Regulation in the Canadian Petroleum Industry

Ronald Goodall

The name Texaco means many things to me. There are the drinking glasses. My family has thermal glasses with scenic pictures of Canada at the cottage and other glasses at home. In fact, we also have cutlery and china place settings, all provided because my wife and I filled up with Skychief or regular gasoline.

Then, there are the Saturday afternoon operas sponsored by Texaco for many years, and, of course, the familiar service stations. Wherever you go, trust Texaco. But these associations with the Texaco name reflect only a small part of one of Canada's largest integrated petroleum companies.

We do not readily recognize a Canadian corporation which traces its history back to 1873 when Canada was only six years old; a corporation very supportive of the arts; a corporation whose assets include interests in oil and natural gas exploration activities in Saskatchewan, Alberta, British Columbia, the Beaufort Sea, offshore Nova Scotia, Brazil and Africa; refineries in Nanticoke, Ontario, and in Dartmouth, Nova Scotia; a distribution and marketing system from coast to coast employing more than 2,100 retail outlets, some of which are currently giving a glass for two fill-ups!

Peter I. Bijur was born in New York, New York, and is a graduate of the University of Pittsburgh with a Bachelor of Arts degree in political science and holds a Master's degree in business administration from Columbia University.

Mr. Bijur brings to us today insights and experience acquired during a career spanning more than 20 years with Texaco.

Joining Texaco Inc. in the United States in 1966, he occupied positions of increasing responsibility in marketing and supply. He gained first-hand knowledge of world energy trade, particularly for crude oil and petroleum products, as president of Texaco Oil Trading and Supply. More than half of his career has been devoted to the marketing of petroleum products, although business experience was gained also in the public affairs and strategic planning departments of the company. Mr. Bijur also played an important role in the disposition of selected assets related to Texaco's acquisition of the Getty Oil Company.

Mr. Bijur was named a director of Texaco Canada Inc. in 1982 and took up his current assignment in Toronto as President and Chief Executive Officer of the company in January this year.

In his spare moments, he finds time for jogging and flying single-engine aircraft.

Mr. Bijur is married and he and his wife, Anne, have three children. Ladies and gentlemen, please welcome Peter I. Bijur, President and Chief Executive Officer, Texaco Canada Inc., to address us on "Regulation in the Canadian Petroleum Industry."

Peter Bijur

I consider it a privilege and pleasure to have this opportunity to address The Empire Club. And in my remarks today, I want to share with you some thoughts from a dual perspective-that of an American and one who heads a large and successful Canadian company. From this vantage point, it's my view that Canada ranks among the most fortunate countries in the world for many reasons.

Driven by international market forces, Canada's economy is moving toward an environment characterized by far less regulation. I want to discuss some of the implications of that deregulation in the context of future economic growth and the importance of the free trade agreement currently pending between Canada and the United States.

Now, courage is the power to let go of the familiar. If Columbus had turned back, no one would have blamed him. No one would have remembered him, either. The "sure thing" boat never gets far from shore. It is always safe to assume, not that the old way is wrong, but that there may be a better way. It is easy to be critical of something new.

For any critic of any policy, however, the real test is to come up with constructive alternatives. And in my view this comment particularly applies to the current free trade debate. Jean Jacques Rousseau said, "Man is born free, but is everywhere in chains." In modern society, that might be altered to read: "Man is born free, but is everywhere regulated."

In a society such as ours, government regulates a great deal of human activity. While some regulation may ensure predictability, it still denies us new opportunity. We are not questioning here regulation of such matters as zoning bylaws or traffic patterns. Here and now, we are concerned with regulations governing day-today economic and business activity.

A certain amount of this regulation is beneficial. But much of it is not. We tend to be over-regulated. This overregulation impedes the general welfare, innovation and level of opportunity in our society.

To be sure, in certain instances the benefits of regulation may be evident. Two cases illustrate the point, the first when a monopoly exists. When monopolies occur, for whatever reason, society usually feels some form of regulation is appropriate to provide a counterbalance. The second case arises when, in a competitive industry, there is no incentive to bear a cost which would render a firm uncompetitive in its field. Regulation will impose the same cost on each of the players, thereby solving the problem.

But there is an economic cost to be calculated-likely in the form of higher prices. Unfortunately, many regulatory restraints end up costing more-in taxes, red tape and higher prices-than the abuses they were supposed to correct. And I think most of you would agree that the daily cost of complying with government regulation has risen dramatically in the last decade or so.

Beyond the limited but legitimate uses of regulation there is a sea of unnecessary and even unfair regulation. Why unfair? Because every benefit or apparent benefit of regulation is achieved at someone else's expense.

In addition, there are important non-monetary costs discouraging entrepreneurship and innovation, thus reducing the range of opportunities open to citizens in a market unfettered by regulation.

Why then do we have so much regulation if it is truly not justified? Politicians often favour regulation for a simple reason. Regulation offers a clear and definite benefit to some well-defined group of constituents at a cost that is spread across the population and is not immediately apparent to anyone. Regulations detail how laws are applied. And regulation tends to beget more regulation as attempts are made to accommodate change. Moreover, adding new regulations is always easier than disposing of old ones. Regulations tend to be cumulative, and cumulative regulations can have wholly unintended results-another reason for caution.

The centrally planned economies of the eastern bloc might be cited as the ultimate example of regulation carried to extreme. Extreme rigidities result from official concern over every aspect of human activity. But even there, changes now appear to be emerging.

Interestingly enough, economic change cannot often come about without substantial political change. It has been observed more than once that a free economy requires a free society. It is not a coincidence that the world's strongest economies are democracies.

The western industrial world has been moving toward deregulation over the past decade. In the United States, airlines, trucking, railroads, financial institutions, communications, and the petroleum industry have been substantially deregulated.

The United Kingdom under Prime Minister Thatcher has pursued similar policies including the sale of many state enterprises to private interests.

While this was going on in the rest of the world, here in Canada we were moving in the opposite direction-toward greater regulation.

Canada's recession was much deeper than that in the United States and the recovery was markedly slower.

Now, no single explanation can account for this divergence, but the sharp differences in regulatory policy during the early 1980s are generally thought to have contributed to the contrasting performance in these economies.

Canada's economic growth has accelerated in the past few years, however, surpassing the U.S. in 1985 and 1986 and topping all economies in the OECD last year.

Not surprisingly, in this time frame Canada made some important progress in deregulation. The oil and gas industry, airlines, and the financial industry have all seen significant deregulation. Some Crown corporations have been sold as well. The foreign investment review agency has been abolished and replaced by the more positive mandate given to Investment Canada.

These policy changes indicate clearly that the Canadian government recognizes that Canada is a full member of the growing global economy and as such cannot be isolated from international markets.

Canada is now embarked on what is directionally the most significant deregulation step of all-free trade. This step is important both for Canada and the United States.

Canada and the United States as sovereign nations are the largest trading partners in the world today. Last year, the total trade between the two countries was $165.6 billion. This country exported $88.2 billion in goods to the United States while importing $77.4 billion, producing a trade surplus in Canada's favour of $10.8 billion.

It is interesting to note that 73 per cent of Canada's total exports went to the United States but these only represented 17 per cent of total U.S. imports. With the removal of tariffs, Canadian industry would have an opportunity to increase its share of the U.S. market, the largest market in the world. What an opportunity!

Neither country can afford to risk the relationship in an international trading environment characterized by increased competition and protectionism. It is only natural then that these two nations should enter into a bilateral trade agreement free of tariffs and barriers in which each country may prosper. The free trade agreement, in establishing the rules for cooperation over the long term, does just this.

But free trade is more important, and more difficult, for Canada as the smaller of the two trading partners. In any free trade agreement it is the smaller nation that has the most to gain. After all, gaining access to a market of nearly 242 million people is potentially far more valuable than gaining access to a market of nearly 26 million.

While benefits of free trade may favour the smaller partner, a disproportionate amount of change and adjustment also becomes necessary. I believe it is the recognition by some, and the fear of others, respecting such change that generates, in part, opposition to free trade.

Lord Macaulay, British historian and statesman of the early 19th century, wrote, "Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular." This unpopularity may be explained at least in part by a statement some 100 years later by the economist W. Arthur Lewis, who wrote: "Painful transitions are inherent in the transformation of a society from one way of life to another; they cannot be altogether avoided except by avoiding change itself."

The free trade agreement as now proposed may be justly claimed as an opportunity of historic importance. On three previous occasions over the past 130 years-the 1850s, 1911, and during the 1930s-efforts to establish a free trade agreement have failed.

But a lot has happened since. World trade has shifted progressively to trading blocs such as the European common market. Some countries, including some elements within the United States, have responded to these developments with protectionist barriers and restraints.

Such barriers and restrictions to trade could choke international commerce and severely hurt Canada. The philosophy represented by this free trade agreement stands out as the soundest possible response to these negative forces.

While the details of the agreement are not fully developed, enough is known to make some key observations:

The agreement enhances the chances for continued progress in reducing tariffs and promoting trade liberalization at the next round of negotiations under the General Agreement on Tariffs and Trade.

The agreement is also an example to the world of the kind of sustained cooperation which can exist between nations and major trading partners. It is a model on which other countries and the international trading community can pattern future relationships.

It is my belief that the intent and design of the agreement deserve the full support of well-informed citizens on either side of the border. Clearly, its objectives are central to our long-term economic well-being.

Consider for a moment, the objectives of this agreement:

• to eliminate barriers to trade in goods and services;
• to establish predictable rules, secure access and fair competition;
• to reduce significantly impediments to cross-border investment;
• to establish effective procedures and institutions for the joint administration of the agreement and, even more importantly, the resolution of disputes between parties; and,
• to lay the foundation for further bilateral and multilateral cooperation to expand and enhance the benefits flowing from the agreement.

If implemented on January 1, 1989, when the free trade agreement will take effect, the two countries, basically, agree that all bilateral tariffs on goods meeting the rules of origin will be eliminated over a 10-year period. The higher the tariff, the longer the phase-out period is likely to be in order to allow those industries affected the maximum time to adjust to the challenges of lower prices.

The agreement stipulates that an independent binational panel consisting of two appointees from each country plus a fifth member to be selected by mutual agreement will examine any complaints or disputes about the implementation of the pact. And of great importance to both countries-and a point that Canada insisted on-the panel will make rulings in accordance with the trade laws of each country, thus respecting the sovereignty of each nation.

At any time throughout the period of the agreement, if either country is dissatisfied, then upon six months' notice either country can abrogate the agreement.

As you know energy is an important and controversial part of this agreement. This is how Canada's Energy Minister Marcel Masse describes the agreement: "The comprehensive free trade agreement will expand opportunities available for economic growth in both countries. It will also bring predictable and impartial rules to the management of our vital trading relationship. This will assure consumers and producers that governments of our two countries, in the future, will refrain from restrictive actions affecting trade."

The free trade agreement is a natural extension of the deregulation of Canada's oil and gas industry. The removal of the surplus test restrictions on natural gas exports was just about the final operational deregulation of the industry by the federal government that began with the signing of the Western Accord.

The agreement assures the freest possible bilateral trade in energy between Canada and the U.S., including secure market access for Canadian energy exports.

The agreement is not a continental energy policy implying Canada and the United States would adopt one energy policy for both countries. By no means is this so.

Let me stress that nothing in this agreement says Canada must sell any form of energy to the United States; it means only, if we choose to sell energy, no barriers will limit access to the world's greatest energy market to our south.

If a shortage arises, Canada is committed to providing its existing customers in the United States with "proportional access" to remaining supplies. This is no more than good business practice and is similar in nature to undertakings Canada has made already through its membership in the International Energy Agency.

There are many good reasons why free trade in energy is critical for Canada. I'd like to focus on four of the most compelling:

• Canada, among industrialized countries, is unique as a net exporter of all forms of energy-oil, gas, petroleum products, coal, uranium, and electricity. In 1986, Canada exported about $10 billion worth of energy. Net energy exports were almost $7.8 billion. The energy trade balance made up about two-thirds of Canada's entire trade balance. Obviously, energy exports are critical to Canada's economic well-being.

• Among Canada's export industries, energy represents a particularly exciting opportunity for future growth. This industry could be one of the few industries with markets for everything it could produce. That is not true now, and without the free trade agreement, it probably will not be true in the future.

The United States represents the only international market available to us for some forms of energy-natural gas and electricity in particular. The alternative to exports is to leave gas undeveloped in the ground and electrical generating capacity underutilized on virtually a permanent basis.

• We have an important transportation advantage in some U.S. markets. Those are the four most critical points. From the petroleum industry standpoint, the agreement also provides welcome assurance that Canada's policy environment will not be subject to extreme swings in the future.

However, let us be clear that a free trade agreement in and of itself will not assure us of growing markets and continuing prosperity. The agreement has not repealed the law of supply and demand.

From a supply perspective, Canada has about one-quarter of the oil reserves and half the gas reserves compared to the United States. These numbers may sound small to those accustomed to hearing Canada described as a vast storehouse of energy. Yet this apparent paradox is resolved by the distinction between resources and reserves. Hydrocarbon resources of a nation are the amounts present within its borders. Reserves are that part of the resource delineated, which may be commercially produced using existing economics and technology.

I say may because converting resources to reserves requires investment. Canada's hydrocarbon reserves are large. Its resources are immense. Without investment, however, these resources may never be anything more than minerals in the ground.

As economic conditions become more favourable-or as technology changes-ever greater amounts of resources may become reserves with the key catalyst, investment.

Export markets help finance the cost of large, capitalintensive projects which could not be supported by the domestic market alone.

It is one of the most basic tenets of economics that investment is critical to economic growth. The importance of the oil and gas industry is nowhere better seen than in its share of total capital investment in this country, which has ranged between 11 per cent and 12 per cent historically.

The next generation of investments in this industry will tend to be large, risky and capital-intensive, such as the so-called megaprojects symbolized by offshore frontier developments and tar sands plants in Western Canada.

Assurance of market access and an open investment environment remove the two great uncertainties today blocking such projects. The basic economics, of course, must still be right for these projects to proceed-that is, prices, costs, and taxes-but the industry has always managed these normal business components.

Now let me return briefly to the subject of regulation. The deleterious effects of regulation hold not only on an international level, but also within our own country. Just as the nation must adjust to new ebbs and flows in the world economy, so the provinces should adjust and not impose measures at variance with these same changes.

There is an inconsistency between the many economic barriers and restrictions that exist within the country and the international deregulatory moves we have been discussing. These must be remedied if the country is to rally its full potential strength in the serious business of world economic competition.

In conclusion, let me reiterate that competition is the driving force behind deregulation and free trade. We believe in competition and therefore free trade. Fewer restraints, and less regulation, increase our productivity, thereby enhancing our world competitive position. Canada has some very large and world-class competitors out there. And if we are to assure our share of growth and national prosperity in the future, we must accept the fact that there are real challenges ahead.

Ladies and gentlemen, 30 years ago Canadians argued the merits of another unusual opportunity-the building of the trans-Canada natural gas pipeline. At that time, fears were expressed about its real intent, its viability, and its ultimate benefits. Few today would question the wisdom of the decision to proceed then.

In a day and age when the world's largest antagonists-the U.S.S.R. and the U.S.A.-can develop a treaty to cooperate on helping to preserve peace, surely Canada and the U.S.-its friend, neighbour, and largest economic partner-ought to be able to conclude an arrangement which makes their respective economic futures brighter and more secure.

We urge that Canadians in all parts of the country study the proposed agreement carefully and assess for themselves the strengths and weaknesses. Canada has a great future. The issue is: what will it be? Canadians now have the opportunity to choose.

Ladies and gentlemen, thank you very much.

The appreciation of the audience was expressed by Henry N.R. Jackman, a Past President of The Club.