The Oil Industry—Where Do We Go From Here?

MR. LAWSON: Our guest speaker today was born in the great state of Texas and graduated from Texas A & M College. He began his career in the oil industry in 1934 when he joined the Gulf Oil Corporation as a roustabout in the oil fields of his native state. Two years later he received his first promotion, to petroleum engineer.

He had a distinguished military career in World War II, advancing from 1st Lieutenant to Colonel and receiving the Purple Heart, the Silver Star with Cluster, the Legion of Merit, the Bronze Star with Cluster, the Distinguished Unit Citation, the Air-Medal from the United States and the Distinguished Service Order from Britain.

Back at Gulf after the war, he was promoted to Assistant Superintendent of Production in 1948 and was in the Pittsburgh office from 1949 to 1952 as Assistant to the Vice-President in the production department. In his next important promotion, he was sent to Gulf's Venezuelan subsidiary, Mene Grande Oil Company in Caracas, where he became Assistant President and Production Manager. In 1955 he returned to the United States as a Vice-President for Gulf. In 1957 he became Co-ordinator of the Production Department and in April, 1958, he was appointed President and Chief Executive Officer of The British American Oil Company Limited.

On his arrival in Canada, our guest immediately began visiting the units of his company from coast to coast. He has continued to do this and, in seeing first-hand the oil and gas producing areas, the expanding industrial developments and frontier resource regions, he has gained a valuable appreciation of this country's potential and our energy needs. In short, no one is better qualified to speak to us on "The Oil Industry--Where Do We Go From Here?"

It is a great pleasure to introduce a new Canadian who is already, in ways too numerous to catalogue, making a great contribution to his adopted country, the President of The British American Oil Company Limited, Mr. E. D. Brockett, Jr.

MR. BROCKETT: Since this talk on the Canadian petroleum industry is entitled "Where Do We Go From Here?", I think it only proper that we first consider the ground already covered and establish the position of the industry today.

The petroleum industry in Canada has grown to its present stature in two clearly defined stages, and it is my feeling that the industry is now entering a third phase which promises to be equally as distinctive and significant. In the first stage of the industry's development, which in my opinion ended with the discovery of major reserves of crude oil in Western Canada in 1947, domestic consumption of petroleum products had grown to the order of 250,000 b/d, and the industry had achieved a fairly high degree of integration in refining and marketing operations to supply this demand. Crude oil production, however, was relatively insignificant, amounting in 1946 to only nine per cent of the country's refinery needs, with over 90 per cent of our crude oil requirements imported from other countries--mainly the United States and Venezuela. With the end of World War II, the industry entered a period of phenomenal growth in the consumption of petroleum products and demand more than tripled to 740,000 b/d in 1959. As major reserves were discovered in Western Canada, the entire complexion of the industry changed, and this country became a major crude oil producing nation as well as a refiner and marketer of petroleum products. Between 1947 and 1958, the industry invested approximately $5.3 billion as the increase in demand for products averaged a phenomenal nine per cent a year. Industry spending on exploration and production, which averaged about a million dollars a month prior to 1947, now amounts to more than a million dollars a day.

With the construction of oil pipelines, markets have developed for Canadian oil to the point where production in Western Canada this year will be equivalent to roughly two-thirds of the total crude runs at Canadian refineries. Today petroleum is our number one mineral, and its products rank in value second only to forest products among our resource industries. Canada's per capita consumption of petroleum products is second highest in the world, a fact which undoubtedly is closely related to the high standard of living which we enjoy.

In the past few years there has been a levelling off in the rate of growth in the consumption of petroleum products. We have entered a phase of less rapid expansion, which gives us the opportunity to consolidate and improve the efficiency of our operations. Still, the industry in Canada can look forward to a long-term growth trend of about five per cent a year in consumption of products. That's a doubling of volume every 15 years. Furthermore, with even a conservative growth in export markets, we estimate the increase in crude oil production over the next 10 years will average better than seven per cent a year, resulting in a 100 per cent increase in production by 1969.

Another important aspect of industry growth in recent years has been the discovery and development of large-scale reserves of natural gas and the construction of major trunk pipelines to transport this gas to market. Certainly the utilization of these reserves in Canada and the U.S. must be dramatically increased in the very near future. Few industries in Canada can look forward to comparable growth, a fact that some investors may have overlooked in recent months.

So much for history and predictions--this is today, and at this point in the industry's development, the Borden Commission has rendered a valuable public service in providing an objective analysis of the present situation and in recommending a sound policy for future development. In its first report, the Commission took a very definite step forward in recognizing the principle that in determining volumes of gas available for export, Canada's future requirements should be related to future trends in growth of reserves. We feel the Commission made an important contribution to the future development of the industry in its recognition of the principle thus stated, and in its finding (which I now quote) "That on any reasonable assumption regarding the growth of reserves in Alberta and British Columbia there will be a moderately increasing volume of gas in excess of Canadian requirements available for export." In its second report, we feel the Commission has put forward recommendations that form a sound basis for ensuring the continuing healthy growth of the producing industry.

The problem confronting the Canadian petroleum industry was well stated by the Borden Commission in the second report. "How best to increase the level of production of the oil industry in Western Canada to the point where such production will sustain a strong and healthy industry without adversely affecting the cost of energy to the Canadian consumer."

Certainly it is a matter of serious concern to the industry and to government that the present level of production is only 50 per cent of the industry's efficient producing potential. This problem is particularly acute for producers in Alberta, since approximately 90 per cent of the industry's total shut-in production is in that province, with the present producing level less than 40 per cent of productive capacity. In this concern about the low level of crude oil production in relation to producibility, we feel there has been a tendency to overlook the fact that the production of natural gas is running even farther behind the industry's ability to produce. While the problem insofar as crude oil is concerned is the development of markets, in the case of natural gas the markets are available today but may not remain so unless immediate action is taken by appropriate authorities.

Without minimizing the seriousness of the present situation, it should be realized that oversupply of this nature is not unusual in the early stages of a new and growing industry. The rapid development in Western Canada was spurred on by an uneasy international situation, which posed a threat to a major source of the Free World's petroleum supply in the Middle East, and which was marked by outbreaks of hostilities such as the Korean War and the Suez crisis. It has also been accelerated by government regulations designed to encourage a high level of exploration activity and the rapid development of reserves. Work obligations under leases and reservations of petroleum and natural gas rights, and government policy in offering proven reserves at auction, tend to maintain a high level of exploration and to accelerate the development of reserves without regard to available markets.

In addition, the present system of pro-rationing to market demand assures an economic allowable to all new wells that are successfully completed, thereby reducing the available market for wells already producing. In order to maintain his present share of production, the operator has no alternative but to continue an active development program that will bring new wells into production to offset the reduction in allowable on producers.

The interest that has been shown in recent months in exploring the sub-arctic regions of Canada is a good example of the type of industry activity that--if successful--might lead to further aggravation of the present situation of oversupply. This sort of exploration activity is essential, provided it is considered in its proper light as a long-range program, aimed primarily at mapping our potential oil-bearing lands against the day when economic markets can be found for oil discovered in these areas. But here again, work obligations tend to accelerate premature development without regard to available markets. At the present time, in view of the extremely high cost of exploration and production in this area and the very formidable transportation problems, the day when this oil can be economically marketed seems remote.

Turning once again to the Borden Commission, we feel that in its second report the Commission has made a thoroughly objective analysis of the situation that exists in the industry today. In considering the economics of the proposal to construct a pipeline to transport Canadian crude oil to the Montreal refining area, we believe that the Commission is correct in its finding that Canadian crude oil would be at a competitive disadvantage compared with imported crudes. Although the Commission made no express finding on this point, we feel that it necessarily follows from this conclusion that the enforced movement of Canadian crude oil into the Montreal area 'would result in either a reduction of wellhead prices to the producer in Western Canada or higher prices for refined petroleum products to the consumer in Eastern Canada--quite possibly a combination of both.

British American has never opposed the movement of Canadian crude into Montreal by pipeline, but rather has simply advocated that such a project be based on sound economics, without resort to artificial trade devices. So far, all our studies have indicated that such economic feasibility cannot yet be achieved. Assuredly, the present low rate of production in relation to productive capacity is a serious matter, and we most certainly agree that a vigorous effort must be made by all concerned to explore fully every possible avenue for increasing production that would not be prejudicial to the Canadian economy or jeopardize the long-range prospects of the industry in export markets. We believe that in the long term the producing industry in Western Canada may look to increased exports. However, if we are to achieve such markets, our crude oil and petroleum products must be kept competitive with those from other sources.

The Commission has suggested a production target of 700,000 b/d by the end of 1960, which we agree would be adequate to sustain a strong industry and to provide the incentive for further exploration and development. This target is made up from three elements. First, in domestic markets now served by Canadian crude, a requirement totalling 440,000 b/d has been forecast for 1960. We agree this is a reasonable estimate and one that should be achieved without difficulty. Second, the Commission has recommended that petroleum products refined from imported crude in the Montreal area and shipped into the Ontario market be displaced by products refined from Canadian crude in Ontario refineries. This would permit an increase of 50,000 b/d in crude oil production in Western Canada, and sufficient refinery capacity and transportation facilities exist today to implement this recommendation.

British American's submission to the Commission in May, 1958, urged that every effort be made by refiners in areas served by existing pipeline facilities to utilize Canadian crude oil to the greatest extent that is economically feasible, and to enlarge the markets supplied from refinery areas served by existing pipelines. B-A has consistently followed this policy in its own operations and we plan to continue to do so. In brief, we fully endorse the Commission's recommendation on this point, and urge prompt implementation by the industry. The third factor in attaining the suggested target level of 700,000 b/d would be exports totalling some 210,000 b/d by the end of 1960. This would require an increase of some 120,000 b/d over the average of approximately 90,000 b/d in 1959.

We are in general agreement with the Commission's suggestion for a continuing effort to expand export markets. However, we feel that undue emphasis has been put on the responsibility of the integrated refineries for expanding these markets. In fact, it should involve maximum effort on the part of all companies with production interests in Western Canada, since all stand to benefit from increased markets for Canadian crude. The logical markets for expansion of crude exports are those areas presently served by pipeline. Not only is Canadian crude that enters the U.S. by pipeline treated preferentially to other imports, but from the standpoint of laid-in cost, it is competitive with oil from other sources.

The major areas in the U.S. presently supplied with Canadian crude by pipeline are the Puget Sound and Minnesota-Wisconsin markets. Exports to the three refineries in the Puget Sound area, having an aggregate capacity of 135,000 b/d, averaged about 36,000 b/d in 1958. During 1959 they have fluctuated widely and will average approximately 32,000 b/d for the year. It is therefore

not unreasonable to expect a substantial increase in movements to this area. Export of our crude to the Midwest states of Minnesota and Wisconsin should average over 60,000 b/d in 1959, and would have been higher if this market had not been affected first by a refinery strike earlier in the year, and now by the prolonged steel strike. Canadian oil is already supplying a substantial portion of the crude requirements of refineries in this area, so any major increases in this very promising market will depend for the most part on normal increase in demand.

The other major refining centre in the U.S. which provides a potentially attractive early market for Canadian crude is the Detroit-Toledo area. At present, our oil is competitive in price with U.S. domestic crude in this area, and, with certain modifications in existing pipeline facilities, Canadian crude could be delivered by pipeline. We feel there is an excellent opportunity to capture a portion of this large and growing market.

While the export target of 210,000 b/d may not be achieved by 1960, we feel the industry must recognize the established objectives and move promptly and vigorously toward these goals. We do not believe that a moderate delay in reaching this level would have any material effect on the future development of the industry or call for drastic action on the part of the Canadian Government to increase domestic markets for our oil. The Commission's concern over the urgency in this matter reminds me of something the great "Boss" Kettering once said when he was told to double his research staff and complete a project in half the scheduled time. He asked his boss, "How much faster do you think an egg would hatch if you put two hens on it?"

While we have been mainly concerned today with the pressing problem of markets for crude oil, I would like in closing to touch again on the equally urgent problem of markets for natural gas, about which something can and indeed must be done immediately. With proved reserves as of January 1, 1959, estimated at 23.3 trillion cubic feet, there is no question that Canada has abundant natural gas for export. The high level of crude oil production projected over the next 10 years would result in over three trillion cubic feet of solution gas being produced along with the crude. By 1969, it is estimated that production of solution gas alone will exceed one billion cubic feet per day.

The penetration of markets for Canada's surplus gas is a matter of extreme urgency, for producers must soon begin to realize a reasonable return on their investment in this phase of the business. If they do not, they must be forced to cut back on the exploration necessary to the orderly development of the industry in Canada. It is essential that prompt action be taken by the National Energy Board and the Canadian Government to approve pending applications for export before markets that are available today are lost to other sources of supply.

THANKS OF THE MEETING were expressed by Mr. Neil McKinnon.