How Public Money Saved Syncrude

This article appears in the August issue of Oilsands Review. 

A quarter-century after Peter Lougheed retired as Alberta’s first Progressive Conservative premier, he is sitting in Calgary’s historic Lougheed House (a mansion built by his grandfather a century ago), reflecting on his government’s impact on the oil sands.

By Peter McKenzie-Brown
Lougheed won a seat in Alberta’s Legislature in 1967, the year the doors opened on the Great Canadian Oil Sands (now Suncor) mine and upgrader; he became premier four years later. During 14 years at the helm, he took an active role in oilsands development. “It was obvious that the oil sands were owned by the people of Alberta,” he says. “We consistently and constantly made sure that the industry understood that the Government of Alberta was the owner and we weren’t just there in a supervisory or regulatory way. We were extensively involved because we were the owners.”

Fast-forward to 1974, when the province’s resource ownership and its commitment to play an active role in development helped revive Syncrude during a near-death experience.

The project had received regulatory approval in 1968, but by 1974 the projected cost of the plant had more than doubled to $2 billion. At year-end Atlantic Richfield Corporation, which was developing its Prudhoe Bay assets, sent its partners a telegram saying that effective January 1st they were pulling out. The remaining participants – Cities Service Canada, Imperial Oil and Gulf Canada – were paying $666 per minute for an increasingly dicey-looking project.

Energy Shock and Energy War
The world’s first energy shock was in high gear. During the previous three years, global oil prices had more than tripled to $11.50 per barrel. While this should have created an energy boom, in Canada it didn’t.

The environment in 1973 was one of high inflation and rising oil prices, and in September Prime Minister Pierre Trudeau asked the western provinces to agree to a voluntary freeze on domestic prices. Nine days later, his government imposed a $0.40 tax on every barrel of exported oil. The tax equalled the difference between domestic and international prices, and the revenues were used to subsidize imports for refiners in eastern Canada.

Outraged that Ottawa would tax a provincial resource, Alberta retaliated in early October. The province cancelled the Alberta Oil Revenue and Royalty Plan effective at yearend, eliminated maximum royalty provisions in all leases and introduced a price-related royalty system. Days later came the Arab/Israeli Yom Kippur War and an embargo by Arab states on oil deliveries to the US and Western Europe. As international prices skyrocketed, so did Ottawa’s export tax. For the rest of the 1970s, OPEC sat in the oil price driver’s seat.

In December Trudeau announced a National Oil Policy “designed to reach Canadian self-sufficiency in oil and oil products before the end of this decade.” Among other measures, this policy added fuel to the crude oil firestorm by making royalties a non-deductible expense for corporate income tax calculations and putting price caps – euphemistically called “made-in-Canada prices” – on oil production for domestic use. Alberta responded with plans to implement a 65% surroyalty on oil. The 1974 Liberal budget made some concessions but retained in principle the right of the federal government to tax provincial royalties.

As Canadians worried about the country “running out of oil,” the producing provinces felt hoodwinked and betrayed. In effect, they argued, the feds were arrogating the fiscal benefits of rising oil prices unto themselves and encroaching on provincial resource ownership. These moves precipitated the bitterest intergovernmental conflicts in Canadian history. The first of two political wars had begun, and battles would rage for a decade.

The political environment was toxic, and it remained so during the Syncrude crisis. According to Hans Maciej, who at the time was the Canadian Petroleum Association’s technical director, “The first energy war did not end until the end of 1975 after the federal government introduced price increases for crude oil and natural gas and, most importantly, recognized the role of royalties paid prior to the price upheaval as a legitimate business expense.”

An Early Thaw
At the beginning of the Syncrude crisis, the consortium created two management teams – one team of executives to plan ways to deep-six the project; another to find ways to keep it alive. In addition to two top executives from each of the three partners, the life-support team included an executive vice president from Cities Services, Calgary-based Bill Mooney. According to Lougheed, “Everybody knew Bill and he just had a way with him of getting people involved and he’s one of the funniest guys I’ve ever met. Mooney played a major behind-the-scenes role in getting people together.”

Though the political environment was toxic, these men had the task of getting government participation in the Syncrude project. Absent other industry partners, public money was the only alternative to a shutdown. The team of seven made a dozen cross-country trips in 17 days. One breakthrough came toward the end of January, when Mooney walked unannounced into Minister of Energy, Mines and Resources Donald Macdonald’s office suite. Hearing that Macdonald was too busy to see him (meetings all day), Mooney decided to wait him out.

When Macdonald returned from Cabinet, Mooney accosted him: “I’ve got to see you.” During a brief meeting the minister outlined the concessions the federal government was willing to make. As Mooney was leaving, Macdonald said “If you tell anyone about this I’ll call you a goddamned liar.”

The Winnipeg Agreement of February 3, 1975 was the outcome of the Syncrude rescue team’s countless phone calls and meetings, and it represented an early thaw in the political climate. The participants in the 12-hour session convened to reach consensus included many of Canada’s key decision-makers. The chairmen of Cities Service, Imperial, Gulf and Shell were there, along with other executives from their companies. Three provincial ministers accompanied premier Lougheed: energy minister Bill Dickie, intergovernmental affairs minister Don Getty and attorney general Merv Leitch. Ontario Premier Bill Davis also brought key ministers to the negotiations. Federal players included Macdonald and Jean Chretien, president of the Treasury Board.

There was give-and-take from everyone except the Shell delegation, which stormed out of the meetings after an hour. They would have considered taking an equity stake in the project, but CEO Bill Daniel first wanted a government-guaranteed base price for production. His team went home empty-handed.

Many people remember the Winnipeg Agreement as a successful effort to replace with government money the 30% equity vacuum created by the departure of Atlantic Richfield: Ottawa took 15%, Alberta 10% and Ontario 5%. The private partners agreed to take a $1.4 billion interest in the project, but Cities Service and Gulf gave Alberta the option to convert a $200 million loan into equity. The province also agreed to construct a pipeline and a power plant, which were risk-free.

Particularly innovative was a royalty structure reflecting technological risks. “When Syncrude came along and we got into the negotiations,” according to Lougheed, “it was clear we could not approach (royalties) from a gross-revenue point of view. It wasn’t really fair because of the risk element involved in such a new process.”

It took eighteen months to prepare legal documentation for the Winnipeg Agreement, and signing took two days. The second day of signing, for dignitaries, was planned for the Saskatchewan Room in Edmonton’s Westin Plaza hotel. For the occasion, Bill Mooney used a pair of table knives to pry off the room’s nameplate. He replaced it with the one that said The Alberta Room.

This article is the first in a series which reflect information from the Petroleum History Society’s current Oil Sands Oral History Project, which is recording the stories of oilsands pioneers in their own words. As with the society’s previous oral history projects, transcripts and recordings will reside in Calgary’s Glenbow Archives. Peter McKenzie-Brown is a member of the team of researchers/writers behind the project.

Saving Lives in Rural India

Most women in rural India have no access to even basic medical care. More than 70% of women deliver their babies at home attended by untrained women. To compound the problem, pre- and post-natal education and care is non-existent. In emergencies, there is little help for the woman in labour or the new-born child. According to the World Health Organization, women in poorer countries are 36 times more likely to die from pregnancy-related causes than those in such rich nations as Canada.

Project: Directed by an experienced volunteer board of directors, Calgary-based CHILD Foundation has built and now operates a hospital to provide basic medical care to women and children in rural India. Supported by individual and corporate donations, plus two Rotary clubs in Calgary, Rotary District 5360 and The Rotary Foundation, Child Foundation constructed Maya Devi Charitable Hospital in the village of Sarurpur, which is near New Delhi. The facility began operations in October 2011 in collaboration with a local charity, MOTHER Foundation – CHILD’s sister charity, in India.

Impact: The hospital’s primary purpose is to provide healthcare to women and children from the community. It is staffed with four doctors and four nurses. These medical professionals provide basic medical care to local clients, plus health, hygiene, and nutrition education. Since opening its doors, the hospital has logged 40,000 service visits by patients. It has saved many lives, and improved quality of life, throughout the community.

Update: In addition to the paid staff, Canadian doctors have volunteered at the hospital. These medical teams have identified a number of key priorities to enable the hospital to better serve the needs of its community. These include installation of a pathology laboratory for blood and urine work; installation of solar power to provide reliable electricity; and the acquisition of basic diagnostic equipment – for example, for ultrasound.

Current Year: We still have much to do. Water-borne diseases are the most common source of illness, so we have identified clean drinking water as our priority. 

Improved education in health and hygiene, and in female reproduction and sexual education, are also urgent. One solution to women’s hygienic needs is to acquire equipment capable of making low-cost sanitary pads for local women. We are raising the money to purchase a machine, and will employ local women to operate it. This will meet an important local need, while at the same time providing some local employment.

This year, the budget for operating the hospital and for providing education and supplies is $45,000.

More Info: Dr. Anil Jain, volunteer Executive Director and Vice-Chair of CHILD Foundation, through the organization's website. Updated: April 7, 2014.

Leaving Libya

A hot Arab Spring and civil turmoil spreading throughout the Middle East left Canadian expats scrambling to get out

This article appears is the July issue of Oilweek; photo: CBC

By Peter McKenzie-Brown

Want to appreciate the risks facing oil-producing regions in the Arab World? Consider this: With few exceptions, companies with assets there won’t discuss business or operating conditions; they refer reporters to sanitized news releases. Expatriate workers will often talk only if guaranteed anonymity.

That said, most of the people contacted for this story confirmed an undercurrent of brutality in Libyan society. Take the case of a geologist working in Tripoli, who received a call at the office warning of a home invasion that could put his family at risk. He had received a tip from a neighbour, and immediately headed home. “I locked myself in the apartment,” he explains. “My wife had already been sent away by one of other tenants who had seen what was going on. My children were at school.”

Soon a large group of uniformed and plainclothes people arrived at the complex demanding access to the apartments, and he heard automatic rifle fire coming from the road. After breaking through the main complex gate, they managed to get security keys to the complex, and then pilfered apartments belonging to the mostly western residents. “The invaders carried side arms and automatic weapons,” he says. “This was most disconcerting for me.”

The invasion clearly had government support. His apartment seized, he and his family returned to Alberta in disgust. He soon accepted another job as a petroleum geologist in the Persian Gulf.

Atrocities
Of course, what happens to Western expatriates is less severe than what can happen to rebellious Libyan nationals. A video on CBC’s website describes a recent outrage through the voice of eyewitness Arif Pervez.

Pervez was working on a horizontal drilling project for Waha Oil Company – a joint venture owned by Libya’s National Oil Company, ConocoPhillips, Marathon and Amerada Hess. Shortly after fighting began in other parts of Libya, a military plane landed at the airstrip near Jalu, a small oasis village. Soldiers rounded up oil workers and locals, according to Pervez, then randomly selected two villagers and beat them to death.

Here is how one of them met his end: “Four men were there to torture him” said Pervez. “One was holding his hands, one was holding his feet, and they started beating him with a piece of wood, and he was shouting, screaming and crying. Then they poured benzene or gasoline on him and started burning him. He started shouting a lot, so they continued beating him. Then he died.”

Another Canadian witness to that atrocity was Rick Souther of Taber, Alberta. This was Souther’s second revolution: he had been working in Iran when that country’s revolution began in 1979. When the fighting in Libya started, he was well-site supervisor for two horizontal development wells – 2,700 metres deep with a horizontal length of maybe 1,000 metres with the potential to produce 4,000 to 5,000 barrels per day.

He and Pervez were living in the Waha complex at Jalu – 200 kilometres from the Mediterranean and another hundred kilometres from the oilfield, which is in the burning desert sands. Souther says he and Pervez both witnessed the Jalu murders. Sickened and aware of the gathering danger, they began making plans to leave. Souther first called Canada’s foreign affairs bureau which advised him not to leave the village because Tripoli was too dangerous. “‘Lady, we’ve got no food, no water.’ I told her. ‘If we stay here the villagers are going to make us fight. There’s no sitting on the fence.’” They boarded a plane to Tripoli, but it took a week of bedlam before they could get out of the country.

A study in contrast
Compare these experiences to those of employees working for Canadian companies in Libya – Suncor’s expat workers, for example.

The Canadian energy giant operates a Libyan joint venture company in the Sahara. The company evacuated its own expat employees – about 100 people – quite early after the turmoil began. It then elected to evacuate contractors who worked directly for the company and expatriates who worked for contractors within the joint venture company. The company was quite focused on keeping its people safe and out of harm’s way. There were no questions about the financial resources required for pulling out.

“We had plans in place and contingencies,” according to Suncor’s Kelli Stevens, “but we had hoped we would never have to use them. This wasn’t a Suncor thing. It was a huge exercise in cooperation between Suncor and the (Canadian) government, other companies and other embassies. We ended up evacuating more than 200 people of more than 20 nationalities.”

Libyan nationals working for the joint venture remain in the country. However, with the exodus of Suncor staff and its joint venture contractors, field operations stopped. Suncor’s share of production was 34,700 barrels per day last year – about 6% of the company’s total production and 2% of total Libyan oil production.

Suncor’s Libyan assets are operated by a joint venture with the country’s National Oil Company along the lines of the Waha Oil Company model. Acquired through its merger with Petro-Canada, the company’s Libyan assets are technically known as “Exploration and Production Sharing Agreements.” Having invested $1.4 billion in its Libyan operations, the company acknowledged in May that it might have to write down some or even much of its investment.

Another Canadian company active in Libya also acted quickly to get its employees out. Calgary-based Pure Technologies Ltd was providing pipeline monitoring systems for what is known as the Great Man-Made River water supply project. The largest underground network of pipes and aqueducts in the world, this project consists of more than 1,300 wells supplying six and a half million cubic metres of fossil water each day to Libyan cities. Qaddafi once described the Great Man-Made River as the “eighth wonder of the world.” Like Suncor, Pure Technologies had safely evacuated its expat personnel by the end of February.

The business case for Libya
There isn’t much of a Canadian presence in Libya. As the turmoil began, only six Canadian companies had established themselves in the country. These included Montréal-based SNC-Lavalin, which is heavily involved with engineering and construction of the Great Man-Made River and other projects; Hyduke Energy Services and Caradan Chemicals (both based in Nisku, Alberta); Calgary-based Pure Technologies and producers Suncor Energy and Verenex Energy. Verenex sold out to a government-owned company two years ago, after a bitter dispute with the regime over a property the company had acquired in 2005 – a property with crude potential of some two billion barrels, as it turned out.

Formerly president and CEO of Caradan Chemicals, Dale Clemmer recently resigned that position. He is now president of the company’s international division, which he owns. His company provides oilfield chemicals for production and transportation – “chemicals for treating oil from well to tanker,” says Clemmer.

When the trouble began, he says, “We had employees there from Britain, Bosnia, and the Philippines” in addition to Libyan nationals. “My manager was in the desert at the time. He despatched the expats out of the country, and he was the last to leave. The Filipino had a wife and child there, but he was out of the country getting his visa renewed, so getting the family back together was a real challenge.” Although he stopped doing business in the country when the turmoil began, he kept his staff on small retainers.

“I think there will be regime change,” says Clemmer. “Everybody seems to want it, and there is great potential in that country. I have assets there, like computers and trucks, but (when things settle down) they will need chemicals to get restarted. The world needs the oil. We have been working there getting set up for two years. We’ve made sales, but we now have new systems and ideas in place. We were all ready to take new orders, but I’m really glad they didn’t come in before this started, because we would have a hard time collecting receivables.”

Clemmer believes in the country’s future. “Libya has a lot of potential,” he says, “thousands of kilometres of great beaches and not a single hotel on any of them.” Then he adds with a flourish, “I love the international side of operations. There’s so much potential there. Canadians are really appreciated and welcomed with open arms. There’s a lot we can do.”

Canada may have a small presence in Libya, but it isn’t for lack of trying. As the Arab Spring began, 70 Canadian companies were trying to develop business there. One of those companies is Calgary-based Western Petroleum Management (WPM).

“Before we made the decision to go into Libya we did our in-country evaluation of Libya,” according to Dennis Besler, president of WPM International Inc.’s Libyan branch. “We could see since 1998 a steady progression of change. Twelve years of progress was a major contributing factor to our decision.”

“I was in Canada when the revolution started,” he adds. “We were basically in the marketing mode, building contracts in Libya. Under Libyan law you have to hire Libyan staff. Practically speaking, you need Libyan staff to negotiate your way through the difficulties of working in the country.” Besler stays in touch with his staff in Tripoli by Skype or cell phone. “I know these people personally and consider them friends so my interest extends well beyond business.”

“We’re very busy in Canada, so I was lucky. When I left Libya I had a lot of work to do here. (Before the uprising began) there were maybe a million expats Libya-wide, and many of them had good jobs. Now those people, a lot of them, are out of work.”

Besler looks forward to returning to Libya. “We first need to see stability within the government and the country overall,” he says. “WPM does wish to share in the future of Libya but for now we wait, hoping for a quick resolution to the conflict. It is difficult to hear about the loss of life when you have spent time there. To a large degree we look forward to going back because Libyans are such a gracious people.”

The real surprise
One Canadian interviewed for this article works for a Libyan company based on western models. The Trans-Sahara Group is a Tripoli-based oil services and IT company owned by prominent western-educated Libyan business people; chairman Naaman el-Bouri, who formerly worked for a Swiss bank, is based in Logan, Switzerland.

Gamal Ghobrial’s story is an unusual one – not least because his wife Samia, who had been living with family in Egypt during that country’s insurrection, moved to Libya for relief from the stress. She arrived just before the Libyan upheaval began. “There was supposed to be a peaceful march in two days’ time” says Ghobrial, “but that wasn’t what it turned out to be. It quickly became an uprising.

Calgary-based Tarco International had hired Ghobrial to develop business in Libya, but closed the operation when the 2008 financial crisis hit. Fluent Arabic and a lifetime of experience in the energy service industry were both assets, and Ghobrial soon found himself working for Trans-Sahara.

“I personally have not witnessed brutality,” he says, “but Libya is not a reasonable place to live in for many reasons. Normal day-to-day life is very difficult; quality of life is poor for an oil-rich country. We lived in what was supposed to be a nice area, but the roads were dirt, the water came from a well and there was no sewer. We experienced power cuts. To live in a compound where you can have everything to a North American standard would cost you $7,000 to $10,000 per month.”

To illustrate Qaddafi’s frequently erratic behaviour, Ghobrial cites a 2009 diplomatic incident. Canada and many other Western countries were angry that Libya had given a hero’s welcome to the man convicted of the 1988 Lockerbie bombing. In protest, foreign minister Lawrence Cannon planned to rebuke Qaddafi when his plane landed for refuelling in St. John’s, Newfoundland. To avoid the incident, Qaddafi cancelled the stopover. “Every day under there were new rules for Canadians,” he says. For six months after that, “You couldn’t plan anything. You couldn’t even plan your visa issues. Work permits were very difficult.”

According to Ghobrial, “The leader Qaddafi and his family say ‘The oil revenue is for me and my family. You have nothing to do with it.’ Qaddafi himself looks after that. This is common knowledge for everyone living in Libya, and to people who work with international oil companies. Of course, I don’t have documents to prove it.”

When a service provider does work for the oil industry, he says, “It takes six to 12 months before you get paid. That’s because the National Oil Company produces the oil and then the revenue goes to the government, which produces a budget every year giving them less than they need to pay their bills. So they pay the bills that have to be paid immediately and just wait to pay the others.”

“Because (Libya) is a dictatorship, you mostly feel secure there,” he adds. “We only became scared when Saif al-Islam (Qaddafi’s son) gave his speech threatening everyone, and saying that everyone would be punished. Because we were foreigners with Canadian citizenship, we were afraid of being harassed by pro-Qaddafi Libyans. We didn’t live in a compound, so we were quite exposed to the public.” On February 25th he and Samia decided to leave. “Things were getting very dangerous.”

“I had registered with the Canadian government as a Canadian abroad, so they had the information they needed and we were prepared to leave. My friend who had gone to the airport with his two kids and his mother in a wheelchair called me at five the next morning to say ‘Nothing is moving, so look for an alternative.’” Only an hour later, though, the foreign office in Ottawa called to say there would be a flight. After a hair-raising ride with a driver they knew, they got to the airport, where confusion reigned. “There were two vans with Canadian flags on them. The ambassador was there, everything was extremely chaotic, and then the Canadian flight was cancelled for some reason.”

Two hundred Canadians were at the airport, but cooperation among countries contributed greatly to their evacuation. Ghobrial speaks highly of the efforts of Canadian ambassador Sandra McCardell, who left the country the same day. “Some of the people went on a Brazilian flight, some went to Gatwick (London) on a British flight and we were lucky to go to Malta on a fixed-wing plane that serves the oil teams.”

Until things settle, Ghobrial and his family are enjoying the stability of Egypt.

Where is Libya headed? Everyone interviewed for this article had a sense of optimism about the country’s future. According to another senior person who requested anonymity, “The brutality (of recent events) doesn’t surprise me, because I have seen that before. What has surprised me is the success of the uprising. The low rates of pay and Libya’s other efforts to keep these people subdued…the people just said it wasn’t right. They didn’t want to be treated as third-class citizens anymore. The successes of the Arab Spring are the real surprise.”

The Leader

Rarely ever did an individual have such a singular force on a global industry as Muammar al-Qaddafi, who began ruling Libya after a successful coup on September 1, 1969. Within months of his seizure of power he had broken the pricing power which had long been asserted by large international oil companies. The result was a petroleum world which rapidly became unlike anything anyone could have imagined before.

In The Prize, his magisterial history of the global petroleum industry, Daniel Yergin describes what was to follow. Qaddafi “would plot and campaign endlessly against Israel, Zionism, other Arab states, and the West, and – equipped with huge oil revenues – he would become banker, sponsor, and paymaster for many terrorist groups around the world.” Today he is known as “the leader,” although he doesn’t hold formal office.

Rocketing oil prices were the hallmark of the 1970s, to a very large extent because of Qaddafi’s mischief and machinations. He made Libya a key player in the 1973 Yom Kippur War and the related oil price shock. Triggered by an embargo of Arab oil to countries supporting Israel, this crisis put OPEC firmly in control of prices for a decade and led to the nationalization of the petroleum industry within OPEC and beyond.

As his rule presumably comes to an end, Qaddafi’s final gift to the world is – you guessed it – higher oil prices. By using brutality to try to retain power, he has caused great damage to the Libyan oil industry and taken 1.6 million barrels per day out of the market. Once the turmoil is over, it will take years to return the country’s production to pre-revolutionary levels. The experiences of Iran, the Soviet Union, Venezuela and Iraq all demonstrate that this is so. Don’t expect WTI prices to soon drop to $86 – the low in mid-February, before the revolution got ugly.