Energy: The New Challenges and Opportunities

Ronald Goodall

In 1857, James Miller Williams dug Canada's first commercially successful oil well in southwestern Ontario at Oil Springs. Three years later an oilfield was discovered at a nearby town called Enniskillen. The town was renamed Petrolia and became Canada's first oil capital. Natural gas was discovered in 1914 at Turner Valley, Alberta, and crude oil was discovered there in 1936. However, the discovery of the Leduc oilfield in 1947 and of the Redwater oilfield in 1948 marked the emergence of Canada as a major world producer of oil and natural gas. Canada gained two new oil capitals, Calgary and Edmonton.

In recent years, multinational and other companies developed the western and northern oil wealth of Canada, none more so than Dome Petroleum Ltd., a company described by one author as "the house that Jack built." From a start in 1950, Dome Petroleum expanded steadily, drilled extensively in western Canada and the United States, pioneered oil exploration in the Arctic and became a major developer of Canada's oil and gas resources.

Newspaper headlines reported Dome Petroleum's activities over the years, particularly in recent years with the much publicized purchase of Hudson's Bay Oil and Gas. Dome Petroleum's ongoing battle to stay alive since that date has captured our attention as we read daily or weekly the business story of the decade. This story seems to be about to have a happy ending. After months of secret and public negotiations, our speaker today and the company he heads plan for the future of the Dome Petroleum they are about to take over.

Thomas Donald Stacy was born and raised in Texas. He studied petroleum engineering at Louisiana Tech University. He joined Amoco Corporation (formerly Pan American Petroleum Company) in 1956 and gained an international perspective on the petroleum industry by serving in several positions including vice-president, production, for Amoco's Central and South American region. From 1963 to 1967, Mr. Stacy took a leave of absence and was assistant professor of petroleum engineering at

Mississippi State University and earned a doctorate in engineering science. In 1975, he attended the University of Western Ontario school of advanced management. This particular career phase has resulted in his being known in Amoco as "The Doctor."

Amoco Canada has been operating in Canada since 1948. The company is the eighth-largest producer of oil and gas in Canada and Mr. Stacy served as chief engineer in Calgary from 1971 to 1975. During this period, Amoco Canada experienced significant growth. Mr. Stacy was a driving force behind Amoco Canada's launch into the high-tech area of enhanced oil recovery, the name for new techniques for pumping previously unrecoverable oil out of reservoirs in the ground. He returned to the United States and became production research manager for Amoco's research centre, one of the most technologically advanced facilities of its type in the world. His appointment as President of Amoco Canada in 1986 marked his return to Calgary.

He has been involved in numerous Canadian and international civic and professional organizations, is a member of the boards of Junior Achievement of Southern Alberta, and of the Canadian Petroleum Association, and the Board of Governors for the YMCA of Calgary. In 1983, Mr. Stacy was worldwide president of the Society of Petroleum Engineers. Recently, he was a director of the sponsoring board hosting the 1987 World Petroleum Congress.

Mr. Stacy and his wife, Wanda, a childhood sweetheart, now reside in Calgary and have four children. Mr. Stacy was selected as Executive of 1987 by the Financial Times of Canada, 1987's Newsmaker of the Year by the Financial Post and Sun Oil Patcher 1987 by the Calgary Sun. On a much-less-serious note, he was labelled "The $5 billion man" by Maclean's magazine in 1987, reflecting the price to be paid for Dome Petroleum.

Ladies and gentlemen, please welcome Don Stacy, President, Amoco Canada Petroleum Company Ltd., who will address us on "Energy: The New Challenges and Opportunities."

Don Stacy

Thank you for your kind introduction, and my thanks to The Empire Club for the invitation to address you here today. Amoco Canada's offer to purchase Dome Petroleum is certainly getting its share of attention. During the last 10 months, I have learned what it's like to live under the glare of public scrutiny. And that sits well with us at Amoco. For, as George Bernard Shaw once remarked, the only thing worse than being talked about is not being talked about.

There is, of course, a much more compelling reason to welcome the widespread media coverage and the extensive public debate about the proposed purchase. The new merged company will play a major role in the future development of Canada's oil and natural gas resources. It will become one of Canada's leading employers. And it will contribute substantially to Canada's future industrial growth and economic prosperity. Canadians have a right to know about the merger and what effect it will have on their well-being. And we at Amoco Canada welcome the opportunity to answer any questions that the public may ask.

The primary question is whether there is going to be a deal at all. We thought we had one last May, when both Amoco Canada and Dome worked out what each had regarded as a fair and equitable agreement. But some of Dome's lenders didn't agree, and we returned to the negotiating table for another round of hard bargaining. Our task, as always, was to negotiate terms that would satisfy the needs and desires of a wide variety of sometimes disparate groups-banks, institutional investors, individual shareholders, the federal government, regulatory agencies, the management and employees of both companies and, of course, the general public.

In the end, we came up with a fair and generous package-one that will provide the greatest good to the greatest number. The $5.5-billion deal-the biggest in Canadian history-gives Dome's secured lenders an average of 95 cents on the dollar and its unsecured lenders an average of 45 cents on the dollar. Common shareholders are offered securities having a face value of approximately $1.47 per share and preferred shareholders $7.30 per share.

Of greater importance, the merger will guarantee the jobs and livelihoods of thousands of Dome employees. It will pump billions of dollars a year into the Canadian economy through wages, capital expenditures, taxes and royalties. It will ensure continued exploration and development of some of Canada's most promising natural resource properties. And it will bring the country closer to its goal of achieving a secure supply of energy.

So far, our acquisition of Dome has been approved by the federal government, by all of Dome's secured lenders and by a solid majority of Dome's unsecured lenders. Most common shareholders seem to endorse the deal. Only a small minority of preferred and common shareholders have challenged the classification and voting levels that were recommended by Amoco and subsequently approved by the Court of Queen's Bench of Alberta. The recently concluded court proceedings have allowed us to proceed to the final stages of a lengthy and highly complex process. We have dedicated a lot of energy toward the consummation of this deal and we have overcome several major hurdles. What remains now is the formal polling of creditors and shareholders and the final fairness hearing. We expect the final closing to occur by mid-year.

This acquisition is a mammoth undertaking for Amoco Canada, but it is one that the company eagerly accepts. From the merging of the two workforces to the implementation of enormous energy projects, the company will face unprecedented challenges in an industry already underscored by risk. The stakes are always high in the chameleon-like and volatile oil patch. The energy industry harbours both uncertainty and dependability. It gives rise both to concern and optimism. It foments failure and despair, while it also engenders wealth and fulfilment.

In the past two years the price of oil dove from more than $30 a barrel to less than $10; then rose to above $20, only to come down once again in the face of OPEC's difficulty in controlling its own members' production rates. But if the December meeting of the OPEC countries raised questions about the organization's effectiveness, it also reaffirmed the importance of oil to the economic well-being both of producing and of consuming countries.

Whichever way the winds of international discord may blow-however uncertain the present may seem to be-there is no doubt that the oil industry will be quick to adjust and adapt to any new events, and that, over the long haul, demand for oil and natural gas will remain strong.

Here in Canada signs of this brighter future are already visible. The development of reserves in the Beaufort Sea and an increase in the number of enhanced oil recovery programs and heavy oil projects will likely proceed in the not-toodistant future. These programs will, of course, be possible only through continued government cooperation. And so far, the policies of the present government have accomplished a great deal to temper the volatility of the oil industry.

The deregulation of the oil industry in 1985 and the subsequent deregulation of natural gas prices in 1986 have allowed petroleum companies to establish new markets for their products.

The 1985 action to phase out the petroleum revenue tax has further encouraged investment to develop Canada's energy resources. And during the past two years, Canadian producers have doubled their drilling activity. By contrast, in the United States, which retains its windfall profits tax, activity has risen by less than half the Canadian rate.

The proposed reduction in the general corporate tax rate to 28 per cent will undoubtedly have a positive impact on growth for all sectors of the Canadian economy. For the energy industry, it will certainly provide an incentive to increase investment in conventional oil and gas activities.

I also expect the recently negotiated free trade agreement with the United States to herald a new era of economic and industrial expansion in our two countries. The prospect of unfettered access to the enormous market south of the border may seem awesome, at first glance, to many Canadian businesses. And to some, the challenge presented by an equal competition with Americans in our Canadian markets may seem a daunting undertaking. But prophets of doom are rarely vindicated, and we should give little credence to those who condemn free trade.

I feel I can speak on behalf of the Canadian oil industry when I say that free trade with the U.S. will motivate investment in long-term projects requiring long-term markets. It will spur the creation of new jobs, raise our standard of living, and give Canada increased economic strength and energy security.

Another milestone in the march toward future prosperity is the government's attack on Canada's oversized deficit. Our staggering national debt-proportionally larger than that of the United States-is the greatest single barrier to future economic security. It is the dead weight that can drown the hopes of a more prosperous life-not only for the working men and women of today, but for the generations that succeed them. Ottawa's commitment to deficit reduction must rank, therefore, as one of the most significant contours on Canada's political horizon. As yesterday's budget confirmed, the deficit can be managed. But bringing the national deficit below the $30-billion level is not the final objective. It is merely a vantage point from which we can look upon further reductions in the months and years ahead. The long and gruelling process of deficit reduction has only just begun, and it is up to all of us to ensure that the government has the necessary support to see it through.

For its part, Amoco Canada is confident about the future of the Canadian economy and of the long-term viability of the nation's oil and gas sector. And we at Amoco are committed today, as we have been for the past 40 years, to the beneficial development of Canada's energy resources.

From our modest beginnings in 1948, when we operated out of rooms in Calgary's Palliser Hotel, we have grown into one of the most significant oil and gas developers in Canada. During the past four decades, we have drilled more than 3,300 wells and added one billion barrels of oil and six trillion cubic feet of natural gas to Canada's reserves. We spend almost $500 million annually on capital projects and operating activities in Canada. More than 22,000 people across the country owe their jobs directly or indirectly to these ongoing programs.

Amoco Canada has paid over $4.5 billion in direct taxes to government during the past 10 years. And every year, Amoco Canada contributes approximately $1.8 billion to the country's gross domestic product, $3.6 billion to the gross output of Canadian industry and more than $600 million to the incomes of Canadian households. These contributions will not only continue once the Dome purchase is complete, but they will grow, and grow substantially. The merged company will become the largest petroleum production enterprise in Canada, with a truly impressive pool of financial, technological, and human resources.

Amoco's agreement with Investment Canada demonstrates our continued commitment to this country. The agreement, reached after rigorous negotiating, is one in which both parties can be justifiably proud. To ensure that the mind and spirit of the new company remain in Canada, Amoco has agreed to enlarge its board of directors from nine to at least 12 members, at least two-thirds of whom will be Canadians and half of whom will be outside directors. We will continue to have Canadians in at least 70 per cent of our executive management positions and we will offer employment to virtually all of Dome's employees. We will allocate at least $2.5 billion over the next five years to exploration, development, pipeline construction, and other capital projects. This is about $1 billion more than would have been spent separately by Amoco and Dome. Our capital projects will stimulate growth in a variety of industries across our country, with a particular boost to the manufacturing and service sectors. Of the thousands of new jobs that will be created by Amoco's enhanced capital program, it is expected that more than 30 per cent will be in Central and Atlantic Canada. The ongoing discovery and refinement of improved technology is critical to the successful development of oil sands, the Beaufort Sea reserves, heavy oil deposits, and enhanced oil recovery programs. Toward this end, Amoco has earmarked $100 million to be spent in Canada over the next five years for experimental and applied research. And, as part of our commitment to Canada, 20 per cent of Amoco Canada's voting stock will be made available to Canadian investors in a series of public offerings that will begin within five years after the acquisition of Dome is completed.

I have bombarded you with a lot of gee-whiz numbers today -a billion dollars for this, another three billion for that. My motive, in part, was to impress you with the sheer magnitude of our activities and our considerable contribution to the wealth and prosperity of Canada. It was an expression of my desire to gain your understanding and your support for Amoco Canada and for what we are doing. We do recognize, after all, that Canadians from all walks of life and from all regions of the country are essential to our corporate well-being.

Unless Canadians realize that the oil and gas sector as a whole and that Amoco in particular provide significant benefits to this country, we would not get approvals for our activities and we would not participate in the development of critical public policy affecting our industry. Without the everpresent support of our workforce, Amoco would lack the skill, creativity, innovation, and dedication needed to remain vital and competitive. And without the backing of investors, Amoco would lack the capital needed to expand our operating base and develop the natural resources upon which our corporate livelihood depends.

What it comes down to is this: I believe in the future of Canada and in the positive contribution that Amoco Canada will make. Canada is a young nation, full of strength and vigour. It is blessed with bountiful mineral resources, landscapes of unmatched natural beauty, and a population enriched by a mosaic of cultural and ethnic backgrounds.

But Canada, at times, still seems uncertain of its full potential. It is still refining its particular sense of nationhood and its proper role within the family of nations. The decisions and actions we take today as business people will contribute mightily to this continuing process of nation-building, with the consequences reaching far beyond the fate of a single company or a single industry.

Amoco's acquisition of Dome and the success or failure of the merged company will affect more than its 5,500 employees, more than the wealth of those who will hold equity in the company, and more than the people who rely upon its products. The acquisition will play a part in determining whether Canada's energy industry grows or stagnates. And this, surely, will have a significant impact on Canada's drive for economic prosperity and energy self-sufficiency.

The appreciation of the audience was expressed by John A. MacNaughton, a Past President of The Club.