Mega-Projects and Their Futures

MR. STALDER:

Distinguished members and guests, ladies and gentlemen: Happy birthday to The Empire Club of Canada. We are slipping from our seventy-ninth to our eightieth year. On November 18, 1903, in Webb's Restaurant, the first meeting of The Empire Club of Canada was held. LieutenantColonel James Mason was the first President. Membership was limited to five hundred; within a month there were three hundred members and two years later there was a waiting list. Now, the club's membership is over two thousand.

Our guest of honour could be a free man, if he did not have to deal with the National Energy Board, the National Energy Program, the Petroleum Monitoring Agency, the Energy Supply Allocation Board, the Petroleum Incentive Administration, the Canada Oil and Gas Lands Administration, and last but not least, the Foreign Investment Review Agency. And the industry he represents could be a free industry if it were not subject to "capital punishment," which can be defined as follows the government limits and taxes the industry so that it can go into business on its own in competition with the free market, and then taxes the profits of the industry to pay for its own failures.

And this government's management comes in different disguises. For example, take the former Minister of Energy--he went for management by Murphy's Law: if something can go wrong, it will! Or the former Minister of Finance--he was betting on management by kangaroo: "big hops with empty pockets!"

Pardon me for the foregoing remarks. We are a non-political speaking platform giving equal opportunities to express opinions. And today, we have with us the Chairman and Chief Executive Officer of a large, mostly foreign-owned, company, Imperial Oil Limited.

Don McIvor, was born in Winnipeg, Manitoba, and received an honours B.Sc. degree in geology from the University of Manitoba in 1950. He began work with Imperial as a geophysical trainee on a seismic crew in Alberta and between 1950 and 1958 he held various, operational and research positions in exploration with Imperial and affiliated companies. Between 1958 and 1968 he held a variety of positions in Calgary, including Assistant to the Exploration Manager, Supervisor of Exploration Planning, and Manager of Exploration Research. During this time he also held brief overseas assignments in Angola and France with evaluation teams from Standard Oil of New Jersey (now Exxon Corporation). Mr. McIvor spent a year as an employee of the Jersey Production Research Company in Tulsa, Oklahoma before moving to Toronto to become Assistant Manager and then Manager of Imperial's Corporate Planning Department. In 1970 he became Imperial's Exploration Manager.

Upon his return to Imperial in 1973 he was named a Senior Vice-President and Director, and in 1975 he became Executive Vice-President. In 1977 he joined Exxon Corporation as VicePresident with responsibility for oil and gas exploration and production. In July 1981, Mr. McIvor returned to Imperial as Deputy Chairman and Director; he assumed his present position in January 1982.

Mr McIvor is a member of the Canadian Society of Petroleum Geologists and a member of the Board of Trustees of the Fraser Institute. Ladies and gentlemen, please welcome our guest of honour, Mr. Don McIvor, Chairman and Chief Executive Officer of Imperial Oil Limited.

MR. MCIVOR:

Mr. Chairman, distinguished guests, ladies and gentlemen: It is an honour to be asked to a return engagement at The Empire Club of Canada.

Like many other Canadians, I find myself spending a good deal of time thinking about our economic future. It's become hackneyed to point out the magnificent human and natural resources we possess in this country. While this remains true, I keep wondering about what it is we can do to capitalize on these resources and to return to the more prosperous times we used to take for granted.

In sharing some of my thoughts with you today, I am reminded of the words of H. L. Mencken, who wrote: "For every complicated problem there is a simple solution--unfortunately, it is wrong." Therefore, when I venture some opinions as to solutions, I'll be mindful of the complexity of our economic situation.

Often when I think about our economy, my thoughts turn to--of all people--Charles Darwin. Ever since I was a young geologist I have been fascinated by Darwin's genius and the theory of natural selection he offered in his scientific classic, The Origin of Species. In the struggle for existence, Darwin suggested, those individuals better equipped for the struggle tend to survive and reproduce themselves, while those less well equipped often perish.

I think many of the ideas that Darwin developed to explain the workings of the organic world are quite relevant to our economic and social existence. Without pushing the analogy too far, in economic matters particularly, one can find striking parallels among the conditions that govern the natural world and those that affect the progress of our man-made institutions. For example, economic history has taught us that systems and institutions that are unable or unwilling to adapt to change and that depend for survival on a continuation of the status quo are eventually doomed to extinction. Manufacturers of steam locomotives and vacuum tubes have fallen on hard times.

We have learned that some economic environments, like some natural environments, provide periods of comparative ease in which virtually all can survive and even flourish. The economic climate of the sixties and early seventies represented just such a period for many Western nations. On the other hand, there are times when the environment changes quickly and for the worse, in which only a few flourish and in which survival itself becomes a challenge. Today's economic climate falls unquestionably into that category.

Experience teaches us that such periods of rapid transition and difficulty generate high levels of energy and inventiveness on the part of those determined to survive. (As Dr. Johnson remarked, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.) Thus the process of economic evolution, like its natural counterpart, does not proceed at a uniform pace. Change occurs relatively slowly in good times and accelerates in bad times.

But, overall, it remains an evolutionary process, rather than a revolutionary one. The key to economic survival, as in organic survival, probably lies in incremental adaptations and pragmatic responses to environmental change. Even the most radically different future contains many elements of the past.

If one accepts, in its broadest sense, the idea of economic Darwinism--that is, that those individuals and enterprises, and indeed countries, that do the best job of adapting to change stand the best chance of survival and prosperity--I think it offers us some profitable pointers as to how we might address our current problems.

I'll list some of these pointers to survival and future prosperity as I see them. First, since economic change, like natural change, requires adaptation to survive, we need to focus our attention on the period that's ahead rather than on the period through which we have passed. There's no question that we can learn from past trends. However, our emphasis should be on rational speculation about the future. It's obviously impossible to forecast specific details of the future, but it is often quite possible to ascertain general trends.

Perhaps the safest way of preparing for the future is the Darwinian way--by allowing as many different entities as possible to pursue their own ideas. You only have to participate in bidding for oil leases--with all the variables that are involved--to appreciate the diversity of opinions that exist on how the future will turn out. Most bidders for oil leases turn out to be wrong, but a few winners emerge.

During periods of economic transition some industries and companies are bound to decline, while others will grow. In tough times, such as those we face today, there is a strong and totally understandable urge to protect jobs and incomes by maintaining the industrial status quo. But shoring up the weak links in the economy is not necessarily the best recipe for success.

We have to recognize the inescapable fact that some products and companies cannot hope to survive in a changed environment, support them how we will. They have to make way for the innovation that changing times demand. Therefore, while it may be necessary to succour the weak it is at least equally important to encourage the strong.

But changing times also present opportunities as well as problems. Many successful enterprises have been built on this philosophy. During World War II the Timex Company in the United States was a thriving little company making timing devices for bombs. Around the middle of 1945, however, the bottom fell out of the market for bombs. Someone at Timex got the idea of using the company's mass-production technology to manufacture inexpensive watches. The rest is history. When the first market survey for computers was conducted in the United States in 1945 it was only able to identify five potential customers, all of them military. But that didn't discourage a few people with vision from getting into the field. Today, I think you'd agree, computers are reasonably big business.

But we don't have to look south of the border for examples of such enterprise. We have them right here at home. Over the past decade around six out of every ten new jobs in Canada have been created by small entrepreneurial firms.

Companies such as Mitel, Northern Telecom, Telidon, and Telesat Canada have made this country an acknowledged world leader in communications technology. Spar Aerospace, which built the "Canadarm," has played a vital role in the success of the space shuttle.

Such examples demonstrate that Canadians don't have to take second place to anyone when it comes to grasping the opportunities presented by a changing environment. Obviously, the commercial risks in such ventures are high. For every successful Mitel or Telidon or Spar there are scores--perhaps hundreds--of companies that fail.

This, I think, illustrates an important evolutionary principle which holds as true for the economic world as it does for the natural one. The surest recipe for survival and progress lies in having a multiplicity of competing species. Given the extremely long odds against being able to forecast the survival of any single species--or industry or company--any attempt to be very specific about future winners is unlikely to succeed. This is one reason why state-run economies (Russia is a good example) are notably less productive and efficient than those of Western democracies, which have traditionally adopted a pluralistic approach to social and economic development.

Attempts by governments to manage and direct their economic systems really amount to placing decision-making on how we will cope with the future in the hands of a small number of people, rather than allowing response to change to evolve naturally from the outcome of millions of competing experiments.

Such arbitrary efforts to forecast economic evolution create the possibility--or even the probability--for major errors. A multiplicity of competing experiments results in incremental adaptations to social and economic change, with a good probability of success. On the other hand, betting heavily on some grand design holds tremendous potential for disaster if the guesses behind the grand design turn out to be wrong.

And they frequently do turn out to be wrong, because any one group of assumptions we make about the future is rarely correct.

How many people foresaw the rise of NATO and the profound effect it was to have on international economies over the last decade? For that matter, who could have predicted far more recent events in the oil industry? A couple of years ago the assumption that world oil prices would continue to increase at a rapid rate for the foreseeable future, which was a basic premise of Canada's National Energy Program, was the conventional wisdom. Today, when oil prices have fallen in real terms, people who bet their companies--or their tax revenues--on that grand design are in deep trouble.

Half a century ago we could scarcely glimpse the profound changes that technological advance and resource development would bring to the economic and social structure of this country. Take agriculture, for example.

Fifty years ago, agriculture was highly labour-intensive. In 1931 considerably more than a million Canadians--or 29 per cent of the country's adult population--worked on farms. Today, agriculture employs fewer than half a million Canadians--4 per cent of the adult population. Yet the value of Canadian agricultural output increased fourfold over the period, through increased mechanization, advances in plant genetics, and the development of herbicides, pesticides, and fertilizers. Today, Canadians are better fed than ever, while our agricultural exports help feed millions of people in other countries and earn us valuable dollars.

The manpower efficiencies that were achieved in agriculture helped to provide the additional labour required in the industrial sector. The transition was not accomplished without difficulty but it represented an inevitable step in this country's economic evolution. Today we may be facing the same kind of reallocation of human resources within the industrial sector with the trend from mechanical equipment to electronic devices that require less manpower.

But, here our experience with agriculture provides us with another clue to the future. Agriculture did not disappear in the face of increasing industrialization. It is no less important today than it was fifty years ago. What happened was that it evolved and adapted to a changing environment.

In the same way, I don't think many of our present industries are going to vanish overnight. Undoubtedly, they will change--in fact, they must change to survive--and, like agriculture, they may give up manpower to newer industries. But transition is more likely than annihilation.

We are witnessing that kind of transition in the energy sector today. In Canada, as in some other Western countries, oil is gradually becoming less important as a fuel as natural gas and electricity become more so. But this does not mean that oil will become obsolete. Canada will likely need oil for a variety of purposes well into the twenty-first century.

And while the overall demand for petroleum products in Canada is shrinking, so is our crude oil production capacity. We have many opportunities to offset this decline in our oil-producing capacity, and even to increase production to the point where we are self-sufficient.

The important thing to remember is that no one can predict with certainty the future demand for any fuel. The example of coal is instructive. It got off to a bad start when, in 1306, King

Edward I, who believed that burning coal made the air unhealthy, issued a proclamation making its use punishable by death. Even our federal government's program to discourage the use of oil stops short of the death sentence!

By the nineteenth century, however, coal was in enormous demand to fuel the Industrial Revolution. Then, as oil gradually took over, coal production went into a long decline. But today, for a number of reasons, coal is making a strong comeback. Who would have predicted it? The moral, in energy as in the economy generally, is that we should maintain maximum flexibility by keeping our options open.

Another aspect of our economy that would benefit from a Darwinian approach is productivity--a key ingredient of any economic system. Never was it more crucial than it is in this country today. If we are going to remain competitive in world markets, we have to become more productive. I was encouraged by the emphasis Prime Minister Trudeau laid on productivity and international competitiveness in his recent series of television broadcasts. He was "right on" in regard to this vital issue.

Unfortunately, productivity too often falls into the same category as Mark Twain's weather, with everyone talking about it but few doing anything. It is a difficult problem; probably the toughest that Canada faces today.

But not, I think, insurmountable. Surely, once again, the answer lies in allowing multiple species to compete on equal terms. Productivity is bound to benefit from a system that encourages competition among many different players. It is bound to benefit, too, from a system that rewards real success, rather than just "busy-ness." We should never confuse activity with achievement.

So far today I have been discussing economic Darwinism in broad terms. How individual companies respond to a changing economic environment depends, of course, on their particular corporate philosophies. These range all the way from a consistent willingness to accept very high risks to consistent ultraconservatism. In easy times the habitual high-flyers can flourish but they stand to get badly hurt when the going gets tough. The habitually ultra-conservative company, on the other hand, may be better equipped to survive hard times but, in boom times, tends to miss out on the action. Once again, adaptability to swings in the environment is the key to success.

At Imperial Oil we have had some very practical lessons in economic Darwinism in adapting to the difficult environment in our industry. Our response to severely reduced revenues and profits has been twofold.

First, we have decided very firmly that we will only undertake what we can afford. That means we have had to shelve, at least for the time being, some very promising projects. For instance, we simply haven't the cash to proceed with a fullscale Cold Lake project as originally envisioned no matter how good the terms are. But we'll still be investing around a billion dollars this year in other high-potential projects that promise a pay-off within a reasonable time. And we are examining the possibility of developing the Cold Lake deposits on an incremental step-by-step basis which could be said to represent a Darwinian approach to oil-sands production.

Second, we are intensifying our drive for increased productivity in every aspect of our operations. Such measures will improve Imperial's annual after-tax earnings by around 15 per cent from what they would have been without these efforts.

I said earlier that I would be careful about offering solutions. But if I were asked to draw up a blueprint for Canada's economic recovery, it would be influenced by the Darwinian thoughts I've been expressing. Here's what I'd suggest:

Let's not assume that we can predict the future in fine detail. Let's avoid the temptation to lock ourselves into grand designs that may have the potential for disaster.

Let's play the odds by encouraging a multiplicity of experiments rather than by betting our future on a few winners picked in advance.

Let's embrace enterprise and innovation, regardless of their country of origin, and treat all corporate citizens equally.

As a motivator, let's reward success, rather than "busyness." Why are we afraid to let success earn its just rewards?

While encouraging success, let's not be afraid to cut losses on unsuccessful ventures.

and finally: Let's recognize that the skills, knowledge, experience, and enterprise of Canadians are our greatest resource. These flourish most in a climate where multiple activities are encouraged. They flourish less where pre-ordained designs focus on only a few activities.

In summary, ladies and gentlemen, I believe that our best chance for a prosperous future lies not in pursuing any kind of carefully structured economic grand design but in encouraging diversity, entrepreneurship, and productivity by many players in all sectors of our economy.

Charles Darwin's great breakthrough in scientific thought was his recognition of the fact that natural evolution is a creative process, not a negative process of extinction. I am convinced the same thought also holds true for Canada's economic evolution.

The appreciation of the audience was expressed by Montague Larkin, Third Vice-President of The Empire Club of Canada.