US-CANADIAN ENERGY CONSULTATIVE MECHANISM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000500330001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: August 11, 2010
• Sequence Number: 1
• Publication Date: January 21, 1983
• Content Type: MEMO

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21 January 1983
MEMORANDUM FOR: Doug Nartwick, EB/IEP/EPC
Department of State
FROM
Chief EURA/WE /BBC
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Central Inte igence Agency
SUBJECT US-Canadian Energy Consultative Mechanism
Attached is the background material you r
tion for the US-Canadian Energy Consult
e
equested in
a Mechanism
pr
para
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beginning 1 February 1983. It was prepared by
I regret that at this time we are unable to provide you
advance copy of the NEP paper. Please feel free to dir
with an
ect any
dd' ?i nal requests for information
to meat
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Attachment:
as stated
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 Central intelligence Agency
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DIRECTORATE OF INTELLIGENCE
21 January 1983
Canada: Slight Improvement in 1983 Petroleum Prospects
Summary
Although Canadian energy officials have recently begun
to forecast a brighter future for the petroleum industry,
activity should increase only moderately in 1983 because the
industry is still suffering from the impact of the National
Energy Program (NEP) and a soft world oil market. In 1982,
drilling activity dropped 22 percent and production was off
3 percent from 1981 levels. Moreover, because of increased
taxes and, in some instances, the high cost of borrowing to
finance takeovers, many companies sharply curtailed
investments last year.
The slump in the petroleum industry may have bottomed
out last summer. Oil exploration and production increased
in the second half of 1982, probably as a result of
incentives'Alberta and Ottawa introduced in response to the
precarious' position of many firms in the industry. These
incentives, however, ended in December 1982. Continuation
of Canada's modest energy recovery, however, will depend on
conditions in the world oil market and on future government
energy policy.
Impact of the National Energy Program
In October 1980, Prime Minister Trudeau introduced the National Energy
Program (NEP) to achieve three primary goals: increasing the federal share of
energy revenues, raising Canadian ownership and control of the petroleum
industry, and achieving oil self-sufficiency by 1990. The NEP included 25X1
This memorandum was prepared b Western European
Division, Office of European Analysis. It was coordinated with the Office of
Global Issues. Comments and questions are welcomed and should be addressed to
Chief West European Division, EURA,
EUR M83-10016
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several new taxes and set up a series of price schedules intended to bring
Canadian oil prices closer to world levels. Prices of newly discovered oil
and oil from enhanced recovery were raised to world levels, while the prices
of "old" and "conventional" oil were scheduled to increase to a ceiling of 75
percent of world prices. The program also introduced special incentives to
encourage Canadian ownership of the petroleum industry.
The Petroleum Incentive Program (PIP) was introduced with the NEP to
encourage participation of Canadian companies in exploration of frontier
areas. The PIP replaced depletion allowances with a series of federally
funded grants covering from 25 percent to 80 percent of the costs of
exploration. The size of the grant depends on the degree of Canadian
ownership and control of individual oil companies. All companies operating on
federal lands receive a minimum payment covering 25 percent of costs,,w!"e
total rising progressively with the percentage of Canadian ownership.
Ottawa has been partially successful in achieving the NEP's goals.
Canadian ownership of the petroleum industry went from 28 percent in 1980 to
35 percent in 1982, and Ottawa garnered a much higher share of energy revenues
over this period. Total federal oil and gas revenues ballooned from $1.8
billion in 1980 to $8.6 billion in 1982, primarily as a result of the NEP's
Petroleum and Gas Revenue Tax (PORT). Total government revenue from oil
activity is expected to continue to rise -- albeit more slowly.
High taxes and regulated prices have cut sharply into petroleum industry
revenues. The taxes contributed to a $1 billion decline in petroleum
companies' 1981 net income from upstream operations -- exploration,
development, and production. The Canadian Petroleum Agency estimates that the
PGRT was responsible for three-fourths of the decline. For the first six
months net income was down 54 percent from the same period a year earlier.
Reduced income in turn inhibited investment in energy exploration and
development -- making it unlikely that Canada will be self-sufficient in oil
by 1990. Although total capital expenditures for the first half of 1982 rose
7 percent, the gain was entirely due to a doubling--of outlays for refining,
marketing, and transportation, which obscured the decline in upstream
expenditures. Canadian companies benefiting from the PIP increased
exploration expenditures by 8 percent, but exploration outlays of foreign
firms dropped nearly 21 percent. Overall drilling activity fell sharp
the number of wells completed dropped 21 percent from the 1981 level.
Petroleum production declined 3 percent in 1982 following a 11-percent
dip in 1981. Figures for the first nine months of 1982 show output at 1.5
million barrels per day (b/d), a decline of 15 percent since the introduction
of the NEP.
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Other Problems
The impact of the NEP has been compounded by soft world oil markets and
the overall drop in economic activity in Canada. Soft world oil prices have
kept "new oil" prices in Canada from rising as quickly as projected in the
schedule outlined in the NEP. Some major operations such as the Alsands and
Cold Lake synthetic oil projects were canceled as a result of reduced
estimates of future world oil prices. In addition, high interest rates in
1981 and the first half of 1982 added to the costs of Canadian firms engaged
in takeovers; much of the borrowing for the purchases ofi foreign-owned assets
occurred at the time that interest rates peaked.
New Energy Incentives
Reacting to the sharp drop in oil exploration and production, both
Edmonton and Ottawa introduced packages designed to stimulate petroleum
industry activities. Last April, Alberta implemented a four-year, $4.4
billion program, including an average cut in provincial royalties of about 5
percent. This program has already boosted industry revenues by $90 million.
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Alberta's incentives included a temporary $200 million program to aid the
drilling industry. Although originally designed only to help finance well
servicing, the program grew to cover almost 30 percent of the cost of drilling
conventional oil and gas development wells. Despite requests from the
drilling association to extend the program past its 31 December 1982
expiration date, it was allowed to expire. Alberta claimednava achieved
its goal of bringing temporary relief during a slow period.
Stimulated by this program and by some new oil discoveries, drilling
activity in Alberta did pick up significantly toward the end of 1982. More
than 300 oil rigs were operating in November compared to summer levels of 80
to 90 rigs. With the end of Alberta's drilling incentives program, the number
of working ri s probably will decline to about 200-250 for the rest of the
winter.
The federal government followed Alberta's lead with an industry incentive
package of its own last June. Ottawa estimates that its program will return
$1.6 billion to the industry through 1985. It includes:
-- A temporary reduction in the NEP's Petroleum and Gas Revenue Tax
from 16 percent to 14.7 percent, bringing the effective rate down
from 12 percent to 11 percent.
-- A C$250,000 credit toward the PGRT, designed to ease company cash
flow problems. Small companies will be the prime beneficiaries of
this credit.
-- An increase in July 1982 in the price of oil discovered after 1973
to 75 percent of world levels. This oil previously had been subject
to provincial royalties at "new oil" rates even though it was not
receiving the new oil reference price.
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-- The postponement until June 1983 of the new Incremental Oil Revenue
Tax, which is applied to the additional revenue accruing to
producers of "old oil" qualifying for prices above the "conventional
old oil" price set in the NEP.
In addition, payment of PIP grants began last summer after implementing
legislation was passed in July. Payments are retroactive to 1981, and Ottawa
estimates that nearly $1.6 billion will be paid out for 1981 and 1982.
Ottawa's 1982 review of the NEP projects the PIP's costs at $3.7 billion
through 1985, although more recent estimates by the Energy Ministry put the
figure at $7 billion. About 90 percent of the money will go to the small
group of companies operating in the Beaufort Sea and off the east coast.
Another recent development was the replacement in September of Energy
Minister Marc Lalonde by Jean Chretien; this move has done much to improve
relations between the government and the petroleum industry. Chretien has a
reputation as a compromiser, and he appears genuinely interested in helping
the industry through the current difficult period. Thus far, his actions
toward the petroleum industry have been much more conciliatory than
Lalonde's. For example, Chretien has been very lenient in defining the types
of oil qualifying for higher "new oil" prices.
Ottawa plans to extend customs jurisdiction from the current 12 mile
limit to a distance of 200 miles or to the edge of the continental shelf --
whichever is greater. As a result, it will be able to levy duties on the
equipment of foreign offshore drilling firms. Ottawa's intent is to end what
it perceives to be the unfair advantage foreign companies have over domestic
firms and to generate new business for Canadian suppliers.
Activity in Major Petroleum Areas
Nova Scotia
Energy officials have announced the discovery of a major natural gas
field off the coast of Nova Scotia, in an area east of Sable Island known as
Bangereau Banks. The field will be developed by a group-of companies, with a
view to exporting most of the gas to the northeastern United States.
Development will be headed by Petro-Canada (the federally-owned oil company)
and Nova Scotia Resources Limited (the province's oil corporation).
Preliminary surveys indicate that the Banqereau reserve contains 3.1 trillion
cubic feet (TCF) of natural gas, a total approximately equal to that of the
much-publicized Venture Field 40 kilometers to the west. With the Banqereau
discovery, Nova Scotia's total offshore natural gas reserves are now estimated
to be about 7.9 TCF, one-half the estimated combined reserves of the Mackenzie
Delta, Beaufort Sea, and High Arctic areas.
Mobil discovered a large natural gas field at Venture in 1979 and expects
to find at least the 3 TCF necessary to assure production, but it cautions
that at least one year of work is needed to prove the field is commercially
viable. The Nova Scotia government and Mobil announced on 10 January the
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discovery of significant amounts of natural gas in two new fields to the west
and southwest of Venture, although further drilling will be necessary to
assess their production potential. The consortium headed by Mobil that is
developing these fields requires export contracts and a transport system
before beginning production. Mobil estimates production could begin in 1988
tanning to start construction of an undersea pipeline in early 1984.
The federal government is currently renegotiating oil exploration leases
with companies operating off the east coast as required by the NEP. Ottawa
hopes through this renegotiation to ensure that progress is made on developing
the area. Mobil recently has agreed to drill more delineation wells at both
Hibernia and Sable Island. Shell, another major developer, agreed this summer
to spend $660 million exploring the Scotian shelf. Petro-Canada, Bow Valley,
and Husk signed a similar exploration agreement in duly worth $400 million.
Companies involved in east coast exploration have complained of pressure
from Ottawa and the provincial governments to speed development. If an
exploration lease cannot be negotiated, the land reverts to the crown,
increasing the pressure on companies to comply with federal wises
possibly to proceed faster than is economically desirable.
Newfoundland
Major oil and gas finds have been made off the coast of Newfoundland.
The fields may hold up to 7.4 billion barrels of recoverable oil and 72 TCF of
natural gas. Mobil's Hibernia field, discovered in 1979, is the most
promising; oil from Hibernia was included in Canada's official reserve
estimates for the first time in 1982. Production of the estimated 1.8 billion
barrels of recoverable oil was originally scheduled to begin in 1986, but it
has been delayed until 1989/90 by lack of a revenue-sharing agreement between
Newfoundland and Ottawa. This delay has increased the projected cost of
developing the Hibernia field to $5-6 billion at 1982 prices. Agreement over
offshore ownership and revenue sharing is necessary before the area can be
fully developed. Even if an offshore agreement is signed soon, most companies
have already set their expenditure programs for 1983 and have little excess
cash to put toward increased exploration.
Beaufort and Arctic
Estimates of potential oil and gas reserves in the Canadian Beaufort Sea
vary widely. A February 1982 projection by the Royal Bank of Canada put
recoverable reserves at 9.4 billion barrels of oil and 112 TCF of gas; while
Esso has estimated oil reserves at 6-10 billion barrels and gas reserves at
only 8 TCF. Actually discovered oil reserves are currently put at 200 million
barrels by the Royal Bank.
Some operators in the Beaufort Sea initially were optimistic about future
development -- in spite of the NEP -- because of the likelihood of large
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discoveries. However, the massive investment in new technology required to
achieve production, combined with the outlook for a weak oil market at least
until 1985, has recently dampened enthusiasm. For example, Gulf Petroleum
a major developer in the Beaufort Sea. with total projected expenditures of $2
billion through the 1980s -- has considered selling Gulf Canada but has been
unable to find a buyer.
Gulf's latest delineation of the Tarsiut fields in the Beaufort Sea did
not find them to be of commercial size. Moreover, Gulf has recently announced
plans to cut expenditures in northern Canada;-citing excessive costs in
developing the area. Several small Canadian companies involved in the
Panarctic group have been forced to withdraw from-the region because the cost
of exploration was too high, and Dome Petroleum, one of the largest players in
the area, is in such a shaky financial state that future development is
uncertain. Dome has not yet cut back its activity, but the company is having
extreme difficulty financing its operations
Outlook for 1983
Any increase in petroleum activity this year is likely to be slight.
Some analysts recently have been predicting a bright.year for the oil and gas
industry in Canada, but we believe that recovery will be slowed by the soft
world oil market and the re-instatement of some of the NEP's taxes. Although
new incentives and the beginning of PIP payments eased the industry's cash
flow problems in 1982, many companies still finished the year with devastated
balance sheets and will be unable to embark on ambitious programs of
exploration and development. New cash flow likely will be used for debt
retirement. Moreover, the incentives appear insufficient to support the long-
term, expensive exploration activity needed to boost the industry. Foreign-
owned companies -- those in the best position to engage in exploration
activity -- are discriminated against in the PIP grant system.
Production is projected to increase by about 7 percent to 1.6 million b/d
in 1983, and drilling probably will increase by 10 percent, aided at first by
Alberta's incentives. The flow of oil rigs to the United States has been
stemmed, but much of.the Canadian rig fleet will remain inactive throughout
the year. Moreover, provincial land sales -- an indicator of future activity
-- are still slumping.
Most of Ottawa's tax benefits will be absorbed before the end of 1983.
The incentives have provided needed cash to the industry, enabling some
companies to survive in 1982, but the record-high interest rates led to vastly
increased debt service payments for many of the smaller Canadian oil
companies. These companies are still preoccupied with reducing their debt,
and they are not in a position to significantly increase their exploration and
development activity.
The January 1983 wellhead price increase of C$4.OO per barrel will help
industry cash flows. However, with the NEP continuing and with predictions
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that world prices will remain weak, the increases scheduled for July may not
occur because domestic oil prices may reach their ceiling of 75 percent of the
world price. In addition, the taxes reduced or delayed by Ottawa last year
are scheduled to be reintroduced in June.
Another cloud on the horizon is concern investment analysts, industry
officials, and even some government officials that Ottawa will be unable to
finance PIP and may be forced to reduce grant payments in the future. This
concern may lead firms to hold back on large investment activities. Energy
Minister Jean Chretien and his predecessor Marc Lalonde, however, have
repeatedly assured the energy industry that PIP will not be modified because
of cost. Chretien has stated that the program is an essential element in
Canadianization and that expenditures for it are an important indication of
progress toward energy security. Ottawa has stressed the importance of the
exploration incentive program and would be reluctant to drop its grants. We
expect exploration to proceed slowly throughout the.next five years. holdi g
down the cost of PIP and enabling Ottawa to continue the program.
DISTRIBUTION:
1 - DDI
1 - ADDI
1 - ExDir
1 - OD/EUR
2 - EURA Production Staff
4 - IMC/CB
1 - Division File
1 - Branch File
1 - Author
DDI/EURA/WE/BBC 21jan83
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