People Power

Calgary ranks high on the national United Way scale, but it's the people behind the campaign that make a difference.

This article appears in the December issue of Oilweek; photo with permission of Nexen.

By Peter McKenzie-Brown

“While the world is getting better, the disparity between the top and the bottom is getting greater,” according to Talisman CEO John Manzoni. “Those of us at the top who have benefitted from an astounding couple of decades of prosperity often forget that the things that have contributed to that prosperity have actually made things worse for some people.”

“Calgary itself plays a role in that,” he continues. “It’s an oil town, a hydrocarbon city. As the price of oil goes up so do costs…the cost of food, the cost of accommodation, the cost of fuel. As a result, people get left behind. All that’s happening in the financial sector is just exacerbating the situation. I am increasingly of the view that business has a moral obligation and responsibility to help to bridge those gaps.”

Those comments represent the windup to Manzoni’s reply to my question, “Why did you agree to co-chair this year’s United Way campaign?” Now comes the pitch. “If you can do something locally, that’s all the better. Based on that perspective, (the United Way) is a great opportunity to do something that helps.”

A relative newcomer to Calgary – he assumed Talisman’s top job from Britain four years ago – Manzoni also acknowledges business reasons to become involved. “From a selfish perspective, I’m new to the city and it’s a great way to get to know more people. There are many advantages to doing this in addition to the fact that you can do some good.”

Manzoni’s co-chair this year is Sue Riddell Rose – the CEO of Perpetual Energy, which has about 180 employees locally. A native of the city, Rose says she’s “involved in the program because it aligns perfectly with my goals and my husband’s goals and my family’s goals, and our vision of what we want the city of Calgary to be.”

She adds that “The United Way has been a presence in the community for quite a long time. It’s often been said that every dollar given to the United Way contributes six dollars of benefit to the community. That’s because the United Way helps fund high-impact programs that help the city avoid certain kinds of outcomes down the road. If you do that, you can save the system quite a bit of money.”

Campaign co-chairs “come from every part of the spectrum of the Calgary community – sports figures, small business, technology. It just happened that this year they’re both executives from the energy industry,” according to Ruth Ramsden-Wood, who has been the CEO of the Calgary and Area United Way organization for the last 14 years. On average each co-chair dedicates 46 hours to the annual campaign. “They lead a cabinet of 50 people who represent every segment of our society, from major energy companies to universities to unions,” she says. They “work with those people and they meet with people throughout the community for the whole year leading up to the campaign. It’s a pretty hefty role. They become very visible in the community.”

“We put a lot of time into developing our cabinet and they develop additional cabinets in their own sectors,” adds Susan Rose. “That enables our efforts to trickle down and into the community.”

Fun

Manzoni, Ramsden-Wood and Rose give the big-picture look at the United Way. If you narrow your focus to the workplace campaign, matters get much more interesting.

“Every company has its own fun events” says Susan Rose. “It’s part of the intrigue that you can use these events to express your own creativity. Something like 1,200 United Way campaigns will take place this year, and they will all be different. Lots of creativity comes into play, and that can be defining for companies’ cultures.”

What kind of fun? Ask Melanie Swanson, an integrity analyst at Nexen and chair of that company’s 2011 United Way campaign. Nexen’s theme is “Be a superhero,” and that theme led to a public relations home run for the company.

As the United Way season kicked off, hordes of company employees donned superhero costumes to test the previous world record for “most superheroes in a single place.” According to Swanson, “It was a lot of fun to organize the event, but the purpose was to breathe life into the campaign. There was an adjudicator from the Guinness Book of World Records present, and we had to meet particular criteria.” When the adjudicator announced that Nexen’s 437 superheroes had blown away the previous world record, a jubilant crowd went wild. The event got wide-eyed publicity across the full spectrum of media – from TV to Twitter.

The superhero stunt reflects a corporate culture that strongly supports the charity. A year ago Nexen and its 1900 Calgary-area employees contributed a jaw-dropping $1.4 million to the United Way. Half the total was a corporate contribution.

Nexen’s media success was the envy of other companies. According to Peter Ingle, Imperial’s surplus property manager and co-chair of the company’s campaign, “We have fun events, but I have to admit I’m a bit jealous of what Nexen did. I’d like to do something like that. Our events have tended to be more internal. For example, we have large-scale Wii competitions among our employees.”

Ruth Ramsden-Wood never tires of telling stories about corporate fun. For example, “a few years ago a law firm auctioned a goat for its chairman, and I can’t tell you how many e-mails came in from around the country making pledges.” She adds that many companies find imaginative ways to raise money. For example, for three months each year Esso markets $25 United Way gift cards at its service stations – while supplies last, of course. From each sale, two dollars go to the charity.

When it comes to individual campaigns, companies can do anything. According to Manzoni, “to kick off our campaign we had a breakfast for our employees, and about 300 or 400 came. We need events like that to tell people the stories out there – for example, to tell them about the children who go to school without breakfast. The number in Calgary is stunning – I think it’s 20,000. People need to know that, and we need to find ways to fix it.”

Corporate Support

The high level of corporate support within Calgary has helped make the city a champion within Canada’s United Way network. Last year’s campaign raised about $52 million. In terms of total funds raised, that amount put the city in Canada’s number three spot. However, at $39.20 the city was fifth in terms of per capita giving. Fort McMurray was tops, with contributions of $64.78 per head.

Corporate support involves much more than cash, of course. First and foremost, it involves the work and commitment of individual volunteers. “If employees want to take time to work on the campaign, we let them have it,” says Manzoni, “and we find ways to make them feel special.”

Some companies lend people from their staff to the United Way. “We usually get them involved at the beginning of fall, and they work throughout the campaign,” according to Ramsden-Wood. “They become our arms and legs. I believe we have 35 this year, but in previous years we’ve sometimes had more. Companies do this to some extent because they see it as a leadership development opportunity for their employees.”

Nexen’s Melanie Swanson worked as a loaned rep with the United Way last year, and says she got a great deal out of the experience. “It gave me a sense of how much the United Way actually does. So this year I wanted to contribute again by chairing our corporate campaign.” Swanson and Peter Ingles are two good examples of how the system works, and how much effort is involved.

“I’m a big believer in the United Way and I have been ever since I joined the company 27 years ago,” according to Peter Ingle. “I think it’s a good way to be involved. The United Way targets funds in a very focused way.”

“At Esso we have two campaign chairs, and there is an overlap,” he says. “The lead co-chair is putting in maybe 20% of her time during the peak period of our campaign; I’m putting in about 10%. Next year I will do the bulk of the work while we train somebody else for the year after that. We have a really active cabinet, and we have floor leaders” whose job is to see whether their colleagues will open their hearts and wallets to the charity.

While Esso has a notional target of $1.2 million in contributions from Calgary-area employees, Ingle stresses that this is strictly an internal number. “Philanthropy is a very personal thing,” he says, “and we don’t do anything to influence where people direct their gifts. We designed the campaign to help people learn more about United Way and how it can help in our community, but we also send out a really clear message that (giving) is up to the individual.”

Nexen’s Swanson says that during this year’s peak campaign period she invested half of her time in the company’s campaign. A lot of that time went into the superhero event, which she says was designed to “increase participation in and awareness of the event.” Like Ingle, she was assisted by people on each floor who went from office to office talking up United Way giving.

In her case, they were called “Floor Superheroes,” and most of them trotted around with brochures in their Guinness-adjudicated superhero outfits. Asked how much time she and the other volunteers in her company have given to the cause this year, all she could say was “hundreds of hours.” She estimates that the cash cost of the campaign represented 1-2% of the total money raised.

Virtually all the larger companies in the energy industry make direct contributions to the United Way, but they follow quite different models. According to Ramsden-Wood, gift-matching is “really driven by the philosophy within the company.” The most common approach is gift-matching, by which companies match employees’ and often annuitants’ contributions. Gift-matching is usually dollar for dollar, but some companies match at even higher levels – in at least one case, three dollars for every dollar given by the employee.

Gift-matching can be a powerful motivator – especially since there is often no limit to the size of your gift, and you can actually direct your gift to a specific charity along those the United Way serves. Thus, whether you donate $10 or $10,000, matching funds will double the amount the charity receives. As Susan Rose explains it, gift-matching is a way “to show that the corporation is passionate about what our employees are passionate about. The United Way is not the only area where we match employee giving.”

Gift-matching can also cost a company dear. According to Ramsden-Wood, “Some years ago a retiree from Shell was giving huge amounts to the community (through the United Way), and the company matched him for every dollar he gave.” Last year, Shell and its people contributed five percent of the total raised in Calgary. Between 2000 and 2010, their contributions exceeded $32 million – a vivid illustration of the energy industry’s impact on the city’s not-for-profit agencies.

Unlike most other companies, Imperial doesn’t use the gift-matching model. Its Esso Foundation treats corporate United Way funding as part of its nation-wide community investment program. According to the company’s Jon Harding, “the total budget is based on community need in the regions where we live and operate. Over 17 communities across Canada receive funding as part of our annual United Way grants.”

People Power

While workplace campaigns are an extremely important part of the United Way calendar, the organization’s volunteers are active throughout the year.

In United Way parlance, leaders are those who give from $1000-$10,000 in a year and major donors are those who give more. According to Susan Rose, “We have a Leaders initiative, but we also have a Major Donors initiative and I’m very involved in those relationships.” As John Manzoni elaborates, “The vast amount of money comes from Leader level giving, so we want to increase leadership giving.” That is one area of the organization’s focus.

The other is to bring new people into the United Way – “to engage the younger generation.” Organization insiders describe this effort as their BeCause initiative. According to Rose, it “originated 10 years ago to try to get the aged 23 to 35 demographic – people who often don’t have the means to actually give – to become ambassadors spreading the good word about what the United Way is doing in our community. Our company actually has two BeCause ambassadors – young, high-potential employees. They are leading our United Way campaign. Ambassadors focus on the idea that if we work as a village we can make the city a better place.” It’s all about people power.

According to Peter Ingle, Esso also focuses “on getting newer employees engaged in the United Way. We encourage them to just give their time through our Days of Caring, for example.” This is a program in which a team from the company will go out and work in the community – helping repair and repaint a shelter for street kids, for example. At Talisman, Manzoni says, “we dedicate a week to the idea of having (our working groups share) ‘A Day That Makes a Difference.’ Members of our executive team get involved in volunteering somewhere, and people get involved with them.”

“I am inspired by the amount of work the many people involved in the United Way campaign actually do,” says Ruth Ramsden-Wood, who will retire this winter. “We are a chronically understaffed not-for-profit organization, and it is these people who make possible what we do each year.” 

Calgary Rising

The world's greatest concentration of energy knowledge resides here. 

A cow town no more, Canada’s oil and gas capital sets its sights on Houston as petroleum capital of the world

This article appears in the December issue of Oilweek

By Peter McKenzie-Brown
Could Calgary become the centre of the petroleum world, finally shedding the century-old moniker of “Cow Town”? Many people think it’s not only possible, but inevitable.

Consider the views of Heather Douglas. “When I was president of the (Calgary Chamber of Commerce), I used to challenge visitors to name another city that had the intellectual knowledge about energy that Calgary has,” she says. Now a VP at Athabasca Oil Sands Corp. she adds, “That knowledge can be applied to any form of energy – nuclear, solar – not just oil and gas. We are already one of the world’s premier energy centres, and in the 21st century energy issues will endlessly challenge global economic and environmental systems.” Already in the big leagues, the city needs to get ready for growth.

Gary Leach puts the possibilities into a broader context. The executive director of the Small Explorers and Producers Association of Canada (SEPAC), Leach argues that “Houston was the late 20th century’s global energy capital. It’s now in decline, and Calgary is in the ascendant. A few things could affect (Calgary’s growing dominance.). What if the Mackenzie Valley and Alaska Pipelines are constructed, making Alberta the distribution centre for Arctic gas across the continent? Even if that doesn’t happen, within the next 20 years hundreds of billions of dollars will be invested in this province to develop the oilsands, and Canada will become a net exporter of millions of barrels per day – maybe 5 million barrels per day, most of it from the oilsands. The numbers are eye-popping.” According to a recent CAPP forecast, this country’s oil production will rise from 2.8 million barrels per day last year to 4.7 million in 2025.

“Looking back 20 years from now,” Leach adds, “we will see Calgary as a city of global importance” in more than energy. “Part of that is because of Canada’s energy and other resource surpluses. The other is the fact that Canada is one of the few countries in the world with food surpluses,” and Calgary will continue to be an agribusiness centre.

Constant Mixing
For decades Calgary has been home to the largest number of major head offices in Canada outside of the Toronto area, which has five times the population. Calgary is a corporate city, which arranges finance and makes business decisions. It is a technical centre, with an amazing array of scientific and technical skills. It is a management city, with seasoned executives continually making high-stakes decisions.

A unique mix of characteristics have set Calgary up for growth and increasing strategic importance in the energy world. Within the city’s ten blocks – the business part of downtown – is an extraordinary concentration of expertise. This includes the largest concentration of geological talent in the world, for example. Alberta’s petroleum industry has traditionally produced from conventional oil and gas formations that on a world scale are relatively modest. The industry developed strong drilling, engineering and technical skills at least partly in response.

Other areas of expertise include management, legal and accounting skills; finance and economics; technological development and environmental innovation. These skills developed in an entrepreneurial climate which takes a competitive delight in financing, exploring, developing and overseeing production from the geologically complex Western Canada Basin.

Underpinning the entrepreneurial environment is a fair and transparent regulatory system. Alberta’s system of land auctions and western Canada’s efficient regulatory systems make hydrocarbon development an attractive proposition. There is an enormous wealth of oil and gas data that must be made available by law. In Alberta, that information is mostly available through the Calgary-based Energy Resources Conservation Board.

With its concentration of companies, executives and expertise, Calgary is now the Canadian city you have to be in if you want to be in energy. You can’t be in Regina or Winnipeg or Toronto and be in the oil business. “In the last 20 years we have had the National Energy Board move here from Ottawa,” says Leach. “We had Shell and Imperial and TransCanada move here from Toronto and Enbridge moved its headquarters here from Edmonton.” Gulf Canada came indirectly, when Petro-Canada bought it out; so did BP when it acquired Amoco. “Calgary now has the densest focus of oil industry talent in the world between the Bow River and the Canadian Pacific rail tracks,” he says. “Everybody here is within a five or 10 minute walk of everyone else. That dense connectivity has created a unique and creative mix. There’s a constant mixing of competitors and collaborators.”

An unusual characteristic of Canadian business is that companies tend to go public at a very early stage – a tradition that in Calgary seems to be on steroids. There are hundreds of start-ups and other small energy companies, many of which have gone public. Forty per cent of the world’s 995 publically traded energy companies are headquartered in Calgary. Those companies represent about 30% of Canadian stocks by market value.

One of the reasons they are here is the resource potential. According to Heather Douglas, “Alberta is well-positioned to be a leading energy producer for decades. Challenging unconventional resources – oil sands, shale, tight and sour gas – are all a vital part of our future.”

The World’s Energy Cities
There is an organization known as the World Energy Cities Partnership, with 16 members. Besides Houston and Calgary, these cities include, for example, Aberdeen, Scotland; Atyrau, Kazakhstan; Dammam, Saudi Arabia; Daqing, China; Stavanger, Norway; and Tomsk, Russia. Canada is the only country to have three “energy cities” – the other two being Halifax and St. John’s.

How do the world’s other energy cities compare to Calgary? “Many of these centres have the disadvantage that they are dominated by a few very large producers, many of them state-owned,” according to Leach. “For example, Rio de Janeiro is the centre for Brazil’s offshore oil production, but it’s dominated by Petrobras.”

Other cities have other problems. “To be a serious contender as an oil and gas centre, you have to have the rule of law, democracy, and a stable environment,” Leach says. “You have to have transparent laws and regulation. You have to be a place where people will invest for the long term.” In many energy cities, few or none of these factors exist: Think China, Iran, Kazakhstan, Russia, and Saudi Arabia. Sudan, anyone?

What about Europe’s energy cities? “Aberdeen is only a service centre for oil and gas. It’s not financial. It doesn’t rival Calgary in any way,” according to the flag-waving Leach. “The same is true of Stavanger: It’s an important regional support and service centre, but that’s all. And of course North Sea oil production is declining rapidly, and that’s going to affect the relative rankings of those two centres…. Only Calgary, Houston, Dallas and London can say ‘We have big companies, we have oil and gas assets, we have a lot of financial strength, and here is where decisions are made.’”

London is a special case. It’s a financial superpower, of course, and it is headquarters for BP, Shell and some producers based in the North Sea. However, because energy is a relatively small part of its economy, it really isn’t an energy city.

The Rise and Decline of Houston
Houston’s status as the world’s dominant energy centre is fairly new. Until 1986 there were five significant oil centres in the US: Houston, but also Dallas, Denver, Oklahoma City and Tulsa.

When the oil industry went into a 20-year slump with the 1986 oil price collapse, much of the industry moved from Tulsa, Oklahoma City and Denver to Houston, which also benefitted from explosive growth in Gulf of Mexico drilling. Dallas is still an important centre, but primarily because ExxonMobil calls it home.

With its port and pipeline connections, Houston has become the world’s largest refining hub. It is an extremely important centre for petroleum technology, especially for offshore drilling and production. Still the world’s premier energy city, Leach argues that “its best days are behind it. As Calgary’s potential waxes, Houston’s is going to wane. We have the potential to rival them, not only in the oilsands but because of the prospect of Pacific Rim exports, for example. Calgary can become a Pacific Rim energy capital. This isn’t fantasy: Chinese, Japanese, Korean and Malaysian (companies are already) here.”

Already snapping at Houston’s heels, Calgary one day may take over. According to Chris Lee, managing partner of a resource consultancy provided by accounting giant Deloitte Touche, this country “has the opportunity to be an energy superpower. To do that we have to ensure that issues around transportation infrastructure are resolved. We need a national energy strategy. We have to deal with potential labour shortages and cost overruns, and we need a more positive public image for the oilsands. The future of the oilsands is incredible. Just imagine what would happen if (bitumen) carbonates became economic! What would this city be like?!”

Heather Douglas thinks Alberta should seize the moment to establish a Canadian benchmark for international trade. Right now world oil prices are quoted in reference to foreign crudes – mostly West Texas Intermediate (WTI), Brent and Dubai. “We usually sell at a discount to WTI,” she says. “Brent production is rapidly declining, while Alberta production is growing. We need to create a Canadian benchmark that is internationally recognized – maybe a price based on upgraded bitumen.”

Awesome
The Economist recently ranked Calgary as number five on its list of the world’s 100 most liveable business cities, and a Houston-based publication named Rigzone named the city number 2 in its list of the top ten energy centres to be transferred to – citing the Rockies, the fishing and the Stampede. (Dubai was number one, because of its tall new buildings and its shopping.)

And some months ago, 17-year-old Megan Butlin, on her way to Sweden as an exchange student, delivered a presentation to my Rotary club. It was a trial run for a presentation she would give to her Stockholm sponsors. According to one of her slides, “Statistically speaking, Calgary is 100% more awesome than Edmonton.”

Is any of this stuff really true?

Because of its proximity to major oil deposits – in the early days, Leduc and Pembina; recently, the Athabasca and Cold Lake oilsands deposits – Edmonton has become one of the world’s premier operations and service centres for the petroleum industry. It has fabrication and manufacturing capacity that would be the envy of virtually any other oilfield service centre. The University of Alberta is a jewel in the city’s crown, and it has been a centre of oilsands research since the 1920s.

The area is Alberta’s refining and petrochemical centre – notably the “Industrial Heartland” northeast of Edmonton. That industrial region has grown organically since the late 1940s, when Imperial Oil brought a tin-pot World War II refinery down from Whitehorse to process crude from nearby Leduc and other new fields. Now the beneficiary of more than $25 billion in investment, this 582-square-kilometre region hosts 40 large companies and many small ones. Together they operate numerous refineries and petrochemical plants, an upgrader, pipelines, service companies and numerous other interdependent businesses.

As the oilsands enable Canada to become an energy superpower, Edmonton will continue to serve as the staging area for the world’s biggest petroleum projects – most of them encircling another dynamic Alberta city, Fort McMurray. That, too, is awesome.

Caught in the Net

With the growth of social networks and electronic trading systems, it's easier now than ever before to trip over insider trading prohibitions

This article appears in the August issue of Oilweek

By Peter McKenzie-Brown
If you don’t get caught, breaking the law can pay quite nicely – especially the offense of insider trading. Consider the case of William Bint. As the indexes of publicly traded oil companies were stretching toward their May 2008 peaks, he bought 38,000 shares of Canadian Quantum Energy Corporation at just under $.30 per share. At the close of trading that Friday afternoon – just after he’d bought his shares – Quantum issued a press release disclosing the acquisition of a prospective natural gas property in Québec.

When the markets opened the following Monday, Bint was richly rewarded. He liquidated his $11,110 investment from the previous Friday, netting $156,443 through a few simple trades. From beginning to end, less than a week had elapsed.

Unfortunately for his reputation and his net worth, the Alberta Securities Commission (ASC) investigated and suggested that Bint had benefitted from illegal insider trading. He had, after all, helped negotiate the deal that drove Quantum’s stock price into the stratosphere. After a hearing by an ASC tribunal, Bint agreed to pay an administrative penalty of $234,000 and $5,000 to cover investigation costs. In addition, the commission restricted his trading privileges for two years.

Now retired, Bint is one of eight Albertans listed in the Canadian Securities Administrators’ list of found to have participated in illegal insider trading last year. Six of those prosecuted traded in energy shares. Looking outside the province, last year three Quebeckers were found to have committed insider trading, and so were two Ontarians. No one else in Canada was found to be at fault. Put another way, a province with 10% of Canada’s population was responsible for 60% of the country’s infractions.

Really?
Is this tabulation credible? For example, did absolutely no one in British Columbia trade a mining stock without inside information? That seems unlikely, and it lends support to the idea that the ASC is a very effective commission.

But now consider the case from the other point of view: Forty per cent of the world’s 995 energy companies are headquartered in Calgary, and those companies represent about 30% of Canadian stocks by market value. In all of Canada, are there only six people per year, say, who use illegal insider trading to profit from this dynamic sector? Really?

To find out, I talked to Marc Arseneault – the ASC’s enforcer. As the manager for assessment, market surveillance and investigation, he is responsible for enforcing the rules that apply to this form of white-collar crime. “This is a very difficult problem to investigate” he says. The commission has an insider trading team of five, plus access to legal staff when litigation is required.

"Under our act we can prosecute these cases in provincial court or we can go before an administrative tribunal. Those are the two avenues available to us. We don’t take the case to court unless our evidence is beyond all reasonable doubt. When our evidence is simply a matter of balance of probabilities, we use an administrative tribunal. Those are important distinctions." In either case, the matter is likely to become a matter of public record. For example, tribunal decisions, which summarize evidence and agreed sanctions, are posted on the organization’s website.

Avoiding that kind of public humiliation is a big motivator for those who are caught, and the commission does offer an informal third alternative. According to Arseneault, “Sometimes we have settlement discussions that make the need for an administrative tribunal unnecessary. If we can get someone to give us an admission and agree to sanctions that would be within the proper realm, that frees up resources for us and it works for everyone. If someone says ‘Yeah, I did it’ and is willing to make amends, then we are willing to have that conversation” outside the tribunal process.

“We aren’t here to penalize people,” he says. “Criminal law penalizes. Our goal is to deter people from illegal trading. We aren’t here to punish them, but to discourage them.”

Pace of Change
Insider trading in general is not illegal. If you are a designated insider – a director or executive of a company, for example – you can trade in company shares. You just can’t do it on the basis of privileged information, and you have to report your trades to the ASC within ten days.

Illegal insider trading is different, and it’s is a surprisingly complex problem. It has two elements: first, you have access to undisclosed material information; second, you trade on that information before it is publically released. And critically, you don’t have to be an insider to be guilty of insider trading. You don’t have to be a director or officer of the company to be at fault. In fact, the people caught are rarely corporate executives or directors. They are actually more likely to be outsiders than insiders – for example, employees familiar with a deal or a new development at law firms, investment banks, geological consulting firms, drilling service companies and even printers.

Illegal insider trading and the related infraction of “tipping” are increasingly difficult to control – and part of the problem is partly that they are poorly understood. The key is that if you have access to undisclosed material information you automatically become an insider by virtue of having a “special relationship” with the company.

According to Arseneault “I can’t tip someone if I have insider information. If I (break the rules and) provide someone with that information, I put them in the category of having a special relationship with the company, and their trading would be considered illegal insider trading.” Thus, even if the information you have is fifth-hand and you’ve never even heard of the company in question before, trading on the basis of undisclosed material information makes you guilty of illegal insider trading. If you pass this information on to another person, you’ve committed the offence of “tipping,” which is also subject to fines, sanctions and, in extreme cases, jail time.

The rules are strict. However “because of the nature of the oil and gas industry in Calgary there is a lot of opportunity to trade on insider information,” acknowledges Arseneault. “That information should be contained. Once it gets out of the container, troubles begin” – and that trouble is increasingly difficult to reign in. There are many new platforms on which people can trade, and even micro-cap companies can be listed on a number of exchanges. There is computer trading, there are social networks and there are online sites that promote stocks. Also it’s increasingly easy to put smaller trades into different accounts – your own, but perhaps also those of a spouse or a trusted accomplice – to ward off suspicion.

“The system is evolving very quickly,” Arseneault concedes. “We have to respond to that, so we’re pushing harder.” As evidence of the pace of change, the legislation governing securities regulation has changed several times since receiving royal assent a decade ago. Changes through order-in-council have been even more frequent.

Penalties
Is enforcement more stringent in Alberta or are acts of commission more common? It’s possible that the ASC had more successful prosecutions than Canada’s other securities commissions in recent years because the commission is more vigilant and aggressive in combatting insider trading. It’s also possible that there are more prosecutions in the province because there is a bigger pool of offences. The answer to this conundrum is unknowable, although Gary Leach – the executive director of SEPAC – thinks senior people in the patch have powerful financial reasons not to transgress. “The oil industry is a close-knit community, and you have to have a sterling reputation to succeed. You want to go back to capital markets year after year. One offense will make it a lot harder to do that.” If caught, an offense could also get you fired or expelled from the board.

The ASC’s investigation and enforcement tools seem relatively limited, making the challenge a big one. “We work with other agencies and we have a network of contacts that help us stay informed,” Arseneault explains. “We have to stay on top of the news and the markets. We carry out market surveillance, including real-time computer surveys. We analyse trading in individual stocks, we analyse trading by individuals, we talk to people and we summon documents. This enables us to develop a case.”

Most of the ASC’s cases are generated through market surveillance conducted by the Investment Industry Regulatory Organization of Canada (IIROC) and through post-trade investigations conducted by commission staff. Arseneault is reluctant to provide details about his investigations, but a couple of red flags are obvious. If people have traded in large numbers just before a deal is announced market, share volume spikes. This sends up a flag that IIROC can easily detect. The discovery that an individual under investigation recently opened new accounts for trading is a different kind of flag – one that would greatly interest commission investigators.

Most illegal insider trading is treated under administrative law, and therefore isn’t criminal – but don’t let that lull you into complacency. In 2004 Canada created the first specific Criminal Code offences of improper insider trading and tipping. The legislation also made it a crime to threaten or retaliate against employees who blow the whistle. The legislation applies to the “most egregious cases” of illegal insider trading.

The penalties? Conviction carries up to ten years in the slammer for each offence. Tipping carries a maximum five-year term. They aren’t worth the risk.

In the Centre of the Storm

This article on SEPAC chairman Stan Odut appears in the April 2009 issue of Oilweek magazine; graphic from here.

By Peter McKenzie-Brown

Toward the end of a long and thoughtful interview, a smile flickers across Stan Odut’s face. The topic of his grandchildren has come up, and he brings out a photo of the four who are aged seven and older. Wearing Ukrainian dress, they are dancing at a multi-cultural festival in Calgary. A Chinese dragon dance takes place in the margin of the picture, suggesting the great diversity of today’s Alberta. His pride is palpable and infectious, and he’s probably thinking back on a life well lived.

Odut’s story is exactly contemporaneous with that of Canada’s modern energy era. Born in Germany just as Imperial’s Leduc #1 well ushered in Alberta’s post-war conventional oil age, his family migrated to “a very poor farm” near Dauphin, Manitoba, where he grew up. The new chairman of the Small Explorer’s and Producers Association of Canada (SEPAC) moved to Calgary after earning an engineering degree from the University of Manitoba in 1969. Forty years on, no one is prouder of his city or his province than Stan Odut.

As SEPAC chair he is the voice of junior oil, and he urges small companies to join the trade association. “Membership isn’t expensive, and SEPAC can help you get your voice heard by provincial and federal politicians.” With more than 450 members, the organization describes itself as representing “Canada’s oil and gas entrepreneurs” – a tag line the association has actually trademarked.

According to Odut, the small companies need to “press for revised regulations, cutbacks in bureaucracy and a more efficient industry.” He has strong views on the changes needed to return health to the juniors.

Background: His early career included stints with Hudson’s Bay Oil and Gas, Texas Gulf and Canterra Energy – larger companies that were eventually absorbed by acquisitors. After finding himself at Husky after its 1991 takeover of Canterra, he left that corporation and began working with smaller companies.

He was one of the founders of Del Roca Energy, which eventually sold out to Tusk Energy. Five years ago he formed privately-held Sifton Energy, which he serves as president and chief executive officer. Sifton has 80 shareholders, ten employees and daily production of 950 barrels of oil equivalent. Odut’s original exit strategy was to sell out to a trust “but now with the downturn, we’re struggling a bit to keep on going. There would be no advantage in going public, though. Public companies are so badly discounted that there would be a real disadvantage to doing that.”

Now he begins to address his key messages. “The sources of capital for the junior sector are equity, debt and cash flow,” he begins. But in today’s environment, “many companies are already mired in debt and credit lines are being pulled. You can’t get additional debt coverage. You can’t raise any equity because there is no reason for investors to put money into the energy business right now. And governments (provincially in particular) have strangled cash flow. So help me with the equation: you’ve got to get one of those factors to change to get the business going again.”

Odut describes the economic situation as “dire”, and observes that it has built up over several years. The treatment of trusts has been a major contributor. Another has been the loss of the Alberta royalty tax credit. “Actions by provincial and federal government have debilitated our industry”, which is mostly headquartered in Alberta. The economic environment is becoming similar to that of the 1980s, when exploration and development collapsed, layoffs replaced hectic hiring, and Alberta’s rural areas found themselves with little work on the rigs or in oilfield construction. In both periods, the junior sector was hit particularly hard.

Just as westerners with long memories generally finger the National Energy Program as an important cause of decline in that earlier period, Odut places blame for the deteriorating situation on Alberta’s new royalty regime. “It has resulted in fewer jobs, less activity and less money in government coffers.” He acknowledges that it has been “more than the royalty regime that has killed activity…. It’s also been oil and gas prices – but those prices are the same in Saskatchewan and British Columbia” where activity is still relatively strong. In Odut’s view, Alberta’s new regime helped drive activity into the other western provinces.

“The Alberta advantage seems to have disappeared,” he laments. “You can see it in municipalities increasing taxes on infrastructure, the cost of obtaining surface leases or the new royalty system. Alberta’s bureaucracy now seems to be anti-development.” While he acknowledges that “there are land bargains out there,” he stresses that “you need cash to take advantage of them. And if I put on my Alberta resident’s hat, should I be happy that provincial (mineral rights) are being sold for a song?”

As this article goes to press, the Alberta government has promised measures that will provide relief for the juniors, and the government has agreed to consult with SEPAC and other trade associations. “My advice on help is the sooner the better,” says Odut. “We have already lost the winter drilling season. Now we have to concentrate on (getting activity going during) the summer drilling season.”

Incentives: Only two years ago, when oil prices dropped to $50 per barrel, there was no let-up in investment in Alberta. Yet last year, when average oil prices hit their all-time high, that changed. Why? Because investors no longer feel they can count on a stable regime in Alberta.

“Large companies are still going around the world and investing,” says Odut. “They know that one pass through (countries with immature petroleum basins) can give them a good short-term return. They are less concerned if the regime changes. (But Alberta) is not a one-pass-through basin. You need to know there will be a stable return over time.” After the recent changes in royalties, that certainty is no longer there.

Although Alberta is a mature basin, Odut is optimistic about its future. “Better than 35 per cent of the conventional oil resources are still there waiting to be recovered,” he says. Odut’s optimism about Alberta’s productive potential is qualified by deep skepticism about its exploratory potential. “Right now, only one (exploratory) well in seven is a decent well. I think there are still a lot of good opportunities in the conventional sector. The opportunities are in technology, because of improved recovery methods. We aren’t going to find a lot of great new fields, but we can get a lot of left-over barrels of oil using new technologies. We need incentives to do that.”

“The present regime,” he says, “penalizes you if you come up with a good well by increasing royalty rates from 35 percent max to 50 percent max”. While acknowledging that at present prices oil royalties are “at the bottom of the scale,” he stresses that the present system “penalizes horizontal wells, which reduce the industry’s environmental footprint. If you are successful, instead of having four 10-barrel-per-day wells, you could have a single horizontal well producing 100 barrels per day.” However, because the present regulations impose lower royalties on less-productive wells, “you shoot yourself in the foot by drilling (horizontally) under the existing regulations.”

At the end of last year, the Alberta government announced a 5-year window in which companies could apply the old royalty system to new wells. Stan Odut wasn’t impressed. “It doesn’t address the basic question of what you are going to drill with. You need debt, equity or cash flow to drill, and it really didn’t address any of those issues. Equity I can’t raise any, credit there isn’t any and governments are strangling cash flow.” The royalty regimes are better in BC and Saskatchewan, he says, “and BC is tweaking its system to make it even better. The biggest problem is here in Alberta.”

The outcome is that large companies have taken their cash flow and vacated the province, leaving it to the junior sector. Yet the junior companies have little to work with. To turn this around, he says, “You have to acknowledge that capital will flow to where it will get the best return. Our fiscal regime does not encourage the flow of capital into Alberta.”

What’s a government to do? Provincially, he suggests incentives for horizontal wells. Federally, he argues for changes in flow-through tax rules.

If Edmonton encouraged small companies to use horizontal wells, production would go up and the environmental footprint would go down. “You need to encourage investment in horizontal wells, as Saskatchewan does. They have a royalty holiday for horizontal wells – you pay a very small royalty on the first 100,000 barrels or so. That way the investor is able to recover his money before the government begins receiving its take.”

Ottawa, on the other hand, should take steps to expand flow-through investment. Under the present flow-through rules, companies can pass tax breaks associated with exploration directly to individual investors. The focus of that program, however, is exploration, the success of which is in decline. “Flow-through rules should (be changed to) enable companies to put flow-through money into development wells, where the risk is lower. (The federal government should) make larger sums available, so slightly larger companies could take advantage of it. This would encourage investment, and that investment would be used for drilling. Companies could choose whether they wanted to put money into exploratory drilling or development. It would give you much more cash flow.”

Peak Oil: Stan Odut is one of a growing contingent of oilmen now subscribing to the concept of peak oil – the notion that the planet’s maximum rate of oil extraction is at hand. After that point arrives, the rate of production will enter terminal decline. “I believe we probably aren’t going to see an increase on the supply side globally,” he says. “With the global economic situation there has been (crude oil) demand destruction, but I would add that there has also been supply destruction because drilling has been declining, producers are shutting in supply” and many large projects, world-wide, have gone on hold.

Prices are low because “right now oil is overbalanced on the supply side,” he says. “When things do recover, I think we are going to be in a really tight situation. The horizon might be shorter than many people predict. I think within the next five years – certainly within the next ten – we will meet a supply crunch probably like we have never seen before.”

“There’s a huge disconnect between developing world and developed world consumption,” he says. “Either we have to tap some alternative resources which we don’t really know about today, or many of us in the developed world are going to have to really cut down on our oil consumption. The developed world has to contract its consumption a lot.” This sounds ominous, and Stan Odut quickly adds that he doesn’t want to be a scare-monger.

“I’m getting a bit long in the tooth and I have an eye for what my grandchildren are going to face as we go down the road. I think they are going to be facing a different world from the one we are in today.”