"We Were Canadians First"

With the news of former premier Peter Lougheed’s death on September 13, aged 84, an outpouring of grief began throughout Alberta – indeed, throughout Canada. Rarely has a politician ranked so high in the esteem of the people he or she has been chosen to lead. 

This article appears in the November issue of Oilsands Review 

By Peter McKenzie-Brown

The tributes and commentaries ranged from reflections by ordinary citizens to formal commentaries from the great and the good. One of Lougheed’s biographers, Alan Hustak, observed that he was “the architect of modern Alberta” who, among many other achievements, helped turn the province’s petroleum industry into a global powerhouse. Nothing you can say about this great man seems over the top.

Lougheed’s career in the provincial Legislature began in 1967 – coincidentally, the year the Great Canadian Oil Sands (Suncor) plant was commissioned. The convergence is compelling, since several of his greatest achievements were oilsands-related. Energy issues dominated his years in power (1971 to 1985), and he was a decisive figure in what became known as Canada’s energy wars.

Among governmental issues, oilsands remained a core interest to the end of his long life. As he said in an Oil Sands Oral History Project interview 18 months ago, “After I left government in ’85 I said to my successor, Don Getty, ‘Don, I will stay out of most things you’re doing… but the one thing I am going to stay involved in is the oilsands, because I am very interested in its evolution and its development.…’ Things happened so quickly [under] Premier Klein. I have stayed involved in the oilsands in a more public way and I have discussed it frequently with Premier Stelmach as well. Perhaps more than any other, that’s the one subject I have stayed involved in since I left government.”

The Energy Wars: Lougheed’s early political battles began with a shot across the bow from Prime Minister Pierre Trudeau.

Inflation had become a national problem, oil prices were rising, and on September 4, 1973, Trudeau asked the western provinces to agree to a voluntary freeze on oil prices. Nine days later, his government imposed a 40-cent tax on every barrel of exported Canadian oil. The tax equalled the difference between domestic and international oil prices, and the revenues were used to subsidize imports for eastern refiners. At a stroke, Ottawa began subsidizing eastern consumers while reducing the revenues available to producing provinces (mostly Alberta) and the petroleum industry.

This outraged Premier Lougheed, who understood how long and hard the province had fought for control of its natural resources; resource ownership had not been conferred upon the province until 1930. In response, Lougheed announced that his government would revise its royalty policy in favour of a system linked to international oil prices.

His timing was impeccable. Two days later, on October 6, 1973, the Yom Kippur War broke out – a nail-biting affair between Israel and its Arab neighbours. OPEC used the conflict to double the posted price for a barrel of Saudi Arabian light oil to US$5.14. The Saudis and the other Arab states then imposed embargoes on countries supporting Israel, and oil prices rose quickly to $12. These events aggravated tensions among provincial, federal and industry leaders.

The rest of the 1970s were marked by rapid-fire, escalating moves and counter-moves by Ottawa, the western provinces and even Newfoundland. From 1974 to 1985, Ottawa imposed an export tax on conventional crude oil – a move Lougheed called “the most discriminatory action taken by a federal government against a particular province in the entire history of Confederation.”

Lougheed strongly asserted and ultimately resolved, beyond question, Alberta’s ownership of most hydrocarbon and other mineral resources within its provincial borders, and he made it clear to industry itself that the government was in charge. “It was obvious that the oilsands were owned by the people of Alberta,” he explained in the Oral History interview. “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.”

Canada’s political conflicts over energy climaxed with the introduction of the National Energy Program (NEP) in 1980. Lougheed led negotiations on significant modifications a year later, mainly exempting “new oil,” but the contentious policy was not fully removed until 1986. As the policy collapsed due to severe recession and wrong assumptions about global oil prices, Lougheed played a key role in negotiating a new constitutional agreement for Canada, then retired from office.

Syncrude: One of the positive developments of the energy wars era was the rescue of Syncrude in 1975. The oilsands project’s costs had soared, and one of its partners had pulled out. To a certain extent, that rescue involved a different way of looking at royalties. Lougheed’s interest in petroleum royalties began early in his years in power, before the events of the early 1970s embargo drove oil prices to historically high levels. “We were in a fairly experimental period with the oilsands,” he said, “we had the Great Canadian Oil Sands [project] which was struggling. When Syncrude came along and we got into the negotiations, it was clear we could not approach [the owner’s share] from the perspective of gross revenue….We had inherited from [Ernest Manning’s] Social Credit Government, a good system of royalties for the conventional oil and gas system, which was a percentage of gross revenue. We modified it from time to time in government, but the conventional oil and gas business was based on a percentage of the gross revenue.”

The oilsands were a different kettle of fish. Lougheed continued, “Right from the start it was clear that it wasn’t really fair because of the risk element that came with being involved in such a new process. You know, a lot of people wondered, was it going to work? Would it be economic?” All of those questions led to a discussion between the owner – the Government of Alberta – and Syncrude. ‘What kind of royalty scheme should we have?’ [The discussion] evolved into the whole question of a net profits approach. It was completely different than [the policy used for] the conventional oil and gas industry.”

The 1975 Winnipeg Agreement, which saved the Syncrude project, was one of the few moments of cooperation among governments during the energy wars. Always a savvy negotiator, during those 12 hours of meetings on February 1st, Lougheed committed the province to take a 10 per cent interest in the project for the then-mind-numbing sum of $200 million (about $1 billion in 2012 dollars). Alberta would provide loans that the province could convert into equity, would construct no-risk utilities for the project, and would purchase an ownership interest for cash. This proved to be an extraordinary investment for the people of Alberta, “the owners of the resource.”

AOSTRA: Through the formation of a government agency, Peter Lougheed created a scientific and technical environment that unlocked the secrets of producing bitumen from the deposits too deep for mining, and fundamentally transformed the industry itself.

At the time, work on the deeply buried oilsands reservoirs, which represent about 90 per cent of the resource, had stalled. Imperial had made progress on the Cold Lake deposit, but there were no demonstrated technologies that could commercially unlock deep oil from the Peace River, Athabasca or Wabasca (now seen as an extension of Athabasca) deposits. At the time, there was little likelihood things would improve. Few companies were actively developing oilsands leases outside the mineable area.

Originally called “Project Energy Breakthrough,” the idea was to speed up the development of new in situ oilsands technologies. When legislated into existence in June 1974, the Alberta Oil Sands Technology Research Agency (AOSTRA) became one of the largest research and development programs ever launched in Canada. The act originally limited AOSTRA’s activities to oilsands, but an amendment to the legislation soon gave the agency the authority to fund heavy crude oil research. In 1979, the Crown corporation’s mandate was expanded again to include enhanced recovery of conventional crude. Over its lifetime, AOSTRA funded about $1 billion (1980 currency) in oilsands extraction research.

Initially, the Alberta government agreed to invest $100 million in this technology development fund. During the active life of the corporation, however, AOSTRA spurred the petroleum industry to undertake numerous demonstration projects, representing some $2 billion of research and development spending. In most cases, the authority essentially agreed to match the amount of money a company or industry partnership was willing to invest in oilsands projects.

During the AOSTRA years, the industry launched in-situ demonstration projects in all the major oilsands deposits. These included cyclic steam stimulation (CSS); steam flooding; forward combustion; reverse combustion; and combined forward combustion and water injection (COFCAW). However, AOSTRA’s crowning achievement occurred 25 years ago, when its Underground Test Facility proved the effectiveness of steam-assisted gravity drainage (SAGD.)

Premier Lougheed got excited when he talked about SAGD.  “I think SAGD…should be encouraged by the owner and is being encouraged by the owner. It’s the longer-term asset for the province. Surface mining has its limitations, and involves more environmental and water concerns. So, there is a clear and important distinction when you get into oilsands and that’s what the Alberta Oil Sands Technology and Research Authority had been focusing on….Throughout all of our discussions here, let’s make sure that we are drawing a distinction between SAGD and in situ [those words can be used interchangeably] and surface mining.” Lougheed served on the board of MEG Energy, which was one of the first companies to develop a commercial SAGD operation.

Ideal Model: AOSTRA spurred oilsands experimentation and development, although prospects for further development diminished in early 1986 when a precipitous collapse in oil prices, once again, threatened commercial development. While AOSTRA did not have a mandate to undertake projects on its own, in the 1980s it took a significant risk by constructing the now-legendary Underground Test Facility. The UTF proved steam-assisted gravity drainage (SAGD), which has since emerged as the most important system for developing deep underground oilsands reservoirs.

A noteworthy footnote to this discussion is that the 2009 Summit of the Americas held AOSTRA up as an ideal model for energy development. According to the Centre of International Governance Innovation (CIGI), which sponsored the summit, AOSTRA “engaged the private sector and the university research community in developing technology related to the oilsands, while the government retained the rights to the technology.” A government endowment allowed the organization “to function independently of the electoral cycle. A dedicated expert and respected seven-member board of directors helped secure the private sector’s buy-in.” In addition, “control by the government helped maintain continuity over downturns in the economic cycle.”

CIGI also noted with approval that, before AOSTRA determined its goals, “it conducted two years of extensive consultations with many stakeholders. Only after determining exactly where the technology gaps existed did AOSTRA put out a call for proposals.” Furthermore, “aside from successfully developing new technology, AOSTRA fostered and financed a new generation of academic and scholarly expertise in many aspects of oilsands development. The investment in human resources is often discounted, but has been fundamental for the sector’s success in Alberta.”

Afterword: Much has been said about Lougheed’s impact on the province of Alberta. However, out of the seemingly endless stream of tributes that followed his death came this from former Prime Minister Brian Mulroney, whose government finally dismantled the National Energy Program. “Peter built the modern Alberta: schools, universities, hospitals, highways and whole communities [like modern Fort McMurray]. He always defended Alberta’s interests brilliantly around the federal-provincial table. At the same time, he would be the first to say…‘We were Canadians first.’”

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.

Maintaining the Faith

Five visionaries who changed the path of the oilsands industry, and the wall over which the sixth must climb.Photo: Karl Clark

This article appears in the September 2010 issue of Oilsands Review

By Peter McKenzie-Brown

Oilsands development continually hits a wall of some kind, and obstacles to development seem insurmountable. However, at critical times in the history of the oilsands, a visionary leads the charge over the wall and an important new stage of development takes place. This is the idea behind an excellent presentation titled “Visionaries – Climbing the Wall” given by Dr. Clement Bowman. The present commentary develops that idea, but mostly uses different historical resources.

By the 1920s it was clear that the sands are not underlain by a huge pool of light, source oil. The oilsands are just what they appear to be: huge deposits of sand saturated with thick, gunky bitumen. Encouraged by government, some entrepreneurs tried paving roads with the stuff. No luck; now what?

Enter a research chemist Bowman’s first visionary. With tremendous determination and limited support from the newly fledged Alberta Research Council, his employer, between 1923 and 1930 Clark developed and demonstrated the bitumen extraction process which, with some tweaks, is in use today in oilsands mines. His work made it clear that oil can be extracted from the sands. His name was Karl Clark.

Over the next two decades a few small projects began producing. They were not commercially successful, however, and didn’t use Clark’s extraction process. Each was eventually destroyed by fire. After the Second World War there was no commercial interest in this intractable resource – especially after the 1947 Leduc discovery, which made it clear that large reservoirs of light oil were available in the province.

Despite the legacy of failed commercial efforts, a Canadian politician became the next visionary. He arranged for the province to commission the Bitumount demonstration plant using Clark’s hot water process, and had the entire legislature visit the plant in 1949. He also commissioned an independent evaluation by Sidney Blair – an oilsands expert who began his oilsands career as Karl Clark’s research assistant. Blair concluded that the oil sands were “a commercially viable source of crude oil that could compete on the world market.” The visionary’s name was Ernest Manning, Alberta’s longest-serving premier.

The industry acquired additional oilsands properties and undertook experiments in mineable oilsands development in the 1950s and 1960s. For his part, Manning maintained a life-long belief in the importance of the sands to Canada.

In the 1960s, Alberta announced that it would only approve small oilsands projects. Light oil production was still growing, and the province didn’t want too much competition between oilsands and conventional oil. The province’s insistence on small-scale projects led to thin private sector support.

The visionary who surmounted this obstacle was an octogenarian and a personal friend of Premier Manning. On his insistence, Sun Oil Company filed an application for a 31,500 barrel per day project (later amended to 45,000 barrels per day). In 1967, he told his audience at opening ceremonies for Great Canadian Oil Sands that “No nation can long be secure in this atomic age unless it be amply supplied with petroleum . . . . It is the considered opinion of our group that if the North American continent is to produce the oil to meet its requirements in the years ahead, oil from the Athabasca area must of necessity play an important role.”

The name of this visionary is J. Howard Pew, and he was then chairman of Sun Oil Company, Today, GCOS is known as the Suncor Oilsands Plant.

In 1973, a second commercial project was losing private sector support because of the alarming escalation of costs besetting major North American projects. The Syncrude budget had more than doubled to $2.3 billion, and a major corporate partner pulled out. One man more than any other saved the day. He kept the remaining partners onside while marshalling equity participation in the project from the Alberta, Ontario and federal governments. He set up the first lab dedicated to oilsands research, and developed a long-term plan for upgrading bitumen. He was Syncrude’s first president, Frank Spragins.

In the 1970s, multinational companies had few active development plans for in situ leases. While these deeper deposits represent 80 per cent of the resource, there were no viable in situ technologies for the Athabasca, Peace River, Carbonates, or Wabasca deposits. The major exception was Imperial Oil, which was making limited progress at its Cold Lake site.

Once again a provincial politician took the lead. In 1975, he created the Alberta Oil Sands Technology Research Authority (AOSTRA) to provide government support for private research. During its 15-year life, AOSTRA provided $670 million of funding for oilsands research. Roger Butler’s SAGD process was the single most important advancement from this program. The politician? Premier Peter Lougheed.

Visionary number six has the opportunity to change Canada over this decade, leading the shift to production of cleaner, higher-value products from the oilsands.

There are more major obstacles, they are here and now, and they are environmental. Water, air and land are no longer free; there is a powerful green consciousness demanding that they be protected. Many consumers do not want to use products manufactured from Alberta’s “dirty oil.” Financial markets are concerned about the burden of environmental risk.

Who will help the industry overcome these obstacles? According to Clem Bowman, the next visionary will be able to articulate energy as an integrated system with the oilsands, hydro, natural gas, coal, nuclear and renewable energy all performing key roles. As importantly, that person will have the skills to forge the national will to make Canada a sustainable energy superpower.

Bowman does not conjecture on who this person might be,but his or her name will be marked in history.