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How Oil Thinks. From the patriarchs who first drilled for liquid gold, to the geologists, engineers, CEOs and politicians who followed, perspectives on big oil have changed this province for better and for worse.
11 Jan 2008 By: David Finch The Calgary Herald Patriarchs (1912-1919)
Alberta was an unusual place 100 years ago. The premier, Alexander Rutherford, was a Liberal and his party would dominate provincial politics until 1921.
There were only 41 cars in the province. Gasoline was purchased in tins at the hardware store. And Ottawa was encouraging exploration for oil by paying a bounty of 1.5 cents for every gallon produced--or $96 per barrel of oil in today`s currency.
But oilmen at the turn of the last century were not just in it for the bounty. Calgary`s first petroleum pioneers were dreamers, visionaries, builders and the movers and shakers in society. They helped fashion Albertan society out of the raw wilderness.
Some were lawyers, like Senator James Lougheed, Peter`s grandfather, and R.B. Bennett, a future prime minister of Canada. There were ranchers W.S. Herron and A.E. Cross, who founded the Calgary Brewing and Malting Company in 1892 and was one of the "Big Four" who created the Calgary Stampede. Archibald Dingman was the only experienced oilman in the group, providing natural gas to Calgary businesses starting in 1910.
Oil was already big business in Ontario and Pennsylvania so these Calgary dreamers were anxious to find it in Alberta, too. In 1912, these well-heeled businessmen, along with real-estate mogul Thomas Skinner, created the Calgary Petroleum Products Company. It took deep pockets to get into the highly speculative oil industry. No one really knew how to find oil, or process it, or even how to get it to market.
The oil company raised the cash to drill from the bank accounts of its founders and brought in Joseph Brown, a driller, from Geneva, Indiana. The first well was located where Herron had found natural gas seeping out of a riverbank in what is now Turner Valley. The drillers spiked together the wooden drilling rig by hand, one plank at a time, working their way up into the sky. Once completed, the drilling machinery was steam-powered with coal from the nearest mine. If the well hit natural gas, it was piped off to the steam boiler to fuel the drilling process.
Drilling a well in the old days took many months, sometimes years. When they ran out of money, company directors had to find more investors or dig deeper into their own pockets for more cash. Most wells were a bust, but Calgary Petroleum Products struck oil in its first well on May 14, 1914. People from all over southern Alberta flocked to see the well`s flare and to buy gasoline for their cars.
By the end of 1914 there were 226 oil companies in Calgary but only a handful ever drilled for oil and most of them never made back their investment. Even though the Turner Valley oilfield eventually became the largest in the British Commonwealth, producing more than about 10 million barrels of oil per year, the early days were tough. The pioneers who succeeded did so because they had money and connections in the community--and more than a little luck.
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W.S. Herron Oil Pioneer
None of the early pioneers ever made much money off the oil industry. After a fire at the Turner Valley gas plant in 1919 burned his beloved Calgary Petroleum Products` buildings to the ground, Bill Herron was forced to sell the company to Imperial Oil, an Ontario-based branch of an American oil company (now Exxon). He formed other oil companies and, after the discovery of a large supply of oil in the south end of the Turner Valley oilfield in 1936, was able to lease out some of his land to other drillers.
Herron died in 1939 before his oilfield really became a success. />
His son continued his legacy, and Herron is best known as the rancher who became an oilman and dreamed of a day when oil and gas would make Alberta rich.
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Geologists (1920-1949)
In 1926, Saturday Night, an Ontario-based magazine, asked, "Is there Oil in Alberta?" To be fair, not much oil had been found in the West. Alberta only produced 844 barrels of oil in 1924, compared with Ontario`s more than 150,000 barrels.
But Alberta production more than doubled to 183,491 barrels in 1925, or 67 percent of the total Canadian supply. A year later, Alberta boasted six refineries and 33 oil companies. Twenty-two gas producers worked fields at Wainwright-Fabyan, Redcliff, Viking, Wetaskiwin, Medicine Hat, Bassano, Suffield, Foremost, Bow Island and Turner Valley. Petroleum geologists started the Alberta Society of Petroleum Geologists in 1927 and by 1930 the province was producing 92 per cent of the Canadian supply.
Alberta`s population in 1931 was more than 730,000, or almost twice as many people as in 1911. The United Farmers of Alberta was in power, lead by John Brownlee, a lawyer. In 1930, Brownlee`s government negotiated an agreement with Ottawa that gained the mineral rights for the province. No other event in Alberta`s political history was more important.
But the big payoffs from owning oil resources was a long way off. The economic depression of the 1930s was as hard on Alberta as any other part of Canada and in 1935 the people voted in a new government, the Social Credit. Though charismatic premier William Aberhart promised to lead the province out of debt, times were so tough that the province declared bankruptcy in 1936.
The Second World War kick-started the economy, providing plentiful jobs. Petroleum production peaked in 1942 at over 10 million barrels of oil per year but fell off quickly as the original oilfields were exhausted. Geologists and geophysicists scoured the West in the 1940s looking for new oil, but it seemed as though Western Canada had no more to give. One major oil company cut back its staff to just two geologists in Alberta, a short-sighted response too often employed by the know-it-alls in lofty and distant corporate offices during a downturn. "Management had reached the conclusion that the geological department had looked over the best prospects for oil and gas fields in Alberta and that little remained to be done," says geologist Pete Sanderson many years later. "It has subsequently been demonstrated that the words `looked over` had been well chosen, but were used the wrong way around."
By 1946 the Alberta government was getting desperate. In the face of declining oil production, W.A. Lang of the Alberta Research Council gave a talk to the Canadian Club of Calgary about techniques for synthesizing oil from Alberta`s abundant coal reserves.
The scientists kept looking. Some had new theories but most, based on the earlier Turner Valley discovery, were still looking for oilfields along the mountains. In 1945, a professor at the University of Alberta offered to drink all the oil found west of the Fifth Meridian because he did not believe there was any oil under the prairies.
Unfortunately for him, geologists found oil east and west of the Fifth Meridian, a line that runs north through the central Calgary and Stoney Plain just west of Edmonton. The first of the large prairie discoveries came in February 1947, when Imperial Oil`s drillers finally hit oil after a long series of dry holes. This gusher at Leduc proved that Alberta still had lots of oil. Geoscientists went on to find hundreds of millions of barrels of oil in the coral reefs that were once part of an ancient ocean. These oilfields contained much more oil than anyone dreamed possible and it was dedicated geologists and geophysicists who helped find these important reserves.
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Helen Belyea Geologist
Born in New Brunswick, Helen Belyea joined the Geological Survey of Canada in 1947, the year oil was discovered at Leduc.
Dr. Belyea and hundreds of other dedicated scientists spent many months in the field, collecting samples, mapping the surface and even canoeing down the rivers to find outcrops to study. These thrusts of rock gave hints as to the layers deep below the surface, as did the exposed edges revealed in the mountains.Over time she and other geologists were able to piece together a picture of Alberta 350 million years ago. They mapped out the formations, trying to understand which ones trapped the oil. Belyea`s specialty was the Devonian reefs and the way they preserved the oil and gas. She published 12 scientific reports about Alberta`s oil reserves and was honoured many times for her contributions to the geology of the Canadian West.
Though not a wealthy woman, she gave back to her community in her own way. She was the chair of the Committee on the Prehistoric Park at the Calgary Zoo and served on the Women`s League of the Calgary Philharmonic Society. Her peers commended her for "her ability to work so successfully within the bastions of male privilege."
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Pragmatists (1950-1979)
Oil companies followed up on the discovery of oil at Leduc in 1947 by finding many more oilfields on the prairies, including those at Woodbend, Redwater, Golden Spike, Fenn-Big Valley and Pembina. These discoveries helped Alberta`s oil production mushroom from less than seven-million barrels a year in 1946 to 144-million barrels in 1956. In order to produce and sell 20 times as much oil, the province had to rely on experts. Engineers, pipeline contractors, bankers and many others stepped in and helped the province develop the industry.
In the fall of 1950, then premier Ernest Manning turned a valve and oil began flowing through the Interprovincial Pipe Line, "the longest pipeline in the world." On December 4, 1950 Alberta oil began flowing out of the 1,806-km pipeline into storage tanks in Superior, Wisconsin. Six construction crews of about 1,500 men worked to build "the fastest pipe in the West" at record speed, completing their task in 150 days. Though oil was discovered many times in many places in the West before 1950, the long-distance pipelines created a new era in development of the petroleum industry in Canada.
Some people criticized the premier for letting the big American oil companies invade Alberta in the 1950s. But the big multinational oil companies met their match in Manning. Back in 1938, the Social Credit government had created the Energy Resources Conservation Board to assure orderly development of the province`s resources. In May of 1948, Manning`s government stepped in and took control of a runaway oil well, Atlantic #3, shutting down production in the entire Leduc oilfield and expropriated the oil well, an unprecedented government invasion of the oilpatch. But emergencies sometimes require drastic actions. Imperial Oil`s pipeline from the field to the nearest railway line was also taken over and pressed into service to move the oil from the great bubbling and gurgling pools that had formed around the runaway geyser. Atlantic #3 eventually caught fire and created a large oil spill on a farmer`s field. But under the government`s control, the mess was cleaned up, the oil was sent to a refinery and all the costs were recovered from the sale of the oil.
The Alberta government began taxing and spending its way out of debt and into a prosperous future. Oil revenues that had provided less than one percent of government income in 1946 rose to almost 50 percent in 1958. Manning even paid out two $20 petroleum dividend payments to each Albertan adult in the late 1950s, about $151 in today`s money. But a public-opinion poll taken at the time showed that Alberta residents did not want dividends---instead, echoing the current situation, they wanted the surplus money invested in social programs and infrastructure spending. Education was considered most important (by 73 percent of people who responded to the poll), followed by medical services. Forty-five percent wanted help paying off municipal debts, while only 13 percent agreed that the money should be handed out directly to citizens in the form of a dividend. According to Manning, "the factor that influenced people was the idea of using revenue from depleting capital assets to build another asset in its place."
And so, instead of more payouts, the government paved highways. It built hospitals and nursing homes. It funded electrical and telephone systems. In 1955, to celebrate Alberta`s 50th birthday, it built the Jubilee Auditoriums in Calgary and Edmonton. Manning also reduced the provincial debt, gave tens of millions of dollars in grants to local governments and provided numerous new services to taxpayers without imposing new taxes. (The province also tripled the civil service, as the government payroll grew fourfold.) By 1957, per-capita income had increased 65 percent and an additional 320,000 new jobs had been created in Alberta, primarily tied to the oil industry. There were almost twice as many cars on the road.
Then, in the 1960s, the oilpatch experienced the first of several downturns. Oilmen made their case to the Alberta government and it created exploration incentives for oil and gas companies in 1962. By the mid-1960s the economy was on the rebound as the federal government`s National Oil Policy provided markets for Alberta oil by preventing imported oil from being sold west of the Ottawa Valley, turning the western Canadian oil industry into a protected market. Working hand in hand with industry and riding the wave of strong oil prices and access to markets for western Canadian oil, the oil companies and the provincial government became equally wealthy. In 1966 the Social Credit government had so much extra money in the public coffers, it spent as much in that one year as all the governments before it had spent in the 42 years from 1905 to 1947.
In 1971 a new premier and a new government took charge of Alberta. For a time, the new Progressive Conservative premier Peter Lougheed wrestled with industry leaders as he searched for new ways to increase his government`s income from a now declining resource, while at the same time encouraging the petroleum industry to find and produce more oil and gas. Major international oil companies moved in during this period and they and their subsidiaries began producing the majority of Alberta`s oil. Numerous independent Canadian companies were created during this period as well, including Anderson Exploration, Canadian Hunter, Husky Oil, Norcen Energy, Renaisance Energy and Talisman.
International events in the Middle East drove the price of oil from less than $4 per barrel in 1973 to over $40 in 1980. Industry benefited from windfall profits, as did provincial and federal governments, with Lougheed fighting for most of the 1970s with prime minister Pierre Elliot Trudeau over who should take the largest share of the pie.
Posting yearly surpluses, the Alberta government took on an increasingly powerful role in the economy. Provincial spending increased from less than a billion dollars in 1969 to almost seven billion in 1980. The number of civil servants grew from less than 19,000 to more than 33,000 as the province created numerous development corporations and programs. It bought an air carrier, Pacific Western Airlines, and, in 1976, established the Heritage Trust Fund to save money in a "rainy day fund" for the inevitable bust. In its first 30 years, the Trust Fund generated $29 billion of investment income and it was valued at $15 billion in 2006.
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Alberta Gas Trunk Line and Alberta Energy Company
Unique Oilpatch Players
Both Ernest Manning and Peter Lougheed believed strongly in the free-enterprise system and its ability to discover, produce and market the petroleum thatmade Alberta so wealthy. But they also believed that elected leaders had to play a moderating role in the unbridled marketplace, ensuring the protection of the common good. Manning claimed the right "to control the resources in the interests of Alberta and Canada" and Lougheed wanted "to obtain for the citizens of the Province a fair and reasonable return from the recovery of this depleting resource."
When Alberta needed a pipeline to collect natural gas, Manning stepped in and created a unique company that was neither government-owned nor profit-driven. Called the Alberta Gas Trunk Line, it was owned by the companies that produced natural gas and managed by industry experts. Its charter, however, did not allow it to make money. According to Manning, "Our whole idea was to keep the cost of gas to the Alberta people down... and to keep the cost down to the exporting companies because this gave us a competitive position when we wanted to sell our gas." AGTL eventually became Nova and is now called Nexen.
Lougheed`s government created its own unique oilpatch entity, the Alberta Energy Company, in 1974, a year before the federal government created Petro-Canada.
Alberta Energy was not a Crown corporation, like Petro-Canada.
Instead, it was managed by a skilled oilman, David Mitchell, whose arrangement with the premier was that the politician would stay clear of the day-to-day operations of the oil company and the oilman would stay out of politics. It worked well.
In 1975, the Alberta government sold half the shares in Alberta Energy to individual Alberta residents, who gobbled them up as a way to invest in the oil boom of the day. As a result, a company completely owned by the government and the people of Alberta collected part of the windfall profits of the day.
Throughout the boom of the 1970s, Alberta Energy grew quickly and, as a result of careful management, even managed to expand during the hard times of the late 1980s and become one of the largest Canadian oil and gas companies in the 1990s.
The Alberta government sold off its shares in Alberta Energy over the years, disposing of the last ones in 1993. In 2002, Alberta Energy became part of a new company called EnCana.
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Bean Counters (1980-2006)
Oil peaked in 1980 at $44.66 per barrel--the equivalent of $108.67 in today`s Canadian currency. Eight years later, it fell to $19.10 ($29.56 today). In 1998, oil was worth even less once inflation was taken into account--$21.33 per barrel or $26.06 in 2007 currency. After decades of fighting over the spoils of the oil industry, politicians and CEOs now had to figure out how to share a shrinking pie. They needed to make sure there was enough to keep industry alive if not profitable, and to sustain a high level of government spending.
The federal government in Ottawa responded to the crisis by announcing $2 billion in changes to the National Energy Program provisions. And the Alberta government cut an additional $5.4 billion through changes to its royalty and other income programs in order to provide more incentives for exploration and production.
Lougheed served as premier until the fall of 1985. His government balanced its budget by reducing the amount of income it diverted to the Alberta Heritage Trust Fund--down to 15 percent from 30 percent. In 1987, Alberta quit investing in the Trust Fund altogether. It also watched as resource revenue fell from 56 percent of provincial income in 1978 to 37 percent in 1985, while tax income remained flat. To balance the budget, it drew down on the Heritage Income Fund, which supplied 12 percent of total revenue, an amount that increased to 20 percent in 1986.
Though Alberta held the line on budgetary increases in many areas, it nearly wiped out the accumulated surplus in its General Revenue Fund with a deficit of more than $2 billion in 1983, a trend that continued through the leadership of Don Getty and the first two years of Ralph Klein`s tenure. Unemployment in the province peaked at over 12 percent in March 1983, with more than 300,000 people claiming insurance payments, up more than 70 percent in just one year. Building permits shrank by half and a full quarter of the workers in the construction industry lost their jobs. It came as no surprise at the end of the year when population records showed a net loss of almost 3,500 people, the first such loss in a decade.
For its part, the petroleum industry got what it wanted in 1984 when Brian Mulroney and the Progressive Conservatives won a landslide federal election. The feds quickly followed through on an election promise to deregulate the oil industry--a trend that had started in the United States in the 1970s--and began dismantling the Liberal government`s National Energy Program.
In 1985 Mulroney signed the Western Accord with the western provinces, an agreement that ended 11 years of controlled oil prices. He relaxed oil-export restrictions, abolished five federal taxes from the 1980 NEP and phased out incentives and grants to the industry.
By the late 1980s, when it became evident that the price of oil was not going to rebound quickly, the oilmen and the politicians sat down on the same side of the table and worked hard to preserve as many jobs as possible. As strange as it may seem, it appears that during difficult economic times, the relationship between government and the oil industry actually improves.
Owners (2007-present)
"How did we get into the position where we contributed so much to the well-being of the province and we`re despised?" a Calgary oilman asked recently. "I don`t get that."
How indeed?
The 2007 royalty review process revealed a wide chasm of misunderstanding between the public and industry. Many people in Alberta mistrust big oil and feel the government has not been collecting a fair share of income from the oilpatch fat cats. After 25 years of brutal cost-cutting, belt-tightening, program-slashing, downsizing, user fees and health-care lineups, the people of Alberta are no longer content to live in with Klein`s debt-free utopia. But the only way for the province to return to spending considerably more on infrastructure and public programs without raising taxes is to demand more for its natural resources. Back in the 1970s, when Lougheed raised the royalty rate to an all-time high and collected many other fees and payments in order to finance his attempt to diversify the Alberta economy, he became known as "The Blue Eyed Sheik" for his OPEC-like taxation of the industry.
That was a generation ago, and today`s industry leaders are not accustomed to dealing with a government that demands first and negotiates later. This is an oilpatch used to working out deals behind closed doors and without input from the public. EnCana, the former Alberta Energy (see sidebar, Page 25), was one of the companies that reacted quickly to the recommendations of the royalty review panel. "We are open to changes to Alberta`s royalties--changes that reflect the economic realities of volatile commodity prices, higher costs and the appropriate risks and rewards of long-term capital investments," said its CEO, Randy Eresman. But Eresman also suggested EnCana might cut a billion dollars from its operations in Alberta. "We would greatly regret seeing these job opportunities evaporate."
Why would a company with deep roots in Albertan history make such a strong statement? Because today`s EnCana is an international oil and gas company with operations in in the United States, Brazil, the Middle East, Greenland and France. Half of EnCana`s shareholders reside outside Canada, and its primary responsibility is to the people who own its stock.
That`s why, for example, the company announced plans in early 2007 to shipbitumen from its Alberta oil-sands operations to Illinois and Texas for upgrading. Not everyone in Alberta appreciated this decision, but Eresman had his reply close at hand. "There has been a longstanding policy within the Alberta government that wanted to do as much value-added as possible in the province," he said. "But there has also been a longstanding policy that Alberta operates in a free-enterprise way, and people will make their own decisions, based on the laws that are in effect."
No one likes change, least of all the corporate players in an international oil industry that is complex, nuanced and unpredictable. But the oil companies are not the only ones with skin in this game. That`s why, in the summer of 2006, former premier Lougheed encouraged the people of Alberta to "think like an owner" as it became increasingly obvious that the income from oil royalties was slipping.
No one predicted the economic downturn of the 1980s, but this time we can see the dark clouds on the horizon and they are building higher as they grow even darker. As we wait to see what will happen, Alberta`s housing prices have become some of the most expensive in Canada. Calgary and Edmonton`s populations have grown, creating unmet demand for roads, water and sewers, schools, hospitals and hockey rinks. The pent-up expectation that government will spend billions on expanded services in the next decade has forced the current premier, Ed Stelmach, into a confrontation with the petroleum industry. If Albertans want their government to spend freely once again, we will need to increase our take from the oilpatch by billions of dollars each year or tax residents a similar amount. In 2005, for example, more than 50 percent of provincial spending came from resource revenue, a rate similar to what was spent in the 1970s.
During past booms, the size of the petroleum pie expanded quickly enough to allow provincial governments to spend freely. But unless the price of oil and natural gas doubles, there is not much chance of a larger pie this time. Alberta`s conventional oilfields are old and nearly exhausted, even at elevated oil prices. The cheap natural gas has all been produced, while new sources will be much harder to find and more expensive to produce. And the oil-sands development process has created many social and environmental problems, consuming huge amounts of natural gas and water.
In recent years some oil companies have reported unprecedented profits. And some of them reacted too quickly and emotionally to the recommendations of the royalty review panel. Some of their leaders have acted arrogantly and the knee-jerk reaction against any increase in the royalty rate made it seem like industry was crying wolf.
But this time things really might be different. Natural-gas prices may stay low and the price of oil could drop once again. The Canadian dollar may stay strong and the economy in the United States could stall. Costs may stay high. The weather could remain moderate in both summer and winter. And a time of relative peace may visit the Middle East.
Who knows what will happen next?
But if we are to create a sustainable future, the men and women in the oilpatch and the other citizens of Alberta will need to find a new way to negotiate a fair share of the petroleum pie.
br />David Finch is a Calgary historian and the author of Pumped, Everyone`s Guide to the Oil Patch (Fifth House Publishers)
11 Jan 2008 By: David Finch The Calgary Herald Patriarchs (1912-1919)
Alberta was an unusual place 100 years ago. The premier, Alexander Rutherford, was a Liberal and his party would dominate provincial politics until 1921.
There were only 41 cars in the province. Gasoline was purchased in tins at the hardware store. And Ottawa was encouraging exploration for oil by paying a bounty of 1.5 cents for every gallon produced--or $96 per barrel of oil in today`s currency.
But oilmen at the turn of the last century were not just in it for the bounty. Calgary`s first petroleum pioneers were dreamers, visionaries, builders and the movers and shakers in society. They helped fashion Albertan society out of the raw wilderness.
Some were lawyers, like Senator James Lougheed, Peter`s grandfather, and R.B. Bennett, a future prime minister of Canada. There were ranchers W.S. Herron and A.E. Cross, who founded the Calgary Brewing and Malting Company in 1892 and was one of the "Big Four" who created the Calgary Stampede. Archibald Dingman was the only experienced oilman in the group, providing natural gas to Calgary businesses starting in 1910.
Oil was already big business in Ontario and Pennsylvania so these Calgary dreamers were anxious to find it in Alberta, too. In 1912, these well-heeled businessmen, along with real-estate mogul Thomas Skinner, created the Calgary Petroleum Products Company. It took deep pockets to get into the highly speculative oil industry. No one really knew how to find oil, or process it, or even how to get it to market.
The oil company raised the cash to drill from the bank accounts of its founders and brought in Joseph Brown, a driller, from Geneva, Indiana. The first well was located where Herron had found natural gas seeping out of a riverbank in what is now Turner Valley. The drillers spiked together the wooden drilling rig by hand, one plank at a time, working their way up into the sky. Once completed, the drilling machinery was steam-powered with coal from the nearest mine. If the well hit natural gas, it was piped off to the steam boiler to fuel the drilling process.
Drilling a well in the old days took many months, sometimes years. When they ran out of money, company directors had to find more investors or dig deeper into their own pockets for more cash. Most wells were a bust, but Calgary Petroleum Products struck oil in its first well on May 14, 1914. People from all over southern Alberta flocked to see the well`s flare and to buy gasoline for their cars.
By the end of 1914 there were 226 oil companies in Calgary but only a handful ever drilled for oil and most of them never made back their investment. Even though the Turner Valley oilfield eventually became the largest in the British Commonwealth, producing more than about 10 million barrels of oil per year, the early days were tough. The pioneers who succeeded did so because they had money and connections in the community--and more than a little luck.
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W.S. Herron Oil Pioneer
None of the early pioneers ever made much money off the oil industry. After a fire at the Turner Valley gas plant in 1919 burned his beloved Calgary Petroleum Products` buildings to the ground, Bill Herron was forced to sell the company to Imperial Oil, an Ontario-based branch of an American oil company (now Exxon). He formed other oil companies and, after the discovery of a large supply of oil in the south end of the Turner Valley oilfield in 1936, was able to lease out some of his land to other drillers.
Herron died in 1939 before his oilfield really became a success. />
His son continued his legacy, and Herron is best known as the rancher who became an oilman and dreamed of a day when oil and gas would make Alberta rich.
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Geologists (1920-1949)
In 1926, Saturday Night, an Ontario-based magazine, asked, "Is there Oil in Alberta?" To be fair, not much oil had been found in the West. Alberta only produced 844 barrels of oil in 1924, compared with Ontario`s more than 150,000 barrels.
But Alberta production more than doubled to 183,491 barrels in 1925, or 67 percent of the total Canadian supply. A year later, Alberta boasted six refineries and 33 oil companies. Twenty-two gas producers worked fields at Wainwright-Fabyan, Redcliff, Viking, Wetaskiwin, Medicine Hat, Bassano, Suffield, Foremost, Bow Island and Turner Valley. Petroleum geologists started the Alberta Society of Petroleum Geologists in 1927 and by 1930 the province was producing 92 per cent of the Canadian supply.
Alberta`s population in 1931 was more than 730,000, or almost twice as many people as in 1911. The United Farmers of Alberta was in power, lead by John Brownlee, a lawyer. In 1930, Brownlee`s government negotiated an agreement with Ottawa that gained the mineral rights for the province. No other event in Alberta`s political history was more important.
But the big payoffs from owning oil resources was a long way off. The economic depression of the 1930s was as hard on Alberta as any other part of Canada and in 1935 the people voted in a new government, the Social Credit. Though charismatic premier William Aberhart promised to lead the province out of debt, times were so tough that the province declared bankruptcy in 1936.
The Second World War kick-started the economy, providing plentiful jobs. Petroleum production peaked in 1942 at over 10 million barrels of oil per year but fell off quickly as the original oilfields were exhausted. Geologists and geophysicists scoured the West in the 1940s looking for new oil, but it seemed as though Western Canada had no more to give. One major oil company cut back its staff to just two geologists in Alberta, a short-sighted response too often employed by the know-it-alls in lofty and distant corporate offices during a downturn. "Management had reached the conclusion that the geological department had looked over the best prospects for oil and gas fields in Alberta and that little remained to be done," says geologist Pete Sanderson many years later. "It has subsequently been demonstrated that the words `looked over` had been well chosen, but were used the wrong way around."
By 1946 the Alberta government was getting desperate. In the face of declining oil production, W.A. Lang of the Alberta Research Council gave a talk to the Canadian Club of Calgary about techniques for synthesizing oil from Alberta`s abundant coal reserves.
The scientists kept looking. Some had new theories but most, based on the earlier Turner Valley discovery, were still looking for oilfields along the mountains. In 1945, a professor at the University of Alberta offered to drink all the oil found west of the Fifth Meridian because he did not believe there was any oil under the prairies.
Unfortunately for him, geologists found oil east and west of the Fifth Meridian, a line that runs north through the central Calgary and Stoney Plain just west of Edmonton. The first of the large prairie discoveries came in February 1947, when Imperial Oil`s drillers finally hit oil after a long series of dry holes. This gusher at Leduc proved that Alberta still had lots of oil. Geoscientists went on to find hundreds of millions of barrels of oil in the coral reefs that were once part of an ancient ocean. These oilfields contained much more oil than anyone dreamed possible and it was dedicated geologists and geophysicists who helped find these important reserves.
- - -
Helen Belyea Geologist
Born in New Brunswick, Helen Belyea joined the Geological Survey of Canada in 1947, the year oil was discovered at Leduc.
Dr. Belyea and hundreds of other dedicated scientists spent many months in the field, collecting samples, mapping the surface and even canoeing down the rivers to find outcrops to study. These thrusts of rock gave hints as to the layers deep below the surface, as did the exposed edges revealed in the mountains.Over time she and other geologists were able to piece together a picture of Alberta 350 million years ago. They mapped out the formations, trying to understand which ones trapped the oil. Belyea`s specialty was the Devonian reefs and the way they preserved the oil and gas. She published 12 scientific reports about Alberta`s oil reserves and was honoured many times for her contributions to the geology of the Canadian West.
Though not a wealthy woman, she gave back to her community in her own way. She was the chair of the Committee on the Prehistoric Park at the Calgary Zoo and served on the Women`s League of the Calgary Philharmonic Society. Her peers commended her for "her ability to work so successfully within the bastions of male privilege."
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Pragmatists (1950-1979)
Oil companies followed up on the discovery of oil at Leduc in 1947 by finding many more oilfields on the prairies, including those at Woodbend, Redwater, Golden Spike, Fenn-Big Valley and Pembina. These discoveries helped Alberta`s oil production mushroom from less than seven-million barrels a year in 1946 to 144-million barrels in 1956. In order to produce and sell 20 times as much oil, the province had to rely on experts. Engineers, pipeline contractors, bankers and many others stepped in and helped the province develop the industry.
In the fall of 1950, then premier Ernest Manning turned a valve and oil began flowing through the Interprovincial Pipe Line, "the longest pipeline in the world." On December 4, 1950 Alberta oil began flowing out of the 1,806-km pipeline into storage tanks in Superior, Wisconsin. Six construction crews of about 1,500 men worked to build "the fastest pipe in the West" at record speed, completing their task in 150 days. Though oil was discovered many times in many places in the West before 1950, the long-distance pipelines created a new era in development of the petroleum industry in Canada.
Some people criticized the premier for letting the big American oil companies invade Alberta in the 1950s. But the big multinational oil companies met their match in Manning. Back in 1938, the Social Credit government had created the Energy Resources Conservation Board to assure orderly development of the province`s resources. In May of 1948, Manning`s government stepped in and took control of a runaway oil well, Atlantic #3, shutting down production in the entire Leduc oilfield and expropriated the oil well, an unprecedented government invasion of the oilpatch. But emergencies sometimes require drastic actions. Imperial Oil`s pipeline from the field to the nearest railway line was also taken over and pressed into service to move the oil from the great bubbling and gurgling pools that had formed around the runaway geyser. Atlantic #3 eventually caught fire and created a large oil spill on a farmer`s field. But under the government`s control, the mess was cleaned up, the oil was sent to a refinery and all the costs were recovered from the sale of the oil.
The Alberta government began taxing and spending its way out of debt and into a prosperous future. Oil revenues that had provided less than one percent of government income in 1946 rose to almost 50 percent in 1958. Manning even paid out two $20 petroleum dividend payments to each Albertan adult in the late 1950s, about $151 in today`s money. But a public-opinion poll taken at the time showed that Alberta residents did not want dividends---instead, echoing the current situation, they wanted the surplus money invested in social programs and infrastructure spending. Education was considered most important (by 73 percent of people who responded to the poll), followed by medical services. Forty-five percent wanted help paying off municipal debts, while only 13 percent agreed that the money should be handed out directly to citizens in the form of a dividend. According to Manning, "the factor that influenced people was the idea of using revenue from depleting capital assets to build another asset in its place."
And so, instead of more payouts, the government paved highways. It built hospitals and nursing homes. It funded electrical and telephone systems. In 1955, to celebrate Alberta`s 50th birthday, it built the Jubilee Auditoriums in Calgary and Edmonton. Manning also reduced the provincial debt, gave tens of millions of dollars in grants to local governments and provided numerous new services to taxpayers without imposing new taxes. (The province also tripled the civil service, as the government payroll grew fourfold.) By 1957, per-capita income had increased 65 percent and an additional 320,000 new jobs had been created in Alberta, primarily tied to the oil industry. There were almost twice as many cars on the road.
Then, in the 1960s, the oilpatch experienced the first of several downturns. Oilmen made their case to the Alberta government and it created exploration incentives for oil and gas companies in 1962. By the mid-1960s the economy was on the rebound as the federal government`s National Oil Policy provided markets for Alberta oil by preventing imported oil from being sold west of the Ottawa Valley, turning the western Canadian oil industry into a protected market. Working hand in hand with industry and riding the wave of strong oil prices and access to markets for western Canadian oil, the oil companies and the provincial government became equally wealthy. In 1966 the Social Credit government had so much extra money in the public coffers, it spent as much in that one year as all the governments before it had spent in the 42 years from 1905 to 1947.
In 1971 a new premier and a new government took charge of Alberta. For a time, the new Progressive Conservative premier Peter Lougheed wrestled with industry leaders as he searched for new ways to increase his government`s income from a now declining resource, while at the same time encouraging the petroleum industry to find and produce more oil and gas. Major international oil companies moved in during this period and they and their subsidiaries began producing the majority of Alberta`s oil. Numerous independent Canadian companies were created during this period as well, including Anderson Exploration, Canadian Hunter, Husky Oil, Norcen Energy, Renaisance Energy and Talisman.
International events in the Middle East drove the price of oil from less than $4 per barrel in 1973 to over $40 in 1980. Industry benefited from windfall profits, as did provincial and federal governments, with Lougheed fighting for most of the 1970s with prime minister Pierre Elliot Trudeau over who should take the largest share of the pie.
Posting yearly surpluses, the Alberta government took on an increasingly powerful role in the economy. Provincial spending increased from less than a billion dollars in 1969 to almost seven billion in 1980. The number of civil servants grew from less than 19,000 to more than 33,000 as the province created numerous development corporations and programs. It bought an air carrier, Pacific Western Airlines, and, in 1976, established the Heritage Trust Fund to save money in a "rainy day fund" for the inevitable bust. In its first 30 years, the Trust Fund generated $29 billion of investment income and it was valued at $15 billion in 2006.
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Alberta Gas Trunk Line and Alberta Energy Company
Unique Oilpatch Players
Both Ernest Manning and Peter Lougheed believed strongly in the free-enterprise system and its ability to discover, produce and market the petroleum thatmade Alberta so wealthy. But they also believed that elected leaders had to play a moderating role in the unbridled marketplace, ensuring the protection of the common good. Manning claimed the right "to control the resources in the interests of Alberta and Canada" and Lougheed wanted "to obtain for the citizens of the Province a fair and reasonable return from the recovery of this depleting resource."
When Alberta needed a pipeline to collect natural gas, Manning stepped in and created a unique company that was neither government-owned nor profit-driven. Called the Alberta Gas Trunk Line, it was owned by the companies that produced natural gas and managed by industry experts. Its charter, however, did not allow it to make money. According to Manning, "Our whole idea was to keep the cost of gas to the Alberta people down... and to keep the cost down to the exporting companies because this gave us a competitive position when we wanted to sell our gas." AGTL eventually became Nova and is now called Nexen.
Lougheed`s government created its own unique oilpatch entity, the Alberta Energy Company, in 1974, a year before the federal government created Petro-Canada.
Alberta Energy was not a Crown corporation, like Petro-Canada.
Instead, it was managed by a skilled oilman, David Mitchell, whose arrangement with the premier was that the politician would stay clear of the day-to-day operations of the oil company and the oilman would stay out of politics. It worked well.
In 1975, the Alberta government sold half the shares in Alberta Energy to individual Alberta residents, who gobbled them up as a way to invest in the oil boom of the day. As a result, a company completely owned by the government and the people of Alberta collected part of the windfall profits of the day.
Throughout the boom of the 1970s, Alberta Energy grew quickly and, as a result of careful management, even managed to expand during the hard times of the late 1980s and become one of the largest Canadian oil and gas companies in the 1990s.
The Alberta government sold off its shares in Alberta Energy over the years, disposing of the last ones in 1993. In 2002, Alberta Energy became part of a new company called EnCana.
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Bean Counters (1980-2006)
Oil peaked in 1980 at $44.66 per barrel--the equivalent of $108.67 in today`s Canadian currency. Eight years later, it fell to $19.10 ($29.56 today). In 1998, oil was worth even less once inflation was taken into account--$21.33 per barrel or $26.06 in 2007 currency. After decades of fighting over the spoils of the oil industry, politicians and CEOs now had to figure out how to share a shrinking pie. They needed to make sure there was enough to keep industry alive if not profitable, and to sustain a high level of government spending.
The federal government in Ottawa responded to the crisis by announcing $2 billion in changes to the National Energy Program provisions. And the Alberta government cut an additional $5.4 billion through changes to its royalty and other income programs in order to provide more incentives for exploration and production.
Lougheed served as premier until the fall of 1985. His government balanced its budget by reducing the amount of income it diverted to the Alberta Heritage Trust Fund--down to 15 percent from 30 percent. In 1987, Alberta quit investing in the Trust Fund altogether. It also watched as resource revenue fell from 56 percent of provincial income in 1978 to 37 percent in 1985, while tax income remained flat. To balance the budget, it drew down on the Heritage Income Fund, which supplied 12 percent of total revenue, an amount that increased to 20 percent in 1986.
Though Alberta held the line on budgetary increases in many areas, it nearly wiped out the accumulated surplus in its General Revenue Fund with a deficit of more than $2 billion in 1983, a trend that continued through the leadership of Don Getty and the first two years of Ralph Klein`s tenure. Unemployment in the province peaked at over 12 percent in March 1983, with more than 300,000 people claiming insurance payments, up more than 70 percent in just one year. Building permits shrank by half and a full quarter of the workers in the construction industry lost their jobs. It came as no surprise at the end of the year when population records showed a net loss of almost 3,500 people, the first such loss in a decade.
For its part, the petroleum industry got what it wanted in 1984 when Brian Mulroney and the Progressive Conservatives won a landslide federal election. The feds quickly followed through on an election promise to deregulate the oil industry--a trend that had started in the United States in the 1970s--and began dismantling the Liberal government`s National Energy Program.
In 1985 Mulroney signed the Western Accord with the western provinces, an agreement that ended 11 years of controlled oil prices. He relaxed oil-export restrictions, abolished five federal taxes from the 1980 NEP and phased out incentives and grants to the industry.
By the late 1980s, when it became evident that the price of oil was not going to rebound quickly, the oilmen and the politicians sat down on the same side of the table and worked hard to preserve as many jobs as possible. As strange as it may seem, it appears that during difficult economic times, the relationship between government and the oil industry actually improves.
Owners (2007-present)
"How did we get into the position where we contributed so much to the well-being of the province and we`re despised?" a Calgary oilman asked recently. "I don`t get that."
How indeed?
The 2007 royalty review process revealed a wide chasm of misunderstanding between the public and industry. Many people in Alberta mistrust big oil and feel the government has not been collecting a fair share of income from the oilpatch fat cats. After 25 years of brutal cost-cutting, belt-tightening, program-slashing, downsizing, user fees and health-care lineups, the people of Alberta are no longer content to live in with Klein`s debt-free utopia. But the only way for the province to return to spending considerably more on infrastructure and public programs without raising taxes is to demand more for its natural resources. Back in the 1970s, when Lougheed raised the royalty rate to an all-time high and collected many other fees and payments in order to finance his attempt to diversify the Alberta economy, he became known as "The Blue Eyed Sheik" for his OPEC-like taxation of the industry.
That was a generation ago, and today`s industry leaders are not accustomed to dealing with a government that demands first and negotiates later. This is an oilpatch used to working out deals behind closed doors and without input from the public. EnCana, the former Alberta Energy (see sidebar, Page 25), was one of the companies that reacted quickly to the recommendations of the royalty review panel. "We are open to changes to Alberta`s royalties--changes that reflect the economic realities of volatile commodity prices, higher costs and the appropriate risks and rewards of long-term capital investments," said its CEO, Randy Eresman. But Eresman also suggested EnCana might cut a billion dollars from its operations in Alberta. "We would greatly regret seeing these job opportunities evaporate."
Why would a company with deep roots in Albertan history make such a strong statement? Because today`s EnCana is an international oil and gas company with operations in in the United States, Brazil, the Middle East, Greenland and France. Half of EnCana`s shareholders reside outside Canada, and its primary responsibility is to the people who own its stock.
That`s why, for example, the company announced plans in early 2007 to shipbitumen from its Alberta oil-sands operations to Illinois and Texas for upgrading. Not everyone in Alberta appreciated this decision, but Eresman had his reply close at hand. "There has been a longstanding policy within the Alberta government that wanted to do as much value-added as possible in the province," he said. "But there has also been a longstanding policy that Alberta operates in a free-enterprise way, and people will make their own decisions, based on the laws that are in effect."
No one likes change, least of all the corporate players in an international oil industry that is complex, nuanced and unpredictable. But the oil companies are not the only ones with skin in this game. That`s why, in the summer of 2006, former premier Lougheed encouraged the people of Alberta to "think like an owner" as it became increasingly obvious that the income from oil royalties was slipping.
No one predicted the economic downturn of the 1980s, but this time we can see the dark clouds on the horizon and they are building higher as they grow even darker. As we wait to see what will happen, Alberta`s housing prices have become some of the most expensive in Canada. Calgary and Edmonton`s populations have grown, creating unmet demand for roads, water and sewers, schools, hospitals and hockey rinks. The pent-up expectation that government will spend billions on expanded services in the next decade has forced the current premier, Ed Stelmach, into a confrontation with the petroleum industry. If Albertans want their government to spend freely once again, we will need to increase our take from the oilpatch by billions of dollars each year or tax residents a similar amount. In 2005, for example, more than 50 percent of provincial spending came from resource revenue, a rate similar to what was spent in the 1970s.
During past booms, the size of the petroleum pie expanded quickly enough to allow provincial governments to spend freely. But unless the price of oil and natural gas doubles, there is not much chance of a larger pie this time. Alberta`s conventional oilfields are old and nearly exhausted, even at elevated oil prices. The cheap natural gas has all been produced, while new sources will be much harder to find and more expensive to produce. And the oil-sands development process has created many social and environmental problems, consuming huge amounts of natural gas and water.
In recent years some oil companies have reported unprecedented profits. And some of them reacted too quickly and emotionally to the recommendations of the royalty review panel. Some of their leaders have acted arrogantly and the knee-jerk reaction against any increase in the royalty rate made it seem like industry was crying wolf.
But this time things really might be different. Natural-gas prices may stay low and the price of oil could drop once again. The Canadian dollar may stay strong and the economy in the United States could stall. Costs may stay high. The weather could remain moderate in both summer and winter. And a time of relative peace may visit the Middle East.
Who knows what will happen next?
But if we are to create a sustainable future, the men and women in the oilpatch and the other citizens of Alberta will need to find a new way to negotiate a fair share of the petroleum pie.
br />David Finch is a Calgary historian and the author of Pumped, Everyone`s Guide to the Oil Patch (Fifth House Publishers)
