Canada's Energy Opportunity

MR. HERMANT:

Ladies and gentlemen: When Edmund Burke said in 1769, "Public life is a situation of power and energy," he was probably not referring to petroleum products, nor one supposes to hydro power.

And yet energy--its availability, its location, its cost and the speed at which it can be found and in what quantities have certainly become everyday parts of our life today.

J. Tuzo Wilson perhaps summed up our unique position best when he wrote, "There's one thing Canadians should always remember. In many parts of the world, including the southern United States, people will be uncomfortable if heating fuel is cut off--but in Canada many people would die. We need our energy fuels just to stay alive in our rigorous climate and fuel for our future is essential."

Of all the energy sources discussed, the one in the midst of the most controversy is the group loosely known as petroleum products--basically, oil.

Our guest of honour today, Mr. Alexander McIntosh, is an oil man. More specifically, he is a Canadian oil man. Although he was born in Scotland, Mr. McIntosh was raised in the Turner Valley just south of Calgary, in the middle of one of Canada's major oil fields. He was schooled in that oil field, and having served in the RCAF and in the army during the war, graduated from the University of Alberta as an engineer. He went directly into the oil business--as a matter of fact, he even met his wife in an oil refinery office.

It's said that he has three real loves in life--his family, the oil business and golf, true to his Scots ancestry. No one has firmly established the order in which those are presented.

During his early posting as engineer in Fort St. John, McIntosh hewed what is now the Fort St. John Golf and Country Club out of the wilderness and, not surprisingly, was the first president and charter member of that club.

Alex McIntosh has been described as a very direct, very quick, very bright man who doesn't feel the need for the niceties of office procedure. As a matter of fact, he is said to have advised a colleague that, "If you have a geologist in your organization that finds you some oil, you should go and congratulate him, give him a bonus and then kick him out--because the chances of him finding more are pretty remote."

He has spent his entire career with Pacific Petroleum as engineer, production supervisor, chief engineer, district manager, operations supervisor, production manager, and finally senior vice-president and director. He epitomizes the confidence of the petroleum industry and believes that Canada can be one of the few countries in the world having a secure supply of domestic petroleum energy.

He has taken the lead in putting together a consortium of companies to upgrade the refining of oil in Alberta and was instrumental in creating a new industry for Canada when he coerced the federal government and the Dominion Bridge Company to make pump jacks, previously imported, in Calgary.

Many of us in this part of the world will remember when we were told--and quite directly, too--"to go freeze in the dark". I hope we remember with equal clarity the bumper sticker created by the then mayor of Calgary, Rod Sykes, which said, "That eastern bastard is my brother".

Sisters and brothers, Alex McIntosh is convinced that all of us in this country have a unique opportunity to develop a petroleum industry which can keep up with the tremendous uses of Canadians--who consume more energy per capita than any other industrialized country in the world.

Ladies and gentlemen, it is a pleasure for me to introduce to you the chairman of the board of governors of the Canadian Petroleum Association who will be making his first public address since taking over as chairman. He will address us under the title "Canada's Energy Opportunity". Mr. McIntosh.

MR. MCINTOSH:

Mr. Chairman, head table guests, ladies and gentlemen: These are exciting times for the Canadian oil industry. Exciting--because we've embarked on the biggest hunt for new oil and gas supplies in Canadian history.

True, we face political and economic difficulties in Canada today, but the petroleum industry is confident that we will be able to secure for Canada the long-term energy supplies on which a prosperous national economy can be based.

Canadians have a more realistic understanding of the energy situation today than they did just a few years ago. There's a greater understanding that the days of cheap energy are over, that to remain competitive in the present global situation Canada needs secure energy supplies.

Three other factors are not as well understood.

First: Although the consumer is paying higher prices for energy, a relatively small portion--only about 35% of the value of a barrel of oil--comes back to the producing industry.

Second: The magnitude of energy potential Canada has to develop.

Third: The favourable economic impact the development of this potential will have on the country.

My message today is a positive one. I hope to leave with you a better appreciation of how this development can help put Canada back on the road to economic prosperity.

Canada has a vast potential of oil and gas supplies. There is considerable potential remaining in the traditional exploration areas of western Canada, particularly Alberta. We have potential in the frontier areas, including the Mackenzie Delta, the Beaufort Sea, the Arctic Islands and the east coast. We have, in the Athabasca oil sands, one of the largest single potential energy sources in the world. The oil industry has launched an all-out effort to realize this vast potential. That effort in itself has resulted in a healthy infusion of funds into the Canadian economy.

For example, last year, the industry spent $7.3 billion, $100 million more than its total revenues.

The bulk of that money flowed back into the Canadian economy in the form of wages, payments for supplies, taxes and royalties. For the producing provinces the benefits of these expenditures are perhaps more obvious. They are less obvious in a consuming province like Ontario. Yet the spin-off effect of these energy investments has an immediate impact on the economy of eastern Canada.

Let me give you an example of the economic impact that comes from the exploration and development of new energy supplies. One oil sands mining plant, such as Syncrude, requires the direct employment of up to 10,000 workers during construction, both on-site and for related engineering support. Beyond this figure are the significant number of new jobs created from purchase contracts placed across Canada.

As of September this year Syncrude had spent or committed more than $1.7 billion for equipment and material. Of this, 62 per cent or a little over $1 billion had been spent in Alberta, 14 per cent or about $240 million had been spent in Ontario and about 5 per cent or $80 million had been spent elsewhere in Canada.

Last month an application was filed with the Alberta government for a $4 billion plant to extract the heavy oils from the Cold Lake deposits. Another group of companies is in the advanced planning stages for a third mining plant in the Athabasca oil sands. These projects will mean more jobs and more economic activity.

Exploration and development activity is good for the Canadian economy--good because it creates jobs and generates the kind of economic benefits we need.

This vigorous exploration and development program is beginning to solve our energy supply problem.

The problem is well known. Petroleum is the dominant form of energy in the world today, providing more than half of the energy in the non-communist world. Other forms of energy--such as coal and uranium--will begin to make a bigger contribution after 1980. But that transition will take place very slowly. By 1990, oil will still be contributing about half of the non-communist world's energy.

Most analysts expect that demand for oil will approach the limits of producing capacity by 1990, and perhaps even earlier. When this occurs, the price of oil will be anybody's guess. In the meantime, it's likely that world oil prices will advance at a rate somewhat above world inflation rates. OPEC countries may be unwilling to deplete their reserves at ever-increasing rates to meet demand in the western world. In other words, there's a possibility that some OPEC members may reduce production to meet their own economic objectives. In addition, politically-inspired cutbacks remain a constant threat.

At the moment, Canada is using up existing conventional oil reserves faster than new supplies are being added. However, Canada is still slightly more than self-sufficient in hydrocarbons if you add together both crude oil and natural gas. We're long on natural gas, but short on crude oil.

Our current supply position for natural gas is goodvery good. Last year, the amount of gas discovered was more than the total produced. The increase in proven reserves in western Canada is the direct result of the higher prices being received by the industry.

The oil supply situation is less encouraging. No new major fields have been confirmed. But several interesting strikes have been made in central Alberta this year. All indications point to a significant find but it's too early to try to measure the extent of the new discoveries. By this time next year we will have a better feel for the significance of the find.

Our best potential for additional domestic oil supplies lies in the vast deposits of heavy oil and the oil sands. These are located in Alberta's Athabasca oil sands, in the Cold Lake area, the Peace River region, and around Lloydminster on the Alberta/Saskatchewan border. These deposits probably contain something like one trillion barrels of oil. That amount is so large that even a small percentage recovered would help our supply position quite substantially.

A good deal of research has been done. Large scale pilot projects to test recovery techniques for the oil sands are under way. Support for this research and testing is being offered by the Alberta government, through the Alberta Oil Sands Technology and Research Authority. The federal government is supporting the industry by permitting us to defer some income tax obligations and by funding under the Energy Resources Research Fund.

Heavy oil in the Lloydminster area can be developed earlier because it can be produced with known technology. Here the problem relates more to marketing. Canadian refineries are not designed to handle all of these heavy oils. So more than half of it is exported to the United States.

Two proposals have been put forward to upgrade the heavy oil so it can be used directly by Canadian refineries. The cost would be something like $600 million per plant in addition to further investments required to bring on added production. Developing these heavy oil deposits will reduce our short-term deficiency until larger production can be secured from Cold Lake and the Athabasca oil sands.

As you can tell from some of the costs I've quoted, developing our own energy resources is an expensive proposition. What makes this development possible is the simple fact that oil prices in Canada are gradually rising to world levels. As the price rises, the development of oil reserves, like the oil sands and the heavy oil deposits, becomes economically feasible.

As a matter of interest, because of these higher prices the industry is taking another look at exploration prospects in the province of Ontario where oil was first discovered in Canada back in 1858.

Developing our own reserves, even at a relatively high cost, is preferable to purchasing increased amounts of oil abroad. Fifteen dollars spent for a barrel of oil outside of Canada stays outside of the country. That money spent inside Canada on our own oil stays in our economy.

In the past, we've spent about three per cent of our gross national product on total energy development. Now we're going to have to devote about double that figure. But as I've pointed out, that is preferable to becoming more dependent on imported oil which, in any event, would subject Canada to political and economic forces over which it would have no control.

If we are to realize our oil and gas potential, there are two requirements. These requirements can not be fulfilled by the industry alone.

First, we require a stable set of ground rules. Those ground rules are set by government-provincial and federal. We need this stability, because our industry requires long lead times. For example, it takes as long as eight years to assemble the money and men and equipment to build an oil sands mining plant. Frontier exploration takes even longer to reach the production stage.

In those parts of Canada where we have clear, understandable rules we also have the greatest amount of industry activity. The provinces of Alberta and British Columbia have, to a large degree, developed energy policies that are giving us the necessary stability.

In general, the industry feels that governments in Canada are moving in the right direction. We hope that there will be no drastic changes in policy that introduce new difficulties in the development of energy supplies.

There is a second requirement. The industry must have an adequate cash flow if Canada is to realize its energy potential.

The federal government is committed to a policy of moving the price of Canadian oil to world levels. This has helped the industry because there has been some increase in our financial return. But this return is being rapidly eroded by inflation and by the increasing costs of developing new reserves. If we are to maintain our degree of self-sufficiency in energy reserves, we will need an even larger share of the price of a barrel of oil.

We are encouraged by the attitude of government. We hope that this more positive attitude will continue and develop.

I want to comment on the impact of energy self-sufficiency on Confederation.

From the perspective of energy, there is one good reason for Quebec to remain in Confederation. As an independent entity, Quebec would have to compete on the world market for oil and gas supplies, in a world where supplies are diminishing rather quickly. At today's prices that would mean annual expenditures of more than $3 billion to purchase current oil requirements. A Quebec with no domestic supply would be at the mercy of external economic and political forces beyond its control.

Within Confederation, Quebec would continue to share in the benefits of relative energy self-sufficiency which we enjoy as a nation. As part of Canada, Quebec would enjoy a security of supply that would not be possible if she were to separate. This is not a one-way street. Quebec represents a large and important market for Canadian oil and gas production.

Let me quickly summarize the message I want to leave with you.

Canada has energy potential to develop. Much of that potential can now be developed economically, due to the increase in the price of oil. Developing this potential is making a substantial and positive impact on our economy.

The industry applauds the moves taken so far by various governments to stabilize the ground rules under which we operate, and to increase our cash flows.

Given continued stability and increased returns I am confident that our industry can do a good job in helping Canada to achieve self-sufficiency in energy supplies. And if we are successful, it will benefit every citizen of Canada. Thank you.

The appreciation of the audience was expressed by Mr. Douglas L. Derry, C.A., a Director of The Empire Club of Canada.