CANADA: PETROLEUM POLICY AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00895R000200050002-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: May 27, 2009
• Sequence Number: 2
• Publication Date: December 1, 1983
• Content Type: REPORT

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Directorate of Confidential
Intelligence
Canada: Petroleum Policy
and Prospects
Confidential
EUR 83-10285
GI 83-10287
December 1983
Copy `7 5 4
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Directorate of Confidential
and Prospects
Canada: Petroleum Policy
This paper was prepared by f the
Office of European Affairs and of the
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief, Western
Europe Division, EURA or to the
Chief, Strategic Resources Division, OGI, on
Confidential
EUR 83-10285
GI 83-10287
December 1983
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Canada: Petroleum Policy
and Prospects F 25X1
Key Judgments We doubt that Canada will achieve its goal of maintaining net oil self-suf-
Information available ficiency through 1990, although the shortfall is likely to be small-perhaps
as of 15 November 1983 200,000 b/d. Canada temporarily is self-sufficient because of the large
was used in this report.
drop in consumption resulting from the recession.
Since 1980, when the National Energy Program introduced heavy taxes
and discriminatory exploration incentives and declining world oil demand
softened oil prices, Canada's oil production has dropped 10 percent. Oil
production in conventional oilfields is likely to continue to decline, and the
outlook for offsetting these decreases with increases in oil output from
synthetic oil facilities or frontier areas is bleak. Oil consumption, mean-
while, probably will rise slowly during the rest of the decade.
Whether Ottawa can return to oil self-sufficiency in the longer term
depends, in large part, on the willingness of the federal government to
pursue energy policies that encourage exploration and development. To this
end changes in taxes, special incentives for synthetic oil, and a moderation
of retroactive claims for federal rights to some portion of all frontier
discoveries are likely.
If adopted, these changes would, in our view, go a long way toward
improving Canada's oil production prospects in the 1990s, eliminating the
need for net oil imports.
iii Confidential
EUR 83-10285
GI 83-10287
December 1983
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t-onnaential
Contents
Key Judgments
Page
iii
Oil Policy and the Federal-Provincial Relationship
Impact of the NEP
The Demand-Supply Outlook to 1990
Prospects for Oil Self-Sufficiency Beyond 1990
2. Canadian Oil: Proved Reserves, 1970-82
4. Oil Sands Deposits in Alberta
3. Comparison of Projected Revenues (1981-86)
Canadian Oil Supply and Demand Under the NEP
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Figure 1
"Canada Lands"
Start.. ,
(Alaska)
United Pruay e~` ti a
Dewson
\ Y' kon l~W m$n
Victofla
'island
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R&d a
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,Pule'
J.
Hudson
Bay
rrl ; Churchill'
British Alberta (
L Columbia `t ( Saskatchewan
J ( I Manitoba
0 500 1000
Kilometers
Caiteet)ttfOd
(Oef Mark}
Frobisl
Bay
Laoradur
Sea
f'f 7!I ~i
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K
lebr#tlor? Newfoundland
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F7 1 11
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5 t St, t . (France)
P.C I. T
` New Qt prova Scotia
unswiZk,r
- Idalifax
0 1u
federicton
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Canada: Petroleum Policy
and Prospects
Oil Policy and the Federal-Provincial Relationship
Ottawa and the provincial governments share jurisdic-
tion over petroleum resources. Under the constitution,
the provinces own the resources within their borders
and control development and production. Ottawa has
the power to regulate interprovincial and foreign oil
trade and to levy taxes on the resources. In addition,
the federal government owns all petroleum resources
located in frontier areas, known collectively as the
Canada Lands and including the Yukon and North-
west Territories, the High Arctic, and the Pacific and
Atlantic offshore areas (figure 1). Ownership of
energy resources in some offshore areas, however, is
also claimed by the coastal provinces, as is the case
Canada's proven conventional oil reserves amounted
to approximately 7 billion barrels at the end of 1982.
Roughly 80 percent are located in the Province of
Alberta. Although small by OPEC standards, this
amount is about afourth of US reserves, a half of
British reserves, and all of Norwegian reserves.
Proved reserves have been declining steadily for more
than a decade and totaled 10.4 billion barrels in
1970.
Canada's vast frontier regions
with Newfoundland. This situation has led to several
Although the provinces own their domestic resources,
energy prices and the distribution of revenues from
petroleum production are determined by federal-
provincial agreements; For several years prior to
1980, the federal government kept prices and taxes
low to protect consumers. At the end of 1978,
domestic oil prices were only $11.00 ' a barrel, or
about 80 percent of the world price. Petroleum reve-
nues were shared between Ottawa (10 percent), the
provinces (45 percent), and the oil industry
(45 percent).
The runup in world oil prices in 1979-80 prompted a
reexamination of Canada's domestic pricing and reve-
nue agreements. By the end of 1979, domestic oil
prices were less than half world levels, and the
producing provinces were pushing for domestic price
increases. Then Prime Minister Joe Clark was on the
verge of completing a revised agreement with Alberta
that would have substantially raised domestic oil
prices when his government fell. Pierre Trudeau's
Liberal Party was returned to power with a solid
majority in February 1980-largely because of its
campaign against higher domestic oil prices-and
hive goo geo ogi potentta , an current
Canadian policy is designed to accelerate exploration
and development in these areas. Although most fron-
tier basins are still relatively unexplored and fore-
casts of reserves are thus imprecise, the Geologic
Survey of Canada has estimated potential oil reserves
in frontier areas at 29 billion barrels. According to
the survey, the east coast offshore area shows the
greatest promise and may contain over 40 percent of
total expected frontier oil reserves.
As in the United States, Canada's greatest oil re-
serves are in unconventional forms. The Geologic
Survey of Canada estimates proved oilsands reserves
in the western provinces at 100-200 billion barrels,
most of which are in Alberta. Despite considerable
development efforts, these reserves do not appear to
be exploitable in large quantities under present mar-
ket conditions.
Trudeau quickly moved to formulate a new energy
policyF____1 25X1
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Table 1 Billion barrels
Canada Lands: Potential Oil Reserves a
Offshore east coast
12.6
Beaufort Sea/Mackenzie Delta
9.4
Arctic Islands
5.0
The National Energy Program
and Recent Modifications
After failing to conclude an energy agreement with
Alberta, which objected to the new government's
energy-pricing and revenue-sharing proposals, Tru-
deau launched the National Energy Program (NEP)
in October 1980. Its objectives included:
? Gaining greater federal control over energy reve-
nues and protecting the Canadian consumer from
the full impact of world oil price increases.
? Increasing Canadian ownership of the petroleum
industry to 50 percent by 1990.
? Achieving energy security by 1990 by eliminating
net oil imports, which were running at 124,000 b/d.
To make Canada self-sufficient in oil by 1990, the
NEP encouraged oil conservation, energy-switching,
and domestic oil production. Through a gradual rise
in domestic oil prices' and federally funded conserva-
tion programs, Ottawa acted to reduce the demand
for oil. The NEP also contained incentives to promote
substitution away from oil-primarily toward Cana-
da's more abundant supplies of natural gas.
The NEP attempted to encourage production by
stressing nonconventional resources and introducing a
system of exploration grants administered under the
Petroleum Incentive Program (PIP). PIP incentives
were explicitly designed to favor Canadian-owned
'The price of conventional crude oil produced from fields discov-
ered before 1 January 1981 was to rise gradually to a ceiling of 75
companies and to promote a shift in oil exploration
activit from the western provinces to the Canada
Lands Funds for these conservation and
explora ion programs were to come from additional
taxes levied in the NEP.
The timing was unfortunate as the NEP coincided
with a worldwide slump in oil demand that hurt the
domestic industry. In response, both Alberta and
Ottawa shifted policies in early 1982. In April, Alber-
ta announced a relief package for the oil industry,
including royalty reductions and one-time grants val-
ued at $4.4 billion over a five-year period. Alberta
called also for a similar federal initiative, and Ottawa
responded with The NEP: Update 1982, which pro-
vided the industry with financial relief estimated at
$1.6 billion over five years, most of it concentrated in
the 1982/83 period. Federal concessions to improve
the industry's cash flow included a one-year reduction
in the petroleum and gas revenue tax (PGRT) from 12
to 11 percent, an exemption of about $200,000 on
PGRT liabilities, and a one-year elimination of the
incremental oil revenue tax (IORT). These tax modifi-
cations shifted the prospective shares of total revenue
to 22 percent for Ottawa, 32 percent for the provinces,
and 46 percent for the industry-a gain of 10 percent-
age points for industry, mostly at Ottawa's expense
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Table 3
Comparison of Projected Revenues
(1981-86)
Total
100
100
Federal
29
22
Province
35
32
a Incorporates Alberta's changes in April 1982.
b Net of operating costs.
Figure 2
Canadian Oil: Proved Reserves, 1970-828
(table 3). Following the decline in world oil prices, a
new price schedule was negotiated this year that holds
domestic prices at present levels through 1984, unless
there is a sudden change in world prices.
Despite these changes, the thrust of the NEP remains
unchanged. In particular:
? Oil prices will still be controlled.
? Canadian companies will still be favored financially
over foreign oil firms.
? Oil exploration in the frontier areas will be favored
over exploration in the established producing areas.
Impact of the NEP
Although it is impossible to separate the effects of
government policy, economic recession, and the de-
pressed world oil market, it is clear that the three
years since the NEP was introduced have not been
good ones for the Canadian petroleum sector:
? The number of active drilling rigs in Canada fell to
169 in early 1983, some 40 percent below the
number in service at the end of 1980.
? Both the Alsands and Cold Lake oil sands projects
have been abandoned.
? The NEP undoubtedly has stimulated oil explora-
tion in the frontier areas, but this gain probably has
been more than offset by the sharp drop in explora-
tion expenditures in western Canada-from $3.4
billion in 1980 to $1.8 billion in 1982.
I I I I I I I I I
0 1970 75 80
a Yearend. Proved crude oil reserves are the volume
of oil and gas remaining in the ground that geologic
and engineering information indicates with reasonable
certainty to be recoverable in the future from known
reservoirs under existing economic and operating
conditions.
? No new major Canadian oilfields have been discov-
ered, and proved oil reserves in 1982 were below the
1980 level even though the reserves in the Hibernia
oilfield, located off Newfoundland's coast, were first
included in the total in 1981 (figure 2).
The prospect of lower returns on investment due to
the NEP's high taxes and the softening world oil
market forced the oil companies to cut back on their
activity. Smaller Canadian-owned firms with explora-
tion activity centered in Alberta and firms involved in
the long-term, capital-intensive oil sands projects were
especially hard hit by the new energy policy. Record
high interest rates in 1981-82 compounded the prob-
lem by escalating the costs of borrowing for these
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The NEP contained several provisions aimed at
increasing Canadian ownership of the petroleum in-
dustry-from 27 percent in 1980 to 50 percent in
1990. These included federal and private-sector ac-
quisitions of a number offoreign-owned-mostly
US firms, as well as a "back-in" or retroactive
federal claim to a 25 percent interest in every existing
or new discovery on federally owned lands. In addi-
tion, a minimum 50 percent Canadian participation
was required before new production could be ap-
proved on federal lands. Within 18 months of the
NEP's introduction, Canadian ownership of the pe-
troleum industry rose to 35 percent. In addition,
almost all the US companies involved in frontier
exploration have entered into partnerships or joint
ventures with Canadian firms to raise their Canadian
content levels. Although US companies continue to
operate on Canada's frontier areas, their ability to
benefit from this activity has been sharply curtailed.
Control of the Canadian petroleum industry has
changed, as shown in the following tabulation:
Canada
18.7
26.2
United States
63.4
56.3
Other foreign
17.9
17.5
debt-laden companies. To preserve their financial
position, the petroleum companies restricted their
activities (see text table.)
The NEP apparently has had more success in encour-
aging a sharp drop in oil demand. Canada's oil
consumption had increased rapidly throughout the
1960s and 1970s; even the OPEC price hikes in 1973
and 1974 failed to cut Canadian oil consumption
because domestic oil prices were kept low. Now,
however, the higher oil prices and fuel-switching
incentives contained in the NEP have-along with the
Table 4
Canadian Oil Supply and Demand
Under the NEP
1979
1.83
1.86
0.03
1980
1.77
1.89
0.12
1981
1.62
1.78
0.16
1982
1.59
1.46
-0.13
1983 a
1.60
1.31
-0.29
recession-caused a decline in domestic oil consump-
tion. In 1982 and probably through 1983, consump-
tion declined faster than production, enabling Canada
for the first time since a brief period in the early
1970s to become a small net exporter of oil. The
economic recovery and steady domestic prices will
probably boost domestic demand and once again push
Canada toward net imports (table 4).
The modifications to the NEP introduced by both
Alberta and Ottawa in 1982 were for the most part
temporary and did little to improve the financial
status of the petroleum industry. Drilling activity in
western Canada increased marginally but did not
result in any significant oil discoveries. Critics of the
drilling programs have noted that the incentives did
nothing to direct drilling funds to the most promising
areas. The tax concessions were also deemed too small
to overcome the negative aspects of the overall tax
burden and therefore did not encourage additional
investment activity by the petroleum companies. In
our view, the greatest benefit of these modifications
was some good will created by Ottawa's attempt to
ease the tax burden on the petroleum industry.
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The Demand-Supply Outlook to 1990
We do not believe that under present oil policies
Canada will be able to maintain net oil self-sufficien-
cy through 1990; in our judgment, net crude oil
imports at the end of the decade will be around
200,000 b/d. This estimate depends on how fast oil
production from older fields declines and how much
oil consumption recovers after the recession. We think
net oil imports might be, at worst, 500,000 b/d in
1990; at best, Canada could be in a net export
position, but on a very small scale
1990 is unlikely to exceed 1.4 million b/d.
he poor drilling results of the
We agree with the NEP's estimates that both natural
gas supplies and electricity generation capacity should
be more than ample to meet projected increases in
demand over the decade. Canada's National Energy
Board has allowed for natural gas exports to increase
sharply over the period, and additional electricity
exports are also being promoted by Ottawa and
Quebec.
past two years an the technical difficulties in frontier
production indicate no significant oil production from
Canada's frontier areas in this decade. In addition,
Canada's conventional reserves will continue to de-
cline, and we expect that Canadian oil production in
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The Western Provinces. We expect the bulk of Cana-
dian oil production to continue to come from the
western provinces, primarily Alberta, :for at least the
rest of the decade. However, proved crude oil reserves
in these areas-currently about 5.2 billion barrels- 25X1
have been declining at an annual rate of almost 4
percent for more than 10 years. Because the NEP
encourages a shift away from exploration for conven-
tional oil in the west, this trend of declining reserves
probably will continue unless Canada changes its
energy policy
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We estimate that output from the oil sands deposits
will reach only 200,000 b/d by 1990. High tax and
interest rates, combined with the oil industry's expec-
tations of lower world oil prices, caused the collapse of
Canada's two multibillion dollar oil sands projects-
Cold Lake and Alsands-in the past two years. As a
result, there has been a switch away from huge
projects to smaller phased-in synthetic oil develop-
ments that are more easily financed. Both the federal
and provincial governments have made adjustments to
tax or royalty rates to encourage new oil sands
vincial royalties on several new projects.
development. Ottawa's April 1983 budget allows com-
panies involved in synthetic oil production to deduct
their capital expenses against the PGRT until original
investments are recovered. According to the Oil and
Gas Journal, the Alberta government deferred pro-
Most oil sands production in 1990 will come from the
Suncor and Syncrude synthetic oil plants, which are
already operating at Athabaska (figure 4). The 712
billion barrels of bitumen in Athabaska are relatively
close to the earth's surface, enabling the use of strip-
mining techniques to tap the oil sands deposits. Other
oil sands deposits are deeper and require expensive
new enhanced-recovery techniques for production. In
July, following the announcement of Alberta's royalty
reduction package, Syncrude Canada announced a
$970 million expansion of its Athabaska plant to boost
production capacity from 129,000 b/d in 1982 to
149,000 b/d beginning in 1987.
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Figure 4
Oil Sands Deposits in Alberta
Yukon
Terr.
British
Columbia
Prince
Georges
Dawson-
Creek
too 200
Kilometers
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it Synthetic oil plant
Oil sand deposit
O Province capital
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The oil industry anticipates small increases in oil
sands production from new projects:
? Imperial Oil Limited (Exxon's Canadian subsidiary)
was recently granted major tax and royalty conces-
sions by both Ottawa and Alberta that will allow the
company to proceed with the two initial phases of a
project at Cold Lake. The $245 million project
could add 19,000 b/d to Canadian output beginning
in 1985. Additional investment at this site could
allow total output to rise to 57,000 b/d in the early
1990s.
? Some small pilot projects such as Petro Canada's
Wolf Lake project may provide incremental
amounts of heavy oil production in the 1980s. Wolf
Lake, for example, is expected to produce 7,000 b/d
of oil by 1985.
The Frontier Areas. Norman Wells, located in the
Northwest Territories, currently produces about
3,000 b/d of oil and probably will continue to be the
only frontier area in production in the 1980s. Planned
expansion in this field, to add 22,000 b/d to capacity
by 1986, will require the drilling of 170 additional
wells at a cost of about $700 million.
We do not expect significant production by 1990 from
the Hibernia oilfield off the shore of Newfoundland-
the only new commercial oil discovery to date on the
Canada Lands (figure 5). Production was originally
scheduled to begin in 1986 with expected peak output
of 200,000 b/d,
the field probably will not come on line
before 1990. A dispute between Ottawa and New-
foundland over ownership and control of offshore
energy resources has retarded development.
a federal-provincial
agreement is required before the oil companies can
proceed with the investments required to develop
Hibernia. Negotiations between Ottawa and New-
foundland have been stalled since January, however,
when the issue was referred to both the Newfound-
land and Canadian Supreme Courts. The Newfound-
land court ruled in favor of federal ownership of
offshore resources, but the province government of
Newfoundland repudiated the ruling. The Supreme
Court of Canada is expected to render its decision in
the next few months. If the Supreme Court also rules
against Newfoundland, Premier Peckford probably
will prefer to delay a final agreement with Ottawa,
hoping that the next federal election-which must be
held by February 1985-will return a Conservative
government more willing to allow Newfoundland
some control over offshore resources. Moreover, al-
though Ottawa has recently concluded a series of
exploration agreements for work in the area, progress
on the development of Hibernia remains stalled.
The NEP, primarily as a result of the PIP grants, has
been successful in encouraging increased exploration
in Canada's other frontier areas, including the Beau-
fort Sea and the Northwest Territories (figure 5). In
1982, for example, there was a 50-percent increase in
exploration activity on Canada Lands. There have
been some petroleum discoveries in frontier areas-at
the end of 1982 frontier proven and probable oil
reserves were estimated at 3 billion barrels-but few
of these discoveries lie in commercially exploitable
oilfields. Although it is unlikely that there will be
significant production of oil from these areas in this
decade, Canada's frontiers will remain key to realiz-
ing Ottawa's goal of oil self-sufficiency over the
longer term (see text table).
Prospects for Oil Self-Sufficiency Beyond 1990
A key factor affecting Canada's oil self-sufficiency in
the next decade will be energy policy. How it evolves
will have a major impact on conventional oil produc-
tion, on oil sands exploitation, and on exploration and
development in the frontier areas. The potential of the
frontiers is excellent, but development of oil finds in
the hostile Arctic environment will be extremely
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Figure 5
Canada's Frontier Areas
Nerlerk
KopanoarA ?Koakoak
--- ^_ . _ OEast Amauiigakv,
Arctic
Ocean
Northwest Tientories
"~Canada
Ocean r
/
`bcrta/ IMA IIOP
Saskatcha.van
United
ft at**
to
Goose
Bay? Z ,
Newfot~dland
11
AOgo aKtU
so 100 150
Kilometers
Dome Q Gulf
A Oil discovery
o Oil and gas discovery
O Location well
Norman
,\yNells
expensive and will require the latest-and in some
cases not-yet-invented-technology. The industry
thus must have confidence that Ottawa will promote
policies ensuring some measure of stability and profit-
ability for the long-term investments needed in fron-
tier areas.
FJalfa L\
SC0TIPN
Greenland
(Denm ork)
-' Ncwtcundland
~y~~ .rScotiq
^St. Pierre
and Miquelon
(France)
North Atlantic
Ocean
N nth Atl mtcc
0-!,
200 400 600
Kilometers
Labrador
Sea
GRp, O
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we believe the continued depressed
state of the energy industry has forced Ottawa to
recognize the need for further changes in policy.
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Gulf of 6I
St. Lawrence
new / Ponce t!emarA C`'John's1
.... f'sland ' 1 / , Hibernia
Frederict`k arloitetown
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The offshore east coast of Canada-which includes
the Hibernia oilfield--has been the scene of increased
activity by energy developers in recent years. Explo-
ration has occurred offshore of Nova Scotia and
Newfoundland. In the first half of 1983, for example,
32 exploration agreements were signed with oil com-
panies operating on the east coast. These leases call
for the drilling of 38 new exploratory wells over the
next five years. Most industry activity is taking place
off the Scotian shelf because several large natural gas
finds have been made there.
Prospects for production from the Beaufort Sea in
this decade have dimmed, due in large part to the
lack of a big strike after promising drilling results in
1979 and 1980. Drilling in 1982 failed to add signifi-
cantly to proved reserves, and further delineation of
the Tarsiut Field-once thought to have the potential
to be the Beaufort Sea's first oil-producing field-
failed to indicate more than 350 million barrels of oil
reserves, an insufficient quantity for development
under present market conditions and the current tax
regime. The technical difficulties of operating in a
hostile climate have also dampened prospects for
Industry interest and activity in the Beaufort Sea
remain strong despite the lack of a big find. Three
major private-sector operators-Gulf Canada, Dome
Petroleum, and Imperial Oil Limited-all launched
extensive drilling programs in 1983, aimed in part at
extending the drilling season beyond its present 110
days
Gulf will introduce a $674 million drilling system
including an innovative conical drilling unit for use in
deep water, a mobile caisson system for use in
shallow water, two new icebreakers, and two new
supply boats. In addition, Gulf intends to spend over
$436 million in exploration activities in the Beaufort
Sea. Gulf signed exploration agreements with the
federal government in January to drill five wells-
three wildcat and two delineation-by March 1988.
Further testing of the Tarsuit Oilfield will be done, as
well as new drillin in the East Amauligak area.
Dome Petroleum, although experiencing financial dif-
ficulties, plans to increase its Beaufort Sea operations
through its subsidiary, Dome Canada, which is 78-
percent Canadian owned and therefore qualifies for
the maximum PIP grants. In March, Dome and 39
partners signed exploration agreements with the fed-
eral government to execute $960 million in explora-
tion activities by 1987. The agreements also call for
the drilling of eight wells.
Imperial Oil Limited intends to commission a new
$80 million drilling system for use in the Beaufort
Sea this year, including a $20 million mobile drilling
caisson. Imperial claims the new unit will accelerate
construction of offshore drilling structures, reduce
costs, and permit drilling in deeper water. The system
is being tested at Kadluk at a cost of $125 million,
the only offshore testing the company will perform
this year. In addition, Imperial signed six exploration
agreements in late 1982, calling for expenditures of
$800 million. Imperial in turn farmed out much of
the work to a Canadian group headed by Home Oil
Limited, which will drill 13 wells over five years.
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we think that such changes are likely to include:
Given Ottawa's past changes
? Additional concessions and special incentives for
heavy oil and oil sands development.
? Modifications of the tax structure for conventional
oil production in an attempt to slow the decline in
productive capacity.
Such modifications are unlikely to provide significant
new production of oil before the end of this decade,
but we believe they would go a long way toward
improving Canada's oil production prospects in the
1990s and, indeed, could return Canada to net oil self-
sufficiency. (C NF)
The foregoing policy modifications probably would
benefit domestic and foreign-owned companies by
increasing returns to the private sector and would ease
criticism of Ottawa's ener olic .
Approved For Release 2009/05/27: CIA-RDP84SO0895R000200050002-2
 Confidential
Approved For Release 2009/05/27: CIA-RDP84SO0895R000200050002-2
Confidential
Approved For Release 2009/05/27: CIA-RDP84SO0895R000200050002-2