Canada Reeling From Collapse in Price of Oil : Economic Damage Flows Across Nation; Many Fear Foreign Takeover of Firms

CALGARY, Canada — Winter is drilling time in Canada’s huge oil patch, a time when derricks bestriding the snow-covered landscape pull Canada’s prosperity from the ground. But it won’t be that way this winter, or any in the near future.

For as much as any country and more than most, Canada is being ground up in the mixer of geopolitical rivalries, Middle East religious and societal conflicts and economic forces that have caused oil prices around the world to nose-dive.

“What has happened to Canada is a catastrophe,” Canadian Federal Energy Minister Marcel Masse said in an interview.

Since late last year, when the world price of oil fell to about $10 a barrel from $31, the province of Alberta, Canada’s largest oil-producing area, has lost 50,000 jobs directly involved in the oil industry and faces the loss of another 20,000 to 30,000 jobs in the next year.

Suspension of Drilling

The impact of low oil prices is now spreading throughout Canada, causing the dismissal of 4,000 workers in associated industries in otherwise-prosperous Ontario and the suspension of off-shore drilling near Newfoundland, in the Beaufort Sea and the Arctic Ocean, where such drilling is crucial to the hard-hit local economies.

From a 1985 level of more than $11 billion spent on drilling more than 13,500 wells in Alberta, oil companies cut back to an expenditure of $6 billion on 6,000 wells this year.

The projections for 1987 are worse. According to Hans Maceij, a director of the Canadian Petroleum Assn., an oil producers’ trade group, investment next year could drop to $4 billion--”even less if the (world) price doesn’t hold at $15 (a barrel).”

The implications for Canada over the next decade are alarming, but through all of this, no government--not Calgary’s, not the province’s, not the federal Cabinet in Ottawa--seems to have a plan for dealing with the problem, other than some short-term palliatives.

“So far, government actions have been inadequate,” Dale Tufts, president of the Petroleum Services Assn., said during an interview in his Calgary office. “A huge sector is cash short and there’s been nothing done to solve that problem.”

It is not only the oil producers who are in trouble; what may be worse is the condition of the supporting industries--the suppliers and servicing companies that do everything from providing the drilling rigs, to fishing out lost equipment from wells, to catering at isolated well camps.

“We have already lost an entire sector of ultra-deep drilling capacity,” said Tufts, whose trade group represents these industries. “With the cost of deep recovery far more than the sale price of the oil, the oil companies are sticking to existing wells and shallow recovery because it’s cheaper. Only six of 60 (ultra-deep recovery) rigs will be used this winter.”

Out of a job force of 30,000, Tufts continued, 11,000 service and related workers have already lost their jobs and another 4,000 will be dismissed in the next four months.

The supply and service sector’s revenues, which reached $6 billion in 1985, may not reach $1.5 billion next year, meaning hundreds of bankruptcies among the small companies that make up the association’s membership, he said.

“Besides the loss of new business, you have to realize that our members depend on cash flow from the drillers, and if they aren’t working, we don’t get paid. And if we don’t get paid, we can’t stay in business; banks just won’t lend us the money.”

Worst of all, Tufts said, is the probable loss of technology that will seriously hamper the industry’s ability to recover when oil prices start climbing again.

“There is no R&D; (research and development) going on,” he said. “Our equipment is in storage, owners are cannibalizing machinery, meaning we won’t have enough equipment in the future. We’re going to be dependent on foreigners for technology and equipment.”

That threat, that Canada’s oil industry will be taken over by foreign interests, is one of the nation’s major political concerns, made particularly sharp since multinational firms already control more than half of the country’s petroleum business.

To meet that threat, the former government of Prime Minister Pierre Elliott Trudeau instituted a policy in 1980--it was called the New Energy Policy--that forced a reduction of foreign ownership through a combination of taxes and royalty payments levied against the multinationals and incentives for Canadian firms.

The result was a disaster from the industry’s point of view; the program cut profits and incentives to the major producers to drill new wells, and instead aided small but inefficient companies. The protectionist policy also damaged Canada’s diplomatic relations, particularly with the United States.

The current government of Prime Minister Brian Mulroney dropped the New Energy Policy but, just as the industry began to recover, it was hit by last year’s price collapse.

“Canada has tried to reach self-sufficiency” in oil, said Ray Martin, energy spokesman for Alberta’s New Democratic Party, the opposition to the province’s ruling Progressive Conservative Party, “but whatever chance we had for that is being destroyed.”

“The only ones to benefit will be the majors”--the large producers mostly owned by foreign firms, Martin said in an interview. The majors will then swallow up the locally owned and smaller businesses, he predicted.

Meanwhile, the problems are already more widespread than the issue of the Canadian industry’s loss of self-sufficiency in the future. Canada, and Alberta in particular, are having to deal now with the very real threat to an already-staggering economy.

Alberta, a province of barely 2 million people, has a budget deficit of more than $2 billion because of the oil price crisis. Private economists project that the deficit will grow to as much as $4 billion in another year. Even the province’s Heritage Fund, a government contingency fund of more than $10 billion put together from oil royalties during the prosperous days, is largely committed or must be saved to finance future programs.

On the federal level, Finance Minister Michael Wilson had hoped to fight the federal deficit of $34 billion--on a per-capita basis, more than two-and-a-half times the size of the American deficit--by using oil revenues.

However, Wilson figured on $28 a barrel for oil for 1986. Instead of shrinking, the federal budget imbalance will grow.

Because of this, the federal government has abandoned plans to help finance development of the enormous Hibernia oil fields in the Atlantic Ocean off Newfoundland, and the MacKenzie Delta and Beaufort Sea fields in the North West Territories. Also, to the horror of nationalists who demand self-sufficiency into the 21st Century, it has decided not to expand programs to convert massive tar sands in Alberta to usable oil.

“Regarding self-sufficiency--yes, we should have it, but not at any cost,” said Energy Minister Masse. “We can’t bankrupt the country achieving it.”

According to the Energy Resources Conservation Board, an Alberta government agency, the issue is not long-term self-sufficiency but immediate survival.

“If crude oil prices follow the projected lower trend,” the board reported last month, the economy will experience several years of decline before recovery.

Even the latest agreement by the Organization of Petroleum Exporting Countries to try to stabilize prices will not help, most Canadian experts say, since the industry can only hold its current distressed level at $15 to $17 a barrel.

Government efforts to meet the crisis have pleased almost no one, and neither federal nor provincial officials have set out long-range plans to keep the industry healthy and in place for the oil price recovery expected sometime in the mid- to late-1990s.

Alberta has offered incentive programs to promote exploration but the industry has largely ignored them because they do nothing to overcome the basic problem of low oil prices.

The federal government has rejected, for the time being at any rate, the only significant action in rejuvenating oil exploration, a floor price for oil that would make new drilling worthwhile.

Masse rejected an Alberta proposal for a $18.25-a-barrel guaranteed price as “complex and interventionist.. . . It would mark a significant step toward the setting of oil prices by governments and the reregulation of the industry.”

The federal government has promoted more free enterprise and a deregulated industry as a matter of political philosophy. To violate that policy now, Masse said, could bankrupt Canada and would not solve the major cause of the crisis, an international pricing system that is beyond the power of Canada to affect.

Instead, he has proposed a meeting early next year of Canada’s provincial and federal energy officials to create a national policy. But he declines to give any specific goals for the conference.

“People have to realize the government is making its best effort to solve the problem,” Masse said, “but they have to realize the problem is worldwide and . . . the government can’t be perceived as the solution to every problem.”