that period seriously undermined the confidence of the producing provinces in our Confederation. And perhaps most important of all, in preventing the marketplace from working, it prevented price from performing its primary function of balancing supply and demand. We lost the chance to use market price to force conservation and improve efficiency of energy use. The consumer gained something in price but at a high cost--a very high cost--when measured in terms of energy conservation and energy security. While we may have been resource rich, as a nation we were policy poor in those days. And for a nation to grow and flourish, it needs policy that has long-term vision, a vision that respects the legitimate aspirations of all its parts, not just the centre of political power.
Attitudes have been mending since the change of the national government in 1984 and the adoption of new policies that place increased reliance on the marketplace. But the 1973-1984 policies were clearly a product of centralist political causes and election strategies.
When I became Energy Minister, I received a bit of advice on how to deal with Ontario. Actually, I received a lot of advice. But one comment particularly stands out: "When dealing with Ontario," I was told, "there's one thing you should remember: the price is always too high for their liking." I believe this is true. It is also understandable. As John Deutsch noted, Ontario is long on industry, but very short on primary energy. I can well understand the preoccupation you have with security of supply and pricing. But if we are to live and trade happily together, Ontario and Alberta must share some fundamental values. In 1977 the policy and attitude of Ontario was that the price of crude oil, natural gas and coal should not be related to world prices.
That attitude and that policy position simply won't do today. It does not describe the productive relationship that'; we both desire. We are sellers. You are valued buyers. Sellers and buyers do not meet in a legislative chamber or a political meeting room. They meet in the marketplace. The marketplace should drive exploration, development, production, transmission, refining and retailing. We can endure when a freely trading market results in down cycles, when excess supply drives prices down, as it did in 1986 when oil prices fell below $12 a barrel. But equally, Ontario and other consuming provinces must be ready to accept the inverse--the up-cycle when demand or other factors in the marketplace moves prices to higher levels, as is occurring today.
In part it is simply a matter of fairness. And acceptance of this principle will ensure the maintenance of the goodwill that prevails today. If you rejoice in the downturn in price, but then apply political muscle to disadvantage Alberta and our producers when prices rise, we will have no alternative but to resist. We stood toe-to-toe for a dozen years. Neither of us should risk reinventing those divisive days. Alberta won't reinvent those times. But if others seek to do so, we will respond. In any trading relationship there are bound to be pressure points and issues on which there are differences of opinion. But my message to Ontario is that we must learn from the mistakes of the bad policies of the past. Let us not be driven by them.
Albertans, I can assure you, will pay close attention to legitimate concerns of consuming provinces. But we also want to feel confident that the buyers of our energy supplies will pay equivalent attention to Alberta's legitimate concerns. And when you get right down to basics, our concerns are remarkably similar. I refer, of course, to security of energy supply, adequacy of supply, and "reasonableness" of price. Price has been the major single source of mutual irritation. A buyer's definition of "reasonableness" as it relates to price must not be seen as the inverse of a seller's definition. The only way a "reasonable" price can be determined in the "short run" is through the interaction of buyers and sellers in an open marketplace. Whether the market prices for our energy products are high or low, if they truly reflect supply and demand, we will regard them as reasonable. In the "long run" prices must cover our costs of production and must provide a fair return to producers and investors. If they don't, energy production will decline, supply will shrink and the market will make the necessary upward price correction.
But in the days of discord, "reasonable" came to be seen as "cheap" and low prices were established by federal edict. That serves no one. The market dictates a reasonable price for the goods and services we buy from you, and, at those prices, we are big buyers of your goods and services.
Indirect actions that are designed to hurt the market can also be an issue of discord between us. Interveners from the demand side can, and have, as recent history shows, used regulatory and legal processes to achieve a price gain that
would be denied them by normal open market processes. From Alberta's perspective such tactics are extremely short-sighted, and serve only to perpetuate needless ill-will between buyers and sellers. We are very pleased that in the end such tactics have not had much success with regulators. My message on this point is straightforward. On an even playing field that is market-driven, Alberta producers are able and anxious to ensure both security of energy supply and adequacy of supply for Canadians over both the short and long terms. We cannot, however, plan supply when prices are driven by political manipulation and intervention.
Recent history shows, for example, that since the deregulation of the natural gas markets and prices, the price for natural gas at the Alberta border has worked to the advantage of consumers. Prices have dropped from about $2.80 per gigajoule in 1985 to about $1.55 per gigajoule in 1989. Alberta's proven natural gas reserves can meet supply needs for the next 18 years. Our estimated reserve potential can meet supply needs for a further 18 years to the year 2026. In 1989 Alberta produced about 3.1 trillion cubic feet of natural gas, two-thirds of it for Canadians and one-third was exported to the United States. Our sales to the US. currently amount to 7.5 percent of their total consumption, a proportion that we project will rise to 9 percent by the mid-1990s.
Given long-term increased demand and higher prices, Alberta producers can and will increase activity, replace reserves, and maintain an appropriate reserves to production ratio. In an open marketplace, increased demand calls out new supply. But Alberta producers cannot do these things if they are unable to move their production to market. Timely natural gas pipeline expansion is essential if Alberta is to supply the growing market demand in both Canada and the United States. Consumers, regulators and governments in both countries are ready to see expansion proceed. Alberta is naturally very pleased with the National Energy Board's recent decisions affecting the trans-Canada pipeline expansion and the U.S. Federal Energy Regulatory Commission's approval last week of the Iroquois pipeline. T.C.P.L. has been given the go-ahead by the NEB to start the first phase of its $2.6 billion expansion. The first phase alone, which begins in January in Northern Ontario and Eastern Manitoba, will pump approximately $600 million into the economy, and create about 1,400 jobs. The entire project is expected to create 3,600 jobs altogether. Ontario will be a primary beneficiary of this spending and job creation. Expansion of sales benefits Alberta in income terms. It benefits Canada in balance of payment terms. Because we buy energy production goods from you, it benefits industrial Ontario. It aids consumers--especially Ontario consumers- through enhanced energy supply and supply security.
Another area of concern that appears to be primarily centred in Ontario is the opposition to Alberta's gas exports to the United States. Those espousing this position argue that Canadians have a right to expect Alberta to hold excessive gas in reserve--and at our cost mind you--because of possible Canadian demand at some unspecified future date. It is unfair and unreasonable to expect Alberta to agree to such a position. Expansion of markets is what creates a strong, viable supply industry that can succeed in finding and developing new gas supplies. But for those who may have concerns about Canadian consumers' access to Canadian gas supplies, I would refer to the regulatory protection that currently exists. Under the complaints procedure of the National Energy Board's gas export rules, any Canadian consumer can challenge the granting of an export licence and has a call on Canadian gas if he is prepared to execute an agreement with the producer containing similar contractual terms and conditions including price. This right has never been used. Why? Exporters are familiar with the Canadian market and fairly price their gas. But the protection for Canadian consumers is there and can be invoked at any time.
The core market issue has been an on-going source of friction between Ontario and Alberta since 1986 when the Canadian gas market was deregulated. It is my hope that this issue can be resolved. For those unfamiliar with the term, "core market" refers to a specific category of gas users--schools, hospitals, the residential market, and other customers who have no alternative to gas as an energy source. Essentially, therefore, the core market consists of gas users who cannot afford to be cut off in a time of serious gas shortage. Alberta's position throughout our many discussions with officials in Ontario is reasonable and is based on what we truly believe is in the long-term best interests of consumers who are the most vulnerable to sudden price increases and supply shortages. Without going into great detail, the issue centres around length of contracting. Alberta's position is that core market customers should enter into long-term contracts to ensure security of supply. The tendency, however, has been for these customers to enter into short-term contracts to take advantage of lower prices. In some cases contracts are for periods of six months. And while it is true that this short-term contracting may be simply a consequence of deregulation, the real question that has to be addressed is, "How wise is this practice?"
The Government of Ontario must determine whether it is prudent public policy to allow core market users to be at risk of not having guarantied long-term access to needed gas. I believe the Ontario Government must ask itself: "What would happen if hospitals, nursing homes or schools were unable to get heating in winter?" Alberta's position is that core market customers in Ontario should be required to enter into longer-term contracts that guarantee their continuing access to gas supply. This is the policy that is in effect in Alberta under new legislation that was passed in the Alberta legislature this past spring. Under the Alberta policy, residential and small commercial users in Alberta will be able to purchase gas directly from producers but only under 10-year contracts. Institutional and large commercial users will be able to make direct purchases under 5-year contracts. Large industrial users will have no restrictions placed on their length of contracting.
Why does the Alberta Government care about securing supply for core market customers, whether they are in Ontario or elsewhere? The answer is straightforward. Our U.S. buyers typically contract for decades ahead to ensure supply security. Our concern is that a domestic core market user would, in a supply crisis, seek a political solution. The likely outcome is that Alberta would be asked, or worse yet forced, to break into its long-term export contracts with prudent importers to sustain the natural gas flow of the imprudent short-term buyers in the domestic "core" market. This has the potential of hurting our province's reputation as a reliable supplier. The producing industry, which fives by its contracts, will have been forced to breach contracts. Reputations will suffer. The incentive to explore will have been hurt and security of supply will have been prejudiced.
Let me now turn briefly to oil supply. Alberta's production of conventional and non-conventional crude is currently 1.4 million barrels per day. In 1989 our conventional production declined by 40,000 barrels a day. Oil in Canada, however, is potentially as plentiful as natural gas. The oil sands at Fort McMurray could supply our domestic and export markets for a century and beyond.
The Suncor and Syncrude plants currently produce some 220,000 barrels a day, which represents about 17 percent of our total daily production. Approximately 80 percent of the production from Suncor and Syncrude is used for the domestic market. Suncor and Syncrude are contributing in a significant way to Canada's security of oil supply--and the contribution is becoming greater with each passing year and our declining conventional production. Operating costs at Suncor and Syncrude are about $15 a barrel. This is more than the per barrel operating costs of conventional production but the gap is narrowing as technology and production efficiency improve.
Alberta's 17 percent ownership of Syncrude is now on the market for selling, preferably to be sold to Canadian buyers. It is now profitable and should be privatized. There have been rumblings, again mostly coming out of Central Canada, that it would be wrong for the Alberta Government to sell its equity to foreign buyers. Let me be very clear, the Alberta Government's stated position is that it strongly favours Canadian buyers for its share of Syncrude. But if none comes forward, the conclusion we will draw is that Canadians are not interested in investing in their energy future.
Security of supply is Ontario's policy concern and it is Alberta's policy objective. If we agree on this, it surely follows that the pace of oil sands development must accelerate. Canada has an oil resource in Alberta with a potential reserve capability equivalent to Saudi Arabia. In most countries oilsands development and resulting supply security would be a top priority. It should be here. But sadly enough, it appears not to be. The Federal Government's pullout of the Oslo project underscores this point. Alberta is, as best it can, trying to keep the project alive. And we are doing so because it will protect and benefit all Canadians. It is our hope that the Federal Government will reconsider its decision and participate in one form or another. Even leaving aside the security of supply issue, the Oslo project, over its projected life span, could generate an estimated $10 billion or so for the federal treasury in the form of taxation. In view of this, it is especially bewildering why the Federal Government would put this project at risk It makes good business sense and it makes good public policy sense to support it.
We should be particularly conscious of the need for security of oil supply given Iraq's August 2nd invasion of Kuwait and the grave danger of war that exists in the Middle East today. It is becoming harder each decade to accept the Middle East as being a reliable source for world oil. Since the Yom Kippur War in 1973 we have now had three disruptions that have affected the availability and price of oil from the Middle East. The advice I am receiving is that the danger of armed conflict is very real. If that proves to be true, the price of oil will spike up and political leaders in Canada will again be pressed by consuming regions to intervene and to re-institute price controls. Alberta will vigorously oppose any move to do so.
Governments should not tinker with oil prices. We should have learned that security and adequacy of supply are equally prejudiced by government pricing.
Most countries of the world, in contrast to Canada, let the free market function when the oil price tripled in 1979. Japan, for example, did so. Higher prices led to more efficient use. As The Economist has noted "Japan has reduced its oil dependence by more than any other country... today Japan uses 55 percent less oil than in 1973 for every dollar of GNP." But Canada took a different approach. We intervened, kept prices down, did not signal to consumers the need to conserve. And they haven't. On a per capita basis, Canadians are the biggest energy consumers in the industrialized world. While we talked a good fight in the late '70s and early '80s, we gave no price signals that would conserve energy. But besides the energy efficiency argument, there are other compelling arguments for resisting efforts to impose price controls.
There is tremendous misunderstanding about the current higher prices. The price of oil would have to spike at $80 per barrel for six months and then hold at $50 per barrel for two years before having an effect equivalent to the tripling of price in 1979. Oil, even today, is cheap. Said The Economist ... at $30 the real price of oil would be scarcely higher than in 1978 before the prices took off." The higher oil prices we've seen in the past few months have fuelled that persisting myth that the oil and gas industry is rich and excessively profitable. The first question that most people seem to be asking, and incredibly even by those who ought to know the facts, is: "What is the industry doing with all the windfall profit?" To those people, I say, look at the facts. Oil prices for this year, even excluding inflation, are lower than they were in 1985.
In that year, the price for West Texas intermediate crude averaged $28 U.S. per barrel. This year's year-to-date average is about $23 U.S. per barrel. In 1986, the year the real price collapse began, the price dropped from $23 U.S. a barrel to less than $12 a barrel. Since 1986 the annual average price has fluctuated between $15 and $22 U.S. a barrel. Expressed in different terns, if one allows for an annual inflation rate of 4.5 percent, the price of crude oil today would have to be $36.72 U.S. a barrel for it to be even with the price it sold for in October 1985. One must also keep in mind that oil is priced in U.S. dollars and that the Canadian dollar relative to the U.S. dollar has increased more than 20 percent, thus cutting even further into the industry's revenues. And we must also remember that while an armed conflict in the Middle East would likely result in even higher prices, no one believes that these higher prices will be sustained over a long period of time. In fact, most analysts believe that prices are likely to fall dramatically when the current hostilities are resolved.
Since 1985 the industry's revenues have been more than halved. There have been lay-offs in the industry. Royalties to Alberta's treasury have been significantly reduced. In fiscal year 1984-85, the Alberta treasury received about $4.8 billion in resource-related revenue. But two years later, resource revenue declined to $1.7 billion, a decrease of 65 percent. In the past three years, annual resource revenue has averaged about $2.2 billion. As a final comment about today's higher prices, I would remind you of the fundamental commitment Canada made in 1985 to deregulate oil and gas and to rely on open market forces. After that decision was made, oil and gas prices fell and fell precipitously.
But despite these lower prices and the hardships Albertans have had to endure because of lower prices, we remained committed to reliance on the marketplace. We did not seek policy changes that would deny lower prices to the consuming regions. How can there be any legitimate justification in denying Albertans the benefits of prices when they rise?
In my concluding remarks, ladies and gentlemen, I would simply say that Albertans willingly accept the important role their province plays in meeting Canada's energy needs. As a province we have been blessed with an abundance of resources that we know are crucial for maintaining Canada's industrial strength and the high standard of living Canadians are fortunate enough to enjoy.
But with abundance comes responsibility. The Government of Alberta has a responsibility to the people of Alberta, the owners of the energy resources, to provide good stewardship. The Government of Alberta has a responsibility to ensure that Albertans get the full benefits of their resources. And the Government of Alberta also has an obligation to ensure that its energy resources are not squandered, but are developed wisely and used efficiently. Alberta's energy policies have been developed with these objectives in mind. We ask from the National Government and our sister provinces and the territories that they respect our ownership rights and our strategies for managing Alberta's energy resources.
It is my hope that I have built a bridge of better understanding and have left you with the message that Albertans understand that their energy resources are important to Canada. Under the leadership of our Premier Don Getty, Alberta has been a strong consistent voice for a United Canada No political leader in this country cares more deeply or more passionately about Canada's future than Mr. Getty.
I believe that Albertans are very proud to be Canadian and are good Canadians. Work with us.
Thank you for listening.
The appreciation of the meeting was expressed by Sarah Band, Past President of The Empire Club of Canada.