One Man, Immeasurable Impact

How J. Howard Pew's intense and unwavering belief in the oil sands created an industry.

This article appears in the August issue of Oilsands Review 

By Peter McKenzie-Brown

If he is remembered at all, Americans interested in business history think of J. Howard Pew as an industrialist who created what was once one of the world’s largest energy companies. For Canadians, though, he was the legendary force behind the harnessing of the oilsands. Though his efforts in the oilsands sector were a cash drain for his company – at the time, one of the 20 largest in the United States – for this country he created an industry.

The thumbnail sketch of his life is this: Born in 1882, J. Howard Pew graduated from high school at age 14, from university at 18 and became president of Sun Oil at age 30. With his brother Joseph he transformed Sun (founded by his father; now called Sunoco) by introducing new refining, marketing, and distribution techniques. He was astute. During the First World War he responded to the war-time demand for crude by building a navy of tankers. That fleet became one of Sun’s most profitable businesses.

A publication celebrating Sun Oil’s centenary in 1986 described the man, who had died in 1971. “Tall and broad-shouldered, with bushy eyebrows, he was often seen clutching an enormous cigar in his fingers as he moved about Sun’s corridors. He was intense, sure of himself and deliberate in his speech even in old age.”

The Venerable Pew: An extreme conservative in his religious and political views, Pew was passionate about his work. “Working for Sun Company these years has been not merely a job,” he said in 1956. “It has been participation in an exciting adventure – a way of life providing satisfaction in the accomplishment of our goals. So our people have become a great team, welded together by great ideals and purposes accepted by each of us.”

In the 1940s the venerable Pew took a serious interest in the oilsands, in part because of an investigation of potential crude oil sources Sun undertook during the Second World War. In the early 1950s, George Dunlap had a remarkable interview with Pew before moving to Calgary to set up Sun’s Canadian exploration and production operations.

“I have one area that I am interested in and would like to share with you my interest,” Pew told him. He went to a cabinet to pull out a thick file marked “Athabasca Tar Sands,” then shared his vision of the future importance of the oilsands. He told Dunlap to ensure that “Sun Oil always has a ‘significant position’ in the Athabasca Tar Sands area!”

The venture was called Great Canadian Oil Sands Limited (now the Suncor plant), and in 1962 the Oil and Gas Conservation Board (today the ERCB) granted approval for the company to proceed with a 31,500 barrel-per-day, $122 million plant, but imposed severe environmental restrictions on the plant. The partners had serious concerns about economies of scale for such a small project. Costs began to rise and financial difficulties ensued. By 1964 it was clear that a company with deep pockets – not Canadian Oil Sands Ltd. – was needed to lead GCOS. Sun took on that responsibility. The capacity of the proposed plant increased to 45,000 barrels per day and the cost escalated from $122 to $190 million.

The larger plant received approval in 1964, partly because Pew wrote a letter to the Petroleum Resources Conservation Board (now the ERCB) saying “I believe in the future of this project and I will put up my own money without reservations if the permit is approved.” Read aloud at a meeting of the Conservation Board, that letter carried the day. By the time GCOS reached completion in 1967, costs had risen to $235 million.

Building the Plant: The contractor for the project was Bechtel of Canada, and the engineer representing Sun during construction was Robert (Bob) McClements, Jr., who later became chairman and CEO of Sun Oil. McClements described Pew as “one of the strongest influences on my life.”

Pew would visit the construction site and “we would have engineering (and other) discussions. He would ask ‘How much does it cost to feed a man an average twelve hours on a shift?’ He was very, very detailed. I still remember: it was six to eight pounds of food per person per day and a little less than $2.00 per person to feed a construction worker… Anyway, there was a side of J. Howard that I don’t think has really been widely recognized. I think many people would describe him first perhaps as an industrialist. He was certainly known as the leader of a large corporation. Sun was always in the top 20 of the Forbes list of companies. It was a huge company. But there was also a spiritual side to him. He was a very religious individual. His conversations often included two words: faith and freedom, and they were welded together….”

The Sun Company McClements joined in the 1960s was much different from those in today’s oilpatch. “There was no retirement plan, there was no healthcare plan, there was no sick plan. When you were sick, you took your own time off….You would pay for that time. When you retired – and nobody quit and nobody was ever fired at the Sun Company – you retired at 50% of your pay. There were no documents explaining this in those days.”

McClements described the only meeting he attended between Pew and Premier Ernest Manning. “I’m telling you I’ve never been in a business meeting in my life like that. It was like you and me sitting here talking. There were no hard specifics. (There) was a feeling of absolute trust between the two of them. And I remember when I went back to the plant, somebody asked me about it. Without thinking, I said ‘Those two men just reeked with honesty.’ The relationship they had was unbelievable, exactly the same wavelength.”

McClements served as master of ceremonies at the official GCOS opening. A Sun Company publication commemorating the event quoted him as saying “synthetic crude is a natural for petrochemicals. I see no reason why the stretch along the Athabasca (river) cannot become an industrial valley in time.”

McClements vividly remembered the official opening. “It was the end of September in 1967 at the dedication of the plant. Pouring rain, not a very good day at all.” Premier Ernest Manning and Pew (then 85 years old) both addressed the audience of about 200.

According to Manning, “no other event in Canada’s centennial year is more important or significant.… It is fitting that we are gathered here today to dedicate this plant not merely to the production of oil but to the continual progress and enrichment of mankind.” For his part, Pew told the assembly 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.”

McClements, who was the first plant manager for GCOS, recalled a tour he gave Pew once production had begun. “We had visited the mine and were in the refining section of the plant (when he) asked to see a sample of what we were running and I asked an engineer to pull a sample of the product we were making at the moment. Mr. Pew took the bottle and held it up to the light. It was water white. He unscrewed the cap, held one nostril and sniffed the oil again. Finally, he stuck his finger in the bottle and tasted the oil. When he did, you could just see his face beam.”

A broad view of the GCOS story comes from Paul Chastko, a renowned oilsands historian. “When Great Canadian Oil Sands began production in 1968, it represented a remarkable achievement,” he wrote: “a Canadian company, backed by the investment capital of a U.S. multinational corporation, used a separation process researched and developed by scientists funded by the governments of Canada and Alberta to produce a synthetic oil capable of competing against conventional Saudi crude in world oil markets.” All true, but the energy behind this effort was the vision of J. Howard Pew. The impact on the oilsands of this one man has been immeasurable.

The Desirable Barrel

Why conventional heavy oil is a sizzling commodity in Alberta and Saskatchewan

By Peter McKenzie-Brown

As an oil producer, Saskatchewan seems to have it all. The Bakken light oil trend is a play of frenzied activity. So is Cenovus Energy’s carbon injection oil operation at Weyburn (the world’s largest carbon capture and storage facility). But the province’s meat and potatoes – conventional heavy oil production in the Lloydminster and Kindersley areas – are hidden behind these high-profile developments.

The province’s first 2010 land sale tells the story, but it’s only clear if you dig deeply into the numbers.

Out of nearly $40 million in bonus bids, about $26 million went for land in the Weyburn-Estevan – a reflection of the importance of Bakken and Weyburn. Dig a bit deeper into the numbers, though, and you will find that the highest price paid for a single parcel was $2.1 million for a 1,552-hectare exploration licence in the Lloydminster area. One operator, Baytex Energy, paid $6,512 per hectare for a 16-hectare parcel near Maidstone, also in the Lloydminster area – by far the highest bid per hectare.

Between them, the two heavy oil producing regions in Saskatchewan brought in nearly $10 million in bids – not bad for the Cinderella sister of light oil. The message is clear. The resource has been on production since 1946, but despite its longevity is an increasingly valuable asset. This reality applies to conventional heavy in Alberta as much as it does to production in Saskatchewan. In today’s market the commodity is sizzling. Although there was a blip due to low oil prices a year ago, today’s barrel of conventional heavy is almost as profitable as ever before.

Major changes in transportation to the US and modifications to US refineries have made the Canadian commodity extremely desirable. As a result, the differential paid for Canadian light compared to Canadian heavy is holding firm near historic lows. The differential has averaged about C$8 per barrel for the last year. To put that in perspective, as recently as late 2008 conventional heavy sold briefly for 45% less than Edmonton Par. That wasn’t a profitable environment.

By contrast, the market today is a bit like a winery selling this year’s plonk for 14% less than a vintage wine. Like plonk compared to fine wine, heavy oil is intrinsically less valuable than Edmonton Par, the Canadian standard for light oil. In most refineries, after all, heavy feedstock results in less high-value-added gasoline and more low-value-added asphalt.

But the big US refining complexes are changing that. “It’s a matter of adding vessels to the refinery,” according to Steven Paget; he is vice president for energy infrastructure at First Energy Capital. “Those longer-chain hydrocarbons need more work to break up, but new pipelines from Canada are accessing the refineries at Wood River (Illinois) and Cushing (Oklahoma).” Those refining complexes have the capacity to break heavy oil into lighter feedstock. “Therefore the (narrow) differential becomes minimal or close to equivalent to actual operating cost.”

The good news is that the two heavy oil provinces have a lot of plonk left to sell. According to the Canadian Association of Petroleum Producers (see chart), between them the two provinces have more than a billion barrels of established reserves left to produce. More importantly, each has estimated heavy oil in place many times the volume of reserves.

CAPP estimates that initial volumes of heavy oil in place (this includes both conventional and non-conventional heavy) were about 15 billion barrels in Alberta, and 20 billion barrels in Saskatchewan. Established reserves will thus continue to grow, just as new in-place volumes will continue to be found.

The Background
To understand the economics of conventional heavy, cast your eyes back to the industry’s beginnings.

There are three historical reasons for the growing strength of conventional heavy oil. First, since the 1980s operating costs for conventional heavy production have been in relative decline because of improving technology, higher prices and a better understanding of the reservoirs. Second, policies established since 1990 have lowered royalties for the stuff. Third, the volumes of heavy oil in the Alberta/Saskatchewan heavy oil belt are simply huge. Although the reservoirs tend to be thin, the output is large, and production lasts for many years.

Defined as oil below 20° API which can flow from its reservoirs like lighter oils, conventional heavy oil goes back a long way in Western Canada’s economy. The heavy oil belt is a series of thin sand reservoirs straddling the border of the two provinces. The oil is lighter in density (11-18° API) and of much lower viscosity than the bitumen in the oil sands deposits.

The buckle of the heavy oil belt is Lloydminster, the border town. The first conventional heavy discovery occurred in 1938, and modest development began when Husky Oil (now Husky Energy) moved into the area after World War II. Husky began producing heavy oil from local fields in 1946, and by the 1960s was easily the biggest regional producer. In 1963 the company undertook another in a series of expansions to the refinery (to 12,000 barrels per day). To take advantage of expanding markets for Canadian oil, it also began delivering heavy oil to national and export markets. These developments made conventional heavy more than a marginal resource. Within five years, area production had increased five-fold to 11,000 barrels per day. However, production volumes remained small until the 1990s.

The first of two important developments was the completion of two upgraders – the Co-op facility in Regina and Husky’s in Lloydminster. These upgraders, which were subsidized by government to reduce risk during a period of lousy oil prices, created a large local market for heavy oil. In the early 1990s, production from the heavy oil belt had risen to 300,000 barrels per day – one third of that production being upgraded and refined for local markets. Today Husky produces about 75,000 barrels per day of heavy oil – more than 10% of Canada’s total.

More importantly, in 1993 the Alberta government redefined conventional heavy as “third tier” oil, with highly favourable royalty rates. Once Saskatchewan’s New Democrats were removed from power, new governments in that province matched and then exceeded the Alberta initiative – after all, heavy oil is Saskatchewan’s single most important long-term hydrocarbon resource, so the province had good reason to kick-start development. Indeed, in a modification to the royalty system in 2002, Saskatchewan defined “fourth-tier” heavy oil, with very low initial royalties. All these new tier royalties were great kick-starters. However, as the CAPP data show in the chart below, conventional heavy oil production is now in decline despite growing reserves.

OPEC or Infrastructure?
Especially in a market of declining production, the question of whether differentials will remain narrow is critical. And on this score there is debate. Is the differential likely to narrow or to widen?

According to AJM Petroleum Consulting operations vice president Ralph Glass, the basic reason differentials are so low “is an increased demand for the heavier crude oils from US refineries. Over the last few years there has been a movement by US refineries to enhance their ability to handle the heavier crudes. With the downturn in US demand, OPEC cut their volumes. (The volumes cut were the heavier crudes and done to maximize returns from light crudes which receive higher prices). As a consequence, the US refineries found themselves short of heavier crudes to process, and are now paying a premium for Canadian heavier crudes to reduce the shortfall in their systems.”

He suggests that the demand for heavy oil to fill for new pipelines to the US – TransCanada’s Keystone pipeline into Patoka, Illinois and Enbridge’s Alberta Clipper line to Superior Wisconsin – may narrow the differential even more in the short term. However, the return of competition from OPEC will widen the differential, thus making heavy oil production less profitable.

First Energy’s Steven Paget has a more sanguine view. “The reason the differential has gone down is that we have more transportation infrastructure out of western Canada,” he says. “This allows nearly 90,000 barrels per day of crude to access the Gulf Coast refining complex.” Demand for fill for new lines will increase demand over the short term (narrowing the differential), but the more important factor in his eyes is that those new pipelines will provide increased access to markets, making conventional heavy more competitive in US markets. “The narrow margin is likely to continue.”

Ralph Glass takes the more cautious view. In 2011 and 2012, he says, the industry will experience “widening on implied concerns of heavy OPEC production coming online and increased Canadian heavy production.” If he’s right, and if production continues to decline, expect the sector’s salad days to wilt.

Village of Widows

Although he was a life-long pacifist and supporter of human rights causes, Albert Einstein will ironically be remembered also as the man who convinced US president Franklin Roosevelt to begin the Manhattan Project. The Anglo-American atomic weapons effort took place during World War II. It led to the use of nuclear bombs in anger, at Hiroshima and Nagasaki, and it opened the Pandora’s box of atomic energy.

In a now-famous letter, Einstein suggested that nuclear chain reactions in large masses of uranium could release “vast amounts of power and large quantities of new radium-like elements.” And, he speculated, “extremely powerful bombs of a new type may thus be constructed.” While America had only poor ores of uranium, Einstein noted, “there is some good ore in Canada.” Therein lies a tragic story.

At the end of 1998, a Canadian Indian named Cindy Gilday described that tragedy to a United Nations conference on Human Rights. She spoke on a panel considering whether the environment, the economy and human rights were “cross currents or parallel streams.”

Amoco had sponsored Ms. Gilday’s presentation at the conference, held in Edmonton, Canada to celebrate the 50th anniversary of the Universal Declaration of Human Rights. The program brought together many of the world’s foremost human rights activists. One speaker after another described the global struggle for human rights. (Many of the speakers have themselves been jailed for having had the impertinence to suggest, for example, that their national governments endorse democracy.) They argued forcefully that human rights are universal, and do not conflict with cultural or religious values.

Ms. Gilday’s presentation spoke to the experience of one band of Indians during the Second World War. Those Indians lived a traditional nomadic existence, very few spoke much English, and they knew almost nothing about the war. As it happened, however, their traditional territory was near the uranium mine being developed for the Manhattan Project.

The ore came from a rich deposit of uranium and radium along the shores of Great Bear Lake, in Canada’s Northwest Territories. During the long days of summer, a wartime mining company hired local Indian men to carry 40-kilogram burlap bags of ore from the mine to the Mackenzie River. They carried those loads for long hours, for months on end. When the bags ripped apart, they shifted the spilled ore off the trail, but took the contaminated bags to their temporary village. There, the burlap found many uses.

Years later, the ore-carriers began dying of cancer, and the community now known as Deline became, in Ms. Gilday’s words, “a village of widows.” Eventually, the Aboriginal people became aware of the connection between radioactivity and cancer. They also came to understand that they had unwittingly helped contaminate their remote northern homeland with radioactive waste.

According to Ms. Gilday, the families of the men who served as ore-carriers during the war have wounds that are yet to be healed. “Like most Native Americans, their culture, spirit and their very beings are linked intimately with the well-being of mother earth. This has been compromised by uranium mining contamination....If their environment is compromised, their lives are compromised.” She argues that their wartime experience involved a breach of human rights, which no government has ever attempted to redress.

The contrarian could suggest that everyone who dealt with radioactive elements in the early years faced unknown risks. After all, radiography pioneer Marie Curie herself died of cancer.

But whichever side of this argument you take, Ms. Gilday’s story illustrates three powerful trends in modern society. The dynamic relations among public health, safety and the environment comprise a single issue. Another is that many of the world’s indigenous peoples have learned to mobilize public opinion in their effort to reclaim traditional landsand livelihoods. The third is that moral claims based on human rights have economic and political force. Each has powerful implications for globally organized business.

When the United Nations adopted the Universal Declaration of Human Rights in December 1948, Soviet representative Andrei Vishinsky dismissed it as just a “collection of pious phrases.” Sadly, for the first two decades of its existence, Vishinsky’s assessment seemed to be accurate. But the declaration has been gathering momentum since the 1970s.

Today, western democracies expect their leaders to raise human rights issues when they visit such countries as China. Large corporations that buy from Third World sweatshops or operate within countries that are the worst abusers of their citizens frequently find themselves the targets of boycotts and picket lines. And countries that systematically violate human rights often find the world’s economic powers imposing embargoes and economic sanctions upon them.

No one understands this better than South Africa’s Anglican archbishop emeritus, Desmund Tutu. As a critic of the former South African system of Apartheid, Mr. Tutu received the Nobel Peace Prize. His moral influence led to intense international economic and diplomatic pressure, which eventually led to abandonment of that system of institutional racism. This was one of the great recent victories for the human rights movement.

The keynote speaker at the UN’s human rights conference, the charismatic archbishop characterized South Africa’s victory over Apartheid as a “spectacular victory over the forces of evil and wickedness.” In his introduction to a wide-ranging address on South Africa’s Truth and Reconciliation hearings, which he had led, this tiny little man added a small but enormously significant comment – with enormous humility, and to thunderous applause. “Our victory is your victory,” Mr. Tutu said. “Thank you, thank you, thank you for your support.”

After centuries of human rights abuses, Archbishop Tutu said, “We in South Africa are a wounded people, in need of reconciliation. By enabling this reconciliation to occur, perhaps God is setting up South Africa as a beacon to the world.” He chuckled about “the perverse sense of humour” of the Divine, which could make a troubled country like South Africa a beacon of hope for such countries as Bosnia, Rwanda and Serbia.

The movement that Mr. Tutu so articulately represents has gained great strength in recent decades. Why?

The Universal Declaration of Human Rights and a group of related international agreements, including the four Geneva Conventions signed in 1949, have created a body of thought respecting human rights, war crimes and humanitarian law. International bodies are giving this body of law some teeth. And publicity promoted by human rights groups is combining with TV screens full of graphic scenes of humanitarian disasters to increase public concern. Victims are no longer seen as someone else’s problem.

There is also the question of the moral high ground.
A very large percentage of the world’s human rights activists are driven by a sense of higher purpose. Albert Einstein, a Jew, famously remarked that “God does not play dice with the universe.” Cindy Gilday talked about the “culture, spirit and very beings” of American Indians as being “intimately linked with the well-being of mother earth.” And Archbishop Tutu’s profession speaks for itself.

While spiritual values are no doubt one important value behind the human rights movement, “the struggle for democracy” is another. In a notable book by that name published a decade ago, Canadian authors Patrick Watson and Benjamin Barber put the point concisely. “We found that to tell the story of democracy is also to explore the fundamental human urge towards self-mastery and liberation: the inclination to speak openly, communicate freely, pray according to one’s beliefs, dance to one’s own tune, think as one pleases – but to do so in the company of other men and women in a spirit of cooperation.”

Many forces are guiding the human rights movement. The expansion of democracy is one. The human spirit is certainly another. A sense of the Divine, perhaps, is a third. And a growing body of international law underlies all three. Whatever the causes of this remarkable movement, everyone, everywhere, is a beneficiary.