The Incredible Resource Battle

SIR ARTHUR CHETWYND:

Honoured guests, ladies and gentlemen: Somebody said to me the other day that "the great energy debate is generating more heat than light, and unfortunately, we can't harness either one to help alleviate the problem!"

Opinions expressed on the subject of resources vary all the way from Buckminster Fuller's "Spaceship Earth" concept, where our small planet is likened to a spacecraft travelling in an endless orbit, consuming itself on its journey until it is burned out, to the other, more optimistic utterances of Herman Kahn, the Hudson Institute "think tank" pundit, who isn't all that worried and has extrapolated that the earth will provide the things we need about as far as anybody can see into the future.

In Canada, the energy factor has put new strains on Confederation and induced very heated relations between some provinces, as well as between the provinces and the federal government. Fundamental questions have been raised, such as, "If the oil of two or three provinces belongs to all of Canada, why doesn't the fish of one province or the timber of another belong to all others in like measure?"

It all reminds us once more that the tenuous, golden thread of Confederation continues to be a political miracle and an economic impossibility--in addition, of course, to being the most glorious challenge a nation could ever hope for to provide the magic to excite men's souls.

Our speaker today, William Osborn Twaits, was born in Galt, Ontario. He graduated from the University of Toronto in 1933 where, apart from his academic excellence, he won the much coveted first "T" in football. He then joined Imperial Oil Limited where he made his mark in successively more responsible assignments until he gained the Presidency in 1960. In 1970 he became Chairman of the Board and Chief Executive Officer of Imperial Oil, a position he held until April 1973, when he was re-elected Chairman. He retired from Imperial Oil in April, 1974.

Mr. Twaits has always had an active interest in higher education and is a member of the governing council of the University of Toronto, as well as being closely associated with several Canadian universities. He holds doctorates from Acadia University and the University of Ottawa. In April of 1974 he was invested as a Companion of the Order of Canada. He is Honorary President of the Canadian Arthritis and Rheumatism Society, a senior member of the Conference Board, Inc., a member of the Conference Board of Canada, and the International Advisory Council of the Stanford Research Institute. He is Honorary Treasurer of the Olympic Trust of Canada.

Mr. Twaits is also a member of the Canadian-American Committee and Chairman of the Executive Committee of the British-North American Committee and a past member of the Economic Council of Canada. He is a director and Vice-President of the Royal Bank of Canada, and also a director of Abitibi Paper Company Ltd.

There is a saying that a businessman is known not only by the "company" he keeps, but by the companies he keeps solvent. Our speaker ranks high by either of these measurements!

A famous U.S. jurist by the name of Louis Brandeis once defined democracy as "the seeking out of the truth in the marketplace of ideas". With all of its pain and controversy, this system is still so loved by most of us that we prefer it over any other system ever contrived or suggested (short of heaven), undoubtedly because it provides the most freedom in a world where oftentimes freedom is the unappreciated luxury of a shrinking minority. And when our system seems quite awful, we comfort ourselves that other systems are worse.

In our own, rough-hewn, democratic way we shall all have a hand in shaping Canada's resources policy. How helpful it is, then, to have as our guest speaker a man of Mr. Twaits' vast experience and high reputation to "help us seek out the truth" in this particularly controversial marketplace of ideas as he speaks to us on "The Incredible Resource Battle".

Ladies and gentlemen, with great pleasure I introduce to you Mr. William O. Twaits.

MR. TWAITS:

Mr. Chairman, ladies and gentlemen: It is an honour, particularly for a pensioner, to appear before this prestigious group which has had such a long and honourable record of public service. It is also a privilege to speak to you, and a group like this on an issue that far transcends the oil industry or the resource industries and in the views of many is the most serious in the country's history, since Confederation.

I should first emphasize that I am not an official spokesman for the resource industries or the representative of any company. Rather I am here as a deeply concerned Canadian with a fair amount of background in this subject who finds it impossible to believe that a supposedly mature industrial nation in this late twentieth century could contrive a national debacle with such tragic short--and longterm consequences-consequences which have by no means been fully brought to public attention.

Petroleum industry spokesmen have made a major effort in recent years to inform the public and governments on the realities of the energy outlook. There is simply no excuse for lack of forewarning by knowledgeable people. Indeed this was reflected in the federal government's massive Energy Policy Issues study which came out in several volumes in June, 1973, over eighteen months ago, and whose contents were obviously known to government people before that time. I find it strange, therefore, that seventeen months later, the National Energy Board had to rediscover that Canada's developed supplies of oil and gas would begin to decline in a few years' time, and that new sources must be brought into production.

That 1973 federal government study clearly set forth the needs, the policy requirements and the investment environment if Canada were to develop its enormous energy potential in petroleum, natural gas, uranium, coal, hydro, etc. The study emphasized the mammoth job ahead which would tax to the fullest Canada's resources of capital and of skilled people.

At that time, industry planning was in conformity with the federal policy report, in other words, we all recognized the same problems, the same needs. Long-term commitments of capital and people were assigned to the frontier areas by a multitude of companies, in the Arctic and offshore, the tar sands and heavy oils projects, all with vast potential resources. Lead times from exploration or research to commercial development in these areas are a minimum of eight to ten years and involve not only the internal capacities of a particular company, but those of the great infrastructure of contractors, suppliers and transportation systems which are vital to the petroleum industry operation. It must be emphasized that it is not just internal resources in the major oil companies, but rather the long-term mobilization of all these essential services, involving in total some 150,000 to 200,000 people, that must be brought into the long-term planning.

However, at that time investor confidence was high and management morale was buoyant under the stimulus of the technological and financing challenges presented by these developments. The industry well understood that these resources would be much more costly (ignoring any inflation factor) but confident that the long downward trend in petroleum energy prices would be reversed in order to justify the high risks involved. The combination of exploration and market risk was almost beyond management comprehension, but it had to be assumed and it was.

Then, in short order in 1973, two events took place which totally undermined industry planning. Firstly in August, 1973, the Alberta Government suddenly revised the conditions under which the Syncrude partnership had proposed to undertake a billion-dollar tar sands project. The conditions were totally impractical and the partnership, after $60 million of pilot and research work over a sixteen-year period, was at the point of abandonment. Then on September 3, 1973, the second blow fell with the federal government announcement of an export tax on crude oil and a "voluntary" price freeze on petroleum products. This action, of course, set a predictable collision course with the western provinces by limiting the price of crude oil on which their royalty revenue depended, and precipitated the whole question of the division of resource revenues.

In the intervening period, we have seen a series of attacks and counterattacks by provincial and federal governments which has resulted in severe cutbacks of industry investment programmes, collapse of investor confidence, and a deterioration in the morale of skilled people to the extent that some are emigrating from the country. This, of course, is all a matter of record.

But the underlying issues in this battle, in which the resource industries are innocent victims, have not been put before the Canadian public. Nor have the short and long-term consequences been adequately ventilated. We should realize that what is really at stake here is a resolution of the federal/ provincial confrontation over revenue-sharing arrangements which, with inflation, has become increasingly polarized. Revenue-sharing between federal and provincial governments has been a fiscal game since Confederation, executed by power bargaining and without constitutional validation through the Supreme Court of Canada-which is long overdue.

The confrontation is at once simple and complicated. On the one hand we have provincial and municipal governments severely pressed by increasing costs for health care, education and urbanization, and without, in their view, adequate taxing sources. This has led to provincial takeovers of industries to recapture the federal income tax, to oil and mining royalty escalation, and to the formation of provincial Crown companies in many fields of activity.

On the other hand, the federal government income increases rapidly with inflation due to the progressive income tax. Indeed, as every economist knows, inflation constitutes a massive hidden tax on incomes as well as savings. The federal government is painfully aware that the present trend in the fiscal game, including not only provincial resource royalty actions, but the proliferation of provincially-owned companies in every field of business, undermines its whole income structure and its whole basis for the management of fiscal and monetary policies. The contention that "all of the people of Canada" should benefit from the inequitable distribution of mineral and other resources is at best a political euphemism for centralized control of fiscal policy, and hence the ultimatum in Mr. Turner's budgets of last May and November. It should be clear that the blame for this fiasco cannot be laid solely on the federal government -the provinces are equally guilty.

Regardless of how this issue is settled, great damage has already been done. It is difficult to see how we are going to resolve our energy supply problems until our legislators face up to realities. First are the realities of people. We have heard a great deal about governments' needs for revenues; we have heard nothing about the skilled people who produce these revenues. There is today a critical world-wide shortage of skilled earth scientists, engineers, and those disciplines necessary in the energy field. It is generally accepted that the greatest single limitation on resolving the world's energy crisis is the availability of these skilled people. It has been suggested, in very knowledgeable quarters, that energy supplies are so fundamental that compulsory diversion of certain scientists from other industries will have to be undertaken to supplement even a sharply increased university production. Competent management and professional people cannot operate effectively in a climate of career uncertainty or constant bureaucratic interferenceas the U.S.S.R. has learned the hard way.

The current resource battle is leaving hundreds of thousands of talented Canadian individuals with increasing feelings of distrust, frustration and anger at being the innocent pawns of intergovernmental controversy. There can be no basis of planning for the urgent expansion of new energy supplies unless skilled people are assured of career opportunities in the private sector without constant bureaucratic harassment and daily changes in the ground rules. The second reality is the great damage that has been inflicted by the current battle on investment planning for new physical facilities. This was initiated with great fanfare by an attack on industry's inventory or "windfall profits". Now every enterprise from the small shopkeeper to the large corporation knows that inventory profits are illusory. Inventories of either raw materials, materials in process, or finished goods, are necessary to operate a business. When replacement costs rise dramatically, as they have in most commodities, the businessman knows that he is in trouble. To finance the new inventory he must raise his prices, thereby increasing his profit, which is taxable, and he finds himself in a vicious circle of trying to finance working capital requirements. Thus we have the spectacle of the same companies who are being blasted for "obscene" inventory profits, borrowing money heavily in the market and through the banking system.

Some prominent economists are now advocating tax relief on such mythical profits as an anti-inflationary measure. This would relieve the pressures on the banking system so badly strained to finance escalating working capital requirements under double-digit inflation. Unfortunately, the preoccupation with mythical inventory profits has obscured a much more serious and important problem. Like most commodities, replacement costs for new energy supplies have been and are continuing to increase sharply. Public discussion continues to be preoccupied with OPEC inspired* increases in the world price of oil when, in fact, the industry has warned for years that current prices for petroleum were totally inadequate to develop new sources. The current world prices for petroleum are in the $9 to $10 per barrel range at point of shipment, or $11 to $12 per barrel imported into North America. I suggest to you that within a few years, energy for essential heating and transportation purposes will cost at least $20 per barrel expressed in energy equivalent, whether it be in the form of natural gas, oil, tar sands, or coal, and this does not provide for continuing inflation. If you think this is an exaggeration, I would point out to you that the price of electricity, delivered to the lights under which you sit, is equivalent to $21 to $25 per barrel of oil-and yet we live in an area where the cost of electric power is considered to be low.

The trouble is that our sense of values has been totally conditioned by over forty years of declining petroleum prices in a highly competitive market, fostered by what the New Democrats call the "giant oil monopoly". Cheap petroleum has led to the extravagant usage and sheer waste of energy. Here in North America, our annual per-capita consumption of all forms of energy is the equivalent of twenty

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*OPEC-Organization of Petroleum Exporting Countries.

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tons of coal or two thousand gallons of oil-some 50% higher than European per capita consumption, but it may shake you to find out (since energy is parallel to standard of living) that it is 2500% higher than India.

Now we have to recondition our whole thinking toward the use and care of energy resources. This again was brought out in the federal government's Energy Policy study. Yet in the face of these facts Canada is controlling the price of domestic petroleum to about half world-price levels--thus discouraging new supply and encouraging the continuing wasteful use of our existing resources. We are the only industrialized country in the world to follow that policy. The high replacement costs are not just the function of remote areas or expensive technology, but also reflect escalating construction costs as typified by the problems with the tar sands projects. Even in the U.S., a two-tier pricing system has been in force to provide incentive for new energy supplies and many are now advocating a free market as the only method of encouraging conservation of and more efficient energy use, and also to encourage new production.

I have tried to present the basic issues in this battle without technical complications, which are many, or the peripheral effects, which are widespread. For example, one cannot contemplate the impact on the savings of millions of Canadians who participate in pension plans and life insurance due to the drop in stock market values. However, what the situation demands if we are to maximize future energy supplies in this country is crystal clear.

First, we must have price and tax policies that offer continuing incentive and cash-flow resources to justify the high technological and exploration risks. Second, we must provide assurance to the industry of a stability and a continuity in policies that will permit the necessary long-range planning. In short, we must re-establish credibility of government policy in the eyes of the investor and in the minds of the skilled people who make up the industry. To most Canadians, I know, this would sound like a very reasonable proposition. Indeed, it is what every individual looks for in his own career, whether he works with his hands or as the chief executive of a large corporation.

I suggest to you that we would not be in this mess if the market price system had been allowed to operate. The federal government has quite rightly, in my view, rejected wage and price controls as a means of fighting inflation, because they have not worked in other countries, and in fact have aggravated shortages, and the experience in the U.S. is a good indication. Yet, in petroleum, they have imposed price controls of the severest type and are now in the process of legalizing this through the Petroleum Administration Act, the famous Bill C-32 now in Parliament. Now if price controls won't work in food and other basic commodities, why should they be expected to work in petroleum, particularly when such long lead times are necessary to develop new supplies?

I suggest that this dangerous anomaly is due to the preoccupation of our legislators of all party labels with this myth of excess or windfall profits. Now the industry can defend its profits by many comparisons, and has done so. The facts are there, even though they are being subject to what can only be regarded as deliberate distortion by some politicians. I think the case can be very simply stated to the public. When mortgage interest rates are over 10% and when short-term money market investments will earn at least 9%, without any risk, then how can a commercial enterprise, with technological and market risk, be expected to operate with less than a 20% return? Statistics Canada's own data will show that the petroleum industry is far below this level. One of the problems here, with frightening implications, is that most of our legislators do not understand the cost of money.

We have now had a year and a half of utter confusion and we are running out of time. Is there a solution to this impasse and if so what are the possible alternatives? An increasing number of thinking Canadians are concerned that we are witnessing in this country a massive takeover of private investment similar to that which has brought Great Britain to the brink of ruin-perhaps over the brink. The Canadian electorate has consistently rejected state socialism as offered by the NDP at the federal level. Yet in two provinces, under doctrinaire socialist governments, there is a deliberate program to kill private industry (not just petroleum) and take over companies at bargain prices. This is licensed rape of the Canadian saver and an inflationary force of no little significance. In every province, regardless of party label, Crown corporations are invading almost every element of the private sector. The only solution to growing state socialism through the creation of provincial Crown companies is a revision to the Income Tax Act to include all Crown corporations, presently exempt from federal income tax.

In the more fundamental revenue-sharing argument, there are many who advocate that this should be put before the Supreme Court of Canada and decided on constitutional grounds, and we certainly do need new definitions of direct and indirect taxes. But the overall revenue-sharing problem may take years to resolve through the courts, and we cannot afford to wait.

Others feel that a First Ministers' Conference can, if properly structured, produce an effective and lasting solution, despite the debacle of a year ago. There seems to be little political recognition of the urgency of bringing all parties to the bargaining table.

Mr. Chairman, I learned long ago that even the most lucid and logical speeches by businessmen do not command any attention in Hansard or its equivalent in our provincial Houses. I am encouraged that major elements of the media are now recognizing the implications of the resource battle with respect to future energy supplies. But this is only the tip of the iceberg. The truth is that every Canadian, regardless of his location or vocation, has a stake in this controversy and he is simply not being represented at the public-policy bargaining table. We seem to be living in an age of what might be called "manipulated issues", which is leading to a widespread disenchantment with the political process in general, and big government in particular, as evidenced by the recent 28% of eligible voters who turned out in the Metro municipal elections. Many Canadians, by default, are allowing an activist minority to select their governing bodies, and by consequence, their government policies. It is high time that Canadians should react to the real issues in this incredible resource battle as they have so violently reacted to the comparatively minor proposal to increase M.P.'s salaries. The freedom to save and invest as you choose is the foundation of democracy. State socialism (and you can look at history around the world) eliminates that choice first, and ultimately it eliminates the freedom of speech, the freedom of the press, and the freedom of the labour movement.

If you don't like this scenario, you should be talking not just to your M.P. but also to your M.P.P. regardless of party, because this is not just a federal problem. Thank you very much.

Mr. Twaits was thanked on behalf of The Empire Club of Canada by Mr. Sydney Hermant, Past President of the Club.