HARD TIMES HIT CANADIAN PETROLEUM INDUSTRY

The Canadian petroleum industry, pinched by low prices and low return on investment, is seeking relief on a number of fronts. Industry groups are campaigning for reduced royalties, relaxed foreign investment requirements, and a change in rules requiring natural gas inventories for domestic needs before exports are permitted. Meantime, several Canadian companies have reported reduced earnings for the first 9 months of this year. And BP Canada Inc. has cut staff by about 25% and will reduce

Nov. 11, 1991

6 min read

The Canadian petroleum industry, pinched by low prices and low return on investment, is seeking relief on a number of fronts.

Industry groups are campaigning for reduced royalties, relaxed foreign investment requirements, and a change in rules requiring natural gas inventories for domestic needs before exports are permitted.

Meantime, several Canadian companies have reported reduced earnings for the first 9 months of this year. And BP Canada Inc. has cut staff by about 25% and will reduce capital spending by almost 50%.

ROYALTY RELIEF

Reducing oil and gas royalties would stimulate industry activity in Alberta and increase provincial revenues, says a study sponsored by the Independent Petroleum Association of Canada (IPAC). The study by University of Calgary economist Robert Mansell is the latest weapon in industry's campaign to win royalty cuts from the Alberta government.

The study pointed out that the petroleum industry is the single most important factor in determining economic growth and prosperity in Alberta.

"If royalties are adjusted downward, they will stimulate more activity which will create a healthier economy and result in revenue to the Alberta government," Mansell said.

"And if you adjust royalties properly, you don't have to raise taxes."

The Mansell study said a royalty cut of one-third on discoveries made after Jan. 1, 1992, would increase Alberta's gross domestic product by 0.7%/year over the forecast rate of about 1.5%/year for the rest of the 1990s.

There would be an increase in industry investment of about 7%, an additional $89 million in revenue for Alberta, and 57,000 more jobs by 2000. Without royalty cuts on new discoveries, the study said, industry investment and activity will decline until 1994 and increase slowly after that.

Premier Don Getty and other provincial officials have said royalty cuts are unlikely.

Energy Minister Rick Orman is expected to make a formal response later this month to industry pleas for a lower royalty rate. Orman has said cutting royalties would lead to increased taxes. He invited the industry to prove that royalty changes are necessary and feasible.

The Canadian Petroleum Association and other industry groups also have sought royalty relief.

Industry associations also are seeking a reduction in fo!-- id:news category:1 sub:news vol:89 iss:45 date 11/11 year:1991 pub:ogj --

Federal Energy Minister Jake Epp said he is considering changes to foreign investment rules administered by Investment Canada.

The rules limit foreign investment to energy firms worth less than $5 million unless regulators can be satisfied that an energy company has severe financial problems. Approval for the sale of Husky Oil Ltd., Calgary, to Hong Kong investors is being sought under this provision.

Foreign investors can buy nonenergy firms worth $150 million or less.

The industry also wants changes in a requirement for a natural gas inventory equal to 15 years of domestic needs before exports are approved by the National Energy Board.

REDUCED PROFITS

Low crude oil and natural gas prices continue to trim profits among Canadian companies.

Petro-Canada, Calgary, had a third quarter loss of $85 million and a 9 month loss of $234 million. At this time in 1990 the state oil company was on its way to a $181 million profit for the year.

Chairman Bill Hopper said he was encouraged by a third quarter 1991 profit of $10 million before a writedown of $95 million on its investment in the Syncrude Canada Ltd. oilsands plant.

Petro-Canada recently sold a 5% interest in Syncrude to Mitsubishi Oil Ltd. of Japan for $132.5 million.

Meanwhile, Nova Corp. reported a loss of $250 million for the first 9 months of 1991, compared with a profit of $134 million for the same period in 1991. Nova's third quarter 1991 results include a one time after tax writedown of $265 million on its investment in Husky.

Nova will sell its 43% interest in Husky to a group headed by Hong Kong businessman Li Ka-shing for $325 million so it can focus its resources on gas transmission.

The sale is expected to close Nov. 29, subject to regulatory approvals.

After eliminating the one time loss on Husky, Nova's continuing operations had a profit of $39 million in the first 9 months of this year. Nova operates a natural gas pipeline system in Alberta and a petrochemical division in Sarnia, Ont. Petrochemical earnings have been poor due to low prices.

Suncor Inc., which operates a synthetic crude oil plant in the Fort McMurray region of Alberta, reported a profit of $72 million in the first 9 months of 1991, compared with a $41 million profit in the same period last year.

The company said improved profits were mainly due to record synthetic crude production, higher natural gas production, and higher transportation fuels volumes. Suncor's oil sands group recorded its best 9 months for crude production with average rates of 61,900 b/d.

Encor Inc. lost $53.9 million in the first 9 months of this year, compared with a $42.8 million loss in the same period of last year. Capital and exploration spending slid to $60.6 million this year from $79.1 million in the first three quarters of 1990.

All sums are expressed in Canadian currency.

BP CUTS

About 140 employees were cut from BP Canada's payroll of 590. It will reduce capital spending to about $60 million in 1992 from $115 million this year. BP said the reductions will enable it to finance its exploration and development projects out of cash flow without further borrowing.

This is the second round of job cuts at the Canadian unit of British Petroleum Co. plc. The company eliminated 120 jobs in 1990,

The BP cuts increase total layoffs at major Canadian oil companies so far this year to more than 3,000. Other major staff reductions have been implemented at Shell Canada Ltd., Imperial Oil Ltd., Petro-Canada, Amoco Canada

Ltd., and Gulf Canada Ltd.

Esso Resources Canada Ltd., Calgary, Imperial's exploration unit, expects layoffs at the company to continue for the next 4 years.

Esso Pres. Doug Baldwin expects the Calgary payroll of 3,200 to be cut to 2,700 or 2,800 by the end of 1995. Esso has already made staff reductions through a voluntary program offering severance pay and early retirement incentives.