Oil, the State, and Federalism: The Rise and Demise of Petro-Canada as a Statist Impulse 9781442678019

Table of contents :
Contents
Tables
Acknowledgments
1. Introduction
2. The OPEC Oil Crisis, Canada, and the Federal Adjustment Strategy
3. The Establishment of Petro-Canada
4. International Oil-Market Changes and the NEP
5. Petro-Canada and the Effects of the NEP
6. Oil in a Changing International Context and Conservative Energy Policy
7. The Privatization of Petro-Canada
8. Conclusion
Notes
Bibliography
Index

Citation preview

Oil, the State, and Federalism:

The Rise and Demise of Petro-Canada as a Statist Impulse

The creation and privatization of Petro-Canada provides an important lesson in state intervention and Canadian public policy. John Erik Possum explores the reasons for the federal government's intervention in the energy industry between 1973 and 1984 and shows how its initial objectives failed, culminating in the privatization of Petro-Canada in 1990. In other countries, state oil policy unfolded along state-industry lines of conflict. Fossum shows us how in Canada the conflict was deflected to focus on the jurisdictional and constitutional concerns of governmental actors. The dismantling of state intervention was associated with a reverse deflection and reduced conflict in both the state—industry and intergovernmental arenas. Oil, the State, and Federalism is a sophisticated analysis of statist and federalist theories of Canadian public policy-making that will spark debate among political scientists, analysts, and policy-makers. JOHN ERIK FOSSUM is Associate Professor in the Department of Administration and Organization Theory, University of Bergen, Norway. He completed his doctoral studies at the University of British Columbia in 1990.

STUDIES IN COMPARATIVE POLITICAL ECONOMY AND PUBLIC POLICY Editors: MICHAKL HOWLKTT, DAVID LAYCOCK, STKPHKN MCBRIDK, Simon Fraser University Studies in Comparative Political Economy and Public Policy is designed to showcase innovative approaches to political economy and public policy from a comparative perspective. While originating in Canada, the series will provide attractive offerings to a wide international audience, featuring studies with local, sub-national, cross-national, and international empirical bases and theoretical frameworks. Editorial Advisory Board ISABEL BARKER, Political Science, York University COLIN BENNETT, Political Science, University of Victoria WALLACE CLEMENT, Sociology, Carleton University WILLIAM COLEMAN, Political Science, McMaster University BARRY EICHENGREEN, Economics, University of California (Berkeley) WYNFORD GRANT, Political Science, University of Warwick JOHN HOLMES, Geography, Queen's University JANE JENSEN, Political Science, Universite de Montreal WILLIAM LAFFERTY, Project for an Alternative Future, Oslo GORDON LAXER, Sociology, University of Alberta RONALD MANZER, Political Science, University of Toronto JOHN RAVENHILL, Political Science, Australia National University PETER TAYLOR-GOOBY, Social Work, University of Kent MARGARET WEIR, Brookings Institution, Washington, DC Published to date 1 The Search for Political Space: Globalization, Social Movements, and the Urban Political Experience Warren Magnusson 2 Oil, the State, and Federalism: The Rise and Demise of Petro-Canada as a Statist

Impulse]o\\n Erik Possum

JOHN ERIK FOSSUM

Oil, the State, and Federalism The Rise and Demise of Petro-Canada as a Statist Impulse

UNIVERSITY OF TORONTO PRESS Toronto Buffalo London

www.utppublishing.com ©University of Toronto Press Incorporated 1997 Toronto Buffalo London Printed in Canada ISBN 0-80200715-5 (cloth) ISBN 0-8020-7662-9 (paper)

Printed on acid-free paper

Canadian Cataloguing in Publication Data Possum, John Erik Oil, the state, and federalism : the rise and demise of Petro-Canada as a statist impulse (Studies in comparative political economy and public policy) Includes bibliographical references and index. ISBN 0-8020-0715-5 (bound) ISBN 0-8020-7662-9 (pbk.) i. Petro-Canada. 2. Petroleum industry and trade Government ownership — Canada - Case studies. 3. Corporations, Government - Canada - Case studies. 4. Energy policy - Canada. 5. Federal government - Canada. I. Title. II. Series. HD9574.C24P47 1997

338.7'6223382*0971

^97-930146-7

University of Toronto Press acknowledges the financial assistance to its publishing program of the Canada Council and the Ontario Arts Council.

Contents

LIST OF TABLES

VI

ACKNOWLEDGMENTS

1 Introduction

vii

3

2 The OPEC Oil Crisis, Canada, and the Federal Adjustment Strategy 3 The Establishment of Petro-Canada

73

4 International Oil-Market Changes and the NEP 104 5 Petro-Canada and the Effects of the NEP 152 6 Oil in a Changing International Context and Conservative Energy Policy 199 7 The Privatization of Petro-Canada 8 Conclusion 268 NOTES 293 BIBLIOGRAPHY 329 INDEX 353

236

25

Tables

5.1 Petro-Canada's Size 157 5.2 Petro-Canada's Oil Reserves and R/P Rates 158 5.3 Petro-Canada's Natural Gas Reserves and R/P Rates 158 5.4 Petro-Canada's Landholdings 160 5.5 Petro-Canada's Drilling Activities 161 5.6 Petro-Canada's Capital Expenditures 162 5.7 Petro-Canada's Retail Outlets, Capacity, and Utilization 163

Acknowledgments

This book is a revised and expanded version of my PhD dissertation, 'Assessing State Intervention: Federal Oil Policies, 1973-84,' submitted to the University of British Columbia. The original dissertation has been significantly shortened and revised. In addition, I have added two new chapters covering federal energy policy and the privatization of Petro-Canada during the period 1985-91. As a Norwegian national who has spent a number of years in Canada, I am fascinated and bewildered by the complex Canadian political scene. As an outsider with no prior knowledge of Canada, I was very fortunate to have Alan Cairns as my dissertation supervisor. He has been supportive and inspiring. He has also provided me with valuable suggestions and advice in the preparation of this book. Alan combines a passion for politics with analytical clarity in a remarkable and exemplary manner. A number of other scholars also gave much of their time and knowledge to make possible the dissertation on which this book has been built. Keith Banting, Don Blake, Paul Bradley, George Hoberg, John McDougall, and Peter Nemetz have all been very helpful and provided me with many insights and useful suggestions. Michael Hewlett, Alf-Inge Jansen, M. Ramesh, and Paul Roness have read portions of or entire versions of earlier drafts of this book. I have interviewed many people, in the preparation of both the dissertation and the book. Thank you for your time and information. I am grateful to the editing skills of Robert G. Clarke. I also want to thank two anonymous reviewers from the University of Toronto Press for their many useful comments, which I have sought to address in preparing this manuscript for publication. My colleagues and friends in Bergen and Canada and around the globe have been helpful and encouraging. In particular, I want to thank Lars

viii Acknowledgments Blichner, Per Laegreid, Johan P. Olsen, Linda Sangolt, Jasbir Singh Dhaliwal, Louis LeFebvre, Stuart Robinson, Glenna Forbes, Larry Jurjevich, Petula Muller, Nancy Mina, Dory Urbano, Turid Nordhus, Anne Teigland, Mariann Vagenes, Gerd Andersen, Gudrun Hopland, Arne Salbu, and Else Hole. A special thanks to Ewelyn. My research has received support from WUSC, UBC, Norges Forskningsrad, the Nansen Foundation, NAGS, and the Faculty of Social Science and the Department of Administration and Organization Theory at the University of Bergen. I am grateful to all. While many people have guided me to an understanding of the complex Canadian energy scene, any faults in this book are my responsibility. The book is dedicated to my mother.

OIL, THE STATE, AND FEDERALISM

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1 Introduction

Since the discovery in the second half of the nineteenth century that oil is a highly efficient source of fuel, millions of wells have been drilled in the crust of the earth, on both land and sea, and vast sums have been spent and enormous efforts taken to search for the 'black gold.' Gradually, as producers, investors, politicians, and others became aware of the uneven global distribution of the resource, the search for and delivery of oil became a matter of great urgency, and the 'politics of oil' became a central issue in world affairs. The resource's political importance increased yet again in the postcolonial world of the 19505 and 19608, with the emergence of new states that were eager to establish their independence from the old European powers. In the 19708 and early 19805, with the creation of the Organization of Petroleum Exporting Countries (OPEC) and the rise of multinational corporations (MNCs), a highly politicized world oil market elevated oil into the realm of high politics. Supply and price conditions for oil changed dramatically; to ensure supplies, states began to intervene in what had till then been considered mainly as the affairs of corporations. Governments began to launch comprehensive programs of economic adjustment. In Canada, the status of the resource as an important public issue was most evident in the National Energy Program (NEP), introduced in 1980. An NEP report published by the Department of Energy, Mines and Resources (EMR) observed: 'Any country able to dissociate itself from the world oil market of the 19805 should do so, and quickly. Canada is one of the few that can.'1 At the time, Canada, being both an importer and an exporter of oil, appeared to be a microcosm of the world oil market, in the sense that it incorporated the international tensions between consumers and producers within its own borders.

4

Oil, the State, and Federalism

Yet within just one decade the perception that oil was a governmental concern would be reversed almost completely. By the 19905 oil was no longer being singled out as the exception in the world of resource production and delivery; rather, it was viewed as more like an ordinary commodity in a 'globalized' world market that traded more or less freely in commodities. Some eight years after the introduction of the NEP, an EMR assessment found: 'Energy security is an international problem one that can be solved only by working within the international marketplace, not by withdrawing from it.'2 In Canada the interventionist trend had by the early 1990s been largely reversed as a result of comprehensive programs of deregulation and privatization at the federal and provincial levels of government. Even countries that had not introduced programs of deregulation and privatization were becoming increasingly uncertain about the appropriate role of the state in an increasingly interdependent world. By the mid-1990s, Canadian governmental affairs on the oil scene had become so quiet that a newspaper headline, speaking about the oil industry, could proclaim, NEVER IS HEARD A DISCOURAGING WORD ABOUT THE ENERGY MINISTER. Indeed, in an almost complete turnaround from industry-government relations in the 19705 and early 19805, it could now be said that 'no controversial energy issues pit Alberta against Ottawa, or producing provinces against consuming ones.'^ According to one critic writing in 1996, since assuming the portfolio in 1993 tne Liberals' energy minister, Anne McLellan, had championed deregulation - much like her Conservative predecessors of the 19805 and 'backed the industry in fighting her own government's consideration of a carbon tax and convinced Cabinet to exempt Canadian oil and gas exports from legislated environmental assessments.'4 By McLellan's time a twenty-year period of extraordinary changes and unusually high levels of conflict in Canadian energy relations had come and gone. Three distinct periods during those years (1973-9, 1980-4, 1985-91) had seen the introduction of three different federal energy policy frameworks, each new framework a response to compelling changes on the international and domestic fronts. In what seems with the luxury of hindsight to have been rapid succession, the country in the first two periods adopted a fairly complete set of interventionist goals; in the last period it abolished most of them. The subject of this book, then, is the formation and transformation of Canadian oil policy during this broad period from the early 1970s to the early 19908: the actors, the events, the rationales, and the repercussions. I

Introduction

5

set out to answer three basic questions: Why did the federal government intervene in the oil sector in the period 1973-84? Why did Ottawa essentially fail to achieve its original energy objectives in the field of oil? And why was Petro-Canada privatized in 1990? In exploring and assessing this volatile period with its huge policy initiatives, I will look at the following: forces that led to and conditioned intervention; the federal government's objectives; its methods of putting those objectives into practice; and the effects of the intervention. I will also consider questions relating to the state's capacity to intervene, and to control the instruments of intervention. With particular emphasis on the role of its key policy instrument, Petro-Canada, I will consider why Ottawa ultimately failed to achieve its original objectives in the field of oil, why it did not succeed in its attempts to curtail the power of the oil MNCs, and why, finally, Petro-Canada was privatized at a particular - and relatively late - point in time.0 Petro-Canada might have been expected to be the first casualty of the state's retreat from intervention; instead, it proved to be the last instrument to be significantly altered. In this long period, two processes, which I call deflection and reverse deflection, came to typify Canadian oil policy. These two processes are closely related, if not inseparable. Although the particular conditions that caused deflection had largely vanished by the mid-igSos, the process of reversal was deeply informed by that earlier experience and was, indeed, if not exactly its mirror opposite, at least the flip side of a policy paradox. A Historical Approach In looking at this period in close historical detail, I am taking a leaf from Castles's textbook on comparative public policy. Castles observes: 'A sense of history is what is most missing in contemporary policy analysis, a lacunae which can probably only be properly remedied by a focus on the experience of particular cases.'6 My subject is the evolution of federal energy policy objectives and instruments over this period, the forces that shaped the intervention, and the effects of the intervention over time. I intend to identify continuities and changes in the number and range of actors involved; in the intentions and interests of the actors; and in the larger structural context in which the actors operate. In all of this, my hope is to shed light on how institutional and structural factors shape actors' perceptions and preferences as well as how individuals, groups, and collectivities shape and give meaning to existing institutions and structures and set in motion or influence processes of structural change.

6 Oil, the State, and Federalism When viewed from a historical perspective, for instance, Petro-Canada is not simply a single, isolated entity but part of a larger interventionist framework. As an instrument, it can be located in both its immediate and its broader policy and political environments; this location in turn reveals how the instrument interacted with and was shaped by that larger context. As Castles puts it: 'A historical approach is essential not merely in providing analytical leverage on the role of human agency in the public policy equation but, no less important, in making it possible to treat structural contexts as a totality, rather than as mere rankings or weights on a series of discrete variables. History reveals the one sense in which it is meaningful to say that the sum is more than its parts: the sense in which human action is embedded in a particular context.'7 Part of this, too, means accounting for important changes in the economic role of the federal state and considering, for instance, how these changes have helped shape the role and operations of a policy instrument such as Petro-Canada - looking at how changes in instruments of intervention come about because of larger and more comprehensive changes in the role of the aggregate state in the economy. My emphasis will be on the upstream stage of oil and gas development, because that stage was the focus of most of the federal government's interventionist activities. Political scientist C. Tuohy notes: What distinguishes the Canadian policy process ... is its quintessential ambivalence: ambivalence about the appropriate roles of the state and the market, about national and regional conceptions of political community, and about individualist and collectivist concepts of roles and responsibilities. This ambivalence arises from tensions that are endemic to three fundamental features of the Canadian context: the relationship with the United States, the relationship between anglophones and francophones within Canada, and the regionalized nature of the Canadian economy and political community. In each of these sets of relationships Canadians find themselves pulled in competing directions: between attraction to and repulsion from the United States, and between loyalty to the national and the regional or linguistic community ... That very flexibility, however, has ironically derived from a lack of consensus about the design of an overall framework. 8

What Tuohy characterizes as institutionalized ambivalence, which is rooted in uncertainty about and even absence of agreement on the overall constitutional framework, may provide the most compelling reason why federal interventionist measures such as Petro-Canada must be con-

Introduction

7

sidered in a wider context. At times the wider range of policy measures that have an impact on Petro-Canada are oriented to finding solutions to substantive issues; at other times, those measures can be redirected to address the jurisdictional and constitutional concerns of governmental actors. Deep-seated fundamental conflicts relating to the Constitution, for instance, influence both the setting in which the corporation operates and, at times, the corporation itself. Given the complex nature of Canadian oil policy, it is not surprising that the Canadian intervention in the oil sector in the first two periods (1973-84) took several shapes and worked for several different purposes. In response to the initial OPEC oil shock of 1973, Ottawa introduced a number of measures intended to increase federal control over oil activities in Canada. This need for control was manifest in all federal objectives in the energy field and was greatly reinforced in Ottawa's response to the second international oil market upheaval in 1979-80. The Liberal government in Ottawa regulated oil and gas prices. It became a sovereign entrepreneur by establishing a national oil company (NOG), Petro-Canada, as a key policy instrument. It altered its role as landlord by changing the system of rights issuance and land management in areas under federal jurisdiction - the 'Canada Lands' - and revised on a number of occasions the federal price, tax, and incentive regimes in the energy sector. To reduce the influence of both the industry and the oilproducing provinces, Ottawa introduced a host of measures common to all oil-producing countries. In addition, this period witnessed a significant increase in federal administrative capacity in the oil and energy sector. The federal objectives in the NEP of 1980 - self-sufficiency, Canadianization, and fairness - all involved a federal commitment to control oil activities. Both Petro-Canada's role in the new federal policy framework introduced in 1976 and the corporation's assessment of its overall role tell us something about changes over time and about the degree of conformity between federal and corporate objectives. In turn, the intentions of the most important actors associated with Petro-Canada form the backdrop for an analysis of the company's growth and investment decisions. And a look at the corporation's expansion and the scope of its operations should reveal the nature of Petro-Canada's capacity to pursue federal objectives. Petro-Canada, unlike most NOCs in the world, did not escape political control; however, this may have had more to do with the highly politicized energy setting than with the nature of the controls on the corporation. As part of the larger federal and federal-provincial interventionist

8

Oil, the State, and Federalism

setting, the corporation became a key element in a program of 'policy mobilization.' The company was also a vehicle for the federal state's program of jurisdictional defence and expansion in relation to provincial governments. State-Society and Intrastate Relations Among the problems in considering the process of Canadian oil-policy formation during this period is that the initial Canadian oil-market response not only excluded interest groups from intergovernmental bargaining but that the conflict was also subsequently deflected from its 'obvious' focus on relations between state and society (with 'society' here meaning the oil industry) toward intrastate (federal-provincial) relations.9 This deflection involved far more than an exclusion of interest groups. It arose from the manner in which the sudden international changes heightened a latent insecurity on the part of governments in Canada — an insecurity stemming from a lack of agreement on the ultimate location of sovereignty. The deflection occurred in two instances: 1973 and 1980. The net effect was a 'deconstitutionalization of energy policy' during the period 1973-84, which led to a transformation of federal and provincial policies and regulatory systems. These policies and systems became increasingly oriented toward the other level of government; that is, federal policies became oriented toward solving problems in relations with provinces, and provincial policies became oriented toward issues in the federal sphere. This process helped perpetuate an intergovernmental bias that increased the likelihood of future conflicts. Intergovernmental conflicts also weakened the interventionist thrust, and this created a need for generous concessions to make up for regulatory uncertainties. After each crisis, interest groups received compensation for their losses and usually regained strength. In the aftermath of a crisis, however, what cannot easily be regained or compensated for is the sense of heightened uncertainty. In the energy industry and in government circles, the loss of trust and the rapid and wide-ranging changes in regulatory frameworks that accompanied intense intergovernmental and state-society conflict and interaction made it difficult to develop stable, predictable regulatory regimes under which the public and the energy companies would benefit. The net result was weakened or shattered trust relations, and this undermined the policy objectives and the policy instruments and altered the overall setting in which the actors operated.

Introduction

9

These conflicts were exacerbated by key structural features of the state; and by the nature and manner of application of a number of policy instruments applied by both Ottawa and the provinces in the 19705 and early 19805; and by the perceptions of those policies among the actors involved. Policy instruments served to strengthen and perpetuate an intergovernmental bias; this in turn rendered the instruments ineffective in addressing the substantive concerns of government actors relating to resource development and use. The development of federal and provincial systems of resource management was riven with conflicts both in Western Canada and in the Canada Lands; this testifies to the important role played in the process by intergovernmental relations rather than simply federal interventionism in energy policy-making in Canada. For instance, the Atlantic provinces in particular Newfoundland - played an important role in prompting Ottawa to develop, through the NEP, a more interventionist policy for the Canada Lands. What was adopted in both Newfoundland and Ottawa, and part of which applied to the same geographical area, was a type of regulatory regime that seemed largely incompatible with federalism. This policy, derived from one followed for the North Sea, was designed for unitary states, and it may work well in unitary states, but it did not work in Canada. In fact, it could be argued that this was one of the worst systems to use in a climate of jurisdictional conflict. The resource management systems introduced in various parts of Canada differed considerably, and these differences strongly affected outcomes. While the Atlantic provinces relied extensively on the experiences of the North Sea countries, the Western provinces relied on the American model. The important differences between these two different regulatory systems made it far more difficult for Ottawa to develop a coherent federal approach to resource management and to the provinces. The highly interventionist systems in the Atlantic provinces also left less policy space for Ottawa to pursue any type of 'national' or 'nationwide' response. Doern and Toner concluded that the NEP 'did in fact alter the balance of power within both the government-industry and intergovernmental relationships of power. While the industry as a whole and the producing province governments remained powerful interests, the new-found federal assertiveness in the early 19805 did result in a discernible shift in federal power relative to provincial and industry power.'10 At the time they wrote this (the book was published in 1985), they believed that a complete dismantling of the NEP was both unlikely and undesirable. Not long

10

Oil, the State, and Federalism

after, however, the 'new-found federal assertiveness' vanished, most of the NEP was dismantled, and both levels of the state retreated from intervention. The very magnitude of change meant that their conclusion about an altered balance of power among the key interests no longer held. Looking back now, it is easier to see the central importance of the aggregate effects of government - at both levels - on the conduct of Canadian energy policy-making over time; governmental actors became increasingly focused on each other and resorted to increasingly competitive interventionist strategies that conflicted with each other. Both federal and provincial policies turned out to be ineffective in reaching their stated objectives; in part it was this apparent ineffectiveness, coupled with the fact that the intervention increasingly fell out of step with international oil market developments, that led to the rapid and comprehensive dismantling of the federal government's interventionist role after 1984. The inability of the NEP to challenge the oil MNCs must be related in large part - if not entirely - to intergovernmental competition and conflict.11 This is not to downplay the influence and independent role of the 011 MNCs, but rather to stress the application to Canada of the statist proposition that an almost inverse relationship exists between the magnitude of state intervention and its effectiveness.12 Finally, the retreat of the state occurred more at the federal level than at the provincial level. The manner in which the state retreated is revealing. The first policy instruments to be eliminated were the ones that mattered most in the intergovernmental arena; among the last was PetroCanada. The intergovernmental conflicts surrounding the NEP were so intense that key actors needed reassurances against similar actions in the future, and this need influenced the nature of the retreat. As well, following the introduction of the Free Trade Agreement, the retreat of the state was no longer simply a domestic matter but a part of Canada-U.S. relations. The provinces moved to ensure that the FTA would contain clauses that would bar the federal government from certain courses of action and preclude a future NEP. The conflicts therefore also expanded into the international arena to include other countries and agreements that could effectively block a future federal attempt to launch a program of a magnitude as great as the NEP. A Theory of Statism and State Autonomy Stephen Krasner presents perhaps the clearest exposition of the essential features of the statist theoretical perspective. According to Krasner, five

Introduction

11

characteristics distinguish the statist perspective from approaches related to the behavioural revolution in political science: First, statist approaches see politics more as a problem of rule and control than one of allocation; they are more concerned with issues associated with preserving order against internal and external threats than with the distribution of miles to political actors ... Second, statist approaches emphasize that the state can be treated as an actor in its own right either as an exogenous or an intervening variable. Whether in its institutional form or in terms of specific policies, the state cannot be understood as a reflection of societal characteristics or preferences ... Third, statist orientations place greater emphasis on institutional constraints, both formal and informal, on individual behavior ... Actors in the political system, whether individuals or groups, are bound within these structures, which limit, even determine, their conceptions of their own interest and their political resources. Political outcomes cannot be adequately understood as simply the resolution of a vector offerees emanating from a variety of different groups. Fourth ... it is necessary to understand both how institutions reproduce themselves through time and what historical conditions gave rise to them in the first place ... Once an historical choice is made, it both precludes and facilitates alternative future choices ... Fifth, statist arguments are more inclined to see disjunctures and stress within any given political system ... Political life is characterized, not simply as a struggle over the allocation of resources, but also periodically by strife and uncertainty about the rules of the game within which this process is carried out.' 3

Krasner's presentation of the statist perspective contains two notions of the state: whatTheda Skocpol terms the state as actor and the state as structure (or the institutional and organizational composition of the state). 14 From the international perspective, the state as actor can also be seen as the 'gatekeeper,' standing at the junction of the domestic and the international scene; from this position the state is able to mediate international and domestic processes. The state, as gatekeeper, thus acts as a country's most important mechanism for preserving order against internal and external threats or crises. Evans and colleagues note that it is when faced with a crisis that a state is most likely to launch distinctive new strategies with little or no input from societal actors.10 The position at the junction of the international and domestic arenas provides the state with a unique opportunity to utilize external or internal events to forward its own interests. For instance, the ability to define an event as a crisis or

12 Oil, the State, and Federalism threat requiring drastic action is in itself a tremendous potential source of state power. Crises therefore provide states with unique opportunities to set and control the agenda of the nation. Even when responding to demands for action, states often put their own mark or imprint on the intervention and the crisis response. To forward their interests or relative bargaining position at the domestic level, state officials often borrow and adapt ideas and action models from other countries. The world outside the nation-state thus often serves as a fertile ground from which new impulses, trends, fads, and problemsolving approaches appear. In turn, state officials may adopt these approaches to enhance their power and position at the domestic level. States tended to respond to the two OPEC oil shocks of 1973 and 197980 by injecting themselves more than ever before in what had previously been seen as the private affairs of the oil industry. In doing this they prescribed and exercised different degrees of intervention that reflected different aspects of the problems facing oil-consuming and importing countries. One analyst, John Ikenberry, has identified at least three different strategies, which he calls 'neo-mercantilist adjustment,' 'competitive accelerated adjustment,' and 'defensive market response.' The strategies differ systematically with regard to the extent to which oil is singled out as a special concern. Ikenberry suggests that the Canadian adjustment strategy most closely resembled the neomercantilist strategy, an approach also taken by the French government. The neomercantilist adjustment strategy, which emphasized the role of the state as a producer of energy, was essentially a national and government-sponsored (and/or government-owned) program for the controlled development of indigenous sources of energy, and as such was sector-specific and preoccupied with the notion of security of supply. It defined the problem as one of 'national control over foreign energy sources.' The basic policy responses involved nationalization of one or several energy firms, negotiated state-to-state energy contracts, and an active state role in the development of indigenous sources of energy (whatever they might be). France, in adopting this strategy, placed a heavy emphasis on the development of nuclear power. The second strategy, 'competitive accelerated adjustment' relied less on direct state intervention and more on market forces, defining the problem as one of general industrial competitiveness rather than security of supply. As such, the policy measures were not confined to the energy sector but instead encompassed all sectors. The role of the state in devising this strategy, according to Ikenberry, was one of negotiation within the framework

Introduction

13

of intersectoral industrial adjustment and industrial policy. This strategy involved measures to move away from energy-intensive industries. Further, important measures were taken to encourage increased energy conservation and fuel efficiency. Japan and West Germany adopted this adjustment strategy. The 'defensive market response' envisaged the role of the state as one of facilitator, and emphasized the price mechanism as a tool to shape production and consumption decisions. It was thought that this strategy would, in the case of rising world oil and energy prices, stimulate production and reduce consumption. The defensive market response strategy emphasized the development of indigenous resources (as did the neomercantilist strategy) as well as fuel efficiency and conservation (as did the competitive adjustment strategy). The main difference between the defensive market response and the first two strategies is that in the defensive market response strategy, the state's role is largely that of a passive bystander. All three adjustment strategies would allow domestic energy costs to reflect international oil price levels. The neomercantilist strategy was perhaps both the most interventionist and the most ambitious strategy a state could take up in response to the OPEC oil crises of the 1970s. Given the historically dominant role of the oil MNCs in all facets of Canadian oil development, it is interesting to examine the leverage the federal state had in relation to the oil MNCs. Was Ottawa responding to the needs of the oil MNCs, or was it pursuing a relatively independent strategy? It is now widely recognized that states are capable of formulating objectives reflecting their own interests - objectives that may differ or conflict with those of dominant societal actors. However, for a state to be an important actor, according to Skocpol, it needs to initiate independent goal formulation: States conceived as organizations claiming control over territories and people may formulate and pursue goals that are not simply reflective of the demands or interests of social groups, classes, or society. This is what is usually meant by 'state autonomy.' Unless such independent goal formulation occurs, there is little need to talk about states as important actors. Pursuing matters further, one may then explore the 'capacities' of states to implement official goals, especially over the actual or potential opposition of powerful social groups or in the face of recalcitrant socioeconomic circumstances.' 7

Skocpol's definition of state autonomy consists of two parts: state goals

14 Oil, the State, and Federalism and capacities. Both Skocpol and Krasner require essentially that an autonomous state formulate goals that diverge from those of powerful societal actors. But, as Eric Nordlinger suggests, state autonomy can also surely involve cases where the goals of state actors converge with or are compatible with the preferences of societal actors, as long as the state acts on its preferences. According to Nordlinger, the degree of convergence or divergence 'serves as the most important basis for distinguishing between the different types of state autonomy.'19 When issue areas become politicized to involve a larger number of powerful societal actors whose interests may (or may not) conflict, an interventionist state is bound to initiate actions that converge with the interests of at least some actors. In the study of autonomy it is more important, then, to consider whether the state has distinct preferences in a policy-making area; to assess whether and how it has acted upon those preferences; and finally to determine whether those preferences are relatively consistent over time. But it is also important to consider the divergence of interests. In the energy sector, after all, the oil MNCs were the dominant actors prior to the oil embargo, and had a heavy influence on policy. Theoretically it would seem unlikely that in the absence of goal divergence, the federal government would make a deliberate attempt to reduce this industry's influence; it would be more likely, of course, if the state/society goals were divergent. In discussing the capacity of states to pursue specific kinds of policies, Skocpol suggests that 'a state's territorial integrity, financial means, and staffing may be the place to start in any investigation of its capacities to realize goals.'20 In Canada each of the eleven state actors - the ten provinces and the federal government - had administrative and economic resources, constitutional autonomy, and powers related to a specific territory. The question of autonomy thus relates to individual state actors the federal and individual provincial governments - rather than to the aggregate Canadian state as a whole. A state's capacity to intervene is related to the strategy it adopts. In adopting a neomercantilist strategy, the Canadian federal state played two roles: regulator and developer. As an aid to assessing the federal state's capacity to act independently of the oil MNCs, Merrie Klapp provides a model covering a wide range of state interventionist measures in the field of oil in 'new,' non-OPEC, oil-producing countries; in doing so, she focuses both on the role of state enterprise and on the powerful link that can be forged between the state as landlord and the state as entre-

Introduction

15

preneur. Klapp, concerned with analysing the range of policy options available to states to ensure national control of oil development, lists four sets of indirect and direct interventionist measures that governments can use to control the oil industry: revenue control, which includes taxes, royalties, and all kinds of fees; management control, referring to the government's ability to control the operations of private-sector actors, which can be applied to production, leasing, and bidding practices; operation control, referring to performance and safety regulations that stipulate what companies do and where they can do it; and ownership control, referring to the regulation of the companies' relative share of all kinds of leases and contracts, which can be enforced through concession agreements or concession agreements combined with direct government participation.21 Direct participation agreements take many forms, such as profit sharing, carried interest, joint ventures, production sharing, and service contracts. Of all of these measures, Klapp argues that direct participation is the most powerful interventionist means: The greater the degree of state autonomy, the more extensive would be the use of entrepreneurial oil policies ... The more autonomous the state is in bargaining with societal groups, including domestic and international actors, the greater is the likelihood that the state will make public policy choices that rely primarily on public ownership. Conversely, the more influential societal groups are in bargaining with the state, the greater is the likelihood that the state will make public policy choices that rely primarily on taxation, leasing, and regulation of private operations rather than on direct ownership by public enterprises. The presence of influential societal groups, therefore, can be attributed to a weakly autonomous state or to societal groups that retain bargaining power despite strong state autonomy. 22

Klapp essentially equates state autonomy with state capacity, arguing that 'the relative political opposition of multinational and private domestic groups to state autonomy in oil explains the varying degrees of government equity participation in national oil industries.'23 Keeping in mind the simple model of state autonomy outlined earlier, we can consider a number of propositions relating to why and how Ottawa intervened. A first proposition is that the federal government's response to the OPEC oil crises was reflective of federal goals - namely, to ensure control of oil industry activities, to promote Canadianization, and to maximize the federal economic take from oil and gas activities. This

16 Oil, the State, and Federalism proposition assumes that the crises provided Ottawa with a novel opportunity, which Ottawa seized. A second proposition is that to ensure its goals were met, Ottawa adopted a neomercantilist strategy based on a strong, direct state presence. A third proposition is that as part of that strategy, Ottawa introduced a national oil company (NOG). Here, following Klapp, we can attempt to measure the state's autonomy by gauging the relative importance of the NOG: the more prominent the NOG, the more autonomous the state. But an autonomous state must do more than establish a powerful NOG: it must also ensure that the NOG will do what the state officials want it to do. In sum, state autonomy is a function of independent goals, the capacity to intervene, and the capacity to control the instruments of intervention. Why did Ottawa essentially fail to achieve its original objectives in the field of oil? In 1984, the state began to retreat from the oil sector. A state may retreat because it faces societal pressure (which can be felt even more strongly when it lacks the capacity to carry out the intervention) or because of 'recalcitrant socioeconomic circumstances.' P.B. Evans and colleagues note: It is tempting to see the development of bureaucratic machinery as enhancing autonomy, autonomy as facilitating the state's ability to operate as a corporate actor, both as enhancing possibilities for effective intervention, and both as being reinforced in turn by the expansion of state intervention. The result is an image of the state as an evermore self-aggrandizing juggernaut. We argue instead for a more double-edged relationship between these characteristics, suggesting that the state's very success in building its role as a corporate actor may undercut its ability to remain autonomous and that effective intervention may increase the extent to which the state becomes an arena of social conflict.24

Over time, then, an interventionist state becomes increasingly fused with societal actors, and this undercuts its ability to fashion coherent policy initiatives independently of those actors. This tendency is often referred to as 'the embedded state.'20 State retreat may also be strategically motivated. If comprehensive intervention has reduced state autonomy, the state may retreat to reestablish its autonomy. Ikenberry notes that the actions taken by a state to withdraw from regulatory intervention may be 'as powerful an expression of state capacity as intervention was in the first place.'2t) This was not the case in Canada, however. In the post-NEP period, state elites did not see state retreat as a means of restoring state autonomy.

Introduction

17

Why was Petro-Canada privatized in 1990? Following Klapp, we would assume that the greater the societal opposition to intervention, the greater the pressure on state officials to alter the status of Petro-Canada. But the formal decision to privatize Petro-Canada was taken four to five years after most of the NEP had been unravelled. If societal pressure was a key factor in this, why did it take so long for a formal privatization decision to be made? The question is whether the decision to privatize the corporation really mattered as much as other changes in the role and status of the corporation. Two such possible changes come into play, both of which are consistent with the state autonomy model. First, as many analysts have pointed out, over time state elites weaken in their ability to control the activities of NOCs. This tendency is reinforced by the oft-noted propensity for NOCs to escape accountability and control and become the tools of their respective managers, a process referred to as corporate autonomy.27 Presumably, when such a change occurs societal (oil industry) opposition to the NOC weakens because the NOC no longer operates as a policy instrument of the state. Second, the NOC may develop corporate autonomy in relation to both the state and other corporate interests on par with the operations of the oil MNCs. In such cases the NOC will pursue its own corporate priorities; and when state and societal objectives conflict, it will side with the societal actors and not with the state.28 The State as Structure

Skocpol's second notion of the state is termed the state as structure. Skocpol and colleagues, in distinguishing between the state as actor and the state as structure, describe what they call a 'Tocquevillian' approach: In this perspective, states matter not simply because of the goal-oriented activities of state officials. They matter because their organizational configurations, along with their overall patterns of activity, affect political culture, encourage some kinds of group formation and political actions (but not others), and make possible the raising of certain political issues (but not others). To be sure, the 'strengths' or 'weaknesses' of states as sites of more or less independent and effective official actions constitute a key aspect of the organizational configurations and overall patterns of activity at issue in this perspective. This second approach is entirely complementary to the ideas we explored in the previous section [related to the role of the state as actor], but the investigator's modus operandi is not the same. When the effects of states are explored from the

i8 Oil, the State, and Federalism Tocquevillian point of view, those effects are not traced by dissecting state strategies or policies and their possibilities for implementation. Instead, the investigator looks more macroscopically at the ways in which the structures and activities of states unintentionally influence the formation of groups and the political capacities, ideas, and demands of various sectors of society.2^

This notion of the state focuses on how the structures of states tend to favour certain kinds of ideas, objectives, and political capacities. The structure of the state affects the range of policy instruments available and the types of policy networks that states develop and retain over time. The structural configurations of a state also tend to favour certain types of conflicts and outcomes while actively discouraging or preventing others. An obvious example is the noted tendency of the Canadian state to favour conflicts of a territorial nature. In the literature on Canadian federalism, the role of state-related factors in shaping outcomes has long been noted. In addition, the 'state as structure' model also emphasizes how federalism and the constitutional framework guide and shape the perceptions and actions of state elites, and their interactions. Federalism is perhaps the most important structural feature of the Canadian state. In this discussion it is the particular nature of the overall Canadian state and the special version of federalism in Canada that are key points of reference, rather than, say, the effects of federalism as such. W.M. Chandler and H. Bakvis, in a comparative analysis of federal systems, distinguish between two types: jurisdictional and functional federalism. They call the Canadian system jurisdictional federalism because it contains a 'combination of parliamentary institutions and traditions and separate jurisdictional spheres of national and provincial government.'30 Canadian federalism has also taken the special form of a 'federalism of big governments' - an aggregate Canadian state composed of eleven state actors.31 Skocpol and colleagues note that the two state roles - the state as actor and the state as structure - are analytically complementary. However, since they wrote their book in 1985 it has become clear that the two approaches to the study of the state, while complementary, actually differ more than those writers thought at the time. This is also reflected in Skocpol's later writings, which are informed mainly by the 'state as structure' approach.32 Analytically, the state as structure approach is closely linked to the emergence of the new institutional perspective in political science.33 This broadly based perspective includes a set of fundamental assumptions that differ from those which inform the state autonomy

Introduction

19

model. For instance, the conception of actor rationality in the state autonomy model is based on the notion of interest. The assumption is that the state has identifiable interests, which it seeks to realize. The new institutional perspective is informed by the notion that people are rule-governed rather than driven by self-interest.34 What this means is that 'the axiomatics for political action begin not with subjective consequences and preferences but with rules, identities, and roles; and a theory that treats intentional, calculative action as the basis for understanding human behavior is incomplete if it does not attend to the ways in which identities and institutions are constituted, sustained, and interpreted.'35 State officials occupy formal roles, which are embedded in systems of rules and norms. These rules and norms shape the identity and self-conception of every official. Rules and norms guide conduct and provide humans with a sense of meaning and direction. The constitution, which is conceived as a 'bundle' of rules and norms that deeply inform politics and political action, is perhaps the most important single institution in any democratic system. State officials will therefore always be deeply influenced by the basic rules and norms that inform the living constitution. But to say that human action is informed by rules and norms is not the same as confining rule-based conduct to those situations in which the rules and norms are unambiguous and agreed upon. It is precisely when the basic rules and norms that inform actors are suddenly challenged, altered, or undermined that people become most strongly fixated on rules. For instance, when the most important rules and norms are suddenly altered or undermined, it becomes critically important for state officials to try to re-establish a set of rules and norms, or develop new ones. Sudden disruptions are problematic. When uncertainty and conflict over some of the basic constitutional rules - such as those which govern intergovernmental relations - become endemic, the very status of the constitution is affected. Unending constitutional conflict weakens the legitimacy of the constitution as a metaframework. This in turn influences how state officials perceive and define their roles, and how they perceive politics and policy-making. This means that when there is uncertainty and conflict over the rules that govern intergovernmental relations, the process of policy-making will to an extraordinary degree revolve around setting the rules of the game. Under what circumstances will this occur? It is widely recognized that sudden external shocks or crises can challenge and sometimes even

2O Oil, the State, and Federalism undermine an established institutional order. The two OPEC oil crises of the 19708 sparked uncertainty and conflict over the jurisdictional rights of governmental actors. They also underlined the need for comprehensive state action and brought forth novel and unfamiliar interventionist measures. The crises were of such a character as to make it likely that intergovernmental conflicts would revolve not only around how powers should be divided between levels of government but also around what has long been an unsettled constitutional issue in Canada - namely, how to fashion constitutional change. Canadian politics has long been marked by uncertainty and conflict over some of the basic constitutional rules and norms. What Alan Cairns has termed the 'insecurity of governments' derives from what was and still is an unsettled political issue in Canada - namely, the issue of where sovereignty ultimately resides. As Cairns notes, 'Psychologically, the absence of an amending formula in the original B.N.A. Act that could be operated entirely in Canada, and the subsequent inability to agree on such a formula after the 1931 Statute of Westminster, meant that the elementary question of the appropriate location of sovereign power was left in abeyance until 1982.'3 This deep-seated political issue had the potential to inflame sentiments and heighten conflicts among the key actors, the eleven governmental actors. Until 1982 at least, these governmental actors viewed themselves as the stewards of the constitution, as they sought to monopolize the constitution and the constitutional change process. When both levels of government feel compelled to act to avert an externally induced crisis (such as the 1973 OPEC oil crisis), both become more aware of the constraints on their powers in the constitutional framework. They also become tied more closely together in networks of intervention that reduce the ability of individual governmental actors to resolve issues independently of the other governmental actors. This means that increased interventionist capacity may tend to make state actors more sceptical of the appropriateness of the constitutional framework and more likely to interpret the constitution to serve their needs and interests; and state actors may become more cognizant of the other actors' actions that harm what they perceive to be their interests.37 Thus, increased intervention at both levels of government can enhance the insecurity of governments in Canada and weaken the legitimacy of the constitution as a regulatory framework. The OPEC oil crisis and the absence of any fundamental agreement on constitutional change account for the recurring tendency for the energy

Introduction

21

issue to be deflected from its 'obvious' focus on state-oil industry relations toward intrastate issues.38 This is also related to the general proposition in the federalist literature that federalism tends to favour conflicts of a territorial kind.39 But the strong link between, on the one hand, energy policy, and on the other, the jurisdictional and constitutional concerns of governmental actors suggests that the conflicts will be more profound than those normally attributed to federalism. Federalism generally refers to intergovernmental interaction within certain fixed bounds. Here, the very bounds that are meant to regulate the interaction become part of the conflict. This tendency will have profound effects on state-society relations.40 It will also influence the nature of policy-making. In Canada, jurisdictional concerns have tended to deflect attention from policy substance although the reverse has also occurred. The most dramatic example of such deflection was the NEP, with its roots in the 1973 OPEC oil crisis. In turn, the processes of deflection triggered by the two OPEC oil shocks of the 19705 helped produce the subsequent process of reverse deflection, associated with the collapse and subsequent dismantling of the NEP and the privatization of Petro-Canada. The 'state structure model' presents us with a set of propositions that differ somewhat from those set forth in the state autonomy model. First, crises that require comprehensive state intervention are assumed to magnify underlying uncertainties and conflicts regarding the ultimate location of sovereignty in the constitution. This will affect the responses to a given crisis, because state officials are forced to take into consideration their relations with societal actors and with other governmental actors. Second, the more emphatically the response to the crisis becomes focused on jurisdictional concerns, the more the conflict will be deflected away from state-society issues and concerns toward intergovernmental ones. The stronger the deflection, the more the goals and policy measures adopted by one government (for instance, Ottawa) will be oriented toward the positions of other governmental actors (that is, the provinces) . This can mean that the substantive content of energy issues will take second place to how energy concerns affect the jurisdictional and constitutional rights of governmental actors. The same logic that informs constitutional change will then inform the handling of energy issues, in that all governmental actors will be concerned with policies 'to capture the future.' Third, this process will influence the role and operations of policy instruments such as Petro-Canada. Whenever a conflict arises, a high-

22

Oil, the State, and Federalism

profile policy instrument such as Petro-Canada will be politicized and more closely linked to the political priorities of the federal government, almost regardless of the corporation's policy mandate. In the case of Petro-Canada, this meant that the operations of Canada's NOC were pushed onto the Canada Lands, where federal jurisdictional powers could be maximized. Interdependence and Reverse Deflection Why did Ottawa essentially fail to achieve its original objectives in the field of oil? The state autonomy model would portray state failure as a result of societal opposition; the state structure model would focus on opposition from other governmental actors, and emphasize how over time the intervention fell out of step with the conditions that first led to it. The general assumption is that the stronger the deflection from substantive issues to the jurisdictional and constitutional concerns of governmental actors, the less capable are governments when it comes to addressing energy problems. Contextual changes will increase this discrepancy. The most significant contextual changes are the ones in the conditions that first generated the intervention and gave it its particular shape and orientation. Of particular importance here was a reversal of the changes in the world oil market - changes that had prompted states to intervene and that in Canada had done much to fuse the substantive energy concerns of the federal and provincial governments with their jurisdictional and constitutional concerns. The changes in the international oil market that led to lower oil prices and a glut in oil supplies after 1982 lessened the concerns of governments with security of supply, and also reduced the importance of oil as a strategic commodity. In Canada the third OPEC oil shock in 1986, which had its roots in the decline in the price of oil and in an increasingly glutted oil market, helped trigger the process of reverse deflection - that is, the delinking of substantive energy concerns from jurisdictional and constitutional concerns. As well, the country experienced changes in the domestic factors that had contributed to the fusion of energy concerns with jurisdictional and constitutional ones. The process of deflection from policy substance to jurisdictional concerns almost certainly altered the roles and influence of dominant societal actors. There are a number of ways of looking at this alteration. It could be said, for instance, that the net effect of this process of deflection was to exclude societal actors, as Berry notes.41 An alterna-

Introduction 23 live account would suggest that a deflection of conflict reduced the willingness of the federal government (and of the provinces) to grapple with the power of the oil industry as oil industry actors became important allies to governments. Or it could be argued that a deflection of conflict reduced the ability of governmental actors to grapple with the influence of the oil industry, because the intervention became so clearly focused on other governmental actors that governments became ineffective in holding back industry influence. A fourth outcome is also conceivable: that intergovernmental interaction excluded industry interests, but that Ottawa and the provinces afterwards set out to patch up the perceived damage resulting from the intervention in order both to address the substantive concerns they had neglected during the conflict and to ensure the future co-operation of the oil industry. Most likely, the process of reverse deflection altered both the specific nature of state retreat at each governmental level and the fate of individual policy instruments such as Petro-Canada. The assumption in the state structure model is that at both levels, state retreat takes place in response to what is seen as the failure of state intervention. In the matter at hand, this means that the instruments which mattered most in the intergovernmental arena - that is, those which contributed most to the fusion of substantive and jurisdictional concerns - were altered first. The fact that Petro-Canada was not privatized until 1990 indicates, again, that PetroCanada mattered less to the intergovernmental arena than did other of the federal government's policy measures. The Two Faces of Statism

Individual state actors in Canada, then, often pursue goals in the intergovernmental arena and the state-society arena. As well, the actions of individual state actors in Canada are informed, conditioned, and constrained by the unique structure of the aggregate Canadian state and by international factors. In this sense, Skocpol's two notions of state namely, the state as actor and the state as structure — are complementary. A statist perspective by its very nature emphasizes (a) international factors, (b) how the interaction of different states influences the domestic policies of individual states, and (c) conversely, how the domestic policies of individual states influence other states. It would argue, for instance, that international events do not have a uniform impact on a state, but produce effects that can vary significantly from one part of the state to another. International changes in the role of states in resource develop-

24 Oil, the State, and Federalism ment and resource management do not necessarily translate into uniform changes in all parts of a complex state. But the two notions of the state also generate divergent research propositions. Students of state autonomy see states as bearers of interests whose goals may often differ from the objectives of dominant societal actors. In assessing the potential for autonomous action through the analysis of policy instruments such as NOCs, they emphasize the policy roles assigned to the NOG, the wider capacity of the state to intervene (through other means besides the NOG), and the capacity of the state to control the NOG. The international statist literature has generally taken this approach to studying NOCs. Many of the themes that statist scholars are concerned with have been developed independently in the literature on Canadian federalism; the two bodies of literature are therefore highly compatible. While the stateas-structure model as presented here draws heavily on the literature on Canadian federalism, it also adds a more explicit focus based on the new institutional perspective in political science, which sees humans as rule oriented. The state-as-structure model, then, differs from the state autonomy model in that it emphasizes more strongly how intergovernmental relations or intrastate factors, as influenced by the constitutional framework, shape the behaviour of governments. Intergovernmental interaction brought on by a sudden international crisis can serve to deflect conflicts and issues; intergovernmental factors and the jurisdictional concerns of state actors often interact with policy substance to generate outcomes detrimental to solving substantive concerns. All of this influences the role of policy instruments such as NOCs in ways that the state autonomy model does not completely take into account. The revival of fundamental and unsettled constitutional questions plays a role as well. From this perspective, periods of heightened domestic conflict and uncertainty are not likely to be the result only of domestic factors or processes; the interaction of domestic and international developments is also likely to play a role. It is my hope that together, these two models will provide useful insights into the rather mixed bag of Canadian oil policy during the past two decades or more, from the 1973 OPEC oil crisis and dramatic changes in the international oil market, through the new nationalist Canadian policies, to the age of neoconservatism and the privatization of Petro-Canada.

2

The OPEC Oil Crisis, Canada, and the Federal Adjustment Strategy

From the Second World War until at least the early 19705, federalprovincial interaction in the energy sector was characterized mainly by continuing attempts on the part of policy-makers to reach an appropriate balance between provincial needs and federal requirements. In this process, the needs of multinational corporations tended to dominate the formulation of Canada's energy policy, and as a result the federal government tended to share the concerns of both the oil industry and the producing provinces. These concerns were especially apparent within the framework of the Diefenbaker government's National Oil Policy (NOP), introduced in 1961. The NOP, at its heart a response to a worldwide oversupply of oil, and the pipeline debates of the 1950s set the stage for a ten-year-long climate of consensus among the main players on the energy stage, with the administrations of the 19605 essentially taking a rather passive and limited, laissez-faire approach to oil and gas development. Among the main players were strong foreign voices: in 1973 over 91 per cent of the assets in the oil and gas industries were under foreign control.1 The Canadian ownership regulations in the NOP represented no real impediment to the operations of foreign-owned oil companies in Canada. Exports and imports of petroleum were under federal jurisdiction and regulated by the National Energy Board (NEB), set up in 1959; but the NEB had been granted considerable administrative discretion in the matter of formulating and implementing federal regulatory policy. In fact, as Ian McDougall contends, the NEB essentially became co-opted by the oil industry.2 Further, with regard to direct intervention, the federal government decided in 1967 to participate with an equity share in the Panarctic Oil Ltd. venture to explore for oil and gas in the Arctic islands,

26 Oil, the State, and Federalism but this was simply a case of the government stepping in to help in a situation where the private sector considered the costs to be too great; in essence, it was a bailout of small private firms in which there was no federal government influence on corporate decision-making. The NOP divided Canada into rwo market areas: consumers west of the Ottawa Valley (the Borden line) used Alberta oil, paying a certain additional premium; consumers east of the Ottawa Valley used imported oil, paying the lower international price. The intent of Ottawa's price regulation scheme under this plan was to help the indigenous oil industry expand and to provide domestic producers with a market outlet; it was not to protect Canadian consumers from the vagaries of the world oil market. Ottawa's oil and gas tax and incentive scheme - intended to stimulate oil and gas development and expansion of the industry - underlined the federal government's producer orientation. Even in those geographical areas under direct federal jurisdiction - the 'Canada Lands' (the areas north of 60° and offshore) - the federal government's regulatory role was minimal. The main federal instrument in the geographical frontiers was the system of land management and oil and gas licensing outlined in the Canada Oil and Gas Land Regulations of 1961 (SOR/61-253).3 A- Thompson and M. Crommelin note that the COGL regulations offered permits and leases of excessive duration. They observe, somewhat wryly: 'The closest approximation to this long duration is to be found in the 60- and 99-year concessions that the Arab sheiks granted in their unenlightened period prior to World War II.'4 The COGL regulations consisted of departmental regulations that had never been subject to parliamentary approval and that provided the federal government with very little control over the rate and location of resource development in the frontier areas. Writing about the COGL regulations in !973> Thompson and Crommelin noted: 'Few Canadians know about them even now and few are aware that the government of that day gave the oil industry carte blanche, telling them to write the kind of regulations that would create incentives for northern development. As a result we have a resource "give-away" unparalleled in any country in modern times.'5 Increasingly, these departmental regulations fell out of step with developments that began to take place internationally after the late 19605, a time when the state's role in resource management was expanding in most countries. By 1970 the government had introduced a land freeze and notified the industry that it would introduce important changes in the system; but three years later - when the first 'oil shock' struck - the COGL regulations were still in place. When it first confronted the imme-

The OPEC Oil Crisis 27 diate effects of the OPEC oil embargo, Ottawa had little control over industry operations, and had not yet produced a new set of regulations to address the problem. Canadian energy policy in the 19605, then, followed a number of basic principles, according to John McDougall: 'to establish an integrated national economy in natural gas but to permit a continental and international pattern of trade in oil; to export natural gas surplus to Canada's own present and foreseeable requirements; and to permit, if necessary, exports at prices which realize something less than their full value, provided the exports contributed to the service of Canadian markets which would otherwise be inaccessible and provided there was a prospect of future exports on more favourable terms. A basic consensus in values existed between the federal government and the governments of the oil- and gas-producing provinces as to the management of Canada's oil and gas reserves. The NOP's divided oil market ensured Alberta a guaranteed market outlet and the possibility of exports to the United States; and in a period of falling real oil prices the five eastern provinces benefited from the low international prices. Canada thus stood with one leg in a North American system of oil distribution and with the other in the international system of crude oil trade. The two systems were neatly tied together by the large international oil companies that operated both.7 Four large companies - Imperial Oil, Gulf Oil Canada, Shell Canada, and Texaco Canada, all subsidiaries of the major international oil companies, the 'Seven Sisters' - were the largest players in the critically important petroleum sector. They were the key landholders, oil explorers, producers, marketers, refiners, and owners and operators of the pipelines and the refineries.8 The dominant role in Canada of these major oil MNCs, most of them based in the United States, strengthened the links between Canadian and American policy - links that were bolstered also by the fact that most of the oil and gas pipelines in Canada either had the American market as their final destination or crossed American territory. The oil MNCs could bring their vast financial, managerial, technical, and geological expertise into play; and to play their own role, the federal and provincial governments depended on information submitted by the two key industry organizations, the Canadian Petroleum Association (CPA, representing the majors) and the Independent Petroleum Association of Canada (IPAC). Through their participation in the National Advisory Committee on Petroleum (NACOP), key industry players had close access to the main federal decision-makers.9

28 Oil, the State, and Federalism The major international oil companies, with their high degree of vertical integration, and with their oligopolistic power as world purchasers, were able to maintain high barriers to entry to the world oil market both for other private firms and for governments. The results of this included relatively stable oil prices (with a noticeable decline during the 19605), and adequate and predictable petroleum supplies during the postwar period. OPEC and the International Market, 1973-9 In the 1970s a complex mix of domestic and international factors led to the breakdown of the consensus of the 19605, which in turn led to increased politicization and conflict in energy relations. In the late 19605 and early 1970s, new challengers - in particular the independents and the oil-producing governments - eroded the market control of the oil MNCs. This created considerable uncertainty about which actors would dominate oil trade in the future, and about the terms of trade that would hold sway. Perhaps the greatest stimulant to change was the rise of OPEC - a rise driven by that organization's increasing share of world oil production and by its enhanced power to regulate oil production and oil pricing. The sense of crisis of the early 1970s was heightened because oil matters could not be well regulated by the GATT framework; one result of this was an absence of any international framework that could accommodate conflicting interests. Instead, the actors set out to devise their own strategies. Most of the oil-producing and oil-exporting countries had initiated a host of changes in the late 19605 and early 19705 to wrest control from the oil MNCs. As observed by many analysts, including Merrie Klapp, these actions included altering existing concession systems or establishing new types of systems. Besides greatly expanding their landlord role, most of the oil-exporting states also became entrepreneurs. They tended to devise interventionist systems based on the powerful combination of these two roles; the typical result was a mutually reinforcing system of state intervention.10 A number of exporting countries embarked on ambitious programs of nationalization or, barring that, state participation and/or production-sharing arrangements; sometimes they entered the downstream sector of refining and distributing. State-to-state trade in oil emerged as another way that exporting and importing countries could bypass the distribution system established by the oil MNCs. In the early 1970s, as American oil production peaked, reserve addi-

The OPEC Oil Crisis 29 dons fell, and domestic demand continued to climb, Canada's federal government also found itself forced to respond to changes in CanadaU.S. relations. In the process, the United States became more dependent on oil imports, from both Canada and OPEC countries.11 The NEB had placed export controls on Canadian oil and gas to protect Canadian consumers from sudden shortages; but Canadian exports surged after 1971, which was the year the United States lifted its Mandatory Oil Import Program and notified Ottawa that it wanted more Canadian oil and gas.12 Another important factor in the formation of Canadian oil policy was the American push to the frontiers in the 19605; this led to increased drilling in general and to the discovery, in 1968, of the huge Prudhoe Bay oilfield on Alaska's north slope - a discovery that stimulated oil exploration in the Canadian Arctic. The Arctic, it was hoped, would become a vital part of a great energy storehouse that would protect the United States and Canada against OPEC. These considerations were not based on hard facts; but the vast natural resources in Canada and the United States, combined with a long tradition in North America of large-scale resource extraction, made it logical that central decision-makers would look to adopt an adjustment strategy based on the need to develop additional domestic resources of oil and gas. But the greatest shift in the postwar system came in the aftermath of the Yom Kippur War of October 1973, when the Arab countries that dominated OPEC placed an embargo on supplies and forced a sudden price increase, initially with the intention of persuading the Western nations to force Israel to withdraw from certain occupied territories. This precipitated the first oil crisis - an 'oil shock' in the sense that the industrialized countries had for decades taken cheap oil for granted. The spiralling oil price increases and supply shortfalls resulting from the OPEC oil embargo raised grave concerns among industrialized and nonindustrialized oil-importing countries about the security of oil supplies. It became apparent after the volatile oil market of 1973-4 that the OPEC nations, despite internal strife, had been able to assert control over their own natural resources and become the dominant price setter on the international oil scene. Indeed, in the 1970s every OPEC member was able to wrest control of oil production from the major international oil companies.13 The organization introduced regular and structured price increases at least until the Shah of Iran fell from power in early 1979.14 Such market dominance did not have to depend on the invoking of embargoes. The many underlying political conflicts and tensions that existed in the

30 Oil, the State, and Federalism highly volatile Middle East only served to underline the precarious nature of the oil importers' positions; rather than weakening OPEC, these conflicts played into its hands. The erosion of the fragile norms that guided the oil trade meant that the responses to the embargo and the underlying restructuring of power relations had to be framed at both the international and state levels. On the international level, the oil-importing and oil-consuming Western nations formed the International Energy Agency (IEA) to counteract the new power of OPEC. At the state level, both oil-exporting and oilimporting states took measures to grapple with the new reality of dramatically altered power relations. Oil-importing states were particularly concerned with the need to devise strategies to reduce their dependence on OPEC oil. Oil became a strategic good for almost every state, and oil matters became more tightly integrated with the political concerns of each state. This integration of oil policy with other policies and concerns at the domestic level took place at the same time that states were making efforts to dissociate oil concerns from other bilateral trade and multilateral concerns at the international level. The uncertainty faced by central decision-makers in oil-importing countries was soon reflected in the different problem definitions and long-term adjustment strategies formulated in those countries.15 The main underlying trend on the world oil market, as it was seen at the time, was a secular change in the bargaining relations between the oil MNCs and OPEC. Yet this transition was neither clear nor complete. Although the changes signalled a shift in power from the MNCs to OPEC, of almost equal importance was the new-found power of individual oil-producing and oil-exporting states. They could use this power either to follow or to challenge OPEC's collective decisions, as their own needs indicated. The general sense of crisis and uncertainty about the future was in itself an important factor contributing to the often dramatic responses taken by many nations. That being said, the fact that the U.S. government retained a complex system of oil price controls suggests that at least in the initial stages of the oil crisis, American decision-makers were uncertain whether OPEC could stay sufficiently unified to regulate prices indefinitely. Increased American dependence on oil from Canada and elsewhere fostered the perception that America's power was declining, and created apprehension around the world petroleum scene. In the context of Canada-U.S. relations, OPEC's actions could be seen as driving a wedge between oil concerns and other bilateral trade concerns. Most likely,

The OPEC Oil Crisis 31 OPEC's actions gave Canada's federal government a freer hand, in relation to the United States, to develop a national energy strategy. The American response to the crisis, 'Project Independence,' focused at least partly on the need for national independence, and was therefore largely compatible with the actions taken by the Canadian government. In short, Canada was under pressure to reduce its dependence on OPEC oil, and the nationally oriented neomercantilist strategy that it embraced was consistent with the attempts taken by the United States to reduce its own dependence on OPEC oil. The drive for a more independent Canadian stance in relation to the United States was enhanced by mounting scepticism about the role of the transnational and mostly American-based oil companies operating in Canada. The Canadian government, a minority Liberal government, faced considerable pressure from its own backbenchers and from the New Democratic Party, which held the balance of power in Parliament, to take measures to increase Canadian ownership and control in the important oil sector. The inability of the oil majors to fend off the demands of the producing countries for more control over upstream oil activities - exploration and development - as evidenced in nationalizations, state participation agreements, and important changes in the concession systems that regulated the activities of the companies, reduced the ability of those companies to act as vital go-betweens for the oil-exporting and oil-importing countries.16 The ensuing credibility gap spilled over to affect the Canadian subsidiaries. Although these companies had been operating in Canada for years, they were now increasingly seen as foreign actors operating outside the bounds of local control.1^ This issue revolved not only around foreign ownership and control of Canadian operations as such, but also around the degree to which the Canadian majors operated independently of the operational networks established by their respective parent companies. Critics contended that the Canadian majors had no autonomy over their own activities; and that as a result, Canadian oil activities were in the hands of a number of large companies whose operations were being challenged by an increasingly assertive OPEC.18 Oil industry officials, many of them Canadian nationals, denied allegations that their firms lacked autonomy.19 The U.S. government was by then applying price-regulation measures to prevent domestic crude oil prices from rising with world prices. It was clear that if Canada let its domestic price rise to world levels, the Canadian policy stance would at least partly diverge from that of the United States, with potentially negative effects on those consumers and indus-

32

Oil, the State, and Federalism

tries which were dependent on exports to the United States. Canada, being a small oil producer on the global scale, was unable to influence the price of oil; for its part, the United States had played a critical role in price setting. Thus, somewhat ironically, by adopting the world oil price, Canada would be signalling to its neighbour its belief that OPEC's actions would stick - in effect, it would be indirectly supporting OPEC. Ottawa was thus forced to face the uncertainties relating to future developments on the world oil scene, and to the political and economic - international as well as domestic - costs of rapid change. Notwithstanding all of this, there was an apparent need to restrict exports and channel domestic production to domestic markets. Ottawa's intervention was not driven simply by international factors; it was also increasingly shaped and conditioned by actions taken by the producing provinces, both before and immediately after the OPEC oil embargo, to increase provincial revenues from and control over oil and gas development. The OPEC oil embargo became a catalyst for intergovernmental interaction because it raised the stakes so high, because the producing provinces, with their different interests, were eager to capitalize on the potential gains produced by OPEC's actions. As a result, the traditional process for balancing provincial needs and federal requirements was abandoned, and replaced by a process in which each level of government - not just in Ottawa and the producing provinces in Western Canada but also in the potentially producing provinces in Atlantic Canada — largely ignored the interests of the other level, and instead sought to expand its jurisdictional powers to the full. As a result of all this, Ottawa was placed in a number of different and potentially conflicting roles. In the period following the OPEC oil embargo, energy politics - and especially oil politics - thus moved from the stage of 'low polities' to be ranked among the 'high polities' concerns of states. When policy issues become defined and addressed as high politics concerns, states become strongly preoccupied with order, rule, and control. The net result in this case was to reinforce the notion, by then widely accepted, that oil was no ordinary commodity but rather a strategic commodity. This in turn altered popular perceptions regarding the appropriate role of the state in the oil sector. Self-Sufficiency and the Federal Canadian Adjustment Strategy In the post-OPEC embargo period (1973-84), in their attempts to catch up with the changes taking place on the international level, the federal

The OPEC Oil Crisis 33 and provincial governments - no matter what party was in power embarked upon a highly interventionist and 'nationalist' path in oil and gas development. The conflicts of the time, while they reflected the many unique problems in the Canadian setting, were largely driven by the global changes in the power relations between governmental and privatesector actors, and between industrialized and Third World countries. The net effect was a rapid erosion of the fragile norms and rules associated with the petroleum production and distribution regime, which had been largely private-sector-operated in the postwar period. Although the Saudi government denied that Canada was on the embargo list, Canada faced reduced imports in 1973-4 as a result of the extreme pressure placed on available supplies by other importing countries and by the joint decision of the major oil MNCs to 'spread' the effects of the 25 per cent shortfall in supplies that had been imposed by OPEC against the embargoed countries. The shortfall that resulted was mostly offset by tanker shipments, however. Considerable political uproar ensued after it was alleged in the media that tankers were being diverted from Canada to the United States, although it was later found that these allegations were without substance. But the absence of clear effects on supply did not reduce the importance of the OPEC oil embargo as a sudden shock and as an indication that a major political restructuring was taking place between the major oil companies and the consuming countries on the one hand, and the oil-producing countries on the other. The Liberals' 'nationalist' energy program was clearly launched with the Trudeau government's pronouncement, on 6 December 1973, of a new national energy policy for Canada, the overall goal of which was selfsufficiency in oil and oil products by the end of the decade. The basic policy measures announced were (a) to establish an Energy Supplies Allocation Board to handle petroleum shortages, (b) to create a single national market for Canadian oil, (c) to extend the International Pipe Line Ltd network to Montreal,20 (d) to establish a pricing mechanism that would stimulate domestic oil production and lead to self-sufficiency while also preventing the industry from reaping windfall profits, (e) to create a national oil company intended primarily to 'expedite exploration and development,' and (f) to stimulate increased research and development of oil sands technology. The national oil company (NOG), to be named Petro-Canada, would eventually begin operations in 1976. The goal of self-sufficiency was premised on the need to shift oil activities from the production of conventional low-cost oil in the Western provinces to high-cost sources of oil: these included conventional oil from the

34 Oil. the State, and Federalism Canada Lands, synthetic oil from the Alberta tar sands, and the heavy oils of Saskatchewan. Prime Minister Pierre Trudeau noted in his December !973 speech: 'The reserves from conventional sources - mostly from the oilfields of Alberta - are known and no major new discoveries can be hoped for at present. Production from these existing reserves is expected to decline toward the end of this decade and will then be insufficient to meet current and projected rates of consumption ... Canada must therefore move and move immediately to develop its frontier and non-conventional sources of supply so as to be able to reach a situation that will permit self-sufficiency.'21 Federal estimates indicated that while Canada had ample oil and gas resources, the Western provinces were rapidly running out of conventional supplies - although this accounting made no mention of the potential for enhanced or tertiary recovery from the Western Sedimentary Basin. The government considered the main alternative sources of oil to be the frontiers and the tar sands, with the frontiers also important as the main future source of natural gas. Reasoning that maximizing production from existing and potential oil and gas sources would result in considerable pressure to export oil and gas, and would accelerate the process of resource depletion, thereby shortening the period in which Canada would enjoy self-sufficiency, the Liberal government began pushing in a different direction. What was emerging — and what was especially prevalent in the minds of key federal decision-makers — was the idea of a pan-Canadian and nationally oriented supply system in which the federal government would play a critical part. The plan was based not only on the vision of a more independent Canadian stance vis-a-vis the United States but also on the assumption that OPEC would continue to dominate the market in a politicized world oil scene. This neomercantilist orientation, at odds as it was with the established pipeline structure and with the strong continentalist pull faced by the Canadian economy, was inevitably quite fragile. Having adopted the goal of self-sufficiency, Ottawa had little or no assurance that the private sector's investment decisions would conform with the government's stated priorities. Faced with high discount rates, private companies normally require a relatively rapid return on their investment; for this reason, they need to bring any reserves discovered into production as rapidly as possible.22 Because of their capacity to generate investment funds internally (from existing production in Western Canada), the subsidiaries of the MNCs operating in Canada were least exposed to this problem and had the largest capacity for risk taking.23

The OPEC Oil Crisis 35 Besides possessing the most advanced technical information and expertise, they, as the main landholders in the geographical and technological frontiers, had the best geological information available. Indeed, with their international networks of operations, they had the ability to capitalize quickly on technological breakthroughs around the world. But at the same time, the foreign-owned oil companies were constrained by the policies of their home countries and (to different degrees) of their own parent organizations. Because they were no less eager than Canadian-owned companies to bring oil discoveries into production, they would push hard for increased exports of oil and gas. As the conventional production that generated their internal cash flow began to dwindle, they would probably become even more concerned with making a rapid return on their investments. Further, from Ottawa's perspective, their very mobility - their ability to shift operations from one country to another and from one part of Canada to another - made them potentially unreliable as resource developers. Given the high-cost and high-risk nature of Canada's future oil and gas sources, this question of reliability of the corporations became a key issue for the government. At the same time, the federal government, having established self-sufficiency as a goal, faced this problem: How could it encourage increased development of high-cost resources while also maintaining adequate control of development? This dilemma created considerable tension between the Department of Energy, Mines and Resources (EMR) and the Department of Indian Affairs and Northern Development (DIAND), the two federal departments most closely involved in oil and gas development in the frontier areas.24 According to Larry Pratt, EMR was mainly interested in increasing its control over the operations of the oil industry, while DIAND was more concerned with maintaining a high level of private investment in areas under federal jurisdiction. While both departments wanted to maintain a prominent role for the federal government, EMR's focus was on energy policy, while DIAND officials viewed their role as much wider - namely, to pursue 'province building' in the North. 2a Ottawa resolved this policy dilemma by emphasizing the political aspects of self-sufficiency - that is, by focusing on the need to increase federal control over oil and gas development and, it followed, over the activities of the oil industry in Canada. The goal of self-sufficiency was thus combined with other important objectives such as Canadianization of the industry, and revenue redistribution along both federal/industry and federal/provincial lines. By applying principles of Canadianization in both the public and private sectors, the federal government could stimu-

36 Oil, the State, and Federalism late the development of an indigenous oil industry as an important counterweight to the oil MNCs; it could also promote the conversion from conventional low-cost sources (as found in the Western provinces) toward high-cost sources in the geographical and technological frontiers (that is, the Canada Lands, and the tar sands and shale oil in the Western provinces). Because this conversion would be costly, a larger share of oil and gas revenues would have to be redistributed to the federal government as the main governmental actor responsible for this transformation. The federal government acknowledged the link between foreign ownership and control on the one hand, and concerns about oil price and security of supply on the other. Its main concern was not with Canadianization as such, because a policy of Canadianization can relate to both public and private ownership and control. Rather, the government was concerned with increasing federal control over the activities of the oil industry - in particular with its own ability to control the rate and location of oil and gas development in Canada. This emphasis on control was not simply a function of the pressures facing Ottawa, but also an expression of the priorities of federal decision-makers. Policy instruments constitute a vital part of the state's capacity to act, but their use and effectiveness is closely tied to the structure and operations of the central administrative apparatus. The administrative apparatus must provide decision-makers with information and policy advice, and it must co-ordinate and regulate the activities of the wide range of policy instruments established over time by the state. A number of federal officials had for several years been looking into the possibility of establishing a national oil company in Canada as a means of bringing Canadian energy policy more into line with the major changes taking place in the world. The first steps toward this end were taken in Trudeau's administrative reform of 1969, when the government recruited a number of prominent individuals from the private sector, among them Wilbert (Bill) Hopper. This initiative later provided a new deputy energy minister, Jack Austin - himself a businessman drafted into the bureaucracy - with the opportunity to assemble a team of federal officials to strengthen Ottawa's capacity to make energy policy, both within EMR and through the establishment of a public enterprise. The aftermath of the OPEC oil crisis saw a slow but steady accumulation of decision-making capacity in Ottawa, centred in EMR and reinforced by a wide and expanding network of policy instruments. After the OPEC oil crisis struck, it was quickly recognized that an important obstacle to an effective response had been the relative lack of policy-

The OPEC Oil Crisis 37 making and administrative capacity within the federal energy bureaucracy. When they began trying to frame medium- and long-term responses to the OPEC oil crisis, officials in EMR found that they had far too little relevant resource information and data on industry operations; as a result, they found it difficult to formulate policies to address international and domestic events on the energy scene. In the early 1970s the main problem facing EMR, which had responsibility to 'maintain up-to-date data and provide policy advice on the subject [of energy] to the Government of Canada,' was not that it lacked expertise and data on reserves and resources of oil and gas as such, but rather that it lacked the ability to assess the significance to policy of the available data. Joel Bell, who wrote EMR's first comprehensive energy analysis, 'An Energy Policy for Canada, Phase 1,' noted that when he joined EMR in 1972 the department possessed large amounts of data, but the data was neither policy-oriented nor collected with a specific policy-making purpose in mind. 27 Rather, at the 8 time the department had a strong focus on commodities,2 which served to weaken its role in formulating energy policy. The energy development section was also underrepresented as compared to the other sections within the department. 29 The small energy sector combined all energyrelated activities, including nuclear energy - an aspect of energy in which the federal government was much more strongly involved than in oil and gas.3° The department was responsible for both energy and minerals - a circumstance which underlines that energy policy-making was a low priority for Ottawa in the early 1970s. In that decade, EMR's staff increased by over 500 person-years.31 The growth in its influence as a department was most evident in its reorientation from an essendally commodity-oriented and technical department to one that was far more capable of generating policy-relevant data and policy advice for the federal government. The major transition the department underwent after 1972 was visible in the increased importance of its policy sector, in the increased importance of energy relative to minerals, and in the increased administrative specialization within the department's energy sector. By the early 19705 a number of dynamic individuals, including Hopper and Austin as well as Bell, were working at EMR. From then on, EMR's status gradually rose. The department attracted increased policy expertise and became the focal point for an expanded federal presence in the field of energy, a presence that included a host of semiautonomous agencies. This change was of great importance for the process of establishing Petro-Canada. Given its decision to play a greater role in Canadian oil and gas devel-

38 Oil, the State, and Federalism opment and management, the federal government had two basic options: it could adopt direct measures or indirect ones. Direct measures included setting up an NOC such as Petro-Canada, and/or acting as landlord in the areas under federal jurisdication, the Canada Lands. Indirect measures related mainly to Ottawa's powers to tax, to regulate interprovincial and international trade, and to provide grants to provinces, groups, and individuals.32 They also included controlling interprovincial oil and gas prices in Canada. Canada's constitution sets out the measures open to either level of government. One of the problems facing the federal government in influencing upstream oil and gas activity related to the 1867 British North America Act, which granted ownership of the natural resources within provincial boundaries to the provinces.33 Indeed, the oil- and gas-producing provincial governments retained ownership of a very high portion of the oilbearing lands and were therefore less constrained by private-sector actors.34 This circumstance placed the Canadian provinces in a position somewhat similar to that of the North Sea countries, which could claim ownership of all the petroleum resources on the offshore continental shelf. Further, the extensive degree of public provincial ownership of onshore oil and gas resources gave the provinces a particularly strong card in their dealings with the federal government and its Crown agents. For instance, under Premier Peter Lougheed, Alberta made it quite clear that it would not allow a company that was fully owned by the federal government to establish a plant in Alberta.30 This structural aspect of energy policy clearly rendered direct federal interventionist means such as PetroCanada less effective than they would have been in a unitary state. The federal—provincial division of powers constituted an important barrier to any direct federal presence in oil and gas development in the provinces. This was not related to Ottawa's power to establish a NOC as such. Rather, Ottawa was limited by its inability to act as a landlord in the provinces. It could not, for instance, equip its NOC, a direct interventionist measure, with preferential access to land and to oil- and gas-bearing assets in the provinces. Tax and fiscal measures constitute important indirect means for governments to regulate resource development, distribute resource rents and revenues, and influence the nationality of industry participants; however, these means do not meet all of these objectives equally well. When oil companies must pay higher income taxes, they are much less inclined to invest, especially in risky and long-term projects; it is just as true that tax deductions and reductions are powerful incentives to invest. When taxa-

The OPEC Oil Crisis 39 tion is used as a policy measure for regulating resource development, it is not only the level of taxes that counts, but also the nature and composition of those taxes. The latter factors can influence who invests, how and where companies invest, and the extent to which companies reinvest their earnings. As incentive systems, tax regimes can increase the pace of resource development, but they also entail foregone revenues for the government. In this sense, incentive systems often amount to subsidies of industry activities. The size of such subsidies, from a political perspective, is linked to the importance the federal government attaches to a particular goal and also to the industry's ability to extract concessions from the government. But subsidies of various kinds can also ease the acceptance of other forms of federal intervention, including direct federal participation (such as through Petro-Canada) and the federal land-management system. Also, concessions granted at an early stage of resource development can be made up later through increased taxation on production, once the private developers have invested large sums of capital. Tax incentives often have important distributional effects - both anticipated and unanticipated - and tend to favour certain companies over others. In general, the incentive system in place in Canada favoured the large multinational oil companies that made resource profits and paid taxes. Further, incentive systems tend to promote certain regions and discriminate against others. This regional discrimination was particularly pronounced in Canada, because one of the two main petroleum regions was within provincial boundaries, while the other was within federal jurisdiction. Tax and fiscal measures, as multipurpose and multifunction instruments, are used both for allocative and distributive purposes. As such, they can become 'overloaded,' that is, they can be made to fulfil tasks that conflict or at least are incompatible. This applies both to individual measures and to how different policy instruments are made to interact.3 In Canada, the somewhat ambiguous constitutional division of overlapping powers left considerable room for federal actions to influence activities within provincial bounds, and for provincial activities to influence federal actions. This had the potential to exacerbate the problem of overload, especially when each level of government used the available instruments to expand its jurisdictional control. Ottawa's ability to use indirect means to influence resource development in Canada was constrained not only by the constitutional division of powers and extensive provincial ownership but also by the structure and operations of the oil industry in Canada. As J. Bell pointed out: 'Price

4O

Oil, the State, and Federalism

increases and fiscal incentives for new exploration and development would, if left untouched, involve a perpetuation of foreign domination of this sector.'37 The policy-making process was greatly strengthened around 1978, when EMR took in a number of ambitious officials from the Department of Finance and the Privy Council Office, including Marshall Cohen, Ed Clark, Ian Stewart, George Tough, and Len Good. This new influx of highly educated economists and financial experts provided EMR with a much greater capacity for analysis and planning; it also served to link the department more closely to the centre of decision-making power in Ottawa. At the same time, EMR placed increased emphasis on its policymaking and evaluating role, and went through a process of increased administrative specialization. By 1980, Ottawa's much greater emphasis on energy issues had placed EMR at the centre of energy policy-making in Ottawa. Thus, the department had completely outmanoeuvred both the NEB and DIAND. At the same time, all other federal energy agents had become subsumed under the aegis of EMR. This also made Ottawa less dependent on provincial agencies, such as the Alberta Energy Conservation Board (AECB). EMR lacked adequate industry cost data. Bill C-12, the Petroleum Corporations Monitoring Act, passed in early 1978, was intended to provide the federal government with a standard method for gathering data about the sources and uses of funds for all petroleum corporations in Canada above a certain specified level of revenues and assets - a reach that included Crown corporations. This financial information, to be provided by industry on a semiannual basis, would enable Ottawa to pursue more enlightened pricing and revenue policies. The government would also be able to keep much closer tabs on the investment policies of individual oil companies, and to more easily take measures to align the behaviour of individual companies with federal objectives. After 1978, Ottawa possessed the information it needed in order to apply other measures to regulate individual companies, certain groups or segments of the industry, and the industry as a whole. Legislation and the Canada Lands An important aspect of the new federal energy policy was Ottawa's commitment to introduce a new system of rights issuance and land management in areas under direct federal jurisdiction, the Canada Lands.38 But the dynamic of federal-provincial relations was to a large extent driving

The OPEC Oil Crisis 41 the federal intervention; from this circumstance, conflicts arose that weakened both Ottawa's attempts to increase federal control of the operations of the oil MNCs and its ability to address its substantive energy concerns. The federal government's emphasis on developing new sources of supply meant that areas under direct federal jurisdiction would become more important in the overall Canadian oil and gas picture. In its direct role, as overseer of the vast area that included the Yukon, the Northwest Territories, and the offshore areas, the federal government played a vital landlord role, and the establishment of Petro-Canada would enable Ottawa to combine that function with an entrepreneurial role.39 The future role and effectiveness of Petro-Canada in the Canada Lands would to a large extent depend on the nature of the system of land management and rights issuance that would direct activities there. As an intrinsic part of the state's intervention in the petroleum sector, systems of land management and rights issuance, if used to the full, can enable states to gain substantial economic benefits, regulate the rate and location of oil and gas development (for instance, by equipping the NOC with preferential rights to land and to oil and gas production), and in general shape the activities of both the NOC and the private companies.40 Given that the Canada Oil and Gas Land Regulations of 1961 provided the federal government with very little meaningful control over the operations of the oil and gas industry (it could be argued that those regulations instead conferred certain vested rights on the industry), barring legislative change Ottawa was in a weak legal position vis-a-vis the oil industry. This problem was not uniquely related to the COGL regulations, but was a wider problem related to a key shortcoming of licensing as a policy instrument. P.O. Cameron notes: Once licences are awarded it is extremely difficult to change the terms they contain. Yet, at the time of the award little will be known about the territory on offer. To attract companies, licences must therefore contain a discount. In the event of a successful discovery, these earlier terms may seem to constitute a 'give-away.' However, remedial actions will raise a number of questions about legality, since most, if not all, petroleum licences have one special characteristic [sic]. Unlike all other kinds of licence, they contain a combination of contractual and regulatory elements, and appear to transfer something very similar to rights of property. Whatever the differences among various licence regimes, this peculiar feature places obstacles in the path of amendment of terms at a later date. 4 '

Cameron thus summarizes what came to be one of the basic problems

42

Oil, the State, and Federalism

facing Ottawa in drafting new legislation for the Canada Lands. Although a change in systems was possible, this change might be perceived as expropriation and might involve other governments. By retaining the old system, Ottawa would be avoiding the legal problems; but it would not be solving the policy problems, because the existing system left so little room for change. In bringing in its new oil policy, then, the federal government, eager to establish control over oil and gas development in Canada, would be challenging the dominant role of Alberta as the centre of oil activities in the country. Further, Ottawa's actions would be viewed not only as a challenge to the resource management ambitions and objectives of decisionmakers in the Atlantic provinces and the northern territories, but also as a challenge to the role of the oil MNCs as the key oil and gas developers in Canada. Federal-Provincial Relations and Resource Development and Management in Western Canada The federal-provincial conflicts involving Ottawa and the producing provinces unfolded along somewhat different lines in the different regions. In Western Canada, Ottawa's inability to act as landlord meant that the conflict was over a more narrow range of interventionist measures, namely price regulation and tax and fiscal measures. In the Atlantic provinces the conflict revolved around the issue of jurisdiction over offshore areas and the question of who would develop the Canada Lands, and how. Here, the federal and provincial levels established competing systems of rights issuance and land management. An important part of the federal policy of self-sufficiency was the principle of a single oil price for Canada. The decision to adopt the single price emerged partly as a result of the introduction in September 1973 (prior to the OPEC oil embargo) of a 'voluntary' freeze on wellhead prices of oil in Canada. The price freeze, part of a more general anti-inflation package, was to be effective from September 1973 to 31 January 1974 and was first conceived of as a temporary, ad hoc measure in response to consumer complaints about higher oil prices unmatched by rising costs.42 The prime minister promised a return to world prices at the end of the proposed five-month freeze.43 Domestic oil prices were frozen at $3.80 per barrel, and a charge was levied on crude oil exports. The price freeze and oil export tax sparked strong reactions in the oilproducing provinces and in the oil industry. In 1972, even before those

The OPEC Oil Crisis 43 steps were taken, Premier Lougheed of Alberta had introduced legislation to capture increased oil and gas rents.44 Thus, Alberta had started to take steps to benefit from the major international oil market changes well before the OPEC embargo struck. But in October 1973, before the major escalation in world oil prices took place, the Lougheed government abandoned its new royalty plan, which was the product of months of negotiations between the province and industry, and announced that provincial royalties would rise with world prices. Noting that this move was made without prior consultation with the oil industry, John Richards and Larry Pratt suggest: 'The province's primary objective was evidently to force Ottawa to withdraw its export levy by squeezing the industry; damage done to the oil industry could be repaired by Alberta later on. A secondary, but scarcely less important, aim was to free the government from the fixed royalty ceilings in existing contracts so that the province could take maximum advantage from rapidly changing market conditions.'4:> Alberta thus used federal actions as an 'excuse' for breaching contractual agreements with the industry in order to maximize provincial revenues and jurisdictional control. Alberta's actions could be viewed as confiscatory because the contracts had established a maximum royalty ceiling.46 The opportunity available to Alberta - and the one it took advantage of- was to alter the terms retroactively through the legislative powers available to the province. Alberta thus initiated legislation to alter the contractual terms of industry actors as early as 1973. Ottawa's export tax policy was introduced to fill the gap that had emerged between Canadian and international oil prices following the introduction of Canadian oil price controls - a gap that had emerged because Canadian oil exported to the United States would fetch the world price there. Energy Minister Donald Macdonald noted about the export tax that 'additional windfall involved in the re-evaluation of existing oil reserves should come back into the public treasuries, both provincial and federal, rather than being permitted to go through to the hands of the industry.' 47 The federal government proposed to share the proceeds of the export tax equally between itself and the producing provinces. If the producing provinces had been allowed to collect the entire windfall price gains and put these into their general revenues, Ottawa's equalization payments to the poorer provinces would have risen accordingly. Alberta's decision to use nonrenewable assets, instead of collecting taxes from its residents, made this a likely prospect and would have given Alberta special treatment under the equalization formula.4 Alberta's reaction sparked a series of federal-provincial meetings,

44 Oil, the State, and Federalism which ended in a stalemate. At the beginning of December 1973, just after the breakdown in federal-provincial talks but a few days before Trudeau's 6 December announcement of the new energy policy, Premier Lougheed announced a comprehensive regulatory package reflecting Alberta's optimistic view regarding the extent of provincial constitutional jurisdiction over natural resources. The package was clearly designed to entrench this view by putting Alberta's energy legislation on its strongest constitutional footing. Merv Leitch, Alberta's attorney general, asserted: A province can with respect to natural resources it owns: (a) decide whether to develop them, (b) decide by whom, when and how they're going to be developed, (c) determine the degree of processing that's to take place within the province, (d) dispose of them upon conditions that they only be used in a certain way, or in a certain place, or by certain people, (e) determine the price at which they or the produce resulting from their processing will be sold.49

With 85 per cent of Alberta's oil located on Crown lands, the province's legislation changes would not greatly affect the property rights of private-sector actors. But Alberta's wide definition of provincial jurisdictional powers would encroach upon the regulatory powers of the federal government, in particular the federal power to regulate interprovincial and international trade. The province's position thus provides an important example of how state actors in this period increasingly sought to utilize constitutional arguments of limited validity to forward their own interests.00 There is little doubt that Alberta's actions were intended to expand the power of the provincial government to control oil development in the province.51 In late 1973, the ruling Conservatives established the Alberta Petroleum Marketing Commission (APMC), giving it broad powers relating in particular (though far from exclusively) to the pricing and sale of oil within the province.02 The net result of the provincial actions was to establish for Alberta a considerable measure of control over all aspects of resource development in the province through the powers vested in the APMC. In effect, the province had abandoned its traditional policy of granting wellhead control over oil and gas development to the oil industry in favour of a policy of increased direct provincial control over upstream processes. The provincial government could thus deal with Ottawa from a much stronger position, especially in matters relating to the pricing of oil; and it could, at least in principle, pursue an 'Alberta first' allocation policy. Since the provincial government through the

The OPEC Oil Crisis 45 APMC effectively controlled oil pricing within the province, the provincial government could enter into binding agreements with Ottawa, and producers would not be able to opt out of the agreed-upon scheme. The province took care to include freehold oil and gas production in this scheme. Alberta's new legislation infringed on the rights of private-sector actors and the federal government; it was also designed partly to preclude the federal level from exercising or expanding its jurisdictional rights. Richards and Pratt note: 'Since the Commission [APMC] retains ownership of all crown oil until the sale to a final consumer, and is empowered to determine the price paid to producers for their services in producing crown oil and the price at which it sells, the difference between these two prices could be used as an alternative to royalties as a mechanism for collecting economic rent. To date the mechanism remains a potential but unused tactic, and untested in the courts.'0'^ The increased uncertainty over the constitutional boundaries of federal and provincial jurisdiction heightened the 'insecurity of governments' 04 and helped bring about a process of dynamic intergovernmental interaction in which such incursions were repeated. Alberta's response was aimed mainly at the federal government. Alberta did not seek to nationalize the oil industry, nor did it set out to develop a more discretionary resource management regime along the lines of the North Sea model.00 Rather, Alberta's system, in its essential features, was clearly derived from mainstream North American traditions of resource management. The province thus retained a modified version of the American model of resource management, 06 but one that included measures enabling the province to launch an effective fight against Ottawa. The province of Saskatchewan also took drastic action. The NDP government's Bill 42, introduced in December 1973, essentially nationalized (with compensation) all freehold oil and gas rights and imposed a royalty surcharge on all Crown oil production. Thus, the province of Saskatchewan followed the pattern set by Alberta, 'by taxing all incremental revenues accruing to the oil industry at a high enough level, to preclude any increase in federal corporate income tax from the industry.'-' 7 While nationalizing all freehold oil, the province enabled the companies to continue to operate on the land by issuing leases and even instituted legislation to force them to continue to produce.0 8 While the legislation clearly affected both Ottawa and the oil industry, there is little doubt that its main purpose was to preclude Ottawa from extracting any of the excess rent. When compared with the actions taken by oil-producing governments in the Middle East and Northern Europe in this period,

46

Oil, the State, and Federalism

Saskatchewan's nationalization can be seen quite clearly as a means of strengthening its constitutional position rather than of depriving the oil industry of its powers, because the former leaseholders were granted compensation and allowed to retain their leases, and the legislation included no nationality requirements. Instead of taking up the novel procedures being adopted by the North Sea countries, Saskatchewan, like Alberta, continued to rely on the North American traditions of resource management. Still, the oil industry decided to challenge the legislation. In February 1974 Ottawa joined with the Canadian Industrial Gas and Oil Ltd (CIGOL) as a co-plaintiff in a court battle with the Saskatchewan government over the constitutionality of Bill 42. The case was resolved in 1977 when the Supreme Court ruled the royalty surcharge ultra vires, though it upheld the nationalization. The CIGOL case demonstrated the uncertain nature of Alberta's royalty system. As A. Thring points out, it also had repercussions for the province's prorationing scheme, which regulated oil production: 'In rejecting the argument that taxes levied against producers and traders of certain fixed-price commodities are direct taxes, the courts have reasoned that inflexible prices do not figure in the determination of the general tendency of a tax. If the courts choose to apply the same reasoning in an examination of the pro-rationing scheme, it may be decided that the scheme, by regulating the supply of an export good, is infringing on the federal trade and commerce power, notwithstanding that the regulation of supply will not influence price. '°9 The CIGOL court case increased the general uncertainty about the constitutional division of powers; it also heightened the insecurity of governments as they realized that their tax and regulatory systems might be resting on a weak constitutional basis. The oil industry found itself with an important weapon: it could threaten any province with a court challenge related to the powers of its regulatory system. For their part, the provinces felt more strongly the need for constitutional change. The increasingly assertive and interventionist role of the provinces was itself an important factor in generating added uncertainty. Not surprisingly, the provincial actions of 1973-4 precipitated a strong federal response. At a First Ministers' Conference held in January 1974, it was agreed to maintain the price of oil at the current level; at a reconvened First Ministers' Conference two months later, it was agreed to increase that price to $6.50 per barrel. Subsequently, in the House of Commons, the Liberals introduced the Petroleum Administration Act (PAA), which ensured that the federal government would have ultimate

The OPEC Oil Crisis 47 powers over the pricing and exporting of oil. This act also gave Ottawa a means for setting prices unilaterally when a pricing agreement could not be reached. The PAA was a response not only to the changed international context and to the considerable uncertainty that existed over future world oil prices, but also to the provincial actions taken to counter the initial federal price freeze and export tax. Although the federal Conservatives voiced opposition to the PAA, it passed with the support of the opposition parties. In this way, the federal government indicated that it was willing to take strong measures to preserve federal dominance in the area of oil price regulation. But the federal and provincial governments did not clash only in the field of price regulation. In May 1974 the finance minister, John Turner, tabled a budget that contained a number of important changes in the approach to taxing the oil and gas industry. The federal government had to take steps to deal with escalating inflation: the consumer price index had risen by 7.6 per cent in 1973 and by 10.4 per cent in the twelve months ending in March 1974. The May budget was tabled immediately after the Alberta government raised its royalty rates from 50 per cent to 65 per cent to capture the rise in the world oil price from $3.80 to $6.50. The federal measures were instituted with the express purpose of protecting the federal tax base, redistributing incomes to benefit a larger number of Canadians, and retaining fiscal clout so as to preserve the fiscal system as an important policy instrument. The May budget measures included an increase, to 50 per cent, in the basic rate of the corporation tax applicable to profits from producing minerals, oil, and gas. The federal government also decided to disallow the deduction of provincial royalties in the calculation of taxable federal income - an act that Alberta viewed as thwarting 'provincial primacy over the ownership and management of natural resources.'*11 The federal rationale for this measure was that a number of provincial royalties and similar measures had seriously eroded the federal government's income tax base. The finance minister further noted that a number of provincial royalties and other revenue-raising measures were thinly disguised provincial income taxes that blurred the distinction between allowable and nonallowable deductions for corporate income tax purposes. In the same budget, the finance minister also declared an immediate end to the automatic depletion allowance, which had been scheduled to end in December 1976. The conversion from automatic depletion to earned depletion reflected the federal government's view that the oil and gas industry had reached maturity and established itself in a strong pro-

48 Oil, the State, and Federalism ducing position that generated significant industry revenue. This change also reflected Ottawa's commitment to ensure that the funds generated by production actually were reinvested in the development of new production capacity. The federal government was moving to establish control, by indirect means, over oil and gas development in Canada. The finance minister calculated that these measures would produce $410 million in added federal revenue, creating the highest levy on any one single sector of the economy. Predictably, industry reaction to the budget was strong and negative, although the 6 May budget turned out to have little immediate effect because the Liberal government was defeated in Parliament on the budget issue. Many of the key points in the May budget were reintroduced in the November 1974 federal budget, following the re-election of a majority Liberal government. The federal government upheld the 50 per cent tax on natural resource production, reintroduced the commitment to eliminate the automatic depletion allowance and replace it with earned depletion, and retained the nondeductibility clause. The May and November 1974 federal budgets introduced the principle of taxing the oil and gas industry on par with other sectors of the economy. The federal government contended that this was necessary for several reasons. First, the industry had reached maturity and the federal government needed clear assurances that the funds were actually being reinvested. Second, federal taxation rules prior to 1974 had been highly conducive to development.*32 Rapid oil price increases had created windfall profits, and Ottawa had few if any assurances that these profits were being reinvested in exploration. And even if they had been, further investment was needed to bring new supplies on stream. The oil industry's response to the two federal budgets was, according to Richards and Pratt, a 'well co-ordinated capital strike - withdrawing drilling rigs, cancelling new projects and investments, and laying off employees. This campaign was particularly effective in Alberta, as it threatened many of the province's oil-dependent businesses with sudden recession.>63 Industry spokesmen repeatedly pointed out that Ottawa's actions deviated from the stated federal goal of self-sufficiency. The nature of federal-provincial relations seriously affected the measures taken and the outcome of events. The relative historical shares of net operating income of the three main players - the oil industry, the federal government, and the producing provinces - were 57.4 per cent, 17.9 per cent, and 24.7 per cent respectively. 4 The introduction by the province of Alberta of a 65 per cent royalty rate effectively reduced the indus-

The OPEC Oil Crisis 49 try's share to 41.9 per cent and the federal government's share to 9.1 per cent, while raising the province's share to 49 per cent. The federal budgets of May and November must be viewed primarily as attempts to redress this perceived imbalance. The May 1974 budget would have reduced the industry's share to 20.6 per cent, increased the federal government's share to 24 per cent, and brought the provincial share up to 55.4 per cent. The November 1974 budget raised the industry's share to 26 per cent and reduced the federal government's share to 19.1 per cent. Although both levels of government were committed to increased resource development, when challenged by the other level of government neither level refrained from taking measures that could make it harder to reach such goals. Further evidence that the confrontation was first and foremost one between the two levels of government can be found in Turner's remarks at the introduction of the November 1974 budget, when he invited provincial authorities to reconsider their fiscal regimes in order to assist the industry. Alberta's premier responded in December 1974 by announcing a major program to spur exploration and development in Alberta and reduce the tax burden on the industry.60 Further, Turner's 1975 budget also contained new measures that significantly improved the industry's relative share. 66 As Richards and Pratt conclude: 'The interventionist behaviour of the producing provinces and Ottawa seems to have originated as much in a determination by governments to defend their constitutional prerogatives and powers as in any desire to undercut or supplant the private sector.'67 The important policy revisions by Alberta in late 1974 and Ottawa in May 1975 reveal how this conflict became oriented along federalprovincial lines, and how the industry later regained an increased share of the rents. G.R. Berry argues that the federal and provincial governments, interacting in response to the first oil market crisis, effectively shut out the oil industry. The industry reacted by mobilizing its resources, thereby gaining important concessions from the Alberta government. Berry's argument is that crises involving intergovernmental bargaining tend to shut out interest groups such as the oil industry. But federal-provincial interactions not only served to shut out interest groups; they also 'redefined' the conflict along intrastate lines (as opposed to state-industry lines).68 Again, the conflicts reveal the murky nature of the constitutional division of powers and the attempts by expansionist governments to utilize this uncertainty to expand their powers and revenues. The increased will-

5O Oil, the State, and Federalism ingness of individual governments to challenge Canada's constitutional framework exacerbated tensions in the intergovernmental arena. The deflection of the conflict influenced the governments' choice of interventionist means and the relative importance attached to those means. Ottawa's response to the crisis was driven by the issues of taxation and price regulation, because these mattered most in the intergovernmental arena. Ottawa (like the provincial governments) was so preoccupied with jurisdictional issues that it reduced the attention it paid to other issues and was weakened in its ability to apply existing means (and develop new ones) to grapple with the oil industry's continued influence. The Federal Canada Lands Strategy and Federal-Provincial Conflicts

After the clashes of 1973-5, both levels of government sought to devise policies that would ensure oil and gas development in Canada. The new federal policy introduced in 1976 under the heading 'self-reliance' was intended to ensure the security of Canada's future supplies through Canadianization, the development of indigenous sources of oil and gas, and altered revenue distribution — an expanded federal share of the proceeds from current and future oil and gas production. 9 These objectives signalled Ottawa's intention to alter its relationship with the oil and gas industry; to that end, they underlined the now important role of the federal government as producer, landlord, and entrepreneur. In presenting this plan, Ottawa was reinforcing its commitment to a neomercantilist adjustment strategy and putting forward a set of goals that diverged from those of the dominant oil industry players, the oil MNCs. The Liberal government's new energy strategy of 1976 was more comprehensive and coherent than the policy framework introduced to grapple with the international and domestic disruptions of the period 1973—5. The change from self-sufficiency to self-reliance was not so much a change in goals as a change in the premises of the goals already existing,70 with self-reliance presented as a commitment to adequate security of supply. New resource forecasts had generated serious doubts about Canada's ability to become self-sufficient, at least in the short to medium term, and the economic costs associated with the development of additional supplies were becoming more apparent. A new sense of realism was abroad, that was closely related to a more sharply focused federal concern with specific energy issues, which had been less important two or three years earlier, when open jurisdictional conflicts had dominated the scene. The expanded role of EMR as a central bureaucratic actor - in par-

The OPEC Oil Crisis 51 ticular, the expanded role of its energy policy division - helped bring about this new focus. As a corollary to this, Ottawa examined and expanded its institutional, administrative, and regulatory capacities in the energy field. Ottawa's concern with self-reliance was no less politically motivated than had been its concern with self-sufficiency, but now Ottawa was expressing its dependence on the oil industry in more explicit terms. Federal control of the activities of the oil industry was also becoming more necessary to strengthen Ottawa's policy of jurisdictional defence in the Canada Lands. Attempts had been made to reach a nationwide agreement on offshore resource management, but Newfoundland dropped out of the negotiations in 1973 and Quebec did the same in 1974. In the absence of agreement, Ottawa set out to establish its own set of new regulations to ensure development of the Canada Lands.71 From the mid1970s on, a concern with federal jurisdictional and managerial powers became wedded with energy concerns to produce a strengthened federal thrust toward the Canada Lands. According to EMR's 1976 White Paper, countries that adopt a neomercantilist adjustment strategy face a dilemma: they have to make a choice between the political uncertainty associated with continued import dependence on the one hand, and the enormous economic costs of energy autarky on the other. If Canada were to lock itself into developing high-cost future sources of supplies, in particular from the frontiers and the tar sands, it might eventually suffer from the high economic costs associated with autarky. But inaction might have even more disastrous consequences, including increased dependence on imports and even higher prices than if Canada had developed its own resources. The federal government's actions were also influenced by factors relating to the bargaining strength of the major oil companies. The Syncrude Canada oil sands project - the world's largest single synthetic fuels complex - is a case in point. According to Pratt, the generous concessions granted Syncrude by both levels of government to ensure development threatened to establish a precedent for future government-industry bargaining.72 Large-scale tar sands development might be quite unattractive from a federal revenue perspective. Large-scale development along the same lines as Syncrude might also increase future levels of foreign ownership. Ottawa's choice of options was also influenced by the changed resource forecasts. In response to the NEB's forecasts of 1974-5, which predicted that Canada was rapidly running out of low-cost supplies of oil

52

Oil, the State, and Federalism

and gas, Ottawa started stressing the 'need to know.' Only if Ottawa had a clear understanding of the physical and economic characteristics of Canada's resource base could it develop a coherent energy policy. EMR's ability to evaluate the physical extent and economic viability of the resource base was still limited. Thus, an intrinsic part of this emphasis on the 'need to know' related to strengthening the federal government's ability to plan and control petroleum development in Canada. This would catapult Ottawa into a more prominent role in Canadian resource development. An important target under EMR's heading of self-reliance was 'to double, at a minimum, exploration and development activity in the frontier regions of Canada over the next three years, under acceptable social and environmental conditions.'73 To achieve this target, EMR estimated, would require exploration and development expenditures of $10 billion (in 1975 dollars) over the period 1976-80 (or annual investments of roughly $2 billion). EMR estimated that 70 per cent of this amount would be for exploration. But actually bringing these areas into production would require a much larger investment than the $10 billion. EMR noted: 'A reasonable exploration and development program would require about $40 billion, measured in dollars of 1975 purchasing power, over the next 15 years.' In 1976 the main emphasis was clearly to encourage exploration. The commitment to development included the following attempts: to redirect federal interventionist means such as price regulation; to move away from concerns with distribution toward a stronger emphasis on development; to use Petro-Canada for development; to establish new, generous drilling incentives; and to introduce a new land-management system to spur frontier development. Land management policies would also form part of a strengthened federal commitment to Canadianization. Ottawa now sought to strengthen its entrepreneur and landlord roles in the Canada Lands. After years of promises, the government was making a firm commitment to reform the system of rights issuance and land management in the Canada Lands. Ottawa's emphasis on channelling activity to the Canada Lands was to a large extent motivated by the need to reduce future dependence on imports and increase Ottawa's future policy options. This strategy, though not internally consistent, contained in itself room for evolution from the 'need to know' to the 'need to develop'; however, that shift would make Ottawa's task of controlling industry activities all the more difficult. The federal government was faced with the need to reconcile

The OPEC Oil Crisis 53 tensions between the 'development orientation' (which might involve continued reliance on private-sector actors to determine the rate and location of oil and gas development), and the more clearly focused 'control orientation' (which emphasized the federal government's role in determining the rate and location of development). The two strategies denote different state/society configurations in the energy field. In the complex Canadian energy scene, the choice between these approaches would not be based simply on economic calculations or on political concerns about oil industry dominance. Rather, the choice of strategy, and the methods for implementing it, would be greatly influenced by other factors, in particular the jurisdictional concerns of governmental actors and the actual geographical location of oil and gas deposits. A more comprehensive federal energy policy would almost certainly need to adopt a strong Canada Lands orientation. A strategy that favoured Canada Lands development could also be quite beneficial to the federal government to the extent that it enhanced the role of the frontiers in the future Canadian oil supply picture. In turn this would depend on a struggle to determine which actor would take the leading role in the Canada Lands Ottawa or the Atlantic provinces and the territories. Rights Issuance and Land Management in the Canada Lands

Assuming that the political history of industry-government relations in the oil and gas sector can be approached as a conflict over land use, that conflict has centred on the industry's claim to property rights versus the sovereign rights of government, and especially the role of government as regulator and participant in oil and gas activities. Prior to 1976, at least, Ottawa had come down on the side of private rights. The structure created by the key instrument of federal resource policy in the Canada Lands, the COGL regulations of 1961, essentially precluded the federal government from influencing industry exploration rates. As well, the federal regime had consistently offered more generous conditions to industry than had the main oil and gas producing provinces.74 The COGL regulations had in fact grown out of the old Alberta system of rights issuance and land management.70 In terms of entrance requirements, the system contained Canadian nationality requirements, but nothing that the large foreign corporations could not easily adapt to. The system was essentially one of 'free entry,' in the sense that companies could get permits simply by filing an application with the relevant department,"6 and before the 19708 Ottawa did not attempt to regulate the issu-

54 Oil, the State, and Federalism ance of permits. Indeed, before the Prudhoe Bay discovery in 1968, it had problems finding enough applicants. After the Prudhoe Bay discovery, however, all the most attractive acreage was rapidly taken up, and after that the incentives provided by the COGL regulations were no longer required to attract exploration commitments in the North. At the same time, however, the enormous size of the areas to be explored, the almost total lack of knowledge about the actual size of the reserves, the environmental challenges facing those trying to do exploration work, and the need for drilling to establish accurate knowledge made it virtually impossible for the government to set down specific priorities for where the companies were to drill. The twelve-year duration of the permits meant that the federal government was effectively precluded from instituting a second round of exploration until after 1980. It was also evident that a complete evaluation would be impossible during the first sequence of exploration; 'vast acreages would have to be returned to the Crown only partly explored.'77 Land Order 1-1961, by eliminating the Crown reserve system, enabled companies to apply for the Crown share rather than return it to the Crown for reallocation. By allowing the companies to pick up the Crown reserves, Ottawa had deprived itself of an important means of initiating a second round of exploration. The fact that Ottawa adopted Land Order 1-1961 also indicates its inability to compel companies to follow directions that it deemed important. The system was notably permissive, as is clear from the regulations guiding the conversion of permits to leases, the tenure of leases, and the minimal work requirements. EMR's 1976 White Paper announced a federal commitment to 'introduce to Parliament new legislation concerning Canadian oil and gas land regulations.' The need for change, ironically, was compounded by the very uncertainty surrounding the system in place. This uncertainty was the result of a host of factors, which included intergovernmental and interdepartmental issues. Perhaps most significantly, Ottawa's 1970 announcement that it intended to rewrite the system, and its subsequent efforts to alter the COGL regulations between 1970 and 1976 (efforts which included the 1972 land freeze), had created worries in industry circles and elsewhere about the federal government's intentions in the Canada Lands. The sense of uncertainty had provided a strong disincentive to industry investment and created additional pressure for government/ industry consultations to proceed. Such consultations represented a longestablished tradition, whereby the federal government never made any changes to the system without prior consultation with the industry.7

The OPEC Oil Crisis 55 From the oil industry's point of view, this process of collaboration was critical to ensure a proper and profitable path for business activity. From the government's point of view, the longer that uncertainty as to the future of the regulations existed, the more investor confidence would weaken and the more difficult it would be to introduce more stringent regulatory terms. The oil industry considered itself as having a number of vested rights as a matter of contract - a position supported by legal scholars.79 This does not mean that the state was unable to initiate changes. The state as landlord plays two different roles: proprietor and legislator. According to RJ. Harrison: 'In its capacity as proprietor, [the state] can convey interests in petroleum resources by contract, thereby giving rise to contractual rights, with concomitant obligations binding on it as a matter of contract. In its capacity as legislator, however, it can derogate from contractual rights and obligations, including those it has created in its capacity as proprietor. 81 The prevailing climate of uncertainty also underlined how the process of intervention was expanding beyond the narrow confines of industrygovernment relations characteristic of the period prior to 1973, to include a number of other concerns that were helping to shape federalindustry relations. Also reinforcing the uncertainty inherent in the Canada Lands management system was the fact that the five eastern provinces had consistently challenged Ottawa's jurisdiction over the East Coast offshore areas. This was particularly the case with Newfoundland. 82 The Proposed Petroleum ands Naatural Gas Act

The proposed PNGA of 1976 was intended to regulate oil and gas exploration, development, and production in the Canada Lands and to help double frontier exploration activities over the following three years. The act was also meant to ensure increased federal 'control over the rate and direction' of activities on the Canada Lands, to ensure that Canada received a fair return from the development of frontier resources, and to 'enhance the opportunity for Canadian participation.' There would be 'disincentives' against companies allowing land to remain idle. Also, a condition of holding exploration permits would be 'a certain pace in exploration activity. 3 Ottawa's main concern was with increasing its control over resource development in the federal areas. An EMR position paper, 'Statement of Policy: Proposed Petroleum and Natural Gas Act and New Canada Oil

56 Oil, the State, and Federalism and Gas Land Regulations,' noted: 'Given the desirability of reducing our dependence on foreign oil there is an essential "need to know" associated with the early delineation of Canada's resource base with a view to developing a secure supply of hydrocarbons for our future needs. Should it become evident that the reserves are not there, the sooner we know the better, so that other options available to Canada based on non-petroleum sources of supply can be proceeded with. 4 8 Although stressing the 'need to know,' Ottawa remained ambiguous about the speed at which potential resources were to be developed. If the regulations enabled companies then operating in the Canada Lands to quickly extract the oil and gas they found, the effect would be to encourage the early development of those lands, with little federal control over the rate of activity. The oil MNCs would retain their dominance in Canada's frontier areas and even increase it through the available federal exploration and development subsidies. The best way to alter this dominance by the MNCs, it seemed, was to change the landholding structure in the Canadian frontiers. For Ottawa to gain control over resource development, it would have to take measures to regulate the rate of exploration, the conversion from exploration to production, and the rate and location of production. Although Ottawa possessed other means by which it could halt activity, those measures could not regulate industry operations. D The new rights structure abolished the free entry system and replaced it with one that involved bonus bidding. In effect, Ottawa had installed an entry system that would enable it to introduce various 'terms and conditions prior to sale, specifying the form of bid, area, duration of rights, 86 Ottawa work requirements and use of Canadian goods and services. thereby ensured itself more control at the entry stage. But Ottawa had refrained from violating the contractual rights of the industry; this meant there was now a new procedure for allocating exploration and production rights in areas not subject to existing rights, while at the same time essential parts of the old system were retained in those areas currently under permit. All of this meant that a long time would have to pass before the new system covered all of the Canada Lands. In the areas covered by existing permits, it was found that the COGL regulations of 1961 did provide a means by which some terms could be changed so as to apply to existing permits in a way that precluded any legal argument that vested rights were being interfered with. This related to companies that had held their permits for the maximum period of twelve years. The options available to those companies were either to seek

The OPEC Oil Crisis

57

a renewal of the permit or to go to lease. If going to lease, the company was required to relinquish half of the acreage. As RJ. Harrison notes, 'In 1977, the areas covered by federal permits had not been explored nearly enough to enable an informed lease selection to be made in most cases and, therefore, the leasing alternative was not an attractive one at all for many permittees.' This meant that private companies faced important disincentives to take up leases. The federal government, provided the companies were unwilling to go to lease, could impose 'new conditions as a term of any permit renewal that was sought after a permittee had exhausted his renewals as of right.87 Rather than forcing companies to make a choice, Ottawa chose a third option, namely 'voluntary' acceptance of the proposed new regime. This was the function of the 'special renewal permit for such term and subject to such conditions ... as the Minister may determine.' The special renewal permit thus spared the federal government from a confrontation with industry over contractual rights. Crommelin notes that the retention of the exploration permit 'clearly [provided] an opportunity for the government to encourage additional exploration of areas rather than force the private operator to choose between relinquishment and conversion to lease.88 The introduction of special renewal permits clearly demonstrates that the federal government sought to avoid a needed change of system by instituting changes in the system. The proposed PNGA introduced new financial conditions for the oil industry. In place of the old regime that established a 5 per cent royalty rate for the first year and 10 per cent thereafter, a new royalty rate of 10 per cent of the wellhead value of production was to be applied throughout the life of a field. The plan also introduced new work commitments and a new royalty, the Progressive Incremental Royalty (PIR), which was a levy of 40 per cent of production revenues after a number of deductions had been made. Crommelin finds that the PIR was too generous to the private investors. Ottawa introduced a three-year 'holiday' in respect of all discoveries made on or before 30 June 1980, thus exempting those discoveries from the PIR and rendering the PIR irrelevant for several years. Because the incentive system was tax based rather than grant based, the federal government would be sacrificing foregone revenues. With this proposed royalty holiday for fields discovered prior to 1980, Ottawa was willing to forego not only current tax revenues, through tax write-offs for exploration and development, but also future revenues. In effect the federal government was sacrificing the potential for high financial returns in order to promote an acceleration of discoveries on and

58 Oil, the State, and Federalism development of the Canada Lands. Ottawa had backed down from instituting more stringent financial conditions partly because of the legal status of the royalty provisions in the COGL regulations of 1961. Harrison notes: 'The back of the permit set out the royalty provisions of the regulations. Clearly the royalty could only be changed by retroactive legislation.'89 Thus, except by passing new, retroactive legislation, Ottawa could not change the royalty rates without facing legal challenges. The system in place was a matter, then, not only of the past controlling the present but also of the past significantly constraining future actions. A change in the system could have detrimental effects for the federal government, in that it might drive private industry out of the frontiers altogether. With very small proved reserves and little knowledge of the resource base, Ottawa's bargaining leverage, in resource terms, was weak. The nationality requirements in the May 1976 proposal encompassed four different aspects of the rights allocation process. First, at the production stage the proposed legislation would enable the minister to refuse any bid for rights when the level of Canadian participation was below 25 per cent. As well, D.G. Crosby, the director of EMR's Resource Management and Conservation Branch, noted that the new oil and gas permits would be flexible: 'The terms and conditions will not be set out in a detailed manner as in the existing Regulations, but rather will be designed in the light of what appears desirable, in accordance with what the traffic will bear.'90 The nature and strictness of the criteria would hinge on a number of factors, not least the relative attractiveness of the resource base. Ottawa's policy of speeding up the mapping of the resource potential in the frontiers would - if the frontiers indeed were as attractive as most federal officials thought - enable it to impose stricter terms and conditions on the industry. The discretion available in the regulations would enable a determined minister to pursue a program of increased Canadianization. Second, nationality requirements were to be included in the supply of goods and services 'where possible and practical.'91 The application would be subject to ministerial discretion. Third, nationality requirements would also be included in the marketing of production. The federal government could direct production into domestic oil and gas markets at prevailing wellhead prices notwithstanding the existence of private export contracts.92 Crosby noted, 'If the authorities in their judgment believe that the reserves discovered should be used in Canada, then regardless of any previous contractual relationships it can be ordered into a Canadian market.'93

The OPEC Oil Crisis 59 Finally, Petro-Canada would be granted preferential access to land in Crown reserve areas not currently under permit.94 This would enable the fledgling national oil company to accumulate a very considerable acreage, although from the industry's point of view anything left available in 1976 was marginal, given that the companies had in the past been allowed to pick and retain large parts of the most attractive acreage. Still, Petro-Canada could be given large and contiguous areas, and industry circles expressed concern about the possibility of Petro-Canada acquiring vast areas and becoming the main landowner on the Canada Lands.90 Petro-Canada was also granted a number of rights or privileges in areas already under permit in 1976. As part of the so-called 'challenge system,' Petro-Canada could move in to drill exploratory wells that the holder of the rights to a prospect had refused to drill. Crosby stated: If it is thought that a particular exploration prospect should be tested by drilling, regardless of whether or not the holder of the rights to that prospect has met his obligations otherwise, there will be legislative authority to say he must drill it. This is an implementation of the 'need-to-know' concept. If the rights holder does not drill the prospect, Petro-Canada may drill it and thereby wind up with at least a fifty percent interest in the prospect, indeed an entire interest if the party who holds the rights does not choose to go along with Petro-Canada on a working interest basis.^ 6

Petro-Canada's participation would not exclude the rights holder from further activities.97 In evaluating the challenge system, Crosby admitted that it did represent a form of expropriation, but he expressed doubts that the challenge system would be used. Instead, he said that 'the mere fact that this power will be there will likely ensure that wells will be drilled on exploration prospects by the holders of the rights.'98 In such cases Petro-Canada's catalyst function would clearly serve a political purpose. The second preference granted Petro-Canada in the areas under permit — and also the most controversial preference — was the so-called 'backin right.' Crosby noted: 'Under this provision, Petro-Canada will be able to back-in on any exploration acreage that has gone past its term of tenure and in respect of which the rights holder requests a special renewal or goes to another form of terminable grant under the new Regulations. Petro-Canada will be able to back-in up to twenty-five percent without pay-back of any of the past expenditures on the acreage made by the rights holder.'99 In exercising its option to back in, Petro-Canada would not offer com-

6o Oil, the State, and Federalism pensation but would become liable for its share of whatever future costs were incurred. This preference challenged the prominent role of the MNCs in the most attractive areas, although the magnitude of the challenge hinged on how extensive the right was.100 Crommelin notes that when a private operator had made a discovery during the ordinary term of a permit, no option to back in was extended to Petro-Canada; this essentially made the exercise of the back-in contingent on private-sector activities. This aspect of the regulations was clearly an important incentive for the private-sector operators to 'prove up' reserves before their permits expired in order to prevent Petro-Canada from gaining a foothold on their acreage. Viewed in this light, even the back-in provision could be considered an incentive for early exploration of the Canada Lands. Petro-Canada was not granted a majority position in any field, nor did the regulations provide for this at any time. The true effectiveness of the back-in right would also depend on whether Petro-Canada exercised the back-in option (as opposed to using other avenues of expansion such as farm-ins and acquisitions). 101 Still, the rights granted Petro-Canada were a clear attempt by Ottawa to reduce the oil industry's power and influence in the Canada Lands. Ottawa's decision to change the existing system rather than introduce a new system raised the issue of how much change was possible within the old regulations. By choosing not to introduce legislation to Parliament, Ottawa had depoliticized the issue. This enabled the industry to pressure the agencies at EMR and DIAND that administered the system. Since the proposed regulations said little about the specific application of many of the nationality requirements, Ottawa could use its own discretion to ensure itself of more direct federal control and also of an increased private-sector Canadian presence in the Canada Lands. At the same time, however, the discretionary power available in the new proposed regulations could also increase uncertainty about the future effects of the regulations. However, the reasons Ottawa refused at this time to initiate new legislation related to much more than the industry's influence. While industry actors could still find allies in the federal bureaucracy, especially within DIAND,102 EMR was becoming increasingly concerned with curbing the influence of the oil industry, in particular the oil MNCs. The different positions held by the two departments were partly reflected in the different composition of the industry in the areas they administered. Many small companies with limited financial resources were operating in the onshore parts of northern Canada (which suggests why DIAND

The OPEC Oil Crisis 61 adopted a more lenient stance toward the industry). The oil MNCs were the dominant actors in the northern regions and on the East Coast. The differences in industry composition were also reflected in the two departments' divergent land-management practices, which helped fuel interdepartmental tensions and resistance to greater co-ordination. The introduction of new legislative proposals would have provided a new forum for native peoples to pursue land claims in the North, and a more stringent system in the Canada Lands might have failed to offer terms competitive with those offered in the producing provinces. As well, because the Canada Lands were still largely unexplored, considerable uncertainty existed as to the exact nature of the resources they held. This fact in itself placed the industry in a strong bargaining position vis-avis Ottawa. Introducing new legislation for the Canada Lands would have sparked further conflicts between Ottawa and the provinces on the East Coast over jurisdiction and management of the areas offshore. Cognizant of the large potential oil and gas resources on Canada's East Coast, the province of Newfoundland, in particular, took a strong stance on provincial ownership and control of the offshore. The East Coast Jurisdictional Dispute

The jurisdictional dispute between Ottawa and the provinces on the East Coast had roots going back at least to the 19605. As early as 1965, Premier Joseph Smallwood of Newfoundland passed a Petroleum and Natural Gas Act that enabled him to issue provincial permits for the areas off the East Coast.103 This meant that companies operating offshore of Newfoundland had to obtain permission from both levels of government. Throughout the 19605 and early 19705, according to J.D. House, neither level of government was concerned enough with offshore resources to work out a policy for East Coast petroleum development.104 After a 1972 review of the rights structure, which confirmed the granting of interim provincial permits to a number of oil companies, the province in September 1973 sent Ottawa a detailed written proposal, which included draft legislation, to fill what the province considered to be major gaps in the federal system of land management and rights issuance (the COGL regulations of I96i). 105 Ottawa rejected the offer because it was not willing to grant the province anything more than an advisory role. Newfoundland subsequently withdrew from the negotiations, in 1973. At the time, EMR presented the federal stance on jurisdiction:

62

Oil, the State, and Federalism

The Supreme Court of Canada in its West Coast Advisory Opinion handed down in November, 1967, was unanimous in finding entirely in favour of the Crown in right of Canada with respect to the resovirces of all submerged lands lying offshore from the 'ordinary low-water mark' and outside of'harbours, bays, estuaries and other similar inland waters.' The principles forming the basis of this Opinion would appear to be substantially applicable to the east coast as well as to the west coast.108 The jurisdictional status of the offshore areas was not clarified until 1984, when the Supreme Court handed down a decision establishing federal ownership over these areas. During the 1970s the province of Newfoundland did not simply want jurisdictional authority over the offshore areas adjacent to the province; it also had goals that differed considerably from those of the federal government in terms of rate of exploration and production, spinoffs, and rent distribution. Basically, Newfoundland wanted a lower rate of development than was desired by the industry and by Ottawa. Also, the province wanted offshore oil and gas development to be attuned to its own needs rather than to the needs of the federal government or 'Canada as a whole.' In 1975, Newfoundland's energy minister, Leo Barry, noted that 'the Province is attempting to get the Federal Government of Canada to recognize our legitimate right to the mineral resovirces lying off the coast of Newfoundland and Labrador, and our right to control their development.' 107 This strong stance was reiterated in a provincial White Paper in May

1977: By the Spring of 1976, it seemed obvious that a Reference to the Supreme Court of Canada would be necessary to resolve the ownership and jurisdictional question. As long as the possibility of a political settlement existed, the Province, so as not to cloud the issue, has refrained from passing a comprehensive set of oil and gas regulations, depending instead on the interim permit mechanism to regulate drilling. But with the court case imminent, it was obvious that oil companies holding federal exploration and production rights but just Provincial exploration rights, would be under a great deal of uncertainty as to their title to the offshore lands they were exploring and as to their right to produce any oil or gas found, given a Provincial victory. This applied particularly to the Eastcan Group, who had made a number of promising gas discoveries and were beginning to commit to large-scale expenditures. It is important that these companies be free to go forward with their drilling programs while the matter is before the courts and for that they need Provincial exploration and production rights.1

The OPEC Oil Crisis 63 The document also stressed the need for 'comprehensive' oil and gas regulations 'so that a start could be made on working towards the Province's various offshore objectives.' The province did not want to delay action until after the court case was decided. Since the mid-1970s, Newfoundland's efforts to establish a more stringent system had placed pressure on Ottawa to adopt a more interventionist system. Ottawa was interested in reaching a negotiated agreement with the East Coast provinces, but would not back off on the jurisdictional question. An agreement was reached between Ottawa and Nova Scotia, Prince Edward Island, and New Brunswick on i February 1977 according to which those areas would be managed jointly by a Federal-Provincial Maritime Offshore Resources Board, with Ottawa retaining ultimate jurisdictional and managerial powers. Newfoundland opted out of the process because it insisted on provincial jurisdiction. The agreement was never put into effect. Newfoundland introduced a provincial petroleum licensing act and provincial regulations in May 1977. Its new resource management regime, an adaptation of the North Sea model, represented a break with established traditions of resource management in North America, and clearly deviated from the proposed federal PNGA, which was closer to the American model. Several years later House noted, 'Perhaps because it was unencumbered by an earlier history of a more liberal regime, the Government of Newfoundland took the lead in Canada toward a new approach to oil-industry operations. Its 1977 regulations are an application of the North Sea model to the particular circumstances of Newfoundland. Nova Scotia subsequently followed Newfoundland's lead.'109 Newfoundland then started issuing permits in areas that were either already or later to be licensed by the federal government. As I.T. Gault put it: 'There is a rather curious spectacle of some East Coast licensees holding duplicate exploration permits from both the Federal and provincial governments, pending a resolution of the dispute.' 110 Newfoundland's White Paper indicated the importance attached to provincial control over the rate of development. In its view, the provincial government had the sole right to determine the rate of development - to decide 'when, where, to whom and under what conditions exploration and production rights should be granted.'111 The province introduced direct state participation. Section 94 of the regulations stated: 'It shall be deemed a condition of every lease that the lessee shall transfer to the Newfoundland and Labrador Petroleum Board (NLPB) within i year after the start of the term of the lease, an undivided 40 per cent working interest in his lease.'112

64 Oil, the State, and Federalism The NLPB was also granted a 40 per cent representation on every management or operating committee; this ensured the provincial government a strong influence on all field development and production decisions of the oil companies. This important feature, adopted from the Norwegian system, distinguished the Newfoundland regulations from the federal approach. This type of control would provide the province with a direct influence on development - in itself an important reason for Ottawa to ensure a strong East Coast presence through Petro-Canada. The regulations were intended to maximize provincial revenue from all fields, from the most attractive to the economically marginal. The province also intended to encourage the use of local labour, goods, and services, as well as further processing within the province. All of this would require companies (a) to give priority to local labour, goods, and services when these were competitive; (b) to land oil or gas in the province if the government so required; (c) to 'give priority to Provincial consumption, processing and storage needs before petroleum can be removed from the Province'; (d) to spend minimum amounts on R&D and training related to oil and gas activities within the province; (e) to 'establish headquarters-type activities within the Province'; and (f) to allow the province to take in kind its royalty and participation share. This last requirement would be limited to provincial consumption, processing, and storage needs. The province wanted to prevent an inflationary and socially disruptive rate of development. A vital concern was to tailor the rate of petroleum development to the province's absorptive capacity by adopting a controlled and stepwise rate of development. According to the White Paper, the province would 'limit the acreage offered from time to time to that which would result in an acceptable rate of development.'113 This type of control - which Klapp terms 'management control' - was also one of the most important means by which the Norwegian government sought to regulate the rate of resource extraction in the North Sea. The provincial regulations were intended to ensure that Newfoundland gained a large degree of control over the rate and location of industry activities. The province's stance on control of oil and gas development challenged the interests of both the federal government and the oil industry. The provincial initiatives, if adopted, would lead to a lower rate of oil and gas development than Ottawa wanted; from Ottawa's point of view, they would also seriously jeopardize federal supply objectives. The conflict that emerged, in which each level of government actively pursued its goals, had obvious effects on the industry's activities.

The OPEC Oil Crisis 65 In the wake of the 1976 EMR White Paper, the government tabled new legislation in Parliament in December 1977. But Bill C-2O - an attempt to fuse important elements of the American and North Sea models that would have challenged the contractual rights of industry - lapsed in the House of Commons after first reading. For the remainder of the 1970s, Ottawa was left with the temporary regulations of the proposed Petroleum and Natural Gas Act (PNGA), first introduced in May 1976 and somewhat revised in the COGL regulations of June 1977. Both of these systems were modified versions of the American model of resource management.114 It was only with the introduction of the NEP and the land management regime set out in Bill C-48 and administered by COGLA that a comprehensive new set of legislation was put in place. In the meantime the temporary regulations (issued jointly by EMR and DIAND) presented the industry with important signals as to what the federal government emphasized and wanted; but by incorporating the basic features of the COGL regulations of 1961, they also clearly demonstrated how federal policies were being constrained and hampered by earlier policies. Why did Ottawa fail in its attempts to introduce a new land-management system? The influence of the oil industry (and in particular that of the oil MNCs) on federal policies must be taken into account; however, a number of other factors related to international pressures, interdepartmental rivalries within the federal government, the nature of intergovernmental relations, and the nature of the system in place played a critical role. Pressure from the United States has been mentioned as a reason why Ottawa failed to proceed with Bill C-2O. llD Another constraint (likely a more important one) was the Law of the Sea negotiations. Canada was bargaining for a particular position in those talks with respect to recognition of continental shelf jurisdiction and did not want to move ahead unilaterally with initiatives in that area.1lb Another set of reasons relates to federal capacities and to the nature of the issue. Relatively few people were involved in the issue in Ottawa in the 19708, and changes in land management were less politicized than they would be later on in the NEP framework. Also, EMR's bureaucratic status was lower than it would be in 1980. EMR and DIAND differed in their views on the industry's influence, and these differences were reflected in their land management philosophies.117 Further, if Bill C-2O had carried, Ottawa would have faced more than a conflict with industry over vested rights. A unilateral federal move, even

66 Oil, the State, and Federalism one that included the regulatory elements that Newfoundland wanted, would have precipitated a significant federal-provincial conflict over the issue of jurisdictional rights. The absence of any agreement with Newfoundland and that province's introduction of its own set of regulations more stringent than the federal ones and tailored to a slower rate of development - led to the more lenient federal regulations. Ottawa was attempting not only to ensure continued resource development but also to force the province, through industry pressure, to accept a higher rate of development. The uncertain nature of the resource base also acted as a strong obstacle to a more stringent regulatory framework. The resource base is not a fixed entity: it 'emerges' as a product of exploration, technological change, and shifting economic conditions. Conclusion The 1973 OPEC oil crisis presented a distinct challenge to Ottawa and the provinces. The greatly strengthened power of OPEC created considerable uncertainty and forced all oil-importing countries to take measures to reduce their dependence on OPEC. The oil crisis also weakened the oil MNCs, thereby presenting Ottawa with a unique opportunity to increase federal control of the dominant subsidiaries of the oil MNCs operating in Canada. Was this opportunity seized? Ottawa adopted a neomercantilist strategy in response to the OPEC oil crisis, stressing the goals of self-sufficiency (later termed self-reliance), Canadianization, and government—company and intergovernmental redistribution. The point of these goals was to increase federal control over oil industry activities and as such bear testimony to independent goal formulation bent on divergence from the dominant actors in the field of oil, the oil MNCs. These developments relate to key assumptions of the state autonomy model: that the greater the federal state's overall capacity to intervene, the more effective an NOC such as Petro-Canada can be as a policy instrument; and that the greater the federal state's capacity to intervene, the better able is the government to control the corporation. In this case, although Ottawa did have certain vested powers that gave it the capacity to intervene, it also came up against the problem of overlapping federal and provincial jurisdictions. This becomes abundantly clear when we apply Klapp's classification of policy options to the Canadian case. With regard to revenue control - taxes, royalties, and fees - the federal government and the provinces each had unique powers and compe-

T tences, but with considerable overlap. The federal power to issue indirect and direct taxes of all kinds was extensive and faced few constitutional 1 lQ constraints. Between 1973 and 1979, provincial governments questioned the legitimacy of a number of new federal tax and other measures, while introducing their own measures to protect and expand what they considered provincial jurisdiction. In terms of management control, the provinces - on the onshore but subject to a few notable exceptions119 - had almost complete control of all upstream processes. This did not preclude Ottawa from interfering in provincial management decisions through, for instance, price controls. This again led to provincial efforts to regulate prices within each province. Ottawa's position was that its management powers in the Canada Lands were similar to the provinces' powers within provincial jurisdictions. In the Canada Lands, however, and barring a court settlement, Ottawa's ascendancy was challenged by the East Coast provinces. Finally, with regard to ownership control the provinces were free to establish their own Crown corporations and provide them with preferential rights to land and finances within their own boundaries. Similarly, Ottawa could also establish a Crown corporation, which would be free to operate in all of Canada but could only be granted preferential rights in the areas under direct federal jurisdiction, the Canada Lands. Several features of the Canadian case stand out, especially when compared to the countries in Klapp's analysis. First is the federal government's weak potential for influencing upstream processes in the onshore areas of provinces. Ottawa could compensate somewhat for this weakness through indirect measures such as taxes and price regulation. A second feature relates to price regulation. An important difference between Canada and the countries analysed by Klapp is the relative prominence in Canada of price regulation as a federal policy measure. Ottawa could and did use price regulation to shift the pattern of revenue distribution between regions and provinces, and between governments and privatesector actors. In legal terms, Ottawa could institute legislation to regulate prices unilaterally. However, from a political perspective, it was necessary to negotiate with the provinces to reach viable settlements. Such settlements were highly vulnerable to international changes. While it was barred from owning oil and gas resources and reserves in the onshore provinces, Ottawa had at hand a range of policy measures that enabled it to adopt the interventionist North Sea model of resource management. This is because of the vast powers vested in Ottawa to institute resource management regimes in the Canada Lands. However, this

68 Oil, the State, and Federalism model could only be applied in the Canada Lands, and as long as the constitutional issue concerning ultimate ownership was not settled, the provinces in question could establish their own management regimes. The legitimacy of Ottawa's actions was thus contested by the four provincial and two territorial governments involved; the net result was uncertainty and conflict surrounding the location of ultimate and practical power. Ottawa also found itself with immense problems when it came to devising policy measures that had nationwide application and that could produce the desired results. This problem was greatly exacerbated by the multiplication of the number of goals to be addressed. In a sense, the Canadian energy scene was prone to 'instrument overload.' Furthermore, the complexity of the scene made it difficult for interventionist governments to fashion coherent resource management systems. The presence of a number of highly interventionist regimes of resource development and management at the provincial and federal levels could result in a competitive energy scene - a scene made even more confusing by the presence of different policy and interventionist models. In the period 1973-9, Ottawa set out to improve federal capacities in the oil arena, bvit barely succeeded in increasing its control of industry activities. During that period Ottawa generally failed in its efforts to prompt industry to develop indigenous resources. It was only in 1976 that Petro-Canada came on line as an industry player. Meanwhile, Ottawa's objectives for revenue distribution had fallen short. Measures taken to meet federal objectives in the energy field were clearly ineffective. In assigning the reasons for this failure, international factors must not be given much importance. In the second half of the 19705, OPEC's grip on the world oil market continued to strengthen; this would have tended to support the efforts of Canada's central decision-makers to strengthen state capacities and reduce the industry's influence. One set of reasons relates to the long tradition in Canada of weakly based federal interventionist measures. For instance, the old regulations, being strongly based on rights, were inherently inflexible, and this acted as an important constraint on Ottawa's ability to change the industry's terms of operation.120 Ottawa tried to inject more flexibility into the regulations, as evidenced in the much higher degree of ministerial discretion provided in the May 1976 proposal; and it also tried to improve its bargaining position vis-a-vis the oil MNCs by encouraging exploration of the Canada Lands. Ottawa's inability to effect more significant changes was not surprising, given the constraints it faced - the nature and status of the resource base,

The OPEC Oil Crisis 69 the federal-provincial division of power, the structure of the old land management system, and the dominant role of the oil MNCs. The North Sea countries, for instance, did not face such constraints. But the reasons for the failure of federal intervention relate less to the oil industry's influence than to how the two levels of government, adopting different positions, became woven together in a complex and adversarial web of policy interdependence that reduced the ability of both Ottawa and the provinces to address energy concerns. This argument does not deny that the oil industry had the power to withdraw funds, reduce drilling, move operations from one jurisdiction to another, and bargain directly with federal and provincial officials for concessions. It does underline how the process in which governmental actors become increasingly concerned with each other effectively undercut the ability of those actors to combat the industry's power and address substantive energy issues. An important reason for the increased concern of governments with each other relates to how the OPEC oil crisis brought to the fore the unresolved issue of where in Canada sovereignty was ultimately located. Governmental actors, faced with new challenges and opportunities thrust upon them by the OPEC oil embargo, took measures to address these changes. In so doing, they were not overly constrained by the constitutional framework, whose legitimacy and role as metaframework was reduced. This increased the insecurity of governments and set in motion a process of 'deconstinationalization of energy policy'; as a result, the existing constitution increasingly lost its ability to regulate the actors. The net effect was that a process of changes was set in motion that spilled over from the energy arena into the constitutional arena and vice versa, as these arenas become more and more tightly linked throughout the late 19708 and early 19808. The structure and operation of Ottawa's existing policy instruments, the Ottawa-Alberta conflict, the evolving jurisdictional conflicts on Canada's East Coast, a supply-oriented federal adjustment strategy, and the pattern of industry influence all served to further complicate Ottawa's already difficult balancing act. Ottawa faced the difficult task of finding an appropriate balance between the economic and political costs of import dependence. The jurisdictional concerns of governments altered and interfered with the weights on both sides of the scale, and at times even rendered this balancing act largely irrelevant. The federal response - to try to develop a neomercantilist strategy based on the indigenous development of oil - was pursued by a federal

yo Oil, the State, and Federalism government with a weak overall capacity to ensure a unified strategy;121 moreover, it was driven by concerns in the intergovernmental area, an approach consistent with the 'state as structure' model. Some of Ottawa's initiatives for reducing the oil industry's influence were also being pushed by the provinces. Newfoundland, for instance, regarding the Canada Lands, ended up pressuring Ottawa to adopt key features of the more interventionist North Sea model of resource management. The strong intergovernmental imprint on the intervention was also reflected in the nature and composition of the policy instruments. Canada was unique in its active use of price controls, which are difficult to apply in a country that is not already self-sufficient because the strategy becomes heavily dependent on international developments. The regulation of oil prices below world levels - the policy taken up by the Petroleum Administration Act of 1974 - tends to result in disincentives to producers. The disincentives emerge at least partly from uncertainty about future trends in oil prices as price setting becomes a function of bargaining among governmental actors. Price regulation was linked to the principle of self-sufficiency, because self-sufficiency was considered a precondition for price regulation. EMR's 1976 White Paper noted: Through the combination of the export charge and the oil import compensation program it was possible for consumers across Canada to purchase petroleum products at prices consistent with the price of domestic crude oil. At the same time, however, it was recognized that the single-price oil system could continue to operate in this way only as long as we remained self-sufficient.122

The provincial actions123 and the federal response of instituting the PAA in essence meant that the development of self-sufficiency in Canada would be deeply influenced by political criteria, especially in bargaining over price levels by the two levels of government, both of which had little firm knowledge of the nature of the resource base. Governmental actors, concerned with current and future revenue shares, first struggled to establish a division of revenues acceptable to each level. Only after that would they seek to address developmental concerns. This made both levels of government strongly dependent on industry co-operation. Such dependence was exacerbated by Ottawa's largely neomercantilist adjustment strategy, which was conditioned on a high level of indigenous resource development. The fact that Ottawa did not possess adequate industry cost data until at least 1976 only serves to underline how important political criteria

The OPEC Oil Crisis 71 were as the basis for price regulation. Even though both levels of government were strongly committed to resource development, price regulation linked closely to political concerns offered few assurances that that development would indeed proceed. Ottawa's failure to differentiate among the various sources of supply meant that the relatively high prices needed for increased development could produce waste and generate excessive profits for low-cost oil producers, because the largest producers of low-cost oil were not necessarily the most active explorers. Further, few federal measures were available to induce low-cost producers to convert their windfall gains into new exploration and production. In its 1976 White Paper, EMR revealed that it considered the price regulation measures taken thus far to be capable of producing a number of undesirable effects; in particular, those measures could hamper the development of oil and gas and create disincentives to energy conservation. The specific target was to 'move domestic oil prices towards international levels; and to move domestic prices for natural gas to an appropriate competitive relationship with oil over the next 2-4 years.' After negotiations with the producing provinces in early 1977, Ottawa decided to raise domestic oil prices $1.00 per barrel every six months. 124 This decision, although it left the pricing of oil in the realm of politics, clearly served to reduce the uncertainty that had existed about the future development of Canadian oil prices. In 1973, then, price regulation became a more important federal (and provincial) regulatory measure than had been the case before the OPEC oil embargo, and federal-provincial interaction began to play an important role in price regulation. This state-led planning, however, would serve as a trigger to generate more intervention. A government committed both to price regulation (by keeping domestic prices below world market levels) and to increased development of indigenous sources of oil would have to intervene further to encourage indigenous resource development. If price regulation was going to function effectively, Canada would have to become self-sufficient in oil. That being said, self-sufficiency was important largely for political reasons, as a powerful rationale for increasing federal control of the influential oil industry. In all of this process, the federal response to the crisis was deflected from an obvious focus on state/society issues and concerns, and became increasingly driven by thejurisdictional concerns of governmental actors. This influenced the federal government's ability to handle both state/ society and intergovernmental relations. Ottawa was facing increasingly

72 Oil, the State, and Federalism assertive provinces that were being driven by international developments to seek province-first strategies that while qualitatively different in philosophical orientation, shared a provincialist focus. These developments led the federal government into conflicts with the Western and the Eastern provinces, and made Ottawa place greater policy emphasis on the development of the Canada Lands. They also largely undermined the constitutional division of powers as an appropriate guide to intergovernmental conduct. This deep-seated conflict provided the backdrop for the decision to establish Petro-Canada and for the development of the corporation's initial mandate.

3

The Establishment of Petro-Canada

The birth and early days of the federal government's national oil company was - as is usual in these matters - a prolonged and untidy affair. The nationalist-oriented politics of the late 19605 and new concerns about foreign ownership had brought the notion of more direct government intervention into the political mainstream and led to harsh critiques of the 1961 COGL regulations. Yet the 1973 EMR report had been ambivalent about the need for a NOG. In the House of Commons debates that year, 'the minority Liberal government seemed to be hedging its bets while the New Democratic Party pressed for the establishment of a state presence in the petroleum industry.'1 The OPEC embargo and the oil shock of late 1973 most likely made the difference, proving to be a major turning point for Ottawa's role in the oil and gas sector and leading to Trudeau's December announcement of a new national oil policy for the country. The original Bill C-32 died on the Order Paper when the minority Liberal government was defeated over its May 1974 federal budget; but in October of that same year the newly elected majority Liberal government quickly began again with its identical Bill C-8. While there was an internal difference of opinion in the cabinet as to the nature and extent of this measure, the strong Conservative opposition to it helped unite the cabinet to defend it.2 In general, the bill's opponents in Parliament were against an NOC on principle, while some of its proponents - especially in the New Democratic Party - felt that Ottawa was not going far enough. After a long and unusually heated debate, Bill C-8 received second reading on 8 April 1974. The division, pitting the Liberal and NDP members against the Conservatives, was 136 to 67. The Conservatives filibustered the bill in committee through fifteen meetings. Their main

74 Oil, the State, and Federalism objective was to ensure that the cabinet rather than the minister issued written directives to the corporation; they also wanted the chairman and president to be appointed by the board of directors, with cabinet approval, rather than by the cabinet.3 After these concessions were granted, the Conservatives agreed to limit the debate on the third reading of the bill, and the Petro-Canada Act received Royal Assent on 30 July 1975The NOG and State Autonomy

To achieve true autonomy in any sphere of activity - or at the very least to raise the flag of autonomy - the state must both declare its goals and take action to achieve those goals. Thus, for Petro-Canada to be an effective measure, the company would have to be given a set of policy functions reflecting the objectives of the federal government, and it would have to pursue those goals closely. In such a process certain choices are to be made. On the one hand, the NOG can be assigned policy functions that enable it to challenge the dominant role of the oil MNCs. On the other, if it is given tasks that private-sector actors find it unprofitable to perform, it in effect subsidizes industry operations in a way that does not challenge the dominant position of the industry. The choices made reflect the relationship of the NOG to the private actors in the oil industry. State autonomy is not simply a matter of goals; it is also a matter of state capacities, and there can be two different, yet related, types of capacities. The first is the state's capacity to intervene, which is revealed in (a) the size and scope of operations of the corporation; (b) the magnitude of preferential rights, such as infusions of public capital, lower-than-normal capital costs, and preferential access to land and resources; and (c) the existence of restrictions or constraints on the corporation. Operational and size constraints clearly delimit the importance of NOCs as political instruments. The second type of capacity is the federal government's ability to control the corporation to ensure that the operations address Ottawa's priorities rather than those of the industry or company management. Such controls are important not only to establish the corporation's initial policy role but also to match Ottawa's (possibly) changing objectives over time. Given proper controls, a determined government can, at least in principle, alter the corporation's role as its own objectives and needs change. Corporate flexibility, then, can be a requirement for the long-term effectiveness of the NOG as a government instrument.

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Both the policy objectives of the corporation and the two notions of state capacity are deeply influenced by the nature and effects of the larger regulatory and interventionist framework in which the NOG is placed - in this case, the system of rights issuance and land management - or what is often referred to as the state's landlord role. This framework is important not only because it is an important source of corporate preferences but also because, as a guide to the operations of the corporation, it can help ensure consistency between state and corporate objectives. The larger interventionist setting influences the NOC's conception of its own role and intended behaviour, as well as its actual behaviour. The willingness and ability of the corporation to use the preferential rights granted to it become key factors in the effectiveness of the system. In theory, by means of this system of corporate control, a determined government - but not Parliament - would be able to ensure that PetroCanada's operations conformed to Ottawa's objectives, as an independent expression of Ottawa's emphasis on federal control of oil and gas development, which necessarily included federal control over the operations of the oil industry. Petro-Canada's Mandate and Policy Role

When Petro-Canada began operations in January 1976, it was extolled as an important policy measure in Ottawa's program to ensure self-sufficiency (and later, self-reliance) in energy by increasing federal control of indigenous oil and gas development. A second and related concern was to ensure 'politically secure' supplies of oil by means of state-to-state deals. The corporation's mandate provided few clues as to what the government saw as its specific role; however, ministerial statements listed PetroCanada as a means both of increasing federal control of oil and gas development in Canada and of assisting the oil industry by acting as a catalyst for private-sector involvement. On the face of it, this suggests that Ottawa initially presented Petro-Canada as both a political and an economic instrument, with the relative balance of these two functions to be determined by events and future decision-makers. This apparent ambiguity was to some extent a matter of political expediency, but even more it was reflective of Ottawa's concern with gaining a potentially powerful instrument that could move in different ways in both present and future times of considerable international and domestic uncertainty. Although the corporation would be subject to strong con-

76 Oil, the State, and Federalism trols, as few formal restrictions as possible would be placed on its future operations and size. The lack of formal operational restrictions would enable the federal government to hammer out a clearer political role for the corporation, whenever one was needed, without legislative changes. The Liberal government set up Petro-Canada as an agent of the Crown, specifying its goals in the 'Legal Objects' clause of Bill C-8: (a) to engage in exploration for and the development of hydrocarbons and other types of fuel or energy; (b) to engage in research and development projects relating to fuel and energy resources; (c) to import, produce, transport, distribute, refine and market hydrocarbons of all descriptions; (d) to produce, distribute, transport and market other fuels and energy; and (e) to engage or invest in ventures or enterprises related to the exploration, production, importation, distribution, refining and marketing of fuel, energy and related resources.4

The legal objects clause, while providing Petro-Canada with a wide mandate, also specified functions that paralleled those of any other petroleum or commercial energy corporation operating in Canada. In accordance with the powers granted to it, the corporation could become vertically integrated by involving itself in the exploration, production, transportation, refining, and marketing of petroleum products, and it could become horizontally integrated by entering into activities related to other types of energy and related resources. It could diversify its operations and engage in interfuel substitution; it also held the option of expanding its activities to other countries. The bill placed no restrictions on where in Canada the company could operate. Petro-Canada could enter into agreements with other companies and with provincial governments, and it could acquire the rights to new fields or companies and dispose of holdings and investments. 'J The corporation could also establish new agencies and branches. Petro-Canada did not, however, have the power to expropriate other companies; nor was it given powers to regulate industry activities; nor was it intended or designated to act as a rent collector for the federal government. It also could not dissolve itself^ - that power was left to Parliament. Otherwise, Parliament's role in providing the corporation with policy direction was minimal. Section 7 of the Petro-Canada Act stated: 'The Corporation may do such things as it deems expedient for and conducive

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to the furtherance of the objects of the Corporation, within and outside Canada.' Petro-Canada was touted as an important vehicle for fostering state-tostate deals (although this aspect of its operations would be limited by Canada's obligations under the International Energy Agency), and for negotiating long-term bilateral supply contracts. Petro-Canada could help build stockpiles to alleviate the expected emergency, and it would be one means (if not necessarily the best) of finding out what was happening on the world oil market. Two rationales for providing the corporation with a wide mandate and minimizing Parliament's role were (a) to provide the corporation's management with the flexibility necessary for operating in a rapidly shifting environment, and (b) to provide the corporation with room to adjust to changing government priorities. The energy minister, Donald Macdonald, stated: We are not incorporating this for a single or passing transaction; it is to create a corporate person over a period that we anticipate will be very many years in which we will be operating in this field. Therefore we are setting it up with the widest possible flexibility so that this management, as it sees situations that may be advantageous from the standpoint of the general public interest, will have the legal authority to get into them and be able to participate in transactions. If we had to follow the policy of coming back to Parliament each time for each particular transaction, particularly when ... these transactions have often to be negotiated in haste and with private interests, then there would really be no opportunity for it to carry on a versatile and dexterous petroleum development business.7

The many important international and domestic changes in the period immediately following the OPEC oil embargo of October 1973 provided considerable justification for the energy minister's emphasis on corporate flexibility and adaptability; but the wide powers granted to the corporation became a source of great (and loud) concern among Conservative MPs during the parliamentary deliberations on Bill C-8. The Conservative reaction coincided with industry concerns about the specific role of the corporation and, especially, about any preferential treatment in the future. The Liberal government's critics argued that the government itself was not fully certain of its intentions with Petro-Canada. Macdonald spelled out what he saw as the future role of Petro-Canada in a cabinet memorandum of 31 October 1973:

78 Oil, the State, and Federalism It would explore in Canada's frontier areas for various energy resources; research the problems of tar sands and heavy oil development and perhaps into further vises of petroleum; acquire existing production capacity that comes available; seek to establish reliable import supply links; and potentially enter the downstream activities of refining and distribution. In doing this it would enhance the degree of governmental control over the rate and pattern of Canadian energy resources; back up the revision of other policies such as land tenure and rent collection by giving the government the operating capacity to fill any undesirable gaps; take direct steps to improve the security of the supply of energy to Canadian markets; provide a more significant Canadian presence in a foreign-dominated industry; co-ordinate the diverse operational activities of the federal government in the various energy industries, and provide an instrument through which the government might participate with provinces, foreign governments and private sector firms in direct energy industry activities in stimulating further developments. These functions require a separate body - and one which can adapt readily to the commercial and industrial environment in which it would operate. In fact, the foreign governments with which discussions would be sought would prefer to deal with a publicly-owned company. It is for these reasons that a corporate form is suggested.^

Macdonald's statement indicated, first, that the federal government saw Petro-Canada as carrying out a number of functions not normally associated with private company behaviour; and, second, that the government was looking to increase federal government control of oil and gas activities in Canada, and in particular to increase federal control over 'the rate and pattern of Canadian energy resources.' Still, the statement indicated only what the government intended the corporation to be at a particular point in time — not what it might later become as an inherently flexible entity.10 As Macdonald also noted in his remarks to the House of Commons Standing Committee on National Resources and Public Works, the corporation needed flexibility so that it could incorporate changes in government policy, which were to include an expansion in the federal land-management role in the Canada Lands. Ottawa, with its emphasis on the 'need to know,' required an instrument with enough flexibility that it could make ongoing policy choices regarding which resources to develop and where. And the policy instrument had to be able to manoeuvre well enough to deal with the constraints arising from the prominent role played by the provinces in resource development and management. The minister's statements also suggest that the government introduced

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certain changes in the corporation's intended role as early as 1973-5. Before the legislation was tabled in Parliament (in the period between the publication of the EMR White Paper 'An Energy Policy for Canada, Phase I,' in June 1973 and the announcement of the role of Petro-Canada as outlined by Prime Minister Trudeau in December 1973 and specified later on by government spokespersons in parliamentary debates and committee deliberations on Bill C-8), the government's emphasis (according to Paul Halpern, Andre Plourde, and Leonard Waverman, writing for the Economic Council of Canada) shifted from the 'distributional context' - issues related to industry, ownership, and control - to 'arguments relating to security of supply' or 'concerns about allocative efficiency.' The redistributive concerns of ensuring increased Canadian participation in the oil and gas industry had become 'clearly of secondary importance.' 11 Judging from this, economic factors were now more prominent than political ones in the rationale behind Petro-Canada. It seemed that the corporation was not meant (despite the Legal Objects clause) to become vertically integrated, at least not initially; rather, it was to establish a strong upstream presence (that is, in the exploration and development stages), and was to operate mainly in Canada, particularly in the frontier areas. Its emphasis would be on the development of hydrocarbons rather than on the whole range of energy sources,12 and it would not involve itself in activities such as conservation. Significantly, however, the statements indicating this early direction neither committed nor legally bound the federal government to any course. Early on, Macdonald had indicated that the corporation would start with a limited role and expand as time passed. Referring to PetroCanada's role in indigenous resource development, Macdonald said: 'Private investment, both Canadian and foreign-controlled, will continue to play an important role in this area. However, we are looking to the company to increase the Canadian presence in a sector which is of critical importance to assuring future energy supplies. Where possible, the company would seek to operate jointly with both Canadian and foreign firms in development activity.'13 This 'catalyst role' - or 'adding without displacing,' as it was also called - was directly related to the federal government's commitment to oil and gas self-sufficiency in Canada. As part of this commitment, once Petro-Canada was established the federal government used the directive clause of the Petro-Canada Act to establish the company as a major player in the tar sands by having it take over the federal government's investment

8o Oil, the State, and Federalism in the Syncrude project. Petro-Canada was also put in charge of managing the federal government's investments in Panarctic Oils, although Panarctic would continue to operate independently of Petro-Canada. In referring to the new company as a catalyst, federal decision-makers spoke of Petro-Canada both increasing allocative efficiency and working at depletion control. As Prime Minister Trudeau stated: '[the NOC would] not be precluded from developing other reserves which it may discover through its exploration activities, but it may choose to hold part of such resources as a reserve for the long term security of the Canadian market. This is a function which private investors often find it difficult to perform for understandable reasons, and it is a function to which the government attaches importance.'14 This function, variously referred to as severing the link between exploration and production or as 'patient money,' would ostensibly prevent the oil and gas resources that were 'proven up' by means of costly exploration efforts from being developed and exported.15 By keeping proved-up resources in the ground, PetroCanada would be contributing to Canada's long-term security of supply and expanding the possibilities of self-sufficiency. This role, however, seems to have become less pressing in 1974-5 after the announcement of new reserve estimates that cast doubt on Canada's ability to ensure adeQUATE RESOURCES FOR FUTURE SELF-SUFFICIENCY.16 As the federal government became more aware of the possible shortfall in future supplies, it started stressing the need for Petro-Canada to be a 'window on the industry,' supplementing its role of catalyst with the role of seeker and disseminator of information. Notwithstanding that Macdonald referred to this role as a side benefit,17 the federal government attached considerable importance to improving its information basis and, even more, the quality of the interpretation of the information available to it.18 Interestingly, a study produced by the U.S. General Accounting Office discussed the relative merits of this role of Petro-Canada. The study pointedly argued that a national oil company cannot act as an effective 'yardstick' for determining the true costs of exploring for and producing oil, and thereby serving as a measure against which the Canadian Government can judge private companies' performance, [yet an NOC can be] an effective 'window on the industry' to provide the Government with more general industry information, specific information for those projects in which it participates as a joint venture partner, and to supply the Government with operating expertise to help it interpret and evaluate information on industry trends and activities.19

The Establishment of Petro-Canada 81 Both the political importance attached to severing the exploration/ production nexus and the importance placed on the corporation's 'window on the industry' function demonstrate the political role that the federal government had in mind in Petro-Canada. Ottawa's policy instruments would variously serve to expand or constrain the political and economic direction of the corporation. Petro-Canada's Annual Report of 1976, its first year of operation, noted that one of the primary roles of the corporation would be as follows: Assist the Government in the formulation of its national energy policy by accelerating the evaluation of Canada's supply potential from conventional or new sources; by providing a better understanding of the costs associated with various domestic resources and their comparison with available alternatives, to ensure competitively priced energy supplies to Canadian industry and consumers; by providing Government, as a direct investor in the risky ventures of this critical sector, with insights which will assist in policy development.20

Clearly, Petro-Canada's management assigned considerable importance to this function of assisting in policy formulation, to an extent that went far beyond the notion of a 'side benefit.' Macdonald also stressed that Petro-Canada could provide information that was not available from other sources. Petro-Canada would also enjoy a certain usefulness as a political tool through its role and status as a publicly owned corporation. Public ownership, as MJ. Trebilcock and his colleagues point out, can be 'attractive as a way of symbolizing and dramatizing a government's commitment to a particular cause or set of values.' The Liberal administration needed to generate public support for its new, more interventionist approach to energy issues, and in this case 'an assertion of public ownership may be the only way to communicate sufficiently clearly the government's commitment to a particular public objective.'21 At the time what the government most needed to communicate was its own vision of sovereignty, and it especially needed to put forth a clear statement as to where sovereignty was to be located. The period 1973-5 was marked by federal-provincial conflicts - jurisdictional conflicts over sovereignty fought out largely over the issues of price regulation and taxation. These conflicts acted to reduce levels of industry activity and as such were a threat to Ottawa's neomercantilist strategy. The decision to

82 Oil, the State, and Federalism establish Petro-Canada did not ensure that resource development would be beneficial to the oil MNCs. By stressing both economic benefits and political usefulness, the Liberal government sought to win acceptance for its neomercantilist approach and the concept of an NOG. Faced with serious constraints arising from the interventionist system in place, Ottawa could only be uncertain as to how prominent a role Petro-Canada would come to play; thus, it established legislation that would enable it to define and expand the corporation's future role. The somewhat ambiguous role of Petro-Canada must be seen first and foremost as a reflection of the federal government's desire not to commit itself to a very specific definition of Petro-Canada; such a definition would have been the single most important factor restricting the corporation's future activities. There was another element to the symbolic use of Petro-Canada. Petro-Canada was established as a wholly state-owned Schedule D (or proprietary) Crown corporation that was subject to the regulations in the Financial Administration Act. According to B. Jeffrey and M. Morton in their study of Crown corporations, Petro-Canada, as an agent of the Crown: in the sphere of its activities, in a restricted sense, becomes the Crown: its responsibilities (liabilities) become those of the Crown, and it in turn assumes some of the privileges of the Crown ... The more important of these liabilities and privileges are: Crown responsibility for negligence caused by the corporation, corporate immunity from criminal prosecution, from the application of all statutes unless the wording of the statute is such as to bind the corporation, and from provincial taxation. Although the Crown is not obliged to pay contractual debts, statutes which create public corporations usually stipulate that the Crown will assume some sort of financial responsibility for the corporation.22

This agent status was an important preferential measure that facilitated corporate borrowing, because the Crown was ultimately responsible. The agent status was also an important signal to the oil industry that the federal government would stand behind its creation and support it in its endeavours. Petro-Canada was subject to all the legislation guiding the special conduct of Crown corporations: the laws and regulations relating to bilingualism, social and labour-market policy, and environmental concerns. With regard to language policy, Section 9 of the Official Languages Act of 1969 required Petro-Canada as a Crown corporation to ensure that

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'members of the public can obtain available services from and can communicate with it in both official languages.'23 With this came a compulsory language audit. From a political perspective, there was the added potential attraction of a large and highly visible corporation expanding into areas and activities to underscore the federal government's commitment to bilingualism, and to support Ottawa's nation-building efforts by 'showing the flag' in different regions of the country. Thus, the symbolic significance of Petro-Canada was not simply related to its role and status as a publicly owned corporation. The NOC's essentially political nature also came into play through the federal government's expressed intention of establishing Petro-Canada as an entity with the independent power to undertake exploration activities. To be effective, even Petro-Canada's catalyst role - which was seen as an economic function - required a redistribution within the Canadian energy sector (a political function). This is because Petro-Canada needed access to land to be an attractive catalyst. All the most attractive prospective areas were already held under permit by private oil companies. In the frontiers and the tar sands, the dominant landholders were the oil MNCs. To get around this problem, the federal government would grant Petro-Canada preferential access to land. Yet by acquiring these areas, Ottawa might be discouraging industry investment. The catalyst role of Petro-Canada was also inhibited by the provincial jurisdiction over crucial future sources of supply. It was obvious that the Alberta government would not grant Petro-Canada any preferential role, either in the conventional areas or in the tar sands; yet Petro-Canada's effective functioning as a catalyst was conditional on Alberta's acceptance of a prominent federal presence in the tar sands. Petro-Canada's role, then, must be placed in the larger context of Canadian energy policy. It must be considered not only how key decisionmakers reacted to events, but also how the corporation functioned in the context of other federal policy instruments. Ottawa was constrained foremost not by its objectives but rather by structural factors relating to the constitutional division of powers, by the strong industry-rights basis of the system in place in the Canada Lands, and by the ongoing jurisdictional conflict with Newfoundland on the East Coast. Petro-Canada, after all, was established before Ottawa had altered the system of rights issuance and land management in the Canada Lands. In effect, Ottawa had established itself as entrepreneur without adequate knowledge of the exact nature of the larger federal regulatory framework within which the corporation was to operate. In the end, the jurisdic-

84 Oil, the State, and Federalism tional conflicts would create considerable uncertainty and force Ottawa to set up an operational presence that was wholly dependent on access to producing properties in Alberta. As well, the NOG would have to begin its work before Ottawa's new role as landlord in the Canada Lands had been clarified. As Macdonald had noted in the cabinet memorandum, Petro-Canada could be used to shore up the role of the land management system. But the rigid nature and the strong rights basis of the regulations in place left little room for such improvement. At the time, it was quite clear that a change of system was necessary before the state could capitalize on the powers available to it as both landlord and entrepreneur. Controls on the Corporation

The actual standard of operation transmitted from a government to a corporation is most likely to contain a mixed message - if not a series of mixed messages. There are signals that are communicated directly to the corporation, but the corporation also receives signals from the larger interventionist setting of which it is part. If it was not clear in the corporation's mandate and the various statements of policy, Petro-Canada's fundamentally political nature was revealed in the system of controls established - that is, in the government's capacity to control the instrument of intervention. Issues of accountability and control of an NOC have generally been framed in terms of the need to balance the corporation's policy and commercial roles; however, this balance is by no means static. Nor in theory is the corporation's policy role necessarily confined to energy-related issues. Rather, it can be expanded to include other, more fundamentally political concerns. Changes in governmental goals and policies - both directly and indirectly related to the NOC - can change the balance the company faces between issues of policy and those of commerce; changes in corporate strategies also play a part. Both sets of changes, while potentially independent of each other, are channelled through the NOC's larger interventionist framework, which cannot always be altered to conform fully with changes in government policy. The corporation's managers will undoubtedly be well aware of the government's actual and potential capacities and of the constraints on those capacities. Clearly, the state's capacity to control company operations is bound up in its overall capacity to intervene; regarding actual influences on the corporation, 'corporate controls' tell only part of the story.

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Corporate controls are usually seen as vital, not just to prevent NOCs from developing interests in line with those of the oil MNCs, but also to ensure that NOCs pursue their intended policy functions and to prevent them from opposing their political masters.24 But the NOC's corporate interests may or may not coincide with the interests of the oil MNCs, and an NOC can be pushed in one direction or another by the larger interventionist setting, which has the potential to either buffer the NOC from changes in government strategies or accelerate a process of change. From the start, Petro-Canada's activities were subject to two sets of controls: formal and informal. The formal controls were established in legislative form, as part of either the Petro-Canada Act or other relevant legislation pertaining to Crown corporations. The informal controls consisted of the day-to-day interactions between corporate executives and government officials, both elected and unelected. The interplay and effectiveness of these controls are often difficult to assess. In the case of Petro-Canada, the key appointments sharply indicated that informal controls were in action. The corporation's first president (1976-8), Maurice Strong, had an impressive background in the management and financial aspects of corporate affairs, particularly in the mining industry, and was fully in tune with the policy approaches of the Liberal government. Strong's replacement, Bill Hopper, had been assistant deputy minister in EMR, and Joel Bell, the corporation's vice-president in 1976-82, also came from EMR. With these appointments, the government established a strong informal link between the corporation and EMR. The informal controls also relied on corporate flexibility - on the ability of the corporation's managers to gain a central position from which they could define critical aspects of the corporation's strategic role. The formal controls on Petro-Canada, while unusually stringent, could easily prove to be ineffective in producing adequate policy direction; this made the need for flexibility all the greater. Subject to budget controls, management would decide which companies to participate with, where in Canada they would focus operations, and how the corporation was to operate. Informal controls are also influenced by formal controls. For instance, budget submission requirements facilitate contacts and discussions on corporate planning in advance of submission of such plans to Parliament, and the federal government had made certain its budget controls were strict. The corporation had to obtain prior approval for its corporate plan from the cabinet; also, it had to gain approval from the Treasury Board for its capital budget. According to the findings of the Restrictive Trade Practices Commission in 1986:

86 Oil, the State, and Federalism The need for this approval has resulted in regular and extensive governmental review or 'negotiation' as one Petro-Canada witness put it, of the corporation's short and longer term objectives, strategies and expected performance, and of its proposed capital expenditures, commitments, loans and guarantees. Once approved, and in the absence of formal amendment, the corporate plan and capital budget define and limit the major activities of the corporation for the forthcoming year.25

Strict budget controls, if exercised judiciously, make it possible for a determined government to wield considerable influence over a corporation's operations. These controls can be used to ensure that changes in government policy are reflected in the corporation's actions. Thus, in the hands of a determined government, strict budget controls can lead to a good deal of short-term control. But such controls, which deal with only one year at a time, are obviously less effective for providing long-term policy direction and for projecting the cumulative effects of financial operations over time.27 For there to be adequate policy direction, it seems that measures must be taken to include a historical review of company operations (the budget papers, when viewed together, can provide a certain measure of this) as well as company statements relating to its future intended role. The directive clause of Bill C-8 was intended to ensure that the federal government could impose its will on the corporation's activities. During the parliamentary deliberations, strong fears among Conservatives of political intervention in the day-to-day affairs of the corporation led to a change in the initial legislation. This change reduced the energy minister's power to define the corporation's role, as well as the government's ability to impose its priorities on the corporation's operations. The directive clause now required federal directives to Petro-Canada to be delivered in written form and published; this had the potential of exposing the government to charges of political meddling with the corporation's affairs. By forcing Ottawa to publish its directives, the opposition parties ensured that Petro-Canada could use the directive clause against Ottawa, if necessary; and forced the federal government to redraft the directive clause so that it was more formal as a mechanism but less effective as a control. In addition, the Conservatives, through a lengthy process of filibustering, succeeded in ensuring that the chairman and president of the company would be appointed by the board of directors with cabinet approval (the Liberals had intended for both to be cabinet appointees).

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The final set of controls related to the power Ottawa had to appoint Petro-Canada's board of directors. The federal government had the power to appoint the chairman, the president, and the other members of the board. The maximum term for a board member was to be three years, but members could be reappointed, which did in fact happen. Such a set of controls is effective only to the extent that the government can find credible candidates to replace old board members.29 The power to appoint and dismiss board members can be an important indirect control, but it is only truly effective while the corporation is in its infancy. It is inherently difficult for even board members to keep on top of the affairs of a large and complex entity, which is what Petro-Canada soon became. In establishing Petro-Canada, Ottawa was seeking to ensure itself of a strong and flexible policy instrument that it could closely monitor and control. While the decision to establish Petro-Canada did not represent a head-on challenge to the oil industry, there is no doubt that Ottawa had put in place a potentially very powerful political instrument that could be used to curtail the industry's influence. At the corporation's inception, Ottawa's emphasis on corporate flexibility not only made Petro-Canada's role ambiguous but also placed the corporation's management in a highly strategic position. Ottawa's attempt to establish a strong federal role in the corporation's affairs had been undercut somewhat by the political concerns of the parliamentary opposition. Even so, the system of controls available for guiding PetroCanada's operations was more extensive than for any other federal Crown corporation. Petro-Canada's chameleonlike nature was not unique; this condition is in fact an inherent feature of multipurpose public enterprises. Such entities are notorious for evading control schemes and public accountability; and when they are confronted with complex political and economic situations, the contradictions inherent in them can be magnified or can generate unintended effects. oft

The Operations of Petro-Canada NOCs have a tendency to take on a life of their own (even more so than is the case with regulatory boards and agencies), because they usually operate in a more dynamic and market-oriented setting. When it happens, or when they become instruments of their respective managements,30 NOCs often adopt priorities that are essentially the same as those of other companies in the oil industry. When a government's main priority is to con-

88 Oil, the State, and Federalism trol the private oil industry, this outcome is clearly undesirable, especially when federal objectives conflict with or diverge from those of the private oil industry.31 Petro-Canada began operations in January 1976 with four employees and a total of $1.5 billion in federally endowed funds for its first five to seven years of operations.32 By the end of 1979 the corporation had 2,246 employees, assets amounting to $3,411 million, and revenue of $751 million. It had acquired ARCAN for $342.4 million and Pacific Petroleum for $1,496 million.33 Its daily production from oil and gas wells at the end of 1979 was 11,100 cubic metres/day, or roughly 69,800 bbl/day.34 In the late 1970s, the corporation was still relatively small compared to the largest oil MNCs. While Petro-Canada had entered the downstream, it was not a fully integrated company. EMR's 1976 White Paper listed three main functions of Petro-Canada as an instrument of federal energy policy: to increase frontier activities; to nurture resource information and enhance the evaluation of the resource base; and to work for Canadianization - that is, to increase Canadian participation in the industry, both by means of its own operations and by co-operation with Canadian companies. In so doing, it would increase the number of players in the frontiers. According to the White Paper, Petro-Canada would 'accelerate the delineation of our frontier resource base.' The company would 'be able to mobilize capital on an important scale, even by the standards of those large private enterprises which characterize the Canadian petroleum industry.' While taking pains to reassure the oil industry that Petro-Canada was 'not expected to replace private corporations engaged in the search for Canadian oil and gas reserves,' the EMR report emphasized the catalyst role, adding that the company would 'supplement private sector activity in Canada's frontier areas.' The company was needed because 'exploration and development of Canadian frontier resources will require capital on a scale not normally available to most Canadian-owned companies. Petro-Canada can play an important role in facilitating the participation of such companies in the search for new Canadian oil and natural gas supplies.'30 Of the three functions specified by the White Paper, the major priority identified by the company itself in 1976 was 'to become established in conventional exploration activities, especially in frontier areas,' where the country needed additional or renewed investment- 'where costs are high, risks are substantial and development timing is long, but where the potential is significant and the need to determine the presence and costs of any

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resource is crucial to the public interest.'3 In its 1976 Annual Report, the company articulated its 'second major priority' as taking 'responsibility for various investments by the Government of Canada in the energy industry.'37 It stated that 'a further early priority [is] to gain an operating capacity and develop a cash flow from existing Canadian production to support a substantial commitment.'3 The company would also serve as an important source of industry financial information, as a 'window on the industry.' Petro-Canada's success in this 'financial window' role would depend largely on the number of industry plays it participated in. The more plays, the more important would also be its role as a 'geological window.' Thus, an essential requirement was for the corporation to obtain a significant landholding position, not only in aggregate acreage terms but also in terms of the resource prospects of that acreage. The corporation's growth - its control of land, and the various strategies it followed to acquire land - would be a key factor in the direction taken; and its investment decisions (especially as they related to the corporation's balancing of the provinces versus the frontiers) would be factors in how closely it adhered to the government's goals. The preferences granted Petro-Canada in the COGL regulations of 1977 would play a part in this. Subject to certain restrictions in the regulations, the corporation's management had the power to determine the extent to which it exercised its preferential rights. Clearly, Petro-Canada's approach to exercising its preferential rights to land would determine its relationship with the oil industry. Further, the more land that Petro-Canada could obtain without having to pay for it, the more resources the company would have that it could use to increase Canadian participation (by inducing and possibly subsidizing the participation of Canadianowned and controlled companies). The more Petro-Canada had to rely on established industry means for acquiring land, the more it would have to pay for its involvement, and the more dependent it would be on cooperation with the industry, in particular the oil MNCs. Petro-Canada and the Quest for Land

At the beginning of its activities, Petro-Canada had no acreage or land. A strong landholding position was a prerequisite for an effective company both in the present and in the future, because so little drilling had taken place in the frontiers. The aggregate size of the landholdings would be important, but even more key would be the building of a strong presence

go Oil, the State, and Federalism in the most attractive oil and gas lands - in those places where reserves had been found, and in promising areas where no reserves had yet been proved up. The size of the holdings mattered, but the resource potential mattered even more. Petro-Canada could acquire a landholding position by three means: earning an interest in land by 'farming in' on the companies already holding land in permits or leases;39 acquiring existing companies; and using preferential access to land, as granted by the federal government. Acquisitions and farm-ins were accepted industry practices; preferential rights involved governmental interference with the rights of the private oil companies. In the case of preferential rights, it was Ottawa that determined the corporation's landholdings; in the other two practices, PetroCanada's management had much more direct say in the size and composition of its landholdings. Petro-Canada had the power to decide on the extent to which it would use farm-ins, acquisitions, and preferential rights to acquire acreage. This meant that the corporation had to weigh the obvious political costs of each of these strategies. The corporation lobbied the federal government hard for preferential access to land. Although such rights were announced as early as May 1976, they were not available until the summer of 1Q77.40 As a result, in its first year of operation, in the absence of preferential access to Crown reserves and acreage held by the industry, the corporation found that it needed to allocate considerable financial resources to the acquisition of land. Farm-ins involved corporate expenditures of both effort and money to earn a working interest in a piece of land. This means of acquiring land was therefore clearly restricted by the funds available and by the willingness of the federal government to grant additional funds. Farm-ins were not closely monitored by Ottawa, at least not in Northern Canada.41 At the same time, however, the industry could restrict acquisitions of land by means of farm-ins because Petro-Canada was totally dependent on the industry allowing the company to earn an interest. In other words, land through farm-ins was available to Petro-Canada, but access depended on industry co-operation and on the availability of enough capital for the NOG to finance its participation. Further, farm-ins only provided the farmee with a certain percentage of a field, and very rarely did the other participants enable Petro-Canada to earn a majority working interest. Finally, farm-ins provided the farmee with a working interest in, rather than direct control over, a piece of land. All decisions were taken jointly by the companies operating in the joint venture.

The Establishment of Petro-Canada 91 Acquisitions could be an important means of acquiring acreage, but were subject to certain restrictions. Petro-Canada had not been granted the power of expropriation. Rather, the corporation had to acquire companies by ordinary takeovers; this meant that it depended on companies being available for purchase, and on shareholders and/or owners being willing to sell. As the case of Petro-Canada's attempt to take over Husky revealed, this latter limitation proved to be more constricting than the former.42 Large differences existed among the various companies in terms of size, composition, and geological prospects, and all of this made some companies much more attractive than others. Further, Petro-Canada was constrained by the availability of capital to finance acquisitions. Finally, Petro-Canada was limited by the federal government, in that prior government consent was necessary for every takeover. This was particularly the case with publicly traded shares: the corporation needed government approval in principle even before it approached a company whose shares were publicly traded.4^ In the case of preferential rights, it was Petro-Canada (that is, not EMR or DIAND) that determined the extent to which it exercised those rights. Clearly, for a corporation that was newly established and that had a high political profile, it was important to avoid the 'moose pasture' syndrome that is, selecting acreage that was worthless in resource potential. Further, the corporation had to weigh the benefits of exercising its preferential rights against the possible political costs of losing joint venture partners or being excluded from important plays. In gross acreage, Petro-Canada obtained the largest share of its landholdings through farm-ins. Its preferential access to Crown reserves provided it with 21.3 per cent of its total acreage between 1977 and 1981. This was also the most unexplored acreage and, it followed, the most prone to the moose pasture syndrome. The back-in clause accounted for 7.7 per cent of the total acreage obtained. In overall terms, the preferential rights granted to Petro-Canada in the 1977 regulations accounted for 29 per cent of Petro-Canada's gross acreage; normal industry means accounted for the remainder. But Petro-Canada did not refrain from exercising its preferential rights to the full. The size of Petro-Canada's landholdings was much less significant than the actual location of its holdings. Petro-Canada exercised its back-in right on two areas: in Mobil's holdings on the East Coast, and in Esso's holdings in the Arctic Islands. The back-in on Mobil's acreage gave PetroCanada a 25 per cent interest in the very promising Hibernia field.44 Its back-in on Esso's acreage provided the company with a strong land posi-

92 Oil, the State, and Federalism tion in the Mackenzie Delta, both onshore and offshore.45 This enormous continuous area granted to Petro-Canada was different in kind from the fragmented ownership structure in the remainder of the areas north of 60° administered by DIAND. DIAND officials found this a threat to its traditional land-management techniques, in that it meant the arrival of a 'concession-based' approach to land management, similar to the North Sea model. This approach became increasingly favoured by EMR.46 Petro-Canada's exercise of the back-in option thus provided the corporation with roughly 2.4 million net acres in two very promising areas indeed, these were two of the most attractive petroleum regions in the Canadian geographical frontiers. Regarding Hibernia, Petro-Canada now had a 25 per cent working interest in all the areas for which Mobil took out special renewal permits. Through its preferential right to Crown reserves not currently under permit, the corporation acquired 37.3 million acres, of which roughly 17 million were in the Mackenzie Valley. Petro-Canada also obtained Crown reserves in the Davis Strait / Baffin Island area, amounting to approximately 20 million acres.47 Petro-Canada's newly acquired Crown lands especially the acreage taken in the Mackenzie Valley - added little acreage of great resource potential. In fact, Petro-Canada failed to select or overlooked some areas with higher potential.48 Petro-Canada obtained 23.6 million gross or 10.6 million net acres through the ARCAN takeover, and 22.3 million gross or 9.5 million net acres through the 1978-9 purchase of Pacific Petroleums Ltd.49 The ARCAN acquisition provided Petro-Canada with a significant presence in the provinces, especially in Alberta (3.2 million gross or 2.1 million net acres), where that company was an important oil and gas producer; adding this acreage had an immediate effect on Petro-Canada's operational capacity. ARCAN, renamed Petro-Canada Exploration, became the company's main upstream arm and the main source of Petro-Canada's acreage prior to the Pacific Petroleums purchase (in net acreage terms), although it did not provide Petro-Canada with any acreage on the East Coast. Through the purchase of Pacific Petroleums, Petro-Canada acquired more frontier acreage as well as a significant position in the Western Sedimentary Basin, especially in the conventional areas.50 The corporation acquired more acreage in the frontiers than in the provinces, but this is somewhat misleading because the petroleum-prospective areas are more concentrated in the Western Sedimentary Basin than in the frontiers.

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The acreage obtained in the provinces, though smaller in absolute size, was more significant.51 The West Pembina oil discovery, in which PetroCanada got a share through the Pacific purchase, was the most important oil discovery in Canada since Leduc in 1947. Further, most of the acreage obtained was in Alberta, the dominant oil-bearing province. Also, the acreage acquired in Alberta was primarily in the conventional producing areas and not in the tar sands.52 Through this purchase, Petro-Canada had obtained a strong reserve base in the best producing areas of Canada. Takeovers of existing companies were important because they provided Petro-Canada with a strong acreage position in both the frontiers and the provinces and resulted in excellent producing properties.53 Before the ARCAN acquisition in 1976, Petro-Canada farmed in on Shell's and Mobil's acreage on the Scotian Shelf. The Mobil farm-in led to the 1979 discovery of gas at Venture D-23-54 Petro-Canada also farmed in on two different structures on the Newfoundland/Labrador shelf. However, the jurisdictional dispute between the federal government and the province of Newfoundland effectively stopped drilling there until 1979. Both of these farm-ins would prove to be unsuccessful. In 1979, Petro-Canada participated in a major farm-in program in the Labrador Group, operated by Total Eastcan Explo.5r) Early in 1980, Petro-Canada assumed operatorship of the Labrador Group. Petro-Canada's involvement in the Arctic Islands/NWT was extensive. The corporation was a major shareholder in Panarctic Oils, and it was a landholder in its own right. Petro-Canada participated with an 18 per cent share in the Arctic Islands Exploration Group.5 Petro-Canada's Annual Report for 1977 noted that no further drilling was planned in the Mackenzie Delta / Beaufort Sea area until 1979. Farming in on acreage held by the private oil companies became PetroCanada's most frequently used approach, but this was a costly means of acquiring land. The strong emphasis on farm-ins drained the corporation of cash, made it enter into joint ventures with the MNCs, and therefore also prevented Petro-Canada from enhancing the participation of privately owned Canadian companies. The fact that most of the farm-ins were with the MNCs suggests that Petro-Canada may have functioned partially as a subsidy of industry activities: in acquiring the acreage, PetroCanada paid part of the exploration expenses that the MNCs would have otherwise incurred themselves. But while it could be argued that farm-ins were a type of subsidy, this is only part of the story. Farm-ins with the oil MNCs enabled Petro-Canada to furnish Ottawa with useful information and important lessons from its interactions with the oil MNCs. Note here

94 Oil, the State, and Federalism that the vast size of the Canada Lands effectively precluded any single company from exploring the areas alone. Petro-Canada's preferential rights enabled the corporation to acquire some of the most attractive acreage on the Canada Lands; on those lands, Petro-Canada also exercised the back-in option whenever it could do so. Since such back-ins were contingent on industry behaviour, the location of Petro-Canada's rights depended on the industry's actions. Even so, the back-ins placed Petro-Canada in a central position to benefit from future developments in the Canada Lands. Clearly, Petro-Canada was not intended to subsidize industry activities. Corporate Investment Decisions

As Pratt notes, Petro-Canada's management often discussed the relative weight of projects on the frontiers relative to the provinces,57 and the corporation sought to balance its role on the frontiers with a strong commitment to conventional exploration activities in the provinces. From a corporate point of view this was sound economic thinking, because it provided the corporate structure with needed cash that could then be placed in high-risk and late-return frontier activities. Yet from a policy point of view, a high emphasis on operations in the provinces had the potential to shift the company's weight away from frontier activities; the relative balance of frontier versus provincial activities would be central to the corporation's effectiveness.5 This balancing was also politically significant in the sense that it would indicate the extent to which Petro-Canada was adopting priorities similar to those of the rest of the oil industry, especially after the private operators left the frontiers.59 Petro-Canada clearly viewed itself as a means of 'advancing the delivery of frontier and non-conventional sources to market.' The company saw little value in merely enhancing knowledge of the resource base; it was equally interested in producing whatever it could find. If this included exports, as in the case of the Arctic Pilot Project (APP), the corporation was still willing to proceed. The acquisition of Pacific Petroleums signified an important change in Petro-Canada's corporate priorities, in that it marked a change in emphasis from the frontiers to conventional oil production in the provinces. After Strong's departure as chairman, a clear shift took place in corporate priorities as they related to the provinces, evidenced not only in the corporation's land position but also in its investment behaviour62 and in the policy advice the corporation provided to the federal government.

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From the corporation's perspective, there were many reasons for such a reorientation. To begin with, Petro-Canada's acquisitions had provided it with a strong landholding position in the provinces. Petro-Canada urged Ottawa to place more emphasis on the Western Sedimentary Basin, both because of favourable oil and gas economics and because its management felt that Ottawa had underestimated the immediate and medium-term supply potential of this region. 3 Petro-Canada's reorientation could thus be seen as a matter of sharing the industry's enthusiasm for the Western Sedimentary Basin and the generous drilling incentives provided by the Alberta government. PetroCanada also recommended that the federal government allow the price of natural gas from Western Canada to rise; this would reduce the need for imported oil through increased interfuel substitution. 4 A strong position in the petroleum-producing provinces would provide the corporation with internally generated funds that it could use to fuel corporate growth and make itself less dependent on Ottawa 5 - and therefore also render the company less vulnerable to criticisms from the Department of Finance and the Treasury Board. This reorientation and subsequent actions contradicted, to some degree, the corporation's own definition of its mandate, as evidenced in its annual reports. 7 This suggests that the corporation had somehow escaped Ottawa's control. Pratt argues that the reorientation from the frontiers to the provinces was possibly related to the new corporate management's emphasis on managerial autonomy and long-term corporate growth and expansion. But in addition, Petro-Canada's corporate interest and dynamic were also a result of its active takeovers, which produced a new cadre of industry insiders whose basic orientation was toward the dominant organizational culture of private enterprise, that is, the bottom line. Still, given that the takeovers were carefully regulated by Ottawa, the reorientation was most likely a largely unintended effect rather than something carefully planned - less an indication that Petro-Canada had somehow escaped from the federal government's immediate control than a reflection of the different and at times conflicting concerns facing federal officials attempting to reconcile energy concerns with financial and jurisdictional issues.^ In the late 1970s Ottawa was facing different priorities, not only within the energy sector but also relating to fiscal constraints. The government allowed Petro-Canada to emphasize programs in the provinces in order to avoid the political costs of increased federal spending at a time when a key political consideration was to reduce inflation and tackle a new

96 Oil, the State, and Federalism related villain - the federal deficit.70 A review of Crown corporation activities undertaken in the late 19705 made it clear that Ottawa was concerned with increasing its control over Crown corporations, in particular the spending aspect of their activities. By permitting takeovers of established oil companies with good production prospects, the federal government could reduce the need for future public cash infusions into PetroCanada. Petro-Canada's increased emphasis on the provinces may have emerged logically from the takeovers and taken place with Ottawa's blessing, but a different part of Ottawa now giving that blessing (that is, controlling the corporation's activities). Petro-Canada's reorientation was also clearly a response to ongoing jurisdictional struggles. According to Oilweek, Petro-Canada officials expressed regret that Total Eastcan cancelled its drilling program and noted: 'We wanted to continue ... but weren't able to reach a satisfactory arrangement with our partners.'71 Petro-Canada's reorientation toward the provinces would make the corporation less exposed to this kind of setback. But Petro-Canada's stronger provincial presence must be seen more as a short-term practical adjustment than as a significant change in the corporation's role. Petro-Canada's preferential rights and farm-ins had provided it with an important presence on Canada's East Coast; but the federal government, though it had bolstered its landlord role, was still too weak to compel the industry and the corporation to move in a particular direction. The need to strengthen the federal presence was also clearly related to the jurisdictional disagreements between Ottawa and Newfoundland. Newfoundland would not give up its claim to offshore jurisdiction, and its May 1977 petroleum regulations heightened the level of intergovernmental conflict and uncertainty regarding the future development of the offshore. The COGL Regulations of 1977 On June 1977, Alastair Gillespie, Minister of Energy, Mines and Resources, announced several important changes in Ottawa's position since the issuance of the Statement of Policy in May 1976. One was to reduce the extent of Petro-Canada's 'back-in' option. In the May 1976 policy statement, Petro-Canada had been granted a flat rate of 25 per cent, but now the rate would vary with the degree of participation by Canadian private industry.72 This reduced the magnitude of PetroCanada's rights in the presence of some Canadian private participation.

The Establishment of Petro-Canada 97 When companies with a Canadian Ownership Rate (COR) of above 34 per cent were involved, Petro-Canada would no longer have any option to back in. Ottawa, it seems, was reducing the public sector presence to the advantage of private Canadian companies. Although the concession was granted only to a segment of the private sector (the Canadian-owned companies), the MNCs could bypass it: foreign-owned companies could join with other companies that had higher COR-rates, effectively shutting out Petro-Canada.73 This provision, while weakening Petro-Canada's formal position, would have a minor effect because of the lack of suitable private-sector Canadian partners for the oil MNCs. Ottawa retained its commitment to increased Canadianization, but had reduced the minister's discretionary powers, in that the department now had to advertise the terms and conditions associated with each exploration agreement before bids could be accepted. This would presumably reduce the uncertainty that was the result of there being two sets of regulations: federal and provincial. Gillespie's second change was to extend the Progressive Incremental Royalty (PIR) 'holiday' for another two years, to cover all discoveries made before 31 October 1982. This meant that Ottawa was pushing its strategy further into the future and reducing the size of the expected returns from frontier development. Finally, in retaining most aspects of the COGL regulations of 1961, Ottawa failed to introduce any of the changes proposed in the May 1976 policy statement that related to the regulation of production.74 One change that was made was that a 'significant discovery' clause was introduced that enabled the minister to 'order the drilling of a well in relation to that significant discovery.' Ottawa still intended to spur exploration, but placed less emphasis on distinguishing between the exploration and production phases. In the Mackenzie Valley this would hardly be a problem in the short run because of the ten-year moratorium on pipeline development established in the wake of the Berger royal commission hearings (1974-7).75 The concessions granted to industry in 1977 were an attempt to patch up the damage created by the jurisdictional conflict on the East Coast. The COGL regulations of 1977 represented a step backwards from Ottawa's intentions as announced in 1976. However, this was a strategic retreat rather than an absolute defeat. New legislative changes were on the way, and meanwhile, the industry had to be kept interested in the frontiers. The new, temporary framework was strongly geared toward rapid development of the Canada Lands and carried less assurance of

98 Oil, the State, and Federalism proper control over the rate and location of future development than Ottawa had intended. The oil industry found itself confronted with two sets of regulations, and it was becoming increasingly clear that this issue would have to be settled in the courts. Gault, in addressing the question of Canada's lack of offshore oil production in 1983, found: The continuing Federal-provincial dispute concerning jurisdiction over offshore mineral resources is not necessarily the sole cause of Canada's present position, but must be a major factor contributing to it. In addition, the way in which the dispute has been handled by the protagonists, its longevity, and role in the Federal-provincial political process raise important questions of public policy. This conclusion emerges with stark clarity when one surveys the remainder of the juridical framework within which offshore development currently takes place. For example, it is nothing short of incredible that Canada has not made legislative provisions for the general application of civil and criminal law on offshore facilities, or for extending the jurisdiction of the courts ... The point is, the word 'jurisdiction' has been all too narrowly defined in Canada. The protagonists in the offshore resources dispute, while concerned with safeguarding their rights, have perhaps neglected areas of traditional government responsibility, and the failure to provide adequate regulation of safety on installations on the Canadian continental shelf is only one example.7

The jurisdictional conflict effectively made it impossible to establish a stable offshore regulatory regime - a regime that was clearly necessary before development could begin. Further, the existence of two sets of regulations meant that the industry faced the prospect of paying royalties to both levels of government. This in itself was a major deterrent to the industry taking an active role. Both levels of government were interested in offshore development, but Newfoundland's oil and gas regulations of 1977, clearly intended to align industry activities with provincial objectives, had the effect of stalling industry activities rather than maintaining or enhancing them. Total Eastcan, the operator for a Labrador group of oil companies, announced in late March 1977 that drilling would be suspended because the company had not received assurance from the province of Newfoundland that the province would honour its 28 million permit acreage.77 The Shell-Petro-Canada program on the Scotian Shelf was also terminated.78 There is little doubt that Total Eastcan cancelled its drilling program in protest against the new provincial regulations. In response to Total East-

The Establishment of Petro-Canada 99 can's actions, Newfoundland's energy minister, Brian Peckford, noted that the regulations sent to Total Eastcan were only draft regulations, and would be changed if it was shown that they rendered development uneconomic. Yet Peckford also stated: 'It is of the utmost importance that we do not trade minor short term benefits at the expense of our long term objectives. The decision by Eastcan ... must be placed squarely in the context of the overall struggle to ensure the resources are developed for the benefit of the province.'79 For Newfoundland, the main underlying issue was provincial control over oil and gas development, and in particular over the rate of that development. Although this issue involved industry-province relations, it became increasingly defined along federal-provincial lines of conflict. Provincial control was a vital requirement for a 'province-first' strategy as well as an essential building block in the province-building efforts of provincial elites. The province sought to achieve its objectives by becoming the first governmental actor in North America to introduce the North Sea model of resource management. The conflict effectively stopped all drilling offshore of Newfoundland during 1977. When companies did resume drilling in 1978, the activity took place at a lower level than before and was heavily subsidized by Ottawa. In the 1977 federal budget, Ottawa introduced the so-called super-depletion measure, which greatly increased the magnitude of federal subsidization of the industry in the Canada Lands. The largest single beneficiary was Dome Petroleum. John F. Helliwell and his co-authors estimate that from 1965 to 1973 the industry's share of total exploration expenses was roughly 66 per cent. In the period 1974-6 that share fell to roughly 40 per cent, but with the introduction of the super-depletion or frontier exploration allowance, the industry's share of total exploration expenses in the northern areas of Canada dropped to as low as 6.9 per cent (in 1978). In the areas offshore of Eastern Canada, the percentages for the period are roughly similar, although the amounts are significantly lower. Thus, after 1976 the federal government in effect paid for the bulk of the industry's exploration efforts in Northern and East Coast Canada. Ottawa's generous subsidy of industry activities in the frontiers was linked to the pipeline moratorium that followed the release of the Berger Report, because the moratorium reduced the likelihood of early frontier gas production. The subsidy was also part of the price for increased federal jurisdictional autonomy vis-a-vis the oil-producing provinces in Canada.

1OO

Oil, the State, and Federalism

Conclusion

Before the second OPEC oil crisis, and only three years after it started its operations, Petro-Canada had emerged as a large and influential player on the Canadian oil scene. In fact, the corporation had expanded so fast that the Conservatives viewed it as a prime candidate for privatization. Ottawa portrayed Petro-Canada as an important federal policy measure with a wide mandate, and the complex Canadian energy scene made corporate flexibility important. Ottawa emphasized security of supply; even so, state-to-state deals were not listed as an important aspect of PetroCanada's role in EMR's 1976 White Paper because of the restraints imposed upon Canada by its membership in the International Energy Agency (IEA). Petro-Canada would not serve as an effective means of increasing security of supply during emergencies; this is because longterm contracts, according to EMR, 'would not provide as much emergency protection as might seem the case, since our obligations under the IEA would require that the oil so procured be shared with other countries should shortfalls occur.82But long-term supply contracts could help bridge the projected shortfall between Canada's future production capacity and future demand. A deal with Mexico - the Petro-Canada/PEMEX agreement signed in January 1979 - entailed deliveries of 100,000 bbl/d of Mexican crude, although the contracted quantity was later reduced by over 50 per cent.83 Representatives of the two governments negotiated the agreement; PetroCanada's role was a secondary one, limited to working out technical matters with PEMEX. 4 Indeed, the federal government had issued a written directive to Petro-Canada outlining this task. Another agreement, to procure Venezuelan oil, was being negotiated in the period March-June 1979> but the negotiations fell apart and no deal was concluded. As the state-to-state agreement between Canada and Mexico showed, the federal government could define new tasks for Petro-Canada whenever it felt this was necessary. The agreement also demonstrated the limited utility of policy documents as guides to understanding PetroCanada's role and actions. (That being said, Petro-Canada's main role was clearly in the realm of frontier development.) The corporation did have considerable leverage in defining its working relationship with the industry, and Petro-Canada's management sometimes opted for choices that were congruent with those of industry. Ottawa was no stranger to goal conflicts, which often occurred in association with jurisdictional conflicts. For instance, the conflict between Q

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Ottawa and Newfoundland heightened the political consequences of a direct federal presence there. After Petro-Canada's partners left the areas offshore of Newfoundland, the conflict forced Petro-Canada to emphasize the Western producing provinces. While the oil industry could exert strong pressure on energy policy, in its quest for increased control of industry activities Ottawa was also hampered by the interventionist system in place. The rigid and permissive nature of the old COGL regulations and Ottawa's inability to strengthen its landlord role in the Canada Lands formed one constraint. Another was the continuing problem of inadequate policy-making and evaluating capacity in the federal energy bureaucracy, alongside interdepartmental rivalries. Because of these constraints, Ottawa in the end was unable to control fully either the oil industry or the operations of Petro-Canada. But perhaps the most important reason for the federal government's failure to increase its control of industry activities was related to the deflection of its initial response to the oil crisis. Rather than challenging the oil and gas industry effectively, Ottawa found itself caught up in an intricate web of federal-provincial struggles. In other countries, similar policy issues had been solved within the context of state-industry relations; in Canada, the conflict became centred on federal-provincial affairs. The jurisdictional concerns of governments became dominant, informing and driving energy-related concerns. The federal-provincial battle that ensued created considerable uncertainty over the direction of government policy; it also caught the oil industry in the middle, squeezed by both levels of government. The battle led to price regulation policies and budgetary measures; these in turn generated strong disincentives to industry investment. Faced with provinces pursuing 'province first' strategies, the federal government - still bent on increasing federal control of oil activities and ensuring future oil and gas supplies - turned to promoting oil and gas development in the areas under federal jurisdiction. In that sense, the state-led and state-sponsored Canada Lands strategy had its roots in the federal-provincial conflict that arose in 1973 following the OPEC oil embargo. Ottawa's Canada Lands project was also influenced by the assertiveness of the East Coast provinces. A strong federal presence in that region was deemed necessary to assert Ottawa's jurisdictional claims and to respond to provincial initiatives already in place. For Ottawa's defensive adjustment strategy to be effective, however, a high level of selfsufficiency was required. The net result was that Ottawa actively encouraged the development of two increasingly competing petroleum regions

1O2 Oil, the State, and Federalism in Canada, one under provincial and the other under federal jurisdiction. But because the Canada Lands were of uncertain resource potential, the state-led strategy for those lands was highly vulnerable to industry pressure for bargaining concessions. R. Cullen, in comparing the Australian and Canadian offshore disputes, observes that whereas conflicts in Australia were 'dominated by a national focus,' in Canada the dispute became regional: 'That is, there have been no attempts to create a national offshore regime, rather, specific regimes applicable to specific provinces have emerged. 5 Cullen attributes the provinces' success at resisting Ottawa's national program to the much stronger role that regionalism plays in Canada. This relates to important socio-economic differences and to the much greater powers Canadian provinces have (relative to Australian states) to oppose federal strategies and offset them with their own. According to Cullen, the Canadian penchant for bilateralism also exacerbated intergovernmental distrust and suspicion and made long-term political solutions less likely.86 While the Western provinces adopted certain features associated with what Noreng terms the OPEC model, they took these actions mainly to stave off Ottawa. The approach to resource management adopted by the Western provinces - at least in British Columbia and Alberta - was based on the American model. The Eastern provinces, to varying degrees, adopted central features of the more interventionist North Sea model. In the second half of the 19705, albeit somewhat tentatively, Ottawa also adopted certain essential features of the North Sea model; later on, in the NEP, it would adopt this model much more consistently. These wide territorial differences made it hard to reach solutions, regardless of the approach taken. The strong jurisdictional orientation of the conflicts greatly reduced the adequacy of the constitution as a tool for dispute settlement. Competition is often viewed as a positive aspect of federalism, but this notion hinges on a number of preconditions. Effective competition requires a stable set of rules - that is, agreement on the basic constitutional principles involved. In the absence of such constitutional agreement, the philosophical underpinnings and basic structure of a given model of resource management matter greatly. In the absence of a constitutional settlement, clearly defined rules and practices will ameliorate competition between regions and governments; whereas wide discretionary powers will most likely breed uncertainty, distrust, and more intense conflicts. The unsettled constitutional status of the Canada Lands was part of a larger underlying conflict regarding the ultimate location of sov-

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ereignty in Canada - a conflict that placed clear constraints on the range and nature of applicable resource management regimes. The propensity for energy issues to become linked with constitutional ones did much to deflect the conflict from a state-society focus to an intergovernmental and jurisdictional focus. The net result - and perhaps the most outstanding single feature of the Canadian case - was not binding constitutional settlements, but rather a 'deconstinationalization of energy policy' as the constitutional bounds became increasingly irrelevant to the actors involved. This process of 'deconstitutionalization of energy policy' also heightened the potential for issue linkages well beyond the energy sector, with profound effects on the nature and composition of actors, relations among actors involved, the actors' conceptions of their own and others' interests, and the role and status of past experience and future prospects. As Petro-Canada moved through its first years of operation, there was also no assurance that Ottawa would have the same priorities or perhaps even quite the same entity in mind as it had in 1973.

4

International Oil-Market Changes and the NEP

To many observers at the time the rise of the Organization of Petroleum Exporting Countries, and the economic turmoil that surrounded it, marked a turning point in postwar history. The remarkable postwar expansion of the advanced industrial economies was at an end; no longer could governments promise unlimited economic growth. Nor could they retain exclusive control over the management of the world economy; developing countries, particularly those rich in resources, had to be brought into the system. Most important, American postwar leadership, already perceived to be on the wane, looked to have been dealt another, decisive blow. An era was ending. The shape of the new one remained to be negotiated.1

In the new oil era of the late 19705 and early 19805, with its abrupt price changes and staggering problems of supply, it seemed that the rather murky shape of things to come would be determined mainly by the policies and approaches of OPEC on the one hand and by an increasingly state-centred market on the other. With the Iranian revolution of 1978-9 and the subsequent Iran-Iraq War hastening the breakdown of the vertical structure of the international industry, the bargaining relations among oil-exporting states, multinational oil corporations, and oilimporting states moved onto new ground. The market had once been dominated by the major integrated oil companies; now oil-exporting and oil-importing countries were increasingly dealing with each other directly. With the reduced middle role of the oil MNCs, the oil-exporting countries were able to introduce destination restrictions - a development that entailed a strong politicization of the oil market.2 The price rises and the supply shortfalls of the time generated a spreading panic and fuelled the perception that shortages would con-

International Oil-Market Changes and the NEP 105 tinue - a perception strengthened by the changes that were evidently taking place on the international oil market. The events of the time, which had their roots in the rise of OPEC and the 1973 oil embargo, only strengthened the notion that OPEC was now a leading market actor and would continue to be one in the future. According to most analysts, an increasingly state-centred oil market had resulted in a continued strengthening of OPEC's role, a steady decline in the role of the oil MNCs, and increased dependence on OPEC oil in importing Northern and Southern states. The notion of OPEC's dominance was widespread - almost taken for granted. Under the Liberals (and under the Progressive Conservatives, who ruled briefly in 1979-80), this would move policy-making in Canada in a particular, somewhat clouded, direction. The Liberal government's 1980 NEP report captured the prevailing point of view: 'By the mid-1970s the large multinational oil companies had lost their dominance over world oil production, and a new force emerged: the Organization of Petroleum Exporting Countries (OPEC), a cartel formed to obtain higher returns for its oil through supply management and decree ... Today OPEC is more strongly than ever in control of the world oil market.'3 The report argued that bargaining relations would favour oil producing and exporting states rather than oil consuming and importing ones, and cited a number of grounds for this assumption: (a) the organization's ability to raise prices and keep prices high even in situations of slack demand, (b) the increased incidence of state-to-state deals, (c) the reduced role of the oil MNCs in handling non-Communist oil production and, (d) the Organization of Arab Petroleum Exporting Countries' declaration to 'use oil as a broad political and economic weapon.'4 OPEC's ascendancy, it seemed, was going hand in hand with the apparent decline of the oil MNCs and the formation of NOCs in exporting and importing countries - all of which contributed, in turn, to the rise of a state-centred world oil market. Larry Pratt offered the standard academic analysis concerning the future of the oil market when he noted in an article published in 1982: 'The direction of change in this vital industry is centrifugal - from multinational to national oil; from a closely knit, highly integrated structure based on global profit maximization to a loosely organized, decentralized system based on the national interests of the sovereign states.'5 Somewhat ironically, this belief served to reinforce the assumption that OPEC would continue to maintain its dominant position. This is because the organization, although formally an international body, was viewed first and foremost as a collection of individual states.

io6 Oil, the State, and Federalism The Iranian Revolution, which began in September 1978 and resulted in the fall of the Shah in January 1979, was the most highly visible catalyst for what has since been called the second international oil shock; however, the war between Iran and Iraq, which began in 1980 and would last for eight years, was the single most important factor in reducing supplies. One initial consequence of the hostilities was the removal of close to 4 million barrels of oil, which was 15 per cent of OPEC oil output, from the world oil market. At first the shortfall in oil supplies was partly compensated for by increased Saudi production, and by slightly increased Iraqi production in 1979. But in time, the Saudi production increase proved to be neither large enough nor lasting enough to fill the gap. Iraqi production returned to its previous level in 1980 and declined sharply to a low level in 1981-3. 6 Perhaps the most important effect of the Iranian revolution was a significant oil price increase, which occurred first in the spot price market, with its higher price rates and relatively low volumes of crude oil traded. These higher spot prices later were translated into official OPEC posted prices.7 The posted price of Arabian light oil rose from US$13.34 in January 1979 to $26 in January 1980 and $32 in January 1981, and continued to rise until it reached around $34 - a price that held until the early part of 1983. Exporting countries made smaller volumes of oil available for contract sales and instead placed greater quantities^on the spot market, thereby increasing the upward pressure on oil prices. Before 1979, for instance, 3 to 5 per cent of the world's oil trade went through the spot market; but during the 1979 Iran crisis between 15 and 25 per cent of oil traded was going through the spot market. The spot market was rife with speculators, who were eager to make a quick profit on sales to customers, who were willing to buy at almost any price. The magnitude of the price differential in itself served to pressure producers to increase their posted prices. In January 1979 the average aggregate difference between selected spot prices and selected official OPEC prices was $3.19, whereas in January 1980 the average aggregate difference was $9.20. By January 1981 the difference had fallen to $2.55, and in 1982 posted prices had risen above spot prices, creating a weak downward pressure on posted prices. Ironically, OPEC's growing market share, which was achieved through increased oil production in the late 1970s, was a key factor in the generation of excess supply. In retrospect, the Iranian Revolution and the IranIraq War indicate how fragile and volatile the international oil market was, and also how vulnerable OPEC was to events within and between

International Oil-Market Changes and the NEP 107 member states. The Iranian Revolution and the Iran-Iraq War supported the notion that OPEC was a loosely structured group; it became clear that when those members were confronted with a major challenge, they would act to protect their individual interests first. Developments within and among the member states after 1982, rather than strengthening OPEC, combined with other events on the world oil market to heighten tensions within the organization and to weaken its ability to control output and pricing. Actions taken by the industrialized countries to deal with the initial supply interruptions resulting from the Iranian Revolution and the Iran-Iraq War actually worsened the crisis in the short term, because there was a significant increase in stockpiling in 1979 and I98o.9 One factor that softened the impact of the Iranian crisis was the increase in non-OPEC oil production and the willingness of non-OPEC sellers to undercut the OPEC price in order to move their own crude oil. The most aggressive countries were the Soviet Union and the United Kingdom. The USSR - the largest oil producer in the world - entered the spot market and started undercutting its competitors. The non-OPEC producers, all of them relying strongly on state intervention and NOCs, contributed to making the world oil market increasingly state-centred; but they also hastened the process of OPEC's decline. The stepped up and largely state-sponsored search for non-OPEC oil led to discoveries of high-cost reserves in the North Sea, Alaska, and other parts of the world and reduced OPEC's share of oil exports. As well, OPEC's actions to weaken the role of the international oil companies prompted those companies to search harder for oil outside the OPEC countries, especially in the industrialized world.10 Non-OPEC producing states took advantage of this by enforcing harsher terms of operation on the oil MNCs, and on socalled 'independents,' and by establishing their own oil companies. The policy options available to and used in the producing countries related to four areas, which Klapp terms revenue control, management control, operational control, and ownership control. For the last of these, an important option was direct intervention by means of an NOC. In oilproducing states, such an entrepreneurial role for the state was normally backed up by an increased state landlord role; the state then used the other three policy options to shore up the role of the NOC. Oil-importing states also adopted public enterprises, but these functioned more as oil traders or as developers of energy sources other than oil. Oddly enough, in struggling against OPEC policies and practices, the industrialized countries adopted policy measures similar to those of OPEC member states to reduce the power and influence of the oil MNCs.

io8 Oil, the State, and Federalism Non-OPEC states took measures not only to increase domestic oil production but also to reduce oil consumption.11 The result in the first half of the 19805 was a temporary (and later longer-lasting) oil glut, which pushed down international oil prices and forced OPEC countries to reduce their prices in an effort to retain their market share. An American decision in 1980 to deregulate oil and gas prices led to reduced American demand for OPEC oil. This contributed to set Canada and the United States off on widely divergent paths in energy policy in the early 19805. Ikenberry demonstrates how oil policy was becoming more and more tightly interwoven with other foreign policy issues - especially with an almost worldwide concern with high inflation. Clearly, it was difficult for the United States - with its wide global economic exposure and unique global responsibilities - to single out oil as a concern for high politics, while keeping it separate from other pressing international issues and developing a nationally oriented adjustment strategy. The close links between oil and other foreign policy issues - many of them sparked by the OPEC oil shock and subsequent price increases - suggest how the weakened influence of the United States in a critical resource area spilled over into other issue areas and rendered the country vulnerable to pressure from allies and close trading partners. The American commitment to oil decontrol emanated from the 1978 Bonn Summit, which had stressed the future vitality of the world economy. Once the U.S. government had committed itself to decontrol at that summit, the issue became one of its credibility in the eyes of its closest trading partners. While Canada was not faced with similar constraints, its close ties to the United States suggest that there were limits to how greatly its policies could diverge over time from American ones. By the mid-igSos, OPEC's role on the world oil market would be severely weakened. The world oil market was transformed, but the longterm effects of that transformation turned out to be far less wide-ranging than most analysts had believed and predicted. The most stunning aspect of these developments was the lightning speed at which the world oil market changed from a highly politicized, state-centred market to an increasingly competitive market dominated by the private sector. The speed of this transition indicates not only that the structural transformation was less severe than anticipated but also that the nature and dynamics of the second international oil shock were not well understood. With the benefit of hindsight, one of the most interesting points about the late 1970s and early 19805 is the eagerness of analysts and decision-makers to name OPEC as the winner.

International Oil-Market Changes and the NEP 109 On the global level, the perception that the world oil market would become increasingly state-centred, and that OPEC would continue to play a dominant role in it, reinforced an already existing ideological climate favourable to state intervention. The perceptions and cognitive biases of decision-makers in Ottawa were formed in this climate as a response to the disruptions in the international oil market of the late 19705 and early 19805. As the crisis unfolded, rather than focusing on the fragility of OPEC's hold on the world oil market, Canadians came to share the fears of most decision-makers in the industrialized world regarding the dangers of OPEC dominance. Canada had room to manoeuvre because of its large indigenous sources of oil and gas. This meant that the decisions Canada took would revolve around whether and/or to what degree it would develop its large but extremely costly resources of oil and gas, in both the frontiers and the tar sands. Further, since these decisions would be political as much as economic, and would be based on interpretations of world market developments and on the perceived ability of OPEC to manipulate this market, they would involve judgments relating to how much state intervention was necessary to attain the established goals. The constraints and opportunities facing Canada were founded partly on wider international events and changes, which formed an important backdrop to the actions of key Canadian decision-makers - especially when it came to their predictions of future market events. Initial Crisis Response: The Conservative Interlude

During the volatile period of the early 19705, the ruling Liberals learned a number of lessons that shaped their attitudes and behaviour and helped set them apart from the Conservatives, who had been in opposition since 1963. Certainly, in times of crisis the importance of incumbency in shaping the attitudes of state elites is heightened rather than reduced. In the 19705, then, the Liberals and Conservatives underwent different learning experiences, and it was these experiences - perhaps even more than the factors of partisan politics - that came to guide their political priorities. If over time the Conservative and Liberal responses to energy issues proved to be similar, this would indicate that factors other than partisan ideology had come to dominate policy. Energy was not a major issue in the May 1979 federal election campaign, which produced a minority Conservative government, but as the Iranian Revolution unfolded and spot market prices rose dramatically

no

Oil, the State, and Federalism

between April and June, energy issues took on added political importance. In response to the initial crisis, the new Conservative administration attempted to launch a number of policy measures, but ran out of time; it was defeated in Parliament in December 1979, over the issue of its first budget. While more firmly committed than its Liberal predecessors to an oil policy based on international prices, the Conservative government led by Joe Clark found itself caught in a net of conflicting regional priorities. The producing provinces were pressuring it to increase oil and gas prices, while the consuming provinces, led by Ontario, were calling on it to resist price increases. In August 1979 the Ontario government expressed its opposition to letting Canadian prices rise to world levels, and in October 1979 Ottawa decided not to tie Canadian oil prices rigidly to world prices. Canadian prices were to be linked to world prices but would remain considerably lower than international prices. At the outset of the federal-provincial negotiations, Clark offered Alberta generous terms but still faced considerable difficulties in reaching an agreement. In late 1979 a partial agreement was reached by which 'all synthetic oil production would receive the world price, and all conventional production would receive 75 percent of the Chicago or world price (whichever was less) until the end of 1983 when the parity rate would be increased to 85 percent.'12 According to Helliwell and his coauthors, the proposal 'marked the first time that conventional oil prices were directly linked to international prices since the start of regulated pricing.'13 The need to produce a federal budget and Clark's eagerness to reach an agreement with Alberta were important factors in the prime minister's acceptance of a partial agreement; but as it turned out, the proposal became part of the federal budget that led to the defeat of the Progressive Conservative government in the House of Commons. The differences between Liberal and Conservative pricing policy proved to be less substantial than the function and battles of party politics might seem to have indicated. As early as 1976, the Liberals had committed the federal government 'to move domestic oil prices towards international levels,'14 albeit without necessarily reaching international prices; in other words, the principle of relating Canadian prices to the international price was in place well before the Conservatives came to power. The Clark government's approach was novel in that it would have retained Canadian prices at a certain percentage below international prices; this meant that in theory, Canadian prices would have followed international price fluctuations instead of going through staged increases, as they had done until

International Oil-Market Changes and the NEP 111 then. In practice, at least for the first few years, there would probably have been less of a difference between the two types of price regulation, because the Conservative government also planned to raise domestic prices by staged increases. When confronted with reports of a declining federal fiscal base - EMR predicted that in 1985 Ottawa would suffer a net revenue loss from the petroleum sector of over $2 billion15 - the Clark government took several measures to prevent further fiscal deterioration. As J. Simpson notes, in the negotiations with Alberta, 'the Conservatives discovered that the federal government would not receive adequate revenues from the proposed $6-per-barrel oil-price increases.' As a result, Ottawa cut its proposal for yearly increases down to between $4 and $4.50 a barrel. According to Simpson, 'The lower yearly increase would produce a smaller impact on demand and generate less revenue for the federal government. So the excise tax, first discussed as a fallback position, acquired a life of its own.'16 The Clark Conservatives had sought both to bolster federal revenues and to shift more of the oil compensation costs to consumers. Their proposed annual price increases, if averaged out at $4 to $4.50, were lower than the average increase in conventional oil prices would have been under the Liberals' NEP. Under the Liberals, until 1985 the price of conventional oil would have increased by annual increments of $2.95; only after that year was it scheduled to rise more steeply, at an average annual rate of $6.75. Over the period, on average, the Liberal policy would have been more favourable to oil consumers. Early in January 1980, the Clark government considered invoking the force majeure provisions in the agreements with the relevant synthetic crude producers in order to terminate the extension of world-equivalent prices to synthetic oil production. Later in the month, the federal government decided to back down;17 the fact that it had contemplated using this extreme measure demonstrated the gravity of the situation from Ottawa's point of view. In this as well, the Conservative government's pricing policy expressed continuity with the past. Further, it revealed that even though the Conservatives were strongly committed to the principle of world oil prices, they were hindered by a number of factors. As Simpson points out, the Conservative government's initial opposition to Petro-Canada grew out of its concern with the growth of the public sector, and was based on philosophical and ideological concerns about state intervention and state expansion rather than concerns about PetroCanada's role in the energy sector. But the Clark government's efforts to

112 Oil, the State, and Federalism reduce federal intervention in the economy would be largely stymied. For instance, the Conservatives had committed themselves to dismantling and later privatizing Petro-Canada. But once in power, their minority government, faced with strong criticism in Parliament and with an early 1980 election campaign in which energy security was a major issue, made a quick about-face. A statement made in mid-August 1979 by the energy minister, Ray Hnatyshyn, indicated that the Conservatives had 'gone from arguing that Petro-Canada was unnecessary (1975), to allowing that PetroCanada was necessary but better off entirely in private hands (1978), to conceding that Petro-Canada would be only partially sold off (1979), to deciding that Petro-Canada would remain largely intact.' Indeed, the Conservatives introduced a program that would widen Petro-Canada's policy role by enabling or encouraging the corporation to expand into all aspects of energy. While still planning to divest itself of a majority of shares in the corporation, the federal government would retain a sizable proportion of Petro-Canada's shares and use the corporation as a policy instrument for negotiating state-to-state contracts, undertaking frontier exploration, and involving itself in energy research and development. Faced with the new realities on the world oil scene, leading Conservatives, including prominent cabinet members, began to favour retaining Petro-Canada as an important cushion against international oil shocks. The Clark government was now downplaying its ideological opposition to Petro-Canada, and shifting its attention to the imperatives facing Canada in the energy sector. Once they had adopted a more energy-specific orientation to the Petro-Canada problem, federal decision-makers found it relatively easy to accept a continued important role for Petro-Canada. Sinclair Stevens, who was responsible for privatization in the Clark government, suggested to Bill Hopper that Petro-Canada take over Northern Transportation, Eldorado Mines, and Canadair to form a great conglomerate — though in the end the plan would be to privatize the entire company.19 So the Clark government had its interventionist side. The differences between Conservative and Liberal energy policy related more to shape than to magnitude. Thus, the Clark government sought to shift the weight of federal intervention away from direct forms toward more indirect ones.20 Like the Liberals before them, the Conservatives were concerned with maintaining Ottawa's financial and tax base and with preventing the industry from garnering windfall profits from oil price increases; and they duly introduced measures aimed at realizing these objectives.

International Oil-Market Changes and the NEP 113 Although Clark's notion of Canada as a 'community of communities' entailed a decentralized view of Canada, to deal in any way satisfactorily with the crisis imposed by changes in the international oil market - and with the oil MNCs that dominated the Canadian energy scene - the federal government would have to retain and exercise the required muscle. The imperatives of the situation were largely incompatible with Clark's philosophical notion of Canada. The Clark government would very soon have to pay electorally for this apparent inconsistency between thought and action. Despite holding different notions of exactly how and how much to intervene in oil sector affairs, the Conservatives and Liberals had little disagreement about the need for a significant federal presence. And despite his ideological and partisan commitment to a more decentralized Canadian state, when Clark was faced with a major erosion of the tax and fiscal base of the federal state, he took measures to arrest the decline in federal power. When faced with a rapidly deteriorating international and domestic situation, with circumstances worsening practically from day to day, the Conservative government showed a clear willingness to abandon ideological purity and consistency in favour of increased intervention. Since partisan differences often fade under the pressures of governing, it seems reasonable to conclude that if the Clark government had survived, the Conservatives would, like the Liberals, have only increased Ottawa's role in the energy sector. The National Energy Program

The NEP, introduced on 28 October 1980, built on the policies announced by Pierre Trudeau in an election campaign speech in Halifax in January 1980. At that time the world oil market was still in uproar after the Iranian Revolution, and the Parti Quebecois had just announced that it would hold a referendum in May 1980 on 'sovereignty-association.' The NEP itself was introduced at the height of the second OPEC oil crisis, just a month after Iraq had suspended all oil exports and OPEC oil exports had been cut by 15 per cent. The NEP, a unilateral measure on the part of the federal government, followed three unsuccessful rounds of federal-provincial negotiations over energy issues, during one of which (July 1980) an 'Energy Package' was tabled by the Alberta government. Alberta unilaterally announced a $2 per barrel increase (to $16.75) m the wellhead price of crude oil produced from Crown lands, and also stated that it would enact legislation to

114 Oil, the State, and Federalism ensure that wellhead gas prices would continue to track crude oil prices.21 Although Ottawa assumed a flexible position in the initial meetings, it was not willing to accept terms as generous as those in the partial agreement reached between Clark and Lougheed in 1979. While Alberta was willing to make concessions, the two positions were far apart, and actions and statements by each level of government during the negotiations only heightened tensions. In April 1980, Alberta took several measures to strengthen its powers in relation to Ottawa. Greatly aided by its strong presence as an owner of Crown lands, that province increased the powers vested in the Alberta Petroleum Marketing Commission in preparation for a showdown with Ottawa. The province discontinued the approved-purchaser system. Also: All private contracts between producers and buyers on the eligibility list were abrogated, and the APMC became the sole purchaser of crude produced from Crown lands in Alberta. It took over the marketing and handling roles that had previously been undertaken by private agents and offered to do the same for production from freehold lands. It set prices, decided upon buyers, took possession of the crude at the wellhead, and made all the arrangements for its transfer to the buyers.22

Thus, the province could exercise direct control over both the upstream and downstream stages of oil development in the province quite a dramatic move. This was necessary for the next step, which came in May when Merv Leitch, Alberta's energy minister, introduced a bill that would limit oil production when the provincial cabinet considered it 'in the public interest.'23 This would enable Alberta to withhold oil supplies to other parts of Canada whenever it saw fit. Alberta was thus in a position to curb oil production and create artificial shortages in the rest of Canada whenever the provincial cabinet saw the need. Ottawa subsequently proposed a tax on natural gas exports; this only heightened intergovernmental tensions: for Alberta, natural gas export taxes were an intrusion on provincial jurisdictional rights.24 With these events, intergovernmental tensions in Canada appeared to rise to the same level as the tensions between oil-exporting and oilimporting countries on the international stage. The intergovernmental conflict had generated a dynamic of its own that helped drive future actions. Before the NEP was introduced, each level of government had developed ideas about its jurisdictional rights that not only overlapped but also impinged on what the other level considered to be its rights. Fur-

International Oil-Market Changes and the NEP 115 ther, to maximize its jurisdictional rights, each level initiated policies along jurisdictional lines. In essence, the constitutional framework had become ineffective in curtailing the expansionist thrusts of individual state actors, and a reduced respect for the constitution meant that the boundaries of federal and provincial powers were no longer certain.20 This greatly heightened the insecurity of governments on the domestic stage. Finally, this insecurity was made worse by the traumatic and critical events evolving rapidly on the international stage. The net effect was a deconstitutionalization of energy policy. In its policy approach, the federal government clearly saw a fit between what it saw as the actual situation - the development of an increasingly state-centred international oil market - and the domestic concerns facing Canada at this time. The possibility that the crisis could exacerbate problems associated with Quebec's status in the federation, the federal fiscal drain, and the different views on the rights and responsibilities of the federal and provincial entities had an impact on Ottawa's crisis response. The world oil crisis itself became not a fixed sum or a given; rather, its very definition was the result of a complex mix of fears and concerns of both domestic and international origin. The definition of the situation would also relate to Ottawa's assessment of the opportunities and constraints posed by existing institutional and structural arrangements and by the policy instruments available. There was not necessarily anything sinister about the choices made. Rather, decision-makers often combine different sets of concerns and take measures aimed at rectifying perceived problems. Thus it is that a given interpretation or definition of an international crisis will indirectly mirror a host of concerns so that the crisis response will contain solutions to these domestic concerns as well. Then, as events unfold, the policy measures being applied send signals to other actors, indicating the types of concerns that appear to be paramount. When many actors get involved, the stakes are high, and the main actors become locked in a web of structural interdependence - as were the eleven governmental actors in Canada. Concerns other than those directly related to the world oil crisis may become part of the picture and influence outcomes. The NEP's prediction that international oil prices would continue to increase rapidly was based on the underlying assumptions of the day assumptions that were founded to a great degree on an analysis of global politics rather than on assessments of the world's oil and gas resources. The NEP was clear on this point - that is, that political events, and

116 Oil, the State, and Federalism indeed the structure f the international oil market, would push international oil prices strongly upwards. Although the government could back up its case with ample evidence, in retrospect its analysis of the changing market structure as presented in the NEP report was narrow in scope and biased. It did not take into account that a number of factors were only temporarily aiding OPEC and were not likely to hold in the future. While OPEC had succeeded in tightening supply and increasing prices after the Iranian Revolution, important factors were working against continued OPEC dominance. The federal government clearly overestimated OPEC's ability to regulate oil prices, withhold supplies, and maintain its market share of world oil exports. Further, the NEP overemphasized the importance of individual states in the international oil market; OPEC's continuing dominance and the notion of an increasingly state-centred oil market were not necessarily compatible. An increasingly state-centred oil market would surely offer little or no guarantee of a greater role for OPEC. A state-centred market would by its very nature entail increased state interventionist capacities; it did not automatically follow from this that a mechanism would be generated to regulate the trade. On the contrary, as each of the individual states became more capable of defending its position, the differences between exporters and importers would become more pronounced, and interstate organizations such as OPEC would be torn apart by internal strife among the members, whose goals were sure to be radically different. In an increasingly state-centred oil market, the stakes would be higher, and the likelihood of internal conflicts would increase, not fall. As early as 1980, analysts (including members of the Canadian petroleum sector) raised doubts as to whether OPEC functioned as a cartel - or indeed, had ever really worked as a cartel.27 If OPEC did not function as a cartel, its role in the determination of price and supply was possibly more limited than had seemed the case. But the federal decision-makers in Ottawa who produced the NEP strategy seemed unaware of these doubts, or at least did not acknowledge them. Indeed, most analysts of the time would have agreed with the EMR analysts' interpretation of trends in the international oil market. The basic problem underlying the NEP was not this interpretation, which was widely accepted, but its deterministic nature: the NEP's pricing projections and price regulation scheme served as the basic building blocks for a complicated and comprehensive policy structure. In this regard Canada, in regulating oil prices and introducing price differentiation among different sources of oil, distinguished itself sharply from other nations dur-

International Oil-Market Changes and the NEP 117 ing the crisis. While Canada was adopting a complicated system of price regulation, the United States was taking the lead in deregulating oil and gas markets. Ironically, the direction chosen by Ottawa - to regulate prices - would make the NEP and Canada vulnerable to changes in the international oil market while seeking the very opposite - to make the country independent from those changes. Ottawa's interpretation of the future world oil market reinforced its concern about reversing the perceived decline in its dealings with the oil-producing provinces and with the oil and gas industry (in particular the dominant foreign segment). Ottawa's analysis of the future of the international oil market was clearly a worst-case scenario based on the possibility of serious disruptions within the country. But all of this was not foremost a matter of political or economic interests or power. Rather, the NEP was deeply informed by constitutional issues. As an explicit attempt at 'capturing the future,' the NEP was a means by which Ottawa could address the problem of the deconstitutionalization of energy policy. The particular scenario and the policy measures taken were partly a response to ongoing conflicts between Ottawa and the producing and potentially producing provinces, in particular Alberta and Newfoundland. In that sense, the federal-provincial conflicts and the ensuing 'deconstitutionalization of energy policy' clearly influenced Ottawa's view of the future. The key lay not in the dynamics of domestic Canadian partisan politics; nor did it lay in the Ottawa decision-makers' perceptions, which were, after all, shared by most analysts; rather, it lay in just how those assumptions were translated into policies. The NEP: Basic Objectives

The National Energy Program, the most comprehensive energy policy ever orchestrated in Canada, was aimed first of all at increasing the federal government's control over all aspects of energy in the country. Its basic goal was to 'establish the basis for Canadians to seize the control of their own energy future through security of supply and ultimate independence from the world oil market.' The NEP's 1980 report stated that the program 'must offer to Canadians, all Canadians, the real opportunity to participate in the energy industry in general and the petroleum industry in particular, and to share in the benefits of industry expansion. It must establish a petroleum pricing and revenue-sharing regime that recognizes the requirement of fairness to all Canadians no matter where they live.' As a highly interventionist mea-

n8 Oil, the State, and Federalism sure, the NEP would place Ottawa at loggerheads with both the provinces and the oil industry, although the actual actor constellations turned out to be considerably more complex than that. The NEP brought together a number of different philosophical strands that had emerged during the late 19608 and 19705 in Canada and elsewhere in the world. It stressed explicitly the need for increased oil conservation - an emphasis that emerged from the perceived need to reduce oil imports and from the recognition by most resource economists that lowcost fossil fuels were sure to be exhausted quickly if policies were not altered. Internationally, resource economists and policy-makers had ceased to talk of oil as a normal commodity; instead, they emphasized that oil was unique and had to be treated differently from other energy sources. In Canada, an emphasis on Canadian ownership and control, and on the merits of public planning and problem-solving, had taken hold. Influential economists had come to believe in the need for state intervention to handle market externalities; this belief was linked to a growing general recognition that a significant state role in resource development was necessary. Coinciding as they did with the apparent decline in power of the major oil MNCs, and with the greater role of oil-producing and oil-exporting states, these important philosophical or value changes in Canada could clearly be used in the service of the state. Security of supplsmf Supply/Self-Sufficiency fffklfkoemf;lm

The NEP's stated objective included a time line: energy security within the span of a decade. In introducing the NEP, the federal government abandoned its earlier policy of energy self-reliance (which required accepting a certain measure of import dependence) and reintroduced its 1973 objective of self-sufficiency and independence from the world oil market. To achieve self-sufficiency, Canada would 'balance domestic oil supplies with domestic demand by 1990.' In the NEP, as a response to shortcomings in previous federal energy policies, Ottawa was also attempting to move Canadian energy policy away from a strong emphasis on supply enhancement, and toward a greater emphasis on reducing demand. However, the NEP also continued to emphasize the political dimensions of energy, in particular the political aspect of scarcity and the Canada Lands development. In doing so the NEP, more than any other previous energy policy, singled out oil as Canada's main concern. The NEP's commitment to conservation turned out to be weak, as seen

International Oil-Market Changes and the NEP 119 in the government's decision to combine a demand-side approach with supply-side measures. The NEP's emphasis on the demand side - particularly on conservation and interfuel substitution - was evident in the projections of future Canadian oil supply and demand. The NEP was intended to prevent a serious supply shortfall by 1990 and to reduce oil's share of primary energy demand from 42.6 per cent in 1979 to 26.7 per cent in 1990. Yet the NEP's demand-side orientation was primarily, even almost exclusively, toward oil rather than the wider spectrum of energy sources in Canada. If the NEP offered a truly demand-based approach to energy, then theoretically there would be little future need for frontier oil and gas. Under a demand-based scenario, a federal emphasis on the frontiers could be interpreted as a move by Ottawa to promote the mapping of Canada's oil and gas resources without committing itself to the development of those resources. But Canada already had, in Petro-Canada, an important instrument for mapping the resource base, a facility that was meant to act as a 'window' on the resource base. As well, to reduce oil's share of the Canadian energy pot would be to lessen the influence of the oil industry in the Canadian economy, thus depriving the companies of some of their political clout. In policy terms, the program's emphasis on developing future sources of supply was as strong as its commitment to reducing demand. Yet if the NEP's basic thrust were more strongly supply-based, Ottawa's promotion of the frontiers would mean that the resources there were to be exploited. An emphasis on developing additional supply would render the government more vulnerable to industry pressure for concessions. Further, since the provincial and federal governments were deeply involved in developing many of the alternative energy sources, even reducing the importance of the oil sector would not necessarily reduce the aggregate role of the two levels of government in the energy sector. Another policy thrust, the proposed gradual conversion from oil to gas, was logical enough because of the large gas reserves and OPEC's weakness in that area. The measures taken to convert from oil to gas would count more in b/d terms than the measures initiated to conserve oil. In the NEP's structure of financing, the means taken to enhance the supply of oil and other sources of energy would receive a far larger share of funds than would the demand-side measures. Further, Ottawa's policy of regulating oil and gas prices below world levels was clearly anticonservationist. The NEP's supply orientation was based on its projection of a steep decline in conventional oil production. It predicted that conventional oil

12O Oil, the State, and Federalism production would decline from 1,388 Mb/d in 1979 to 713 Mb/d in 1990; this underlined the immediacy of the supply problem. This forecast resembled the one presented in the 1976 EMR White Paper, although that paper had predicted that conventional production would remain higher for a longer period of time than forecast by the NEP report.29 The 1980 report by the NEP did present more optimistic figures for future Canadian oil production than had the National Energy Board in 1979; the NEB by then had a history of underestimating conventional oil reserves in the provinces.30 But considering the actual reserve additions that later came to light, the NEP was clearly pessimistic in its estimates of the potential for further provincial development of conventional oil.31 There is no direct evidence to indicate that this pessimism regarding conventional oil development in the provinces had any hidden purpose; rather, the NEP's assessment was largely consistent with EMR and NEB reports and was also indirectly supported by data provided by the industry. The NEP did not project a reduction in domestic oil production: it projected that 1990 oil production would be the same as in 1979. The program was therefore intended to eliminate oil imports without actually reducing domestic oil production. The NEP's calculations of demand were much lower than those provided by the industry; from a political perspective, this would render Ottawa less dependent on industry cooperation as it strived to attain self-sufficiency. If there was to be a sharp reduction in conventional oil production in the early 19805, it was going to be important to locate additional sources of oil. In Canada the solution to this supply issue was necessarily more than an economic one; it had clear political overtones because of related concerns such as regional development, control, and rent distribution. Although the NEP's oil production schedule did not project any particular level of oil or gas production in the frontiers, the NEP did predict for the 19808 that the largest increase in oil production would come from nonconventional sources of oil. Its specific policy measures revealed a strong emphasis on the frontiers. The federal government introduced a policy package that clearly discriminated against conventional oil (and gas) development in the provinces. Its reasoning was that the conventional areas in the provinces would not add much to the reserves. The remaining reserves needed few incentives to be produced; in fact, they would generate significant economic rents, part of which should accrue to Ottawa.32 The NEP, while not discriminating against the development of the tar

International Oil-Market Changes and the NEP 121 sands, took the geographical frontiers as its basic focus. At first glance it seems somewhat surprising that Ottawa would emphasize the Canada Lands, when those areas were not projected to contribute anything toward the goal of self-sufficiency by 1990. Although not officially relying on frontier (Canada Lands) oil and gas resources to meet its stated objective of oil self-sufficiency by 1990, the NEP revealed a strong optimism regarding frontier development, which stemmed largely from Chevron's discovery of the giant Hibernia field in 1979 and from important oil and gas discoveries in the Beaufort Sea. Hibernia, the largest oil find in North America since the late 1960$, was projected to contain between 500 and 1,500 million barrels of oil. These finds, combined with significant gas (and some oil) discoveries on the Scotian Shelf and in the Canadian Arctic Archipelago, served to create (or raise) optimism in EMR about the resource potential of the Canada Lands.33 This optimism was shared with officials and elected representatives of Nova Scotia and Newfoundland, the two Atlantic provinces that had long fought for provincial ownership of offshore oil and gas resources. The NEP report stressed the continuity in the federal government's frontier or Canada Lands strategy.34 Ottawa's rationale for emphasizing the frontiers was couched in terms of its 'need to know' regarding the resource basis of the frontiers. Such knowledge would enable Ottawa to make more enlightened decisions about resource development in the future. The official rationale in the NEP for promoting frontier development was to relieve the pressure on Alberta's resources. The report's ambiguous wording with regard to the role of the frontiers runs through the whole NEP report - surprising, given the NEP's expansion or introduction of large-scale efforts to develop the frontiers. This clearly suggests that motives other than resource development played a role in Ottawa's strategy, and that frontier development would supplement provincial oil and gas development rather than supplant conventional oil development in the provinces. The tax, pricing, and fiscal structure established in the NEP was certainly discriminatory, in that it favoured the frontiers at the expense of conventional oil and gas development in the provinces. But this discrimination had its limits. For instance, the NEP as such did not discriminate against the tar sands. Rather, it was Alberta's (and later the industry's) reaction to the NEP that greatly reduced the prospects for rapid tar sands development. The dynamic interactions among actors that took place after the program had been instituted would be just as influential as the NEP's initial structure.35 Ottawa channelled activities to the frontiers in order to increase fed-

122 Oil, the State, and Federalism eral control over resource development, wield more direct control over the activities of the oil MNCs, and increase its share of the economic rents from oil and gas development in the provinces. The NEP's concern with an increased federal energy presence, in relation to both the oil industry and the oil-producing provinces, coincided in the NEP. Ottawa's concern with controlling the rate and location of oil and gas development, made urgent by the view that the world oil market would continue to favour producers, made it logical enough that Ottawa would channel oil activities to the Canada Lands, because this was the only petrolific region in which Ottawa could exercise direct control over industry activities. But channelling oil industry activities to the frontiers, while simultaneously attempting to increase federal control over oil industry activities, could also easily backfire. Canadianization

The NEP reaffirmed Ottawa's commitment to Canadianize the oil and gas industry and introduced an impressive list of policy measures to address this goal. While Canadianization had become an integral and explicit part of federal energy policy, it had not by 1980 produced a serious challenge to the very large degree of foreign ownership and control in the oil sector. The NEP was presented as such a challenge. While the percentage of foreign ownership of the Canadian economy had fallen between 1972 and 1980, the share of GNP controlled by foreigners had increased by as much as 310 per cent. For instance, while the rate of foreign ownership declined from 78 per cent in 1972 to 67 per cent in 1980, the revenues owned by foreigners rose from $1.7 billion in 1972 to $11 billion in 1980. Foreign companies appeared to be gaining increased control.3 Given this foreign ownership, oil-company transfer pricing and foreign procurement could rob Ottawa of the increased tax revenues arising from increased industrial spin-offs from oil activities. The relocation of MNC operations to other countries could slow down the rate of operadons and produce lower federal revenues. Canadianization could benefit Ottawa in revenue-sharing terms, because a reduced foreign presence in the economy could increase federal revenues and improve Canada's current account balance. According to the NEP's projections, the future of the world oil market appeared to favour oil producers. If left untouched, this trend would greatly benefit the foreign-owned companies that already dominated the

International Oil-Market Changes and the NEP 123 Canadian petroleum sector. As well, important aspects of the federal regulatory and fiscal system in place were seen as protecting and even promoting foreign industry dominance. For instance, the incentive system in place prior to the NEP was tax-based and favoured the large, established foreign-controlled companies with taxable incomes.37 It could also stimulate increased future concentration in the oil and gas industry and promote the diversification efforts of the oil MNCs.38 The NEP's Canadianization measures were intended to arrest an MNC influence that had become institutionalized in the structure of some of the federal government's policy and regulatory instruments. Even though there was public ownership of land in all parts of Canada, Ottawa readily admitted that this ownership had not been converted into an effective public management of Canada's resources. The structure of the existing system of land management and rights issuance had conferred contractual rights upon industry. The NEP noted: 'The significant fact today remains that the foreign companies control most of Canada's oil and gas industry, and of its revenues. Foreign-controlled firms control the future through their control of the land in which exploration takes place.'39 The MNCs' dominant landholding role meant that increased Canadian ownership of oil companies would not necessarily ensure access to the most attractive and promising fields. This in turn meant that changes had to be made in the system of rights issuance and land management. Ottawa's Canadianization program was intended to increase Canadian control and management of the resource base. An explicit goal in the NEP was to achieve 'at least 50 per cent Canadian ownership of oil and gas production by 1990.' Further, the policy would alter the structure and pattern of landholding, and provide for an increased public-sector presence, by establishing a 25 per cent Crown share of a field; reducing the tenure of exploration agreements and production licences; increasing control over farm-ins and farm-outs; and improving Ottawa's ability to manage oil and gas activities in the Canada Lands and elsewhere. These efforts to increase control over industry operations would also significantly increase Ottawa's ability to control Petro-Canada's activities. Canadianization also involved increasing industrial benefits or spin-offs from oil and gas development. This objective, although in principle applicable to all of Canada, related mainly to the Canada Lands, because Ottawa had only limited influence on provincial resource-management objectives and policies. The objective was also Ottawa's attempt to promote the development of an industry segment that would be much more dependent on the federal government.

124 Oil, the State, and Federalism Federal decision-makers recognized that although something had to be done about the dominant role of the oil MNCs in Canada, the country still depended on foreign investment and would remain so. Strict investment controls could jeopardize Ottawa's goal of self-sufficiency. As a result, although it proposed to step up the role of the Foreign Investment Review Agency (FIRA), in practice the NEP resulted in few changes in that regard. Ottawa sought to devise a policy framework that reduced the level of foreign ownership and control and provided Canadians with an opportunity to participate in the oil and gas industry, while still ensuring a high level of foreign investment.40 New tax measures introduced in the NEP were intended to prevent industry earnings from being transferred out of the oil and gas sector. The NEP, rather than providing generous inducements for MNC investment (as had been the case with earlier policy), represented an attempt to coerce the oil MNCs to invest more of their funds in Canada. The new tax measures would compel foreign companies that wanted to expand their activities in Canada to rely less on internally generated funds and procure more of the needed investment capital from abroad. Because existing investment controls were not upgraded, the thrust of Ottawa's Canadianization objective was to increase federal control over the activities of the foreign-owned companies' oil and gas development activities. The NEP thus emerged as an economic strategy for taking advantage of an altered international oil market while simultaneously ensuring independence from the vagaries of that market. Thus, the NEP's goal of Canadianization entered into a complex and tenuous marriage with Ottawa's goal of security of supply. The success of this fragile marriage would depend on a number of factors, including the federal government's ability to exercise the amount of influence and power over the industry that was needed to fuse these reluctant partners. Another factor was the demand side of the NEP: if demand fell as a result of conservation and interfuel substitution, the potential spin-offs could also be reduced; in other words, the different objectives in the NEP could easily conflict. This tension also underlined Ottawa's key role in the conduct of Canadian energy policy. According to the policy-makers of the time, an increased federal presence in the oil and gas industry, whether direct or indirect, would enable Ottawa to balance its various concerns and prevent the dual evils of underdevelopment and overdevelopment of the country's oil and gas resources. If there was underdevelopment, Canada would remain dependent on oil imports and vulnerable to the caprices of the world oil market. The industry obviously shared this concern with Ottawa. But

International Oil-Market Changes and the NEP 125 overdevelopment would generate considerable pressure for oil and gas exports and thereby reduce the number of years that Canada could remain self-sufficient. On this issue, Ottawa and the oil industry experienced considerable disagreement. Essentially, the oil industry desired to promote a continentalist pattern of oil and gas trade, whereas Ottawa was in favour of developing a national market for oil and gas. As a political issue, Canadianization was not confined to the field of energy. As actively propounded by the newly elected Trudeau government, Canadianization could also be raised as a banner to demonstrate the tangible benefits of federation to Quebeckers. A highly volatile international oil scene threatened, through increased oil prices, to undermine Quebec's fragile industrial structure. Clearly, declaring Canadianization to be an express federal objective could benefit Ottawa by swaying Quebeckers to vote no in the referendum to be held on 2O May 1980. The goal of Canadianization had a tremendous appeal in Quebec, and Quebeckers were among the strongest supporters of the NEP's Canadianization program. This support was strongest in the winter of 1980, when 72 per cent of Quebeckers backed the energy measures. When asked about the effects of the NEP in the autumn of 1983, Quebeckers were far more positive than respondents in any other region of Canada.41 In this way, energy policy was tightly linked to the ongoing debate over the role of Quebec in Canada, and to the future of the Canadian federation. Ottawa's concerns with ensuring order and control in a highly unstable international environment were heightened by domestic challenges to the very unity of the federation. To increase Canadian ownership and control over the oil and gas industry, the NEP introduced two different mechanisms - namely, increased public ownership and control on the one hand, and increased private Canadian ownership and control on the other. With regard to public ownership and control, and the expansion of Ottawa's role, the NEP introduced measures to shore up the role of Petro-Canada. The NEP noted: 'The Government believes that a larger national public sector presence in oil and gas is the only equitable way to meet quickly our goal of increased Canadian ownership. Judging from the results achieved to date by Petro-Canada, it is also an effective way of encouraging the rapid energy development necessary to meet our security needs.'42 Increased public-sector participation, the NEP concluded, would not solely benefit Petro-Canada; it could also lead to the creation of several NOCs. The NEP introduced a Canadian Ownership Account, financed through charges levied on oil and gas consumption in Canada, to

126 Oil, the State, and Federalism increase public ownership in the energy sector. A more indirect, but still important, federal control involved measures to expand Ottawa's knowledge and monitoring of the oil and gas industry. Such measures included the continued operation of FIRA through the Foreign Investment Review Act and the establishing of the Petroleum Monitoring Agency, which would carry out the duties and tasks specified in the Petroleum Corporations Monitoring Act. Finally, a new Canada Lands management regime was put in place, its intent being to increase federal control over the activities of the oil and gas industry. In applying the principle of Canadianization as a means of shoring up private-sector ownership and control, the NEP introduced a range of measures. The most important of these was the new incentive system, represented by the Petroleum Incentive Program (PIP). Further, the NEP declared a commitment to favour Canadian ownership in the NEB's granting of export licences. This second aspect of the NEP involved a government-sponsored and government-led or directed industry restructuring that also, at least indirectly, would benefit the Canadian state, because Ottawa would be dealing with smaller and conceivably more dependent actors than had previously been the case. Both sets of measures, public and private, can strengthen a state's power and influence. 43 However, only one of them - the direct strengthening of the state's role through public ownership and control - can be readily relied upon as an accurate index of state power. More indirect measures to restructure industry depend for their impact on a number of factors, including the industry actors, over which the state has less control. Direct state intervention is largely independent of industry actors, at least in principle, and this enables the state to substitute its own objectives for those of industry. As a result, direct state intervention can assume a different magnitude than do measures that depend on industry co-operation. Important aspects of the Canadian state could serve to constrain or to redirect the state's intervention. The physical location of Canada's resources and the constitutional division of power that ensured provincial ownership of oil and gas resources could serve together as obstacles to increased private-sector Canadian control and to direct federal control. Also, Ottawa's ability to influence the industry's activities was hampered by an energy scene dominated by Alberta, and future activities were most likely to be divided between the Western provinces and the Canada Lands. This left the industry with a tremendous structural source of power and influence: the corporations could wring concessions from each level of government, with both levels eager to develop the resources

International Oil-Market Changes and the NEP 127 under their jurisdiction. Thus, the very essence of federalism could constrain or weaken the state's program of intervention. Federal attempts to reduce foreign ownership and control could be construed as challenges to the established constitutional division of power. The NEP, with its stronger thrust for Canadianization and with its close links to other and equally contentious goals, could only perpetuate or expand this tension, because it was such a comprehensive and coherent program of intervention. Fairness/Red istri bu tion

The NEP's 'fairness objective,' which was aimed at ensuring that the federal government received a fair share of the economic returns accruing from oil and gas development, was probably the most contentious single issue in the entire policy. An important problem facing Ottawa after the second OPEC oil shock was a rapid erosion of the federal tax and fiscal base. The main challenge came from the oil and gas sector. This erosion was a consequence of, first, the structure of the current incentive system. EMR noted, with specific reference to an oil sands mining project, that under the existing incentive system, 'at high enough discount rates the value of future tax receipts can be less than the tax savings provided to the project.' This point applied not only to the tar sands but also to conventional oil. EMR also found that 'while the industry's revenues increased substantially from 1977 and 1978, corporate income tax payments actually fell.'44 The dramatically increased federal oil-import compensation payments caused by the great rise in world oil prices presented another problem. According to Helliwell and his co-authors, 'The federal government had become increasingly dependent on general revenues for financing the oil import compensation program and thus had strong incentives to raise domestic oil prices in order to reduce the cost of this program.'45 Increasing world oil prices were threatening to drive up oil import compensation costs, and the need for urgent action to address this issue was not lost on federal decision-makers. At the same time, federal officials were under strong pressure from consumers to prevent oil prices from rising too rapidly. As well, the revenue-sharing system in place was seen as favouring the producing provinces, consumers, and industry at the expense of Ottawa.46 The federal share would decline relative to both the provinces and the oil industry. For Ottawa, the projected decline in the federal

128 Oil, the State, and Federalism share was particularly alarming because it confirmed a trend that had been perceived as early as the 1970s. The energy minister, Marc Lalonde, noted that provincial governments in the 19705 had experienced faster growth than had the federal government; 'this trend has been accompanied by a growing gap between the federal government's ability to collect revenue, and its responsibility regarding its expenditure.'47 Lalonde attributed the federal government's deteriorating fiscal role not only to explicit energy policy measures but also to the nature of the fiscal equalization system. EMR predicted in 1979 that if the pre-NEP pricing strategy continued, net federal oil and gas revenues would be negative throughout the igSos.48 The NEP observed: The current fiscal system concentrates petroleum wealth within Canada to a highly undesirable extent, and leaves the federal government seriously short of the revenue it requires to manage the Canadian economy, reduce regional disparities, and develop an effective national energy policy.'49 Therefore, although the NEP was first and foremost an energy policy, it was also a program to shore up the role of the federal state; and the policy measures instituted by Ottawa were clearly tailored to meet both these ends. According to EMR, the NEP's redistributive thrust was concentrated mainly against the producing provinces rather than the oil and gas industry. Yet the report also noted that in terms of the predicted effects on industry, some segments would benefit and others would suffer. Clearly, the NEP had been designed so that it did not favour companies that produced oil without reinvesting subsequent earnings in exploration. Yet at the same time, if it came down too hard on the industry, the program's energy security objectives would be placed in jeopardy. Ottawa's strong emphasis on rapid exploration of the frontiers rendered it more vulnerable to industry pressure than if it had followed a strategy more clearly focused on oil conservation. But the more important the frontiers became in Canada's oil and gas supply picture, the more control Ottawa would wield over Canadian oil and gas development through its own instruments. Transferring a larger share of revenues from the producing provinces to the federal government would clearly facilitate this process: by attaining a larger revenue share, Ottawa would be ensuring itself of increased control over the activities of the oil and gas industry. In this way, the government's goal of fairness was fused with its concern about control of and Canadianization of the oil and gas industry. Within the context of the NEP, Ottawa sought to alter the federal-provincial revenue distribution scheme in ways that would help it meet its other pressing objectives. By making explicit Ottawa's revenue-distribution objectives,

International Oil-Market Changes and the NEP 129 the NEP further politicized energy policy, as part of the wider process of deconstitutionalization of energy policy. Ottawa's Policy Measures

The main policy measures introduced in the NEP relating to oil and gas development focused on the following: price regulation; energy taxes and incentives; a new system of rights issuance and land management for the Canada Lands; and an expanded role for Petro-Canada. The measures relating to price regulation, taxation, and incentives were nationwide in character and application, in contrast to the new Canada Lands regime. The NEP was the most comprehensive and consistent policy package ever introduced in the energy sector in Canada, and also the most interventionist. It linked a number of different measures that hitherto had been separate and largely unco-ordinated, and it also introduced a host of new measures. More than any other previous federal program, the NEP involved a dramatic administrative build-up or strengthening of Ottawa's planning and policy-making capacity. The new system introduced in the NEP was intended to (a) promote exploration and development, while preventing windfall gains by the industry; (b) ensure a fair distribution of excess industry profits between the two levels of government; (c) confine exports; (d) encourage substitution of imported fuels with abundant indigenous sources of energy, and increase Canadianization. In the service of these objectives, the NEP introduced a range of new measures, including price regulation; taxes such as the petroleum compensation charge (PCC), the petroleum and gas revenue tax (PGRT), and the natural gas and gas liquids tax (NGGLT); new federal royalties on production from the Canada Lands; and the Canadian Ownership Account (COA). The NEP also sought to separate revenue generation from incentives; to this end, it established a new incentive program based on cash grants rather than tax exemptions. Its main component was the PIP. The depletion allowances in the Income Tax Act were scheduled to be eliminated, and the 25 per cent resource allowance rules were to be changed.50 Price Regulation

The NEP established price regulation as an explicit policy instrument in the service of the federal government. Earlier policy statements and pol-

130 Oil, the State, and Federalism icy papers had also relied on price regulation as an actual policy measure, but they were never as explicit as the NEP. The principles guiding Ottawa's price regulation strategy were as follows: (a) domestic oil prices must be stable; (b) they must be high enough to encourage conservation; (c) they should reflect Canadian costs of production and not be linked to what was seen as arbitrary international oil prices; (d) gas prices should stay well below oil prices so as to encourage substitution away from oil; and (e) there should be a uniform price of oil for all of Canada. The need to separate Canadian from international oil prices was based on the assumption that OPEC would be able to retain control of world oil prices. Since price regulation was a powerful means of altering the relative distribution of income between consumers and governments, and among governments, it was not to be left in the hands of a foreign cartel. Having been freed from the vagaries of the world market, price regulation could be used to influence not only revenue distribution but also the rate of resource development and energy conservation in Canada. For instance, price differentials between different supply sources were intended to ensure a relatively rapid transition to a future of high-cost oil. The NEP's new pricing arrangement was termed a 'blended price system.' The NEP report stated: The Government of Canada has decided to establish a new schedule of prices for domestic oil production, and a new price system to blend the costs of different sources of oil into one weighted-average price to consumers.'51 The new pricing structure distinguished between conventional oil, produced in the provinces, and higher-cost oil, which included enhanced recovery oil, heavy oil, tar sands oil, and frontier oil. The blended price was to remain below 85 per cent of the international price or the average price of oil in the United States, whichever was lowest.52 For conventional oil, the NEP prescribed a gradual escalation of the wellhead price for a barrel of conventional oil.53 This process of escalation would continue until 1990, when approximate parity among sources would be reached - that is, when the price of conventional oil would approximate that of tertiary recovery oil.54 Ottawa considered this price schedule to be an adequate incentive for the industry to discover the projected 3 billion barrels of oil still to be found in Western Canada and, even more, to convert to a future of high-cost oil. The assumption, again, was that conventional oil reserves in the Western Sedimentary Basin, all of them located in Alberta, would not add greatly to Canada's future security of supply. Rather, those pockets of oil were perceived as a source of financing for the process of adjusting to a future of high-cost oil supplies. But the underlying motivation for a price differ-

International Oil-Market Changes and the NEP 131 entiation was, according to P. Bradley, to 'allow an attack on the crossover problem while minimizing conflict with other policy goals - redistribution of income in Canada in favor of consumers and the non-oil producing regions of the country as well as the Canadianization of the petroleum industry.'55 The price structure for conventional oil - slow increases at first, rapid ones later - actually encouraged the industry to delay developing new wells in Western Canada. Clearly, price regulation was not devised to maximize domestic production of oil from the conventional areas, especially not in the short to medium term.56 Instead, as Bradley observes, this aspect of price regulation policy reflected Ottawa's view that little additional conventional oil would be found in the provinces. It also reflected the view that existing production in the provinces was not critical to the funding of further conventional development there. Rather, given the price differential between the cost of production and the value of the commodity, the conventional oil production represented excess profit or economic rent, and Ottawa was entitled to an increased share of this gain. While this approach could be viewed as motivated by resourcerelated concerns, there is little doubt that Ottawa very much wanted to extract as much of the economic gain as possible and prevent the projected revenues from ending up in provincial and industry coffers. In terms of higher-cost oil, price incentives were in place even before the introduction of the NEP, in the form of the 'Syncrude Levy,' which had been directly tied to the world oil price. The NEP delinked this from the world price and introduced a new reference price for synthetic crude from the oil sands. With regard to frontier oil prices, the NEP noted: 'A reference price for specified frontier oil and other domestic sources may be established when more is known about the costs of bringing these new supplies on stream, and the timing of production.'57 The NEP did not specify a price structure for frontier oil, nor did it indicate whether Ottawa would revert to its old strategy of establishing prices on a case-by-case basis. This is a quite remarkable omission in light of the emphasis inherent in the incentive system for frontier oil. Nor did the NEP specify where the price of frontier oil would stand relative to other types of oil. At least in principle, Ottawa could determine prices when supplies became available, instead of committing itself at the outset to a certain price structure. Because the royalty regime was tailored to price levels, it would be difficult to assess Ottawa's share of the rents. Ottawa's failure to specify a price scheme for frontier oil sparked uncertainty, as well as speculation in industry circles

132 Oil, the State, and Federalism as to the impact this powerful policy instrument would have. The federal government, it seems, was seeking to keep the issue of frontier oil-pricing open in order to provide itself with a high degree of flexibility. Yet in the added uncertainty it created about frontier development, this emphasis on flexibility could prove to be a problem. The NEP did not introduce any changes in natural gas pricing. Gas prices were kept well below oil prices; this would prevent the producing provinces from reaping windfall benefits and enable Ottawa to ensure a higher revenue share. Nor did the NEP distinguish, in its pricing policy, natural gas from the provinces and from the frontiers. The failure to make this distinction might in the long run slow down the process of substituting gas for oil. A nondiscriminatory price structure for natural gas might discourage rather than encourage the rapid development of frontier natural gas, especially because of the high transportation costs involved in frontier development. By disconnecting the Canadian oil price from the international one, the federal government could exercise much more control over price as an incentive system for various sources of oil. Further, by regulating the price of each individual source of oil, the federal government could profoundly alter the composition of oil supply sources available to Canadians in the future, thereby influencing not only the rate and location of future oil and gas development but also the distribution of economic rent among producers, consumers, and governments.5 Thus, the price structure of the NEP sought to reconcile developmental objectives with discriminatory and redistributive ones. Ottawa's main concern was not with depletion; if it had been, it would most likely have paid more attention to the enhanced recovery of conventional oil in the provinces. A strong concern about depletion would have meant an even stronger conservation effort; also, Ottawa would have surely had to tolerate a certain degree of import dependence in order to continue domestic production for as long as possible. Instead, Ottawa was concerned with the political aspects of controlling the rate of exploration and development. As Bradley notes, the federal government's emphasis on developing Canada's high-cost sources of oil and gas could first and foremost be reconciled with other aspects of the NEP - namely, with shoring up Ottawa's revenues and placing Ottawa itself in a much more prominent position as a resource developer. Frontier and tar sands developments had long lead times, which made those sources of supply less reliable as direct substitutes. Arguably, this is more than simply a question of optimizing the timing of supply additions.

International Oil-Market Changes and the NEP 133 The NEP, rather than disfavouring conventional oil development, was the Liberal government's attempt to force the producing provinces to foot a larger share of the bill for resource development. The NEP report noted on several occasions that the provinces would have to take increased responsibility for the oil industry's activity levels. The apparent irony of such a federal policy was that the provinces, in devising even more generous incentive schemes for the industry to develop relatively inexpensive conventional sources of oil and gas, would create incentives for the industry to revert back to the provinces. This in turn would place more pressure on Ottawa to devise generous incentives, which could again tilt the balance of its policy toward inducements rather than measures to compel industry behaviour. This strategy, again, could lead to trouble, because after all, Ottawa had the least attractive petroleum areas. The discriminatory strategy, while it did not discriminate against all sources of oil in the provinces, ran a high political risk of a provincial backlash that could render federal priorities even more vulnerable to industry reactions and international changes. Ottawa's pricing policy, when combined with the new federal taxes, discouraged the development of all readily available sources of conventional oil and thus failed to maximize the total amount of economic rent available.59 An important reason for this stems from Ottawa's concern with oil consumers. The NEP not only was concerned with expanding the federal government's role in the Canadian energy sector, but also was very favourably inclined toward benefiting oil and gas consumers. It was assumed based on world market trends that without federal intervention, in the future oil and gas producers would benefit and oil and gas consumers would suffer. The NEP was designed to counter this supposed trend. But while price regulation was an important policy instrument in the NEP, its flexibility of application was greatly limited. Price regulation was implicitly tied to the development of world oil prices, based as it was on the assumption that world oil prices would continue to increase and would follow, if not exactly the pattern set out in the NEP, at least a pattern of relatively steady increases. This meant that federal price regulation could only function as an effective policy instrument in Canada as long as Canadian prices were regulated below international oil prices, and as long as world oil prices were rising. If world oil prices did not rise in roughly the manner assumed by Ottawa, the federal government would not be able to use price as an incentive to ensure the conversion to a high-cost future oil supply. This problem was made worse by the fact that price regulation was very closely integrated with the entire tax and fiscal structure in the NEP.

134 Oil, the State, and Federalism Because Ottawa's deterministic vision of the future of the world oil market was incorporated into the basic structure of the NEP, that program was highly vulnerable to declining world oil prices. Canada was not unique in committing itself to the goal of independence from the world oil market; however, it was unique in adopting a rigid oil-price regulation scheme that produced disincentives relating to the cheapest indigenous oil sources, and that was tied to deterministic predictions about the world oil market. By the time the Liberals launched the NEP, major countries such as the United States had made firm commitments to deregulate oil and gas prices. While the price regulation scheme in the NEP was devised to address problems relating to changes in the international oil market, these problems and the approaches to addressing them were shaped mainly by the problems facing the Canadian state. In a setting characterized by little and waning respect for the constitutional division of power, all governmental actors in Canada took measures to address the altered situation. The competitive nature of this interaction had its roots in the early 1970s, when increasingly insecure and highly interventionist governments started to pursue a large number of often incompatible objectives. The wide range of objectives was often incompatible with the narrower range of policy instruments available to each level of government under the constitutional division of powers. Faced with 'instrument overload,' and with an overreliance on fragile and volatile policy instruments, each level of government set out to devise new and more innovative policy schemes that overlapped with and increasingly imposed on the powers of the other level of government. The objectives were undeniably political in nature, and the relations among many of the actors were often poisonous; that being said, the shape of the objectives was conditioned by the structural context of the times, as was the behaviour of the actors. The basic problem was not price regulation as such, but rather its central role in the whole NEP edifice, because the NEP's tax and fiscal measures were tied directly to the pricing scheme. Price regulation was assigned a range of potentially conflicting functions. It was to serve as an incentive scheme; as a means of regulating resource development; and as a means of influencing intergovernmental and state-industry revenue distribution, both on its own and when combined with a wide new array of taxes. Because price regulation below world market prices was motivated by intergovernmental distributional concerns rather than developmental ones, and because the conversion to future oil sources depended on vastly increased oil prices, the federal-provincial concerns that were

International Oil-Market Changes and the NEP 135 so important in shaping the NEP were also instrumental in rendering federal policies ineffective when world prices declined. Tax Measures

The NEP introduced a number of new oil and gas taxes in order to deal with the perceived shortcomings of the old tax and revenue-sharing system, which various Liberal administrations had designed and retained throughout the 1970s. The NEP report strongly criticized this system as being too generous to the industry; as encouraging exports of natural gas; as taxing oil exports but not gas or other energy commodities; and as depriving Ottawa of the fiscal capacity to manage the mounting energy problems facing Canada. The petroleum compensation charge (PCC), which replaced the old oil-import compensation program, was levied on domestic refiners to cover the costs of oil-import compensation. As such, the PCC was part of the federal government's commitment to a uniform price of oil in Canada. It was intended not only to shift the burden of the subsidy from the taxpayers at large to the oil consumers but also to serve as a new source of federal revenue. It would free the federal government from the heavy burden of oil-import compensation payments, which were running into billions of dollars and in 1979 had been predicted to become the largest federal energy expenditure and a major factor in the alleged federal fiscal drain. The PCC is a clear example of the close link between Ottawa's price regulation scheme and the tax system. The petroleum and gas revenue tax, modelled on a British tax introduced in 1974, was one of the most controversial measures in the 1980 NEP.60 The PGRT, projected to bring in $5.5 billion in the period 19814, was introduced to alleviate the effects of an overly generous incentive system, to ensure adequate revenue for financing the new and comprehensive incentives introduced in the NEP, and to help tailor the incentives to the Canadian-owned and Canadian-controlled segment of the oil and gas industry. The PGRT, a general upstream-based tax, consisted of two parts: a tax of 8 per cent on petroleum and gas production revenues; and an 8 per cent tax on amounts received as, on account of, or instead of resource royalties. The overall tax rate thus would depend on the relevant royalty rate. The tax did not apply to the transport or transmission of oil or gas; nor did it apply to oil refining or gas processing. While the PGRT enabled the oil companies to write off operating expenses, it did not

136 Oil, the State, and Federalism allow them to deduct provincial royalties.63 The tax thus introduced the principle of nondeductibility of provincial royalties that the Liberals had unsuccessfully tried to establish in 1974. It was a tax with a clear mission, as the NEP report noted: 'This tax, in combination with other federal and provincial taxes and royalties, will produce a high marginal tax rate for firms that reinvest little of their cash flow. This is consistent with the thrust of the Program - to secure from non-investing firms the revenue to support cash incentives to more aggressive companies and individuals.' The report also suggested that in 'situations where firms are exposed to hardship due to provincial royalty rates in excess of 50 per cent,' the particular province would be expected to adjust its royalties. 4 The federal government introduced the PGRT as a tax on net oil and gas production revenue. It was not an income tax, because it applied to production and was levied at the wellhead. ° As such, it had a direct effect on provincial royalty rates: it indirectly impinged on the provincial right to collect resource rents, because the tax was designed to prevent the producer from passing it on. Because the tax applied directly to the wellhead, it was in effect both a federal intrusion on the jurisdictional rights of the provinces and a means of forcing the provinces to change the existing royalty structure. All in all, the PGRT represented an attempt to revise the revenue-sharing formula, in relation to both the provinces and the oil industry. The PGRT also enabled Ottawa to extract revenues from provincial Crown corporations such as Saskoil. As that company stated: 'From Saskoil's standpoint, a constitutional issue of taxation of one level of government by another arose.fifi The tax was a blatant example of how greatly energy policy in this period had become 'deconstitutionalized.' In terms of the PGRT's effects on development, Scarfe noted: 'This tax was the major factor which seriously eroded oil company netbacks between 1980 and 1981, and thereby discouraged new exploration and development.'67 Helliwell, in modelling the effects of the NEP and the 1980 federal budget and comparing this to Alberta's proposals, found: 'The imposition of royalty-type taxes that reduce the net wellhead price has the effect of reducing both the pace of drilling activity and the size of the ultimately recoverable stocks of conventional oil and natural gas. This means that some economically recoverable oil and gas that would have been developed without the new taxes will be left in the ground instead.'68 The PGRT (and the NGGLT) would negatively affect Canada's shortto medium-term energy security and make Canada more dependent on higher-cost sources of oil from tertiary recovery, the tar sands, and the

International Oil-Market Changes and the NEP 137 frontiers. Both government and industry were uncertain as to how long it would take to develop these resources, and the federal government had only limited influence on the industry's operational decisions; for these reasons, the most important tax measures introduced in the NEP were likely not only to jeopardize Ottawa's goal of self-sufficiency but also to commit Ottawa to a future of megaprojects, the success of which would depend on federal (and provincial) financial support and other concessions. Ottawa's tax measures might make the federal government more dependent on the oil MNCs that had the expertise, capital, and technology to undertake the huge projects that would be required to achieve the objective of self-sufficiency. In this way, the NEP affected the Canadian 'juniors' even more than the oil MNCs. 9 The net effect might be to thwart the NEP's Canadianization objective - which reveals how difficult it was for Ottawa to launch policy measures aimed at meeting its objectives without either violating jurisdictional bounds or producing unintended effects. Yet another new tax, the natural gas and gas liquids tax (NGGLT), included an export tax component in that it applied to all natural gas that is, gas for the domestic as well as the international market. Its export tax component was scheduled to come into effect later than the tax on domestically used gas because of an agreement with the United States that required Canada to give ninety days' notice of price changes. The export tax section of the NGGLT, however, was struck down by a 1981 Supreme Court of Canada decision, which found that the section contravened section 125 of the Constitution Act, 1867.7° This tax was thus also deemed a clear incursion into provincial jurisdictional bounds. The new tax measures were introduced by Ottawa to increase federal revenues at the expense of both the industry and the oil-producing provinces. The PGRT in particular would undercut or at least delimit the producing provinces' ability to charge provincial revenues and increase industry taxes; it would also force them to reconsider their own royalty systems. In 1973-4, Ottawa had squeezed the industry as a means to pressure the producing provinces into reducing or at least not increasing provincial levies. But the PGRT was even more directly intrusive than earlier measures, which serves to highlight the new willingness of governmental actors to go beyond constitutional bounds to promote their own objectives or thwart the objectives and the actions of other governmental actors. Although intended mainly to increase federal revenues, Ottawa's tax measures were directly related to the other federal concerns: self-suffi-

138 Oil, the State, and Federalism ciency and Canadianization. But the breadth of federal objectives could not easily be reconciled with the available instruments. One result was instrument overload; another was that an increasingly complex web of federal-provincial policies was spun that helped foster or at least perpetuate conflicts. The Incentive System

The new incentive structure in the NEP differed considerably from previous federal policies, mainly in that it shifted the approach to federal incentives away from a tax-based system toward a grant-based one. The Petroleum Incentive Program (PIP) was intended to ensure continued development while also promoting the NEP's Canadianization thrust and reducing the future role of the oil MNCs. The magnitude of PIP payments depended on a number of factors, which formed the structure of the scheme: (a) the Canadian ownership rate (COR); (b) the Canadian control status; (c) the location of the land; (d) the nature of the expenditure (exploration, development, or eligible assets); and (e) the year in which expenditures were incurred.71 The grant-based nature of the incentive system made it more politically visible than the previous incentive system had been. It was more focused on the exploration stage, and signalled that Ottawa was making a clearer distinction than before between the various stages of oil and gas development. In terms of exploration, the earned depletion allowance (EDA) would be retained for 1981, but after that it would be phased out for domestic exploration expenditures outside the Canada Lands. The depletion allowance on conventional oil and gas development would be eliminated, but it would remain in place for integrated oil sands projects, enhanced oil recovery (EOR), and heavy crude oil upgraders. The incentive structure in the NEP was intended to increase the federal government's control over the rate and location of oil and gas exploration and development. In this, it clearly favoured the Canada Lands. The PIP payments available for frontier exploration were significantly greater than those available for the provinces. As Doern and Toner observe, the approach not only made the oil industry more visibly dependent on Ottawa, but also placed Ottawa in a curious paradox of control, in the sense that the expenditure elements by which Ottawa sought to ensure control were demand-driven and dependent on private-sector behaviour.72 Because the focus of the PIP was on exploration, not development, Ottawa had few assurances that the grants would lead to development.

International Oil-Market Changes and the NEP 139 Companies with sufficiently high COR rates could have almost all of their exploration expenditures covered and so did not need to risk their own or borrowed funds to start exploration. Ottawa had little assurance of actual development, which was far more costly and required additional funds. Active explorers would most likely seek additional concessions from Ottawa to develop the resources. The high political visibility could easily become a curse for Ottawa, because the perceived magnitude of federal investments would generate considerable political pressure for early returns on those investments. Thus, although the PIP structure, by primarily encouraging exploration, was presumably a means of furthering Ottawa's 'need to know' objective, it would also in effect further compromise Ottawa's ability to control development. The PIP grants constituted Ottawa's main incentive mechanism, but they were not the only major incentives included in the NEP. The NEP granted high-cost sources of oil much higher prices than conventional, low-cost sources of oil; in this way, price regulation was also presented as a powerful incentive. Because the NEP kept the prices of conventional oil and gas down, the PIP grants were a means of compensating explorers for the effects of price regulation. The PIP, far more than previous policy instruments, conveyed the government's political priorities as much as its resource development objectives; it did so by discriminating among explorers on the basis of Canadian ownership criteria. In the short term, the PIP was intended to enhance self-sufficiency by providing some support to the development of conventional oil in the provinces; in the long term, it was intended to ensure adequate future supplies by promoting frontier sources of oil and gas. The PIP had a clear redistributive objective: it deliberately favoured the frontiers, and discriminated against the foreign-industry segment. The program revealed and probably also heightened existing tensions in Canada Lands policy: the tension between active promotion of the resource potential and close control over the rate of development. The Canada Lands

A vital part of the federal government's commitment to increased federal control of oil and gas development in Canada was the introduction of a new-land management system in the areas under its jurisdiction, the Canada Lands. The main legislative instrument of this regime, Bill C-48, the Canada Oil and Gas Act (COGA), emerged as a response to the major restructuring in the international oil market that was perceived to be tak-

140 Oil, the State, and Federalism ing place between international oil companies and oil-producing and oilexporting states.73 If the political history of industry-government relations can be summarized as a conflict over land use, the two contending claims have been the industry's call for property rights, and the government's call for sovereign rights. Before 1980 the federal regulations had stressed property rights. The new Bill C-48 turned matters around, by emphasizing the sovereign rights of Parliament to determine and alter the terms and operations of the industry. The bill thus represented the implementation or most visible manifestation of an important philosophical change in industrygovernment relations in Canada.74 This philosophical change was to a large extent spurred by the nature of federal-provincial relations. In this new federal Canada Lands regime, Ottawa was attempting to harmonize the federal system with the actions taken by provincial governments - in particular Newfoundland, but to some extent also Nova Scotia - to introduce more interventionist regimes on the East Coast. The new Canada Lands regime was based on the highly interventionist North Sea model, introduced in Britain and Norway,75 and was an important departure not only from the previous federal landmanagement regimes but also from the systems in the producing provinces in Western Canada, which had all been based on the American model. The new Canada Lands regime was also a critical response to the overly permissive systems in place prior to 1980. Bill C-48 emerged out of the defunct Bill C-20 of 1977; it was rooted in the unsuccessful attempts of the late 1970s to establish a more stringent regulatory framework - one that was more in line with the North Sea model, which had initially been adopted by Newfoundland. Three headings in the NEP report stated in capsule form the principal objectives of the new federal land-management regime: oil and gas selfsufficiency, Canadianization, and fairness. These objectives differed in terms of the role and direction of state intervention required for their fulfilment. As such, they placed divergent requirements on the policy instruments available to and used by Ottawa. The goal of Canadianization was related to the objective of selfsufficiency: Canadianization would increase Ottawa's influence over the industry's access to land and petroleum resources. Further, by specifying the level of goods and services to be provided by Canadians, Ottawa could influence the commercial transactions of the oil companies and avoid the oft-cited problem of transfer-pricing by the oil MNCs.76 The Canadianiza-

International Oil-Market Changes and the NEP 141 tion requirements introduced in Bill C-48 were intended, not to maximize the rate of oil and gas development, but to ensure increased federal control over that development. To this end, they actively discriminated against the dominant landholders. Further, the higher and more strictly enforced the requirement for Canadian goods and services, the lower the rate of development would be, because Canadian suppliers would not be able to provide all the necessary equipment. The PIP, tailored as it was to frontier exploration, was intended to address the problem of underinvestment; yet the process of replacing one segment of the industry with another would take considerable time, and the rate of development would fall in the interim. In terms of revenue distribution, Ottawa introduced a number of new taxes. The point of these was to increase the federal share of the rent, ensure the producer of a competitive return,'reward the highly successful explorer by recognizing the elephant-hunting philosophy,' and allow flexibility in the government's efforts to foster industry investment. In addressing these objectives, Bill 048 attempted to change the tax regime in the Canada Lands from a volume-based system to one that was profitsensidve.77 Ostensibly, such a reorientation would enable Ottawa to share in any excess profits generated from oil and gas development, without creating disincentives to the development of large, economically marginal fields. The new system also reintroduced the principle of no frontend loading, which meant that the industry would be able to recover investments in the production phase before paying taxes and royalties. The new tax and fiscal system for the Canada Lands was intended to promote restructuring of the oil industry while also ensuring the rapid development of Canada's oil and gas resources. The new tax and royalty regime for the Canada Lands had several components. First, a basic royalty of 10 per cent was to be collected at the wellhead. This royalty could be collected either in kind or in money, and its application was subject entirely to the discretion of the minister. Second, there was the progressive incremental royalty (PIR), for which the maximum rate was 40 per cent of net profit for each year. The PIR levy varied with field profitability and size and was subject to a large number of deductions, which clearly reduced its importance as a revenue-generating measure. The two final taxes were the PGRT and the corporation income tax.78 Federal officials argued that under this new system only highly profitable fields would generate increased revenues for the federal government. In the matter of marginal fields, the new system was clearly more

142 Oil, the State, and Federalism favourable to the industry. Industry spokesmen argued that the new tax, fiscal, and price regime could lead to 'non-development of smaller fields and a lower level of investment.'79 Because the new system was based on very different pricing assumptions, and (it followed) on different assumptions about the overall value of the oil and gas resource base, even a regime that extracted a higher share for government from the industry could still leave the industry better off in absolute terms. The generous incentive scheme clearly reduced industry costs as well as Ottawa's overall take. Also, the adoption of the unitary development concept did away with the existence of corridor lands, and thereby increased overall resources available to the industry as well as the industry's potential revenue basis.80 The industry's response to the new tax and royalty regime was mild compared to its response to other parts of the legislation. The NDP opposed Bill C-48 because the tax rates were much lower than those introduced in the United Kingdom and Norway, both of which had adopted concession systems. And while the initial NEP report did not establish a price structure for frontier oil, that oil was later included in the new oil reference price (NORP) scheme and listed as a high-price source of oil. In this way was eliminated the uncertainty stemming from the fact that Ottawa had left the frontier price structure open and could influence the industry's decisions as to which sources of high-cost oil to develop first. Bill C-48 represented a change from an auction-based to a concessionbased system of rights issuance. This suggests what Ottawa's main concern was: concession systems enable governments to maximize control rather than revenue. Ottawa's main objective in introducing the new management regime for federal lands was to assert control over the industry's access to oil and gas resources and the rate and location of oil and gas development, so as to attain self-sufficiency through a strong Canadian presence (both public and private) in the industry. While this highly interventionist regime would encounter considerable industry resistance, over time it would indeed enable Ottawa to increase the rate of development, on its own terms. Vital to all of this was a stepped up role for Petro-Canada. Also, by grooming a number of Canadian companies, such as Dome, as heirs apparent to the MNCs, Ottawa ensured the existence of a loyal and dependent industry segment that was sensitive to federal goals. Within the new regime, the single most important element was the wide discretionary powers granted the minister and the federal officials of

International Oil-Market Changes and the NEP 143 the Canada Oil and Gas Lands Administration (COGLA), the agency that looked after the system. The new land-management regime was based on a two-step process of rights allocation: first, the exploration agreement, and second, the production licence. The exploration agreement gave the holder certain exclusive rights, including the right to drill. The production licence gave the holder 'the exclusive right to produce oil or gas from the lands under the licence. 3 Bill C-48 introduced a number of changes in industry access. These related to restrictions for companies seeking to acquire exploration agreements and production licences; the tenure of exploration agree^ ments and production licences; area size; a 25 per cent Crown interest; transfer of interests; and rules regulating the conversion from exploration to production. The aspects of the bill most relevant to the federal government's ability to control industry operations referred to the work requirements specified in the act and to the provisions relating to voting on the operating committees. The bill introduced certain nationality requirements for companies seeking to obtain exploration agreements and production licences. The licensee, if an individual, had to be a Canadian citizen or a landed resident. If a corporation, the licensee had to be incorporated in Canada. In addition, the bill required a minimum Canadian ownership rate 0/50 per cent for a licensee. 4 The minister had the power to determine whether the COR-rate was sufficient. Because it applied to the aggregate COR-rate of companies that had joined together to take out a production licence, this ownership requirement encouraged foreign-owned firms to enter into joint ventures with Canadian-owned companies. But the 50 per cent ownership requirement did not ensure that Canadian-owned companies would control field development, because the system's requirements left the ground open for the oil MNCs to retain a majority role in the company composition. In a hypothetical example presented to the House of Commons, NDP Member of Parliament Ian Waddell pointed out that a foreign-owned corporation could have a majority role even though the aggregate COR-rate was 51 per cent. Waddell described a case in which Imperial and Petro-Canada jointly developed a field; because of the particular COR-rates of the two companies, if Imperial's share was 70 per cent and Petro-Canada's 30 per cent, the company would qualify for a production licence. 5 Still, the combined effect of the Crown share provision being granted to Petro-Canada and of the corporation using its PIP grants and other funds to acquire acreage through farm-ins could enable Petro- Canada to acquire a majority share of certain fields.86 This is fur-

144 Oil, the State, and Federalism ther confirmation that the legislation first and foremost favoured an increased public-sector presence rather than an increased Canadian private-sector presence in the Canada Lands. In terms of the application procedure, the bill provided the government with a range of new powers. First, the minister was not bound to select any proposal submitted. Thus, after considering the first round of bids, the minister could send all bidders back to the drawing board to improve their bids. This provision gave the minister considerable bargaining leverage, because concessions could be obtained in each round of negotiations with prospective bidders. In the final round, with no requirement under the act to select any of the bids submitted, and with a granted recourse to other avenues of land allocation, a zealous minister would have a great opportunity to extract important concessions from the industry. Further, the bill enabled the minister to enter into exploration agreements without calling for public tenders. This meant that the minister could enter into private deals with individual companies, although the bill placed restrictions on how this ministerial power could be applied. An exploration agreement had an initial term of five years, and could be renegotiated for successive terms not exceeding five years each. The tenure of an exploration agreement was open-ended. The legislation did not specify the number of renewals, because renewal was no longer a matter of right but was subject to the minister's discretion.87 The Canadian Petroleum Association claimed that because exploration agreements were not automatically renewed, the minister could, in principle, refuse to grant a company a renewal. The tenure of a production licence was ten years (it had been twenty-one years in the old regulations). This change could have a significant effect, given that the typical productive period of a field was around twenty years. It meant that the holders of a production licence would have to apply for a renewal even as the field was producing at full capacity. By limiting initial tenure at the exploration and production stages, and by specifying certain criteria for renewals, Bill C-48 provided the minister with the tools for increasing control of the industry's operations, especially in the production stage. According to Bill C-48, the Crown would take a 25 per cent share of the geographical area available to the licensees, and in this way reduce the overall area and potential resources available to the industry by up to 25 per cent. The Crown share concept applied to all the Canada Lands, and included existing rights, with the exception of the Norman Wells oil-

International Oil-Market Changes and the NEP 145 field. The Crown share, as a percentage interest, did not refer to any one specific piece of land. In this sense the new Crown share concept resembled the one introduced in the COGL regulations of 1977, although the 1977 back-in was contingent on the behaviour of private-sector companies. Bill C-48 also differed from the COGL regulations of 1977 in that the Crown share was not automatically assigned to Petro-Canada, but to whichever Crown corporation the minister chose to designate. The 25 per cent Crown share was a 'carried interest,' meaning that neither the Crown nor 'any designated Crown corporation to which the Crown share may be transferred under this Act y would pay its share of exploration expenses until the Crown share was converted into a working interest. In principle, if the conversion took place during entry into the production stage, the Crown would not pay any exploration expenses. The legislation gave the minister's designated 'Crown agent' the right to determine when to convert the interest, prior to the production stage. Such a conversion had to take place no later than thirty days after the minister's declaration of intent to authorize a production system for the relevant areas. The elimination of corridor lands was intended to compensate somewhat for the introduction of the universal Crown share. The PIP grants were considered to be another form of compensation for this carried interest concept. The act also significantly increased the federal government's ability to regulate the transfer of interests, or farm-ins and farm-outs. The industry had strong objections to this because it reduced the flexibility of their operations. Ottawa argued that the government had to control transfers of interests in order to prevent significant 'leakages' of PIP funds. The final aspect of access regulation to be addressed was the federal government's regulation of the conversion from exploration to production. The key instruments here were the declarations of significant and commercial discovery. A production licence was granted subject to the declaration of a commercial discovery; the area covered by that licence was limited to the extent of the commercial discovery. The area could be expanded if the minister was satisfied that it formed part of the productive area at the time of the application for the licence or renewal. If the minister decided the lands could not be included in the production licence, they became Crown reserves. The minister thus decided what constituted a productive field. Bill C-48 was designed to establish a new regime, but the legislation in itself provided few guidelines for the specific operation of the proposed system. The actual responsibility for achieving the government's objecOn

146 Oil, the State, and Federalism tives thus often came to rest with the administrators, primarily the staff of the newly established Canada Oil and Gas Lands Administration (COGLA), whose task it was to administer Bill C-48. This agency had no basis in any legal statute, but emerged as a result of a memorandum of understanding between EMR and DIAND signed in December 1981. COGLA was intended as an independent agency with the mandate 'to regulate the exploration for and the development and production of oil and gas on Canada's frontier lands in a manner that ensures safety of the worker, effective resource conservation, protection of the environment and full and fair access by Canadians to the benefits arising from the development of hydrocarbon resources.'90 The basic rationale for creating COGLA was the perceived need to gather all the relevant oil and gas land-management expertise in EMR and DIAND together into one agency so as to avoid overlaps and the duplication of services. The agency grew rapidly in size, till it employed approximately 230 people. The two federal departments had distinct land-management philosophies and practices; in this regard, a notable split emerged gradually after 1974. The need for a uniform system had gained importance as the same industry actors increasingly filled all parts of the Canada Lands; COGLA was a step in the direction of a more homogeneous and standardized land management regime. The trouble was that the agency, although independent, clearly represented EMR's philosophy and land management practices. Although attempts were made to reconcile the differences — the establishment of the Policy Review Committee was a case in point — the agency never escaped this bias. Taking Control: Priorities and Power

Bill C-48 was first and foremost a clear-cut attempt by Ottawa to wrest control over oil and gas operations from the large industry players and empower the government ministers to make the key decisions related to development. Probably the most important single feature of the act was the wide discretionary powers it provided federal officials. But contrary to the industry's contention of federal intervention and abuse of power, Ottawa's intention was to reach such decisions within a framework of detailed government-industry negotiations. The legislation clearly specified that should such negotiations fail, the final say would rest with Ottawa. Bill C-48 therefore not only represented a dramatic departure from Ottawa's previous land management systems, but also demonstrated

International Oil-Market Changes and the NEP 147 beyond any doubt that in 1980, Ottawa was willing to challenge the industry's notions of vested rights and interests and to impose its priorities upon the industry. The absence of consultation with the industry before the bill was introduced made obvious the federal government's desire to establish a new regime under which it would wield more effective control over industry operations. The act did not contain a vesting clause in favour of Ottawa; this meant that any individual province could adopt the act. This would amount to accepting federal management of the offshore, but without compromising provincial claims to offshore jurisdiction.91 By putting in place legislation that Newfoundland could also adopt, Ottawa was seeking to avoid the loss in time and the political costs of a court ruling on offshore jurisdictional rights. However, Newfoundland found no consolation in this approach. It retained its legislation and would not compromise on its claims to both ownership and management of the offshore. Thus, there continued to exist two systems - one federal and one provincial - off Newfoundland. The introduction of the new system of rights issuance and land management for the Canada Lands represented one of the NEP's most dramatic departures from earlier policy. Bill C-48 restructured future government-industry relations in the Canada Lands by rewriting and dramatically reducing existing contractual terms and by drastically altering the industry's terms of operations.92 Thus, in most sectors of the industry, Bill C-48 was perceived as an outright confiscation of the industry's vested rights and interests. Section 61 of the act, which dealt with the replacement of rights, provided its opponents with considerable ammunition. This section stated: The interests and rights provided by this Act replace all oil and gas interests and rights or prospects thereof acquired or vested in relation to Canada lands prior to the coming into force of this Act ... No person shall have any right to claim or receive any compensation, damages, indemnity or other form of relief from Her Majesty in right of Canada or from any servant or agent thereof for any acquired, vested or future interest or right or any prospect thereof that is replaced or otherwise affected by this Act or for any duty or liability imposed by this Act.93

Although section 61 generated considerable legal debate in Canada and elsewhere, there was little doubt that Ottawa in fact could introduce legislation that revoked the statutory rights of the industry.94 A.R. Thompson notes that the Canadian constitution does not include a due

148 Oil, the State, and Federalism process clause for the entrenchment of property rights; this is what opened the way for a sovereign Parliament to 'destroy the rights acquired under a tenure agreement with the State.'95 In introducing Bill €-48, Ottawa revealed that it was willing to employ a measure of power hitherto not exercised in the field of energy in Canada. Bill C-48 enabled the minister in certain cases to order production to commence, and section 38 (i) of the bill enabled the minister to designate Petro-Canada or another Crown corporation to act as operator of the lands in question, whether an operating agreement was in force or not.96 This clause provided Ottawa with considerable power to influence petroleum developments, because section 39 of the act gave PetroCanada or any designated Crown corporation participation rights and the right to vote in all operating committees connected to the relevant corporation - which meant every operating committee on Canada Lands.97 Again, Ottawa, through its various agents, gained considerable influence over the specifics of field development, and oil and gas development in general, in the Canada Lands. (It is worth noting that if the Crown share had been doubled, and voting rights had been accorded on a straight percentage basis, Ottawa could, in principle, have determined the nature and direction of all development in the Canada Lands.)9 The right to participate and vote extended to the cases in which the Crown share had not been converted to a working share. Thus, the holder of the Crown share could influence the direction of projects even without making a financial investment.99 To the extent dial Petro-Canada became the Crown's designated agent, these regulations entailed a vastly expanded role for Petro-Canada in the Canada Lands. All other conditions in the exploration agreement apart from the drilling requirement - including the tenure of the exploration agreement - were subject to the minister's discretion. The introduction in Bill C-48 of firm drilling requirements represented an important break with the past, because at no time prior to the introduction of Bill C-48 had this been an explicit requirement. C.D. Hunt states: 'The essence of the E.A. system ... is one in which almost total discretion is given to the Crown in determining both the rights and obligations of the interest holder.'100 The new legislation provided Ottawa with vastly greater control over federal lands. The flexibility and large amount of ministerial discretion were central to the concession system, and this would enable decisionmakers to alter the terms of industry operations from one part of the Canada Lands to another, and to do so over time. This led the industry to

International Oil-Market Changes and the NEP 149 voice fears about differential treatment and arbitrariness in the administration and implementation of the act. The Crown share concept and the power granted the minister to introduce and reinforce nationality requirements, deny companies access, favour certain companies, and determine the criteria under which the industry was to operate demonstrated clearly that Ottawa's intervention was intended mainly to increase federal control over industry access and industry operations rather than to increase private Canadian access and control. Contrary to some opinion, then, the NEP, at least as expressed through Bill C-48, did not mainly favour private Canadian capital.101 The legislation placed the areas under federal control under a much more stringent regulatory regime than existed in other parts of Canada. This fact, and the uncertainty relating to the resource base in the Canada Lands, would make the regime vulnerable to market changes and industry actions. Doern and Toner attribute much of this to what they term the demand-driven nature of the NEP. The higher the level of development desired by Ottawa, the more vulnerable Ottawa would be to demands for concessions and alterations in the regime. As a comprehensive program of intervention, the NEP covered a wide range of concerns. The policy was a challenge both to the dominant position of the oil MNCs and to the producing and potentially producing provinces. It revoked established industry rights and encroached on the jurisdictional rights of provincial actors. The NEP was also a coherent program of intrajurisdictional policy co-ordination - one that combined a range of hitherto relatively uncoordinated policy measures into a far more coherent whole aimed directly at bolstering the federal government's role in energy policy. As Toner, for instance, asserts: 'The Trudeau Liberals aggressively asserted federal ownership of and jurisdiction over the eastern Canadian offshore in the NEP and through the Canada Oil and Gas Act.'102 While the NEP's strong Canada Lands thrust was no doubt politically motivated, more important perhaps was the manner in which Ottawa sought to combine the resource reasoning of the NEP with its political objectives. The NEP was a political response to actions taken by other decision-makers in other domains; as such, it inspired sharp reactions of its own. The Liberals, at least initially, proved to be very serious about the mapping of Canada's oil and gas resources. They showed this, for instance, in the strong demand basis of the NEP, which could conceivably render frontier oil and gas unnecessary. They showed it in their failure to differentiate between gas from the provinces and the frontiers; and in not fix-

150 Oil, the State, and Federalism ing, in the initial NEP, the price schedule for frontier oil. This meant that the status of the Canada Lands was not clarified when the NEP was first introduced. Another factor was the significant amount of ministerial discretion inherent in the COGA to regulate the different stages of resource development, combined with the fact that the incentive structure did not discriminate against tar sands oil. The dynamic interaction among the governmental actors was key to the development of the strong overall Canada Lands thrust of the NEP. The Canada Lands system of rights issuance and land management was largely a federal attempt to accommodate the actions taken by Newfoundland, not by granting the province jurisdiction, but by adopting a regulatory system that was far more consistent with the one adopted by that province. Newfoundland had introduced the North Sea model earlier on; in the NEP Ottawa was seeking to catch up by introducing a similar system at the federal level. The North Sea model of rights issuance and resource management differed significantly from Alberta's system. Further, Newfoundland sought a low rate of resource extraction, whereas Alberta sought to maximize provincial returns and would also export a larger share of its oil and gas deposits. Ottawa thus faced very different provincial interventionist systems and provincial developmental priorities. Newfoundland played an important role, then, in propping up the federal Canada Lands presence. In its interventionist posture in the NEP, Ottawa set up a system of rights issuance and land management that was closely related to the North Sea model adopted in Newfoundland and that differed considerably from the American-based systems in the Western provinces. This suggests that the strong Canada Lands thrust in the NEP was not just a reflection of centralist Liberal priorities but also, and even more so, a federal response - reinforced by activist provincial governments - to important structural elements of the Canadian federal state.10^ The second OPEC oil crisis reinforced the role of oil producers and producing governments. Thus, together with the coming Quebec referendum, it heightened the underlying constitutional problem related to the location of sovereignty in Canada, which intensified the initial deflection from state-industry to intergovernmental conflict. This shift was also reflected in the NEP. The program was oriented toward both the producing and potentially producing provinces and the oil industry; but, as the NEP itself noted, its main concern was with other governmental actors. As we've seen, the ongoing governmental struggle deeply informed the policies that Ottawa adopted to grapple with the power of the oil industry - a

International Oil-Market Changes and the NEP 151 tendency that runs counter to the state autonomy model, which presumes that the state will explicitly seek to reduce the power of societal actors rather than take measures in response to actions by other governmental actors.

5

Petro-Canada and the Effects of the NEP

Within the framework of the NEP, Petro-Canada had to reconcile its past role as a vehicle for energy development with a greatly expanded role in Canadianizing the oil and gas industry. Because federal energy policy at the time was informed and largely driven by jurisdictional conflicts that prompted Ottawa to promote those areas under federal jurisdiction, the strong Canadianization and Canada Lands thrust of Petro-Canada became an act of 'policy mobilization.' The corporation was pulled into and used in the ongoing federal-provincial conflicts, both to counteract the role and importance of the producing and potentially producing provinces and also, more symbolically, as a means of reassuring Quebeckers of the benefits of continued federalism. Following the introduction of the NEP, Petro-Canada's assets, revenues, and personnel grew rapidly. By the early 19805, Petro-Canada was one of Canada's largest oil and gas companies in terms of assets and revenues. And the company had moved downstream: even before the NEP was introduced, Petro-Canada had taken a number of steps, through its acquisitions of retail outlets and refineries, to become vertically integrated. In 1981, for $1,600.5 million, it acquired Petrofina Canada, an integrated oil company with a substantial downstream involvement. In the same year the corporation acquired Merit Oil Company, which had a number of retail stations in Western Canada, and in 1982 it obtained a 49 per cent interest in Gulfs refinery in Port Moody, British Columbia. In 1983, Petro-Canada purchased BP Canada's refining and marketing assets. The corporation had also gathered together a large team of highly competent personnel with experience in both conventional and nonconventional oil and gas development, in the provinces, the Canada Lands, and around the world.

Petro-Canada and the Effects of the NEP 153 By 189 Petro-Canada had become the second-largest integrated oil company in Canada, measured in terms of proven reserves of oil (conventional and synthetic); and the fifth-largest producer of conventional and synthetic oil in the country.1 It was the second-largest company in gas reserves, and the fourth-largest gas producer. It held significant oil and gas reserves in Western Canada - where it was the second-largest landholder - and controlled the largest frontier acreage in the country almost two-and-a-half times the acreage of its nearest competitor, Dome. A large East Coast involvement demonstrated the corporation's strong interest in developing the frontiers. The federal government had thus set in place a strong entrepreneurial force: a public corporation that appeared capable of challenging the role of the oil MNCs and playing a key role in determining the future of Canada's energy sector. A number of questions remained, however: Would government be able to control this interventionist thrust? Would the corporation's growth and actions be guided by its parent or by its own priorities? And, perhaps most important, would the federal policies achieve success?

The NEP and Petro-Canada's Objectives

When he introduced Bill C-iOi, An Act to Amend the Petro-Canada Act, to the House of Commons in 1982, the energy minister, Marc Lalonde, emphasized several objectives for the six-year-old company: (a) to secure Canada's energy future by finding and developing major new sources of oil and gas in Canada; (b) to encourage exploration and development in the Canada Lands; and (c) to encourage increased Canadian involvement in oil and gas development, especially in the frontier regions. Petro-Canada already had its direction laid out for it in the NEP: it was to be an important instrument of Canadianization and the main vehicle for expanding public-sector involvement in the oil and gas sector. To this end, it would focus on acquiring 'several of the large oil and gas firms.' This function was not assigned solely to Petro-Canada, although there was little doubt that Petro-Canada would be the most important actor. Both the Canadian Ownership Account, which was levied on oil and gas consumption and to be used solely to finance increased public-sector ownership, and the $5.5 billion increase in Petro-Canada's capitalization were important indications that Ottawa was strongly committed to acquisitions and corporate expansion - including downstream expansion. However, the legislation did not clear the field for expropriation or forced take-

154 Oil, the State, and Federalism overs; Petro-Canada would still have to acquire companies that were for sale, subject to prior approval by Ottawa. In addition, the Crown share in the COGA, in tandem with farm-ins involving foreign-owned majors, and PIP grants, provided Petro-Canada with greatly improved access to land and oil and gas resources in the Canada Lands. The voting rights available to Petro-Canada through the Crown share also would give the corporation a significant say in the specifics of field development in the Canada Lands, whether the corporation was an active participant in the relevant field or not (although the voting rights associated with the Crown share were less extensive than their equivalent in Newfoundland and in Norway). Petro-Canada was also intended to function as a vehicle for encouraging Canadian participation. Petro-Canada, as a wholly owned Canadian enterprise, qualified for maximum PIP grants and was therefore an attractive partner for companies with lower COR rates. The COGA enabled the federal government to regulate transfers of interest among industry players; this benefited Petro-Canada indirectly, because Ottawa would not discriminate against the corporation and Petro-Canada had the ability to finance joint venture projects. The energy minister also stressed the importance of Petro-Canada as a vehicle for proving up Canada's 'huge' frontier resources. In his House of Commons speech, Lalonde observed: 'Although its spending in the frontier region is not expected to yield significant amounts of revenue until the latter part of this decade, Petro-Canada is facing the high risks of these frontier investments, knowing that when the time comes it will have the experience and talent, to the benefit of all Canadians, to develop the huge oil and gas reserves.'2 He did not go into details about the specific rate at which these resources were to be developed. Since the Canada Lands were relatively unexplored, there was probably no need for the minister to pinpoint where Petro-Canada's efforts had to be concentrated for the corporation to constitute a 'window on Canada's resource base.' Petro-Canada's 'window' role would involve proving up commercial deposits of oil and gas in the Canada Lands and helping to undertake a more comprehensive mapping of the entire Canadian oil and gas resource base. As a resource developer or catalyst, it could encourage industry efforts by exploring areas that the industry would not otherwise have explored.3 The catalyst role could also lead to the rapid development of Canada's frontier resources, given that the industry was always looking for a rapid payback. The strong temptation to promote the rapid production of whatever reserves were proved up might limit Ottawa's future options as to where

Petro-Canada and the Effects of the NEP 155 and what to develop. Although an important part of the corporation's window role had been to assist Ottawa in expanding the scope of future energy supply options, over time Petro-Canada had focused more and more on promoting the rapid development of the frontiers (as opposed to merely overseeing the mapping of Canada's resource base). When he introduced Bill 101, Lalonde stressed the 'energy policy instrument' aspect of Petro-Canada more than the Canadianization role. Lalonde, more than his predecessors, emphasized Petro-Canada's role in the geographical frontiers or the Canada Lands; he said nothing about the corporation's role in developing (conventional and synthetic) oil and natural gas from the provinces. Nor did he place any great emphasis on state-to-state deals, which earlier on had been considered an important focus for Petro-Canada. The NEP expanded the corporation's mandate, which involved adding a number of new, energy-related goals. These, however, were subsidiary goals that would do little to change the corporation's basic thrust or the scope of its operations. The first of these subsidiary goals related to Petro-Canada's role in developing renewable energy sources and enhancing conservation measures. Bill C-ioi provided for the establishment of a new subsidiary of Petro-Canada, Canertech, which would concentrate on that role - for instance, through joint ventures, technology development, distribution, and marketing, and also through research and development projects. Lalonde noted: Canertech 'will act as a catalyst and provide management and financial assistance to an infant Canadian industry that is in many cases hampered by the lack of managerial or financial strength.'4 Canertech's original capitalization was $20 million; Bill C-ioi provided the corporation with an additional $35 million. This aspect therefore also enabled Petro-Canada to expand its operations horizontally. The NEP and its implementing legislation provided for a larger international presence. Petro-Canada was portrayed as a vehicle for helping developing countries exploit their energy resources and become less dependent on costly imported oil. Bill C-ioi provided for the founding of the Petro-Canada International Assistance Corporation (PCIAC) as a wholly owned subsidiary of Petro-Canada. In superficial terms, this new subcorporation was yet another means of reducing the influence of OPEC and the oil MNCs, by providing developing countries with direct assistance and expertise in developing discovered and undiscovered oil and gas resources. In fact, Petro-Canada's role in this regard was quite limited. The joint projects involving this subsidiary and developing coun-

156 Oil, the State, and Federalism tries were all financed by the federal government as part of its aid commitments; Petro-Canada's role was that of a contract service operator. Petro-Canada neither funded projects nor benefited economically from them.5 The NEP thus established an extended role for Petro-Canada. Originally, the corporation had been involved mainly in upstream oil and gas development; now it was also to be a vehicle for promoting interfuel substitution and energy conservation, and would be expanding its operations horizontally as well as vertically. All the new goals set for Petro-Canada related to reducing the domestic and international importance of OPEC and the oil MNCs. In general terms, Petro-Canada now was a vital instrument in Ottawa's transformation, begun in 1973, from passive landlord to active developer and entrepreneur of Canada's oil and gas resources. Petro-Canada's Operations: Basic Indicators

Certain basic aspects of Petro-Canada - its size, investment behaviour, and vertical integration - related directly to its role in relation to the industry and to its usefulness, as a federal policy instrument, in reducing the dominance of the oil MNCs. In size (as measured in assets, revenues, and personnel), as well as in proven reserves and the production of both oil and gas, Petro-Canada had emerged relatively quickly as one of the country's largest oil and gas companies. This growth was first and foremost the result of the corporation's acquisitions (see Table 5.1). The company's reserve life index for conventional and synthetic oil, which refers to the relationship between reserves and production, was the sixth-highest in Canada (see Table 5-2).6 Petro-Canada's reserves in general increased until 1986. Its conventional, low-cost oil reserves had started dwindling after 1984, but this decline was not especially dramatic. The R/P ratio of Petro-Canada's conventional oil reserves declined from 13.1 years in 1981 to 12.4 years in 1985, the sixth-highest in Canada. In terms of magnitude of oil reserves, the corporation was close to the industry average (see Table 5.2). In life of gas reserves, Petro-Canada placed fourth among companies surveyed by Dominion Securities Pitfield; again, the corporation was not exceptional in this regard. In terms of gas reserves, the company experienced a significant decline between 1983 and 1984 (see Table 5.3). This decline, much larger than the quantities produced, indicates that the corporation's reserve base had been reassessed. Even more strikingly, the decline happened despite moves by the corporation to acquire a signifi-

Petro-Canada and the Effects of the NEP

157

TABLE 5.1 Petro-Canada's Size Year

Assets (Imill.)

Revenue (Imill.)

Personnel

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

878 3,348 3,41 1 3,766 6,612 7,552 8,239 9,055 7,424 6,537 6,745 6,659 6,743 7,278 6,034

92 205 766 1,023 2,674 2,788 4,172 4,991 5,381 5,172 5,079 4,801 5,026 5,873 4,961

649 2,038 2,246 2,823 5,801 6,166 6,601 6,697 9,747 7,740 7,204 7,373 6,468 6,353 6,213

SOURCE: Petro-Canada, Annual Report, various issues. Regarding pre-1986 data, the report does not indicate whether it includes the number of employees of subsidiaries. For the period after 1986, employees in subsidiaries must be added. In 1986 there were 1,482; in 1987, 2,102; in 1988, 2,345; in 1989, 2,329; in 1990, 3,453; and in 1991, 3,311. Note that the numbers listed in the various Annual Report Five-Year Summaries vary somewhat from one report to the next.

cant landholding position in the Western provinces. The corporation's involvement in Western Canada may not have provided returns commensurate with efforts, largely because late entrants to the market such as Petro-Canada typically face much higher land acquisition costs than earlier entrants. Early entrants usually obtain the most attractive resources, and avoid acquiring more marginal fields. Petro-Canada could escape this problem to some degree by acquiring existing companies. As a late entrant, the corporation did not differ from the rest of the industry in terms of its reserve-to-production ratio. In terms of the reserve base, it did not hold any unique motivation for promoting frontier development. Petro-Canada's frontier acreage was almost two-and-a-half times the size of the frontier land held by Dome; its permit holdings were 31 per cent of the total permit holdings listed in the Dominion Securities Pitfield report. Also, Petro-Canada's landholdings were strongly concentrated on the East Coast of Canada. The most attractive of these had been

158 Oil, the State, and Federalism Table 5.2 Petro-Canada's Oil Reserves and R/P Rates (millions of barrels)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Conv. oil

R/P rate

Synthetic

R/P rate

151.6 317.6 317.0 306.3 295.6 296.3 283.0 304.4 288.2 248.7 236.6 248.2 227.6 223.2

15.3 12.7 12.4 13.5 13.1 13.9 13.3 12.9 12.1 10.7 10.2 10.8 10.6 11.8

N/A N/A N/A 128.9 178.0 172.3 165.4 159.8 245.9 289.1 280.9 289.8 250.2 243.3

37.5 36.9 32.6 24.0 30.3 30.8 31.0 28.9 27.8 24.1 22.1

SOURCE: Petro-Canada, Annual Report, 1989 and 1990. All figures are before royalties. Table 5.3 Petro-Canada's Natural Gas Reserves and R/P Rates (trill, ccf.)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Gas reserves

R/P rate

0.8 4.2 3.8 4.0 4.8 4.8 4.7 4.3 3.5 3.4 3.4 3.5 3.4 3.0

27.0 30.0 25.3 33.3 34.3 34.3 36.2 30.7 23.3 25.9 21.4 19.8 16.3 16.5

SOURa-:: Petro-Canada, Annual Report, 1981, 1985, 1989, and 1990.

acquired through the preferential rights granted to Petro-Canada in 1977 and 1980. From a resource point of view, some of these frontier holdings were actually more attractive than the corporation's provincial holdings. In Northern Canada, Petro-Canada's near absence in the Beaufort Sea

Petro-Canada and the Effects of the NEP 159 was somewhat remarkable, considering that this was one of the most promising oil regions in Canada (note, however, that a GSC report found that the East Coast had much larger oil resources than the Beaufort Sea).7 Ottawa's emphasis on retaining a strong federal presence on the East Coast was influenced by the Ottawa-Newfoundland conflict. But as well, there was little doubt at the time - in light of the Mackenzie Valley pipeline moratorium, the structure of the Canadian oil supply system, and geological reports - that the East Coast was a key region for petroleum development in Canada. In 1982, an NEP Update noted: 'Some refiners in eastern Canada have no access to a pipeline providing Canadian crude ... Crude oil from Hibernia will likely be available by the end of the decade to serve eastern Canada. When this occurs, imports will be easily backed out. o Both Dome and Petro-Canada had strong landholding positions in the provinces, largely because of acquisitions made in the late 19705 and early 19808. Yet the figures on the resource base and production potential of the acreage (see Table 5.4) turned out to be somewhat misleading, because both Dome and Petro-Canada were latecomers to the game. The best acreage had been acquired long before Petro-Canada became active in the provinces; the result was that Petro-Canada's seemingly hefty position did not translate directly into production potential. While it was undoubtedly important to establish a strong foothold in Western Canada, the difference in attractiveness between Petro-Canada's provincial and frontier acreage indicates that Petro-Canada had an extra incentive to push ahead with frontier development. Petro-Canada's investment decisions were reflected in the corporation's drilling activities, in its window and catalyst roles, and in its attempts to balance its policy role with concerns about profitability. Petro-Canada's exploration activities, in net terms, increased both in the provinces and in the frontiers until 1985; after that year, exploration fell dramatically in Western Canada (see Table 5.5). The upsurge in drilling activity between 1983 and 1985 in Western Canada related mainly to development as opposed to exploration. In 1982, exploration activity reached its lowest level in Western Canada; in that same year, frontier drilling activities were continuing to increase. Between 1982 and 1983 the Canada Lands' share of drilling expenditures rose from 44.8 per cent (or $1,615 million) to 51.1 per cent (or $2,158 million)9 - the highest share ever allocated to frontier drilling. Frontier drilling activities were first concentrated in the northern parts of Canada; later, they began to move to the offshore East Coast.10 Petro-Canada's share of frontier wells

i6o Oil, the State, and Federalism Table 5.4 PetroCanada's Landholdings (mill, acres) Canada Frontiers Western Canada Year

Int.

Net acres

All areas

East Coast

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985* 1986* 1987* 1988* 1989* 1990*

0.0 0.0 N/A 0.2 0.2 0.2 0.2 0.2 0.9 2.7 1.2 1.7 3.6 6.7 9.9

10.8 15.3 N/A 29.6 92.4 80.3 72.1 70.1 57.4 46.9 25.6 18.8 17.2 16.6 15.7

7.9 12.4 N/A 23.4 86.5 70.9 63.2 61.8 50.6 40.7 19.7 13.5 11.8 11.4 11.1

0.2 4.9 N/A 14.9 N/A 47.0 36.1 33.2 22.5 18.3 N/A N/A N/A N/A N/A

All prov. 2.9 2.9 N/A 6.2 5.9 9.4 8.9 8.4 6.7 6.2 5.9 5.3 5.4 5.2 4.6

Alberta 2.1 2.6 N/A 4.1 N/A 4.9 4.9 4.5 4.3 4.0 3.8 3.5 3.3 3.3 2.9

SOLRCK: Petro-Canada, Annual Report, various issues. All decimals above .05 have been rounded upward. Figures up to and including 1984 do not include international acreage or acreage held on the West Coast of Canada. Figures for 1985 are from the Annual Report, 1989. Figures covering the period 1986-90 are from the Annual Report, 1990. Petro-Canada's 18.2 million acres in the Beaufort/NWT were located on the mainland in the Northwest Territories — a fact that reveals Petro-Canada's weak acreage position in the Beaufort Sea. * Offshore WTest Coast acreage is included in figures for these years.

was in gross terms 51.3 per cent, and in net terms 12.9 per cent. Clearly, Petro-Canada was a vital frontier player. Its share of Western Canadian wells was 5.6 per cent in gross terms, and 2.9 per cent in net terms. It is quite evident from this that Petro-Canada was less averse to risk than other players in the Canadian oil industry, with the possible exception of Dome Petroleum. Petro-Canada's frontier expenditures rose significantly throughout the period 1976-84 (see Table 5.6). The corporation's emphasis on the provinces declined from a 65 per cent share in 1980 to a 27.8 per cent share in 1984.11 Its commitment to oil sands development was, predictably, much smaller. These figures confirm that in its spending patterns, Petro-Canada was a thoroughly conventional oil company. As Helliwell and his co-

Petro-Canada and the Effects of the NEP

161

Table 5.5 Petro-Canada's Drilling Activities, Wells Drilled (Gross/Net) Provinces Year

Explo.

Dev.

Frontiers/Int. Explo. /Dev.

Total

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

8/ 16/8 44/ 153/ 177/84 172/84 128/83 133/94 ' 164/103 167/110 97/52 65/42 88/62 55/46 25/19

45/ 112/73 240/ 235/103 285/151 193/103 316/185 174/101 384/149 577/216 333/70 339/152 547/270 192/62 157/56

16/ 13/ 16/ 15/ 13/3 17/3 19/4 25/8 41/11 52/15 37/11 9/3 12/4 11/4 13/7

69/ 141/ 300/ 403/ 475/238 382/190 463/272 332/203 589/263 796/341 467/133 413/197 647/336 258/212 195/87

SOURCE: Petro-Canada, Annual Report, various issues. Gross number of wells refers to all the wells that Petro-Canada had participated in drilling. Net refers to all the wells that Petro-Canada drilled alone.

authors indicate about Petro-Canada's frontier role: 'The role played by Petro-Canada in the push to the geographical frontier should not be underestimated ... Since the introduction of the PIP in 1981, the Crown firm has accounted for about 21 per cent of (undiscounted) real exploration and development expenditures on the Canada Lands. Given that, it should not be surprising to learn that Petro-Canada and its subsidiaries received about 22 per cent of all federal PIP grants made during that time.'12 A comparison of Petro-Canada's share of frontier activities with its relative share of industry revenues confirms the notion of Petro-Canada as a risk taker. As an active player on the frontier, Petro-Canada increasingly tailored its activities to, and lobbied hard for, rapid development there. Pratt noted in 1982: Petro-Canada's frontier exploration spending appears to be a great deal higher than would be justified on domestic self-sufficiency grounds - that is, if the corporate objective were only to get Canada to a position where petroleum supply/ demand were roughly in balance by the early 19905. Petro-Canada is no longer

i62 Oil, the State, and Federalism Table 5.6 Petro-Canada's Capital Expenditures ($mill.) Exploration/Development Year

Frontiers

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

28 49 59 77 119 207 371 581 602 443 245 41 54 12 29

Provinces

7 29 74 176 212 224 299 250 232 311 161 209 393 232 291

Oil sands 171 90 80 17 29 31 50 29 84 90 64 79 138 40 28

SOL'RCK: Halpern et al., Petro-Canada, Table 2-2, p. 16; and PetroCanada, Annual Report, 1988 and 1990. These figures include PIP grants but not international upstream expenditures.

simply acting as a 'catalyst' in the frontiers. Hibernia plus government incentives have stimulated a large increase in industry activity which would continue without Petro-Canada, though perhaps at a reduced level. Despite this Petro-Canada appears to be accelerating the activity off the East Coast in anticipation of oil exports and earnings in the next decade.1''*

According to Pratt, Petro-Canada was no longer acting simply as a catalyst; it was actively promoting frontier oil and gas production, as well as exports. On 7 December 1984, for instance, Petro-Canada concluded an agreement to export 2.5 million cm/d of natural gas from the Venture field; by then, the company was taking part in almost all the wells drilled on Canada's East Coast.14 Further, Petro-Canada was one of the largest recipients of Ottawa's PIP grants (if not the single largest recipient). Without these grants, activity levels would have declined dramatically. One of the most important changes in Petro-Canada's role in the Canadian energy sector in the early 19805 was the corporation's strong expansion downstream. Petro-Canada's share of retail gasoline sales rose from 1.7 per cent in 1979 to 14.3 per cent in 1983, and the corporation's share of light oil products sales increased from 1.8 per cent in 1979 to 13.9 per

Petro-Canada and the Effects of the NEP

163

Table 5.7 Petro-Canada's Retail Outlets, Capacity, and Utilization Year

Retail outlets

Refinery capacity*

Refinery utilization(%)

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

— — 426 420 407 1,504 1,605 3,107 2,716 3,965 3,844 3,677 3,429 3,295 3,205

2 15 19 32 32 46.2 64.0 64.0 60.6 54.2 54.2

94 87 86 78 86 78 74 76 77 86 80

SOURCE: Petro-Canada: Annual Reports, various years. The listed number of retail outlets differs considerably from one annual report to the next.

cent in ig83.15 With 2,625 branded stations in 1983, Petro-Canada ranked fourth in Canada in terms of number of market outlets. 16 From a political perspective, vertical integration has been emphasized as an integral part of states' attempts to control industry operations. Klapp noted: 'The greater the share and extent of vertical investment, the greater will be the ability of the state to manage the national economy.'1" It is evident from this that Klapp viewed vertical integration as a means for the state to improve its ability to plan and control the economy. Klapp's assumption was that for vertical integration to be effective, the NOG must have a prominent downstream presence, which the state can then exploit to manage the economy. Petro-Canada's downstream presence, while extensive in this country, never really challenged the dominant role of private-sector oil companies. Nor was Petro-Canada intended to be such a challenge; rather, federal officials saw Petro-Canada's main purpose as involving the upstream, not the downstream. Further, vertical integration, as defined by Klapp, only improves a state's effectiveness when that state intends to manage the economy and takes steps to establish such control. The Canadian state did not have an industrial policy of such magnitude and comprehensiveness during the period of study.

164 Oil, the State, and Federalism Finally, Ottawa's ability to plan and manage the economy was greatly circumscribed by the power of each producing province to control its own oil and gas development, and by the power of every province to formulate and implement its own tax and fiscal policies. It is unlikely that vertical integration increases a state's direct control by any great degree. But, as Pratt noted, vertical integration could help Petro-Canada promote private-sector Canadian participation by reducing the high barriers to entry that existed in the downstream sector of the international oil industry.18 Marc Lalonde supported this contention. Speaking to the Standing Committee on Energy Legislation in April 1982, he stated: 'I did receive at that time very strong representations to the effect that the independent distributors wanted Petro-Canada to engage in the refining business, to act as a kind of supplier of last resort, at least, or first resort, depending on the needs of the independent distributors ... The Bertrand report quite clearly indicated the problem that resulted from the fact that practically all the distribution, or the large majority of the distribution, was in the hands of a very small number of multinationals in this country.'19 As it turned out, however, Petro-Canada did not much reduce the barriers to entry into the downstream sector. Concentration in the retail sector increased following Petro-Canada's entry (the five largest retailers expanded their marketing outlets from 13,951 in 1982 to 15,081 in 1983),20 mainly because Petro-Canada did not acquire the retail outlets of any of the largest retailers. Only by doing that and then selling those outlets off to private Canadian retailers would Petro-Canada have been able to lower the barriers to entry. Indeed, Petro-Canada acquired a small, Canadian-owned retail outlet, Merit Oil, which led to increased concentration in British Columbia. Petro-Canada represented the entry into the retail market of another very large player and in that sense reduced the dominant role of the oil MNCs; however, this did not lead to reduced barriers to entry for other privately owned Canadian companies. Further, even though Petro-Canada reduced the relative size of the MNCs' involvement in the retail sector, Petro-Canada's entrance into the downstream sector did not clearly alter the terms of industry operations or address the problems Lalonde articulated. There was another reason for Petro-Canada's increased downstream presence, a reason consistent with Petro-Canada's initial mandate. Joel Bell, one of the early architects of federal energy policy and a vice-president of Petro-Canada, noted that in order to function as a real window on

Petro-Canada and the Effects of the NEP 165 the industry, Petro-Canada would have to become involved in all aspects of oil industry operations, which certainly included the downstream sector. Lalonde reinforced this notion in his statement to the Standing Committee in April 1982: 'The fact is that neither the provincial governments nor the federal government had much knowledge of what was happening in that sector.'21 For the government, Petro-Canada could clearly be a means of influencing the industry's operations through information and operational experience communicated to Ottawa - although Petro-Canada's exact influence on the operations of other companies in the downstream is difficult to pin down, given the available information. Petro-Canada did have close contacts with EMR, and the corporation's central management sought close control of these contacts.22 The entry into the retail sector did not lead to reduced oil prices and thus in effect would not end any collusion, insofar as such existed. Petro-Canada did draw in a number of senior officials from the oil majors operating in Canada, and these executives came to dominate Petro-Canada's downstream operations the Products Division; this again suggests strongly that the corporation did not do things much differently from private-sector operators. In addition, the significant build-up of financial expertise in EMR after the late 19705, and the ministry's greatly improved access to financial information, would indicate that this role for Petro-Canada was becoming less important in the 19805. An important political reason for vertical integration that pertains to the particulars of the Canadian case relates to the Liberal government's use of Petro-Canada 'to show the flag' and indirectly bolster its bilingualism policy - a need that was particularly acute in 1980, when Quebec was pondering separation and the Liberal government's electoral base was Central Canada. The policy approach gained added political weight and importance during the patriation of the constitution and the writing of the Charter of Rights and Freedoms. Ottawa could use Petro-Canada as an important vehicle for selling its constitutional package, both inside and outside Quebec. The corporation's Maple Leaf logo seemed to play a strong part in the company's downstream sales, which increased at a time when the rest of the industry was suffering declining sales. Between 1981 and 1982, Petro-Canada's gasoline sales increased by 11 per cent in Eastern Canada and by 4 per cent nationally; for the rest of the industry, sales dropped by 9 per cent and 7 per cent respectively. Petro-Canada's market share rose from 6.4 per cent in 1981 to 8.7 per cent in ig82.23 During a period when energy issues were heavily politicized, Petro-

i66 Oil, the State, and Federalism Canada played an important role in the federal government's attempts to bypass the provinces and reach out and build more direct links with the citizens of the country. But the evidence of Petro-Canada's politically important role in the downstream does not necessarily indicate any increased federal control of the oil industry. The Federal Capacity to Control the Corporation

A system of unusually strict formal controls - as in the case of PetroCanada - can have at least one obvious shortcoming: it may provide no adequate means for addressing goal conflicts. Given the large number of policy goals assigned to Petro-Canada, it was inevitable that goal conflicts would arise. For one thing, the state's role as landlord was clearly going to affect its role as entrepreneur. For another, in the context of the NEP the corporation was expected to strike a balance between its Canadianization and self-sufficiency functions; this had the potential to undermine the corporation's commercial viability by requiring it to perform a large number of often conflicting roles.24 The corporation might receive a consistent and explicit set of signals from one interventionist setting; but the troubled relations among the governmental actors (federal and provincial), and the complex and conflicting signals arising from those relations, might undermine the company's potential for ensuring coherent state action. For some analysts, this question of corporate accountability and control has come down to assessments of financial and legislative measures. But the wider interventionist setting, including the land management systems - the federal state's landlord role - and the federal tax and fiscal measures also played a significant role in ensuring a strong measure of operational control of the corporate entity in the Canada Lands. According to Pratt, the NEP's requirement for Petro-Canada to increase the spin-offs of oil and gas development to Canadian industry could have made Petro-Canada act as an instrument of Ottawa's regional development policies and programs rather than as a resource developer. The effect of this would have been to increase the number of political masters that Petro-Canada had to answer to, thereby confusing the pattern of corporate accountability and control. If this tendency were carried far enough, Pratt argued, it might alter the nature of the corporation from an energy company to a company concerned mainly with regional development. That is, the corporation itself would not be allowed to

Petro-Canacla and the Effects of the NEP 167 determine whether to pursue certain projects, including the large-scale and high-cost energy projects that stemmed from Ottawa's dual concern with Canadian benefits and security of supply. Further, once involved, it would not be easy for Petro-Canada to walk away from such projects if they proved to be financial liabilities; this would undermine the corporation's own financial viability. The logical extension of this, for Pratt, was to argue for more corporate autonomy for the corporation in its dealings with the federal government. The issue of goal conflict also came up in the context of the company's push to vertical integration. As Pratt noted, vertical integration could help reduce or alleviate the corporation's large, high-risk upstream exposure. Halpern and his co-authors took this point further, arguing that Petro-Canada was driven by the very logic of vertical integration. Based on little available evidence, they argued that the corporation circumvented its mandate and initiated its downstream involvement on its own. Halpern and colleagues argue that Ottawa's controls were inadequate and that much of the corporation's expansion was generated by PetroCanada itself. Pratt, on the other hand, argues that Petro-Canada was so closely linked to Ottawa that its actions were essentially driven by Ottawa.25 Petro-Canada's management undoubtedly did have a strong interest in vertical integration, since presumably it would increase the corporation's capacity to finance itself, and make it less dependent on public infusions of capital. All of this would enable management to pursue a more independent line vis-a-vis Ottawa. After 1982, management faced increasing pressure to become more autonomous and efficient, both from within the federal government (the PMO, the Auditor General's Office, and the Department of Finance) and from without (the oil industry, the opposition Conservative caucus, and the media). The more the corporation could reduce its need for public funds, the less exposed it would be to criticism from these quarters. The company insiders, and others in the industry at large who were benefiting from the public corporation's activities, realized that increased vertical integration would also make it more difficult to dismantle PetroCanada. Many of the insiders - and the president, Bill Hopper, in particular - were ambivalent about the role of public enterprise and not adverse to the idea of privatization. If changes to the company's status had to be made, the company's large size would favour privatization over dismantling. But the company insiders were not alone in their attitude to vertical

i68 Oil, the State, and Federalism integration. Many federal officials also quietly supported Petro-Canada's increased degree of vertical integration. They appreciated the impact of the Maple Leaf logo. Further, federal decision-makers concerned about public spending and increased Crown corporation efficiency sought to increase the corporation's degree of self-financing and reduce the need for more infusions of public equity. In general, Petro-Canada's push toward vertical integration was not only sanctioned but also largely promoted by Ottawa. In the beginning, a number of federal officials in the parliamentary deliberations on Bill C-8, the Petro-Canada Act, emphasized that Petro-Canada's main role was in the upstream; yet the act did not preclude Petro-Canada from entering into the downstream. Another factor was Petro-Canada's built-in flexibility as a public enterprise. Governments often promote this flexibility because it enables them to use the corporate form to promote different objectives over time, or different aspects of the same objectives; thus, a Crown corporation's flexibility often renders governments less vulnerable to industry and public criticisms. Here, the concern to reduce Petro-Canada's need for public funds replaced the previous emphasis on Petro-Canada as an instrument for increased federal control over oil industry operations. In Ottawa the relative political weight backing the need for that instrument declined in light of the deteriorating economic and political situation. Although considerable consensus did exist between important parts of the federal government and Petro-Canada's management, in the final analysis Ottawa's policies, not those of Petro-Canada, were responsible for the corporation's primary direction. Petro-Canada remained closely tied to the federal government and its goals. It was, after all, the NEP's version of 'policy mobilization' that made Petro-Canada an important player in the unfolding jurisdictional struggles. As the North Sea model of rights issuance and land management adopted for the Canada Lands was based on a strong link between the state and the corporate entity, it also played a part in ensuring state control of both the oil MNCs and the NOG. As well, the need for a certain degree of autonomy from the state was consistent with both the assumptions and the structure of the North Sea model, based as it was on the state's attempts to maximize two separate capacities: to intervene through a corporate entity, and to control that corporate entity. The North Sea model assumed a convergence of these two dimensions; however, as the Canadian case reveals, those dimensions do not necessarily correspond or mutually reinforce each other. The strong Canada Lands thrust of the NEP and the strict controls on Petro-Canada available to Ottawa pulled Petro-Canada to the frontier

Petro-Canada and the Effects of the NEP 169 and particularly into rapid frontier development. Among the controls available to Ottawa were those relating to the system of rights issuance and land management: the granting of preferred access through the Crown share, the voting rights, the regulation of farm-ins and farm-outs, the generous PIPs, the wide discretionary powers available to federal officials in the granting of exploration and production rights, and so on. Because of the premises underlying the NEP, the policy program was vulnerable to rapid changes in the international oil market; the frontier thrust of the NEP made that program particularly vulnerable to falling oil prices. The ongoing federal-provincial conflicts, between Ottawa and the producing provinces in Western Canada and between Ottawa and the provinces on Canada's East Coast, affected Petro-Canada's operations, because the corporation was made to play such an important role in the Canada Lands. In its megaproject strategy, Ottawa clearly equated the two objectives of Canadianization and self-sufficiency or security of supply, whereas Pratt and most economists have tended to view these as separate objectives. But the conflict between these goals was not necessarily so strong. What did prove to be separate and distinguishable elements were the discretionary powers available to Ottawa through the COGA legislation, and the manner in which these powers were actually applied. For instance, as Doern and Toner note, the land managers did not feel compelled to favour Petro-Canada, nor did they in fact favour the public corporation. Even more significantly, the context within which the corporation was operating underwent important changes, some of which were beyond its control. These contextual factors and events shaped the corporation's operations and often dictated its direction. For instance, when he introduced Bill C-ioi, Lalonde downplayed Petro-Canada's Canadianization objective, emphasizing instead its role as frontier developer. Indeed, as time went on, Ottawa reduced more and more its emphasis on increased public sector expansion, especially in the upstream,27 by postponing or at least scaling down its commitment to Canadianize the oil and gas industry. In any case, because Petro-Canada had not been granted the right to expropriate companies, it could only take over companies that were for sale; this meant that the overall number of eligible companies it could acquire was limited. The requirement to pay fair market value for the companies it did acquire also limited the number of eligible take-over candidates. As financial conditions worsened during the recession of the early 19805, Ottawa became increasingly reluctant to channel public funds into

170 Oil, the State, and Federalism Petro-Canada. For instance, it channelled Canadian Ownership Account funds, originally earmarked for Petro-Canada's expansion, into its general revenues, for use in funding resource development or financing PIP grants. 2 Also undermining the Canadianization objective was the fact that, although it continued to increase its participation with Canadian companies, Petro-Canada continued as well to participate with the oil MNCs, which were undoubtedly its most important partners. On the Grand Banks, Petro-Canada farmed into Mobil's Ben Nevis permits and allowed a number of Canadian-owned companies such as Bow Valley, Husky, and Canterra to farm in on its acreage. On the Scotian Shelf, Petro-Canada participated with Mobil at Venture and Shell on Glenelg. In the Mackenzie Delta/Beaufort Sea area, Petro-Canada worked jointly with Imperial Oil. Petro-Canada, it seems, was becoming less of a challenge to the industry than the NEP had intended. In response to the economic recession, Petro-Canada put itself through an important corporate restructuring. In early 1983 the company reorganized itself into two (down from four) main business groups. The old structure had consisted of (a) an offshore and international division, (b) a mainland Canada division, (c) a refining division, and (d) a special projects division. In its new form, it had an exploration/development division concerned with upstream affairs, and a downstream division entitled Petro-Canada Products. In conjunction with this restructuring, PetroCanada cut its staff by 1,400 through layoffs, voluntary severance, and early retirement. 29 It also established a new management team composed of senior management personnel recruited from the largest oil companies operating in Canada. Of the corporation's thirty-two senior executives, thirteen were hired in 1982-3, most of them from Esso and Gulf. Significantly, all five senior executives of the newly established products division were new recruits. These changes clearly made the corporation more similar to the oil MNCs in structure, outlook, and operations. Petro-Canada also followed the industry lead in another direction. In 1981 and 1982 the industry scrapped a number of megaprojects, and Alberta delayed approval of two tar sands plants projected to cost approximately $10 to 12 billion each pending an agreement with Ottawa on energy. That decision and the subsequent recession made the oil industry players involved drop those projects. This chain of events significantly reduced the importance of Petro-Canada's spin-off role. PetroCanada itself also scrapped a number of high-risk, high-cost projects: in 1982-3 it discontinued the Rim Gas Project, a joint venture to ship lique-

Petro-Canada and the Effects of the NEP 171 fied gas to Japan; it ended the Labrador Shelf exploration program, of which Petro-Canada was the operator; and it deferred the Arctic Pilot Project indefinitely.^0 The government's strict budget controls on Petro-Canada did give the federal government the power to either back up or deny any corporate initiative that was not in line with federal objectives. Joel Bell noted that if Petro-Canada wanted to acquire a publicly traded company - and all companies acquired by Petro-Canada with the exception of ARCO (1976) were publicly traded companies - it was required to contact Ottawa beforehand to obtain permission to contact the company in question. Petro-Canada could not bypass federal officials in that regard.31 Its pursuit of the downstream was subject to government approval and not entirely in the corporation's own hands. In certain cases, then, the budget controls on Petro-Canada could be quite effective, in particular with regard to take-overs. Goal conflicts arose less from the corporation itself than from changing priorities at Ottawa. Thus, while goal conflicts reduced the coherence of state action, this did not necessarily indicate a loss of control. It could simply have meant that the corporate entity was now held accountable by another sector or segment of the government. The pressures facing Petro-Canada in promoting the Canada Lands illustrate the role of the wider interventionist setting in shaping corporate priorities. As a measure for evaluating Canada's oil and gas resources, the corporation could improve Ottawa's ability to regulate the rate and location of oil and gas development in Canada - a role that clearly conflicted with the industry's interests. However, by lobbying for rapid development of the frontiers, Petro-Canada would be reducing Ottawa's ability to make such decisions and generating tremendous pressure for exports; in this way the corporation would end up serving the industry's interest. Most likely, too rapid development of the frontiers would jeopardize Canada's long-term self-sufficiency. Petro-Canada, by fostering rapid frontier production and exports, would be boosting its own corporate interests and those of the industry rather than promoting Ottawa's initial objective of controlling oil and gas development. The Push to the Frontier

In the early 19805, the recession and a poisonous political climate worked against Ottawa's attempts to orchestrate the corporation as an instrument for industrial policy. Ottawa's concern with Canadianization had to com-

172 Oil, the State, and Federalism pete with a number of other concerns. The downplaying of Ottawa's Canadianization objectives clearly affected Petro-Canada's role. Petro-Canada's increasingly strong drive toward the frontier did not arise simply from its own business-oriented momentum, or from Ottawa's policy priorities. Rather, these two factors worked in combination; PetroCanada did not set this course on its own, as some analysts would argue. Certainly, the evidence shows that Petro-Canada was close to the multinationals in the oil industry - that it shared common interests with the industry. Besides working on joint projects with private industry, PetroCanada followed the MNCs' path in the new, hostile economic climate that emerged in 1981, placing greater emphasis on bottom-line considerations and less on long-term policy ideals. But the corporation also remained close to and guided by the federal government. In the period prior to 1982, Ottawa's focus was on increasing frontier activity, and EMR in particular sought to use Petro-Canada as a counterweight to the increased power of Alberta. It was the federal government's own energy segment - including the comprehensive interventionist apparatus introduced in the NEP - that prompted Petro-Canada to increase its activities in the Canada Lands. The company's promotion of the frontier became largely an attempt to ensure a rapid payoff from the corporation's inordinately high frontier investments and to establish an alternative to its declining oil reserves in Western Canada. Ottawa's embarkation on a policy of very rapid development of the Canada Lands was not, then, modvated solely by its concern with ensuring Canada's future self-sufficiency; it was driven by another concern, which was partly of a financial nature and partly distributional andjurisdicdonal — namely, to counteract the importance of Alberta in Canada's energy supply. Once Petro-Canada became an instrument for Ottawa not only to shift activities from the provinces to the frontiers, but also to promote rapid frontier development, the corporation became an intrinsic part of the jurisdictional struggles that were unfolding. But the fact that Ottawa did not possess any means by which to alter the nature and pattern of resource ownership in the main producing areas - the Western provinces - meant that Petro-Canada's role necessarily would be far weaker than that of, for instance, Statoil, the Norwegian NOG. Between 1974 and 1984, at least, Statoil had the option to acquire up to 80 per cent of a producing field and had a veto role on every operating committee. It could be said that by pushing Petro-Canada to develop the frontiers, Ottawa undermined its own policy of regulating the rate of resource

Petro-Canada and the Effects of the NEP 173 development: in essence, the corporation's actions served to undermine Ottawa's objective of long-term self-sufficiency. Placed in a larger perspective, this was a case of the federal-provincial conflict clearly overtaking the state-industry conflict. It may have seemed as if Petro-Canada was circumventing its original mandate; what more likely happened was that a change in policy goals was conveyed to Petro-Canada from its political masters in Ottawa. The double-irony in the case of Petro-Canada was that this played into the hands of the oil industry, because Petro-Canada came to act as a spearhead for the industry in its continued quest for increased exports of oil and gas. As time passed, other sectors of the federal government introduced operational and budget constraints on Petro-Canada that forced the corporation to seek to maximize its financial returns, streamline its operations, become independent of public equity infusions, and (eventually) greatly scale down its Canada Lands thrust. The corporation's 1983 annual report seemed to back this approach. It noted: 'Funds from operations increased approximately 35 per cent to $676 million, the highest level in the Corporation's eight-year history ... Internally generated funds will increasingly become the major source of funds for reinvestment with government equity injections becoming less significant as the Corporation matures. The programs instituted in 1982 to control operating expenses and staff levels were continued and re-emphasized this year and have yielded clear benefits in terms of improved efficiency and financial returns.'32 Petro-Canada's bottom-line orientation was apparent in Hopper's unwillingness to go ahead with a tar sands operation unless the federal government could offer it and its partners guarantees on price and fiscal incentives. According to Hopper, without those guarantees the privatesector partners would not join in; and if Petro-Canada had to go it alone the corporation might get wiped out.33 Essentially, Petro-Canada had become willing to lobby for concessions on par with the industry. The very magnitude of the projects tended to reduce Petro-Canada's ability to go ahead with development should industry co-operation fail. As thejurisdictional conflict unfolded, the priorities of other segments of the federal government became increasingly visible. At the time, the focus of federal policy was to ensure that Crown corporations increased their financial accountability and efficiency. On 30 June 1982, as part of this commitment, the federal government introduced the Government Organization Bill (Bill C-123), Part V of which was directly concerned with Crown corporations. As part of this push toward a leaner and more

174 Oil. trie State, and Federalism efficient Crown corporation sector, federal allotments to Petro-Canada shrank by $100 million in 1983, to $367 million. In 1984 it was proposed that federal funds to Petro-Canada decrease a further $150 million, to $217 million. In 1983 Petro-Canada could finance $1.2 billion of its capital expenditures from internally generated funds.34 It was this combination of factors that led to the change in Petro-Canada's emphasis, which effectively undermined Ottawa's objective of controlling the rate of resource development, and also played into the hands of the oil and gas industry. Once Petro-Canada's partners left the frontiers, Petro-Canada had to do the same. Through the NEP, Ottawa enjoyed considerable power to intervene in the Canada Lands and to control the oil MNCs; however, this strong interventionist posture was not converted into an effective control over producing properties. The oil companies were not particularly prompted to follow state direction; but at least initially, Ottawa's inability to control the upstream producing operations of the oil companies — because these were in the provinces — did not greatly affect its capacity to control the NOC. The two different petroleum regions that emerged - one under provincial and the other essentially under federal control - were in the hold of different interventionist postures. This divergence clearly affected PetroCanada, which had to adjust its operations according to widely different operating conditions. The introduction of the North Sea model in the Canada Lands (by Ottawa) and on the East Coast (by Newfoundland and Nova Scotia) meant that Petro-Canada's role in the NEP was different from the role usually undertaken by Canadian Crown corporations that operate at arm's length from Ottawa. The interventionist posture in the NEP was qualitatively different from the policy programs existing in the Western provinces at the time - which also helps to account for the close links between Ottawa and Petro-Canada. Petro-Canada's main role was to achieve certain policy objectives with very clear and important political overtones. These objectives were not achieved, largely because of the nature of the goals and the changing economic context. Here, Petro-Canada's own actions were less of a factor. As a result, over time Petro-Canada increasingly shed its policy role and began to copy the interests and behaviour of the main actors in the oil sector, the oil MNCs. Petro-Canada's promotion of rapid frontier development served the interests of the oil MNCs. With its easy access to generous PIP grants and its willingness to take on the oil MNCs as joint-venture partners, PetroCanada provided the oil MNCs with simple and relatively inexpensive

Petro-Canada and the Effects of the NEP

175

access to the frontiers. The MNCs farmed out parts of their acreage to more aggressive Canadian firms; effectively, this meant that other companies worked their land for them while they themselves waited for an opportune time to get involved directly. Their strategy, it was alleged at the time, was to 'save' Canada's frontiers until the 19905, when according to predictions the world oil market would again become tighter. The NEP's strong thrust for frontier development, although intended to increase federal control, collided with the goals of Newfoundland and encouraged the oil MNCs to withhold drilling funds; in this way, it rendered the policy program highly vulnerable to economic downturns and international oil price changes. This inadvertently played into the hands of the oil MNCs. Long before Petro-Canada left the Canada Lands, it was evident that Ottawa had lost most of its ability to regulate activities there. In the larger context of the changing world oil scene, stringent economic conditions, and federal-provincial conflicts, the realigned objectives of Petro-Canada and the approaches of important federal decisionmakers became increasingly compatible with the basic interests of thedominant players in the oil industry. High taxes and the strong emphasis on high-cost oil sources made the NEP particularly vulnerable to economic downturns, which reduced oil prices and oil consumption. The assumptions in the NEP of an increasingly state-centred world oil market and a strengthened OPEC role proved to be far less compatible than federal officials had envisaged. The increase in oil supplies and the falling oil prices that resulted from the international changes that actually did occur undermined the NEP. Still, the story of the NEP, and in large part that of Petro-Canada, must be told in terms of how federal-provincial conflicts intervened with and helped reshape a program to increase federal control over the oil industry - with the result that such control was rendered ineffective. The Failure of the NEP By the time the Liberals left office in 1984, there was no doubt that the NEP had failed. In the first place, the basic assumptions behind the program turned out to be faulty. Indeed, by 1983 the program was increasingly out of step with international and domestic events, which were undermining the NEP's price regulation scheme and tax and incentive systems. By that time, too, Ottawa's ambitious Canada Lands promotion had failed. Ottawa's commitment to Canadianization had weakened. Although the

176 Oil, the State, and Federalism NEP had produced a significant increase in Canadian ownership and control - if the rapid increase of the early 19805 had continued, the program would have reached the objective of 50 per cent Canadian ownership and control by 1990 - the main portion of that increase was in private ownership and control, which did not translate into federal control of industry activities. Using 40 per cent Canadian ownership as a benchmark criterion, oil production by companies with COR rates of 40 per cent and above rose from 6.9 per cent of total Canadian oil production in 1978 to 28.3 per cent of Canadian oil production in 1982.35 But this increased Canadian private ownership and control did not greatly weaken the oil MNCs. Indeed, the oil MNCs' share of production rose between 1978 and 1982,3 largely because of Ottawa's relative inability to alter the pattern of industry production and land ownership in the areas under provincial jurisdiction. Ottawa's strategy to increase federal control over the oil MNCs necessarily focused on the Canada Lands; but there, too, despite significant inroads by Petro-Canada and Dome, the oil MNCs were still the dominant landholders in aggregate terms. Only over time, if the NEP had survived, would this aspect of dominance by the oil MNCs have been noticeably reduced. The economic downturn, reduced energy prices, and Alberta's initial response to the NEP - later reinforced by the actions of the oil MNCs also undermined the NEP's objective of ensuring increased spin-offs to Canadian industries. To Alberta, Ottawa's Canadianization program was a badly concealed attempt to undermine provincial authority over natural resources through federal control and direction over the oil and gas industry. The generous incentives available in the NEP increasingly looked like oil industry subsidies once they could no longer be combined with the regulatory powers available in the Canada Lands regime. Ottawa's objective of oil self-sufficiency by 1990 was effectively blocked by the many negative reactions to the NEP. Alberta's strong response was motivated by its view that the NEP was a ploy by Ottawa to fundamentally alter the nature of Canadian federalism. The premier, Peter Lougheed, therefore took a number of measures to ensure and strengthen provincial ownership and control of natural resources. Alberta announced that it would cut back crude oil production to 85 per cent of capacity, or a maximum of 180,000 barrels per day. The cutbacks would take place in three stages of 60,000 barrels each. The province gave ninety days' notice before the first cutback, which began on i March 1981. Lougheed noted that the cutbacks would end if a serious shortage occurred or if the federal government negotiated a fair agreement with Alberta. Further, the

Petro-Canada and the Effects of the NEP 177 cancellation of the two tar sands plants would, if upheld, undermine one central aspect of Ottawa's self-sufficiency objective. Lougheed also announced that Alberta would challenge in the courts the legality of the federal tax on natural gas exports. In March 1981 the Alberta Court of Appeal ruled unanimously that the portion of the federal tax on natural gas that applied to exports was void.37 In all of the above, the Alberta government was taking steps to regulate the rate of production for explicit political reasons, against what it considered to be federal incursions into areas of provincial jurisdiction. In doing so, the province was adopting measures of a gravity at times on par with those taken by OPEC. The net effect of the cutbacks in Alberta oil production was to increase the level of imports. Another important effect was to render Ottawa's policies 3 much more vulnerable to industry pressure.38 Ottawa's Canada Lands promotion also failed because the NEP's predictions about a rapid transition to a future of high-cost oil and gas failed to come true. As a result, the second part of Ottawa's de facto energy strategy withered away when the major oil companies decided to curtail their frontier investments. Ottawa's strong involvement in the Canada Lands turned out to be 'expensive experiments' with 'disappointing results.'39 The industry's initial reaction was to slash its planned exploration budgets and increase foreign spending. Later, the main industry players — especially the oil MNCs — moved their exploration activities back to the provinces or reduced their activities in the frontiers. As is clear from all this, the NEP failed to ensure increased federal control over industry activities, not because the main industry players challenged Ottawa's intervention but because they simply withdrew from the Canada Lands. The complex dynamics of these events were not mainly a function of the industry's influence; in fact, they were largely a result of the complex Canadian oil scene, which at that time was made up of two distinct petroleum regions, one in Western Canada and the other in the Canada Lands. The potential for Canada Lands development was also reduced by Newfoundland's strongly negative reaction to the NEP. House noted: 'When the federal government moved unilaterally to give out new permits in the Hibernia region, Newfoundland countered by assigning provincial permits in the same area to the NLPB.'40 Not only were there still two different regulatory systems offshore of Newfoundland, but each level of government, through direct state participation, was becoming much more directly involved. Since the jurisdictional status of these areas had still not been decided, the competitive introduction of state participation

178 Oil, the State, and Federalism rights heightened the uncertainty surrounding the nature of the industry's future rights in this area. This was obviously an important deterrent to offshore resource development. By 1983, according to Gault, the development of Hibernia had been stalled 'largely because of the jurisdictional dispute.'41 Another important effect of the jurisdictional dispute was to obstruct the process of establishing a clear and relatively stable legal administrative regime for offshore resource development in Canada. In the absence of such a regime, private-sector actors were understandably hesitant about committing large funds to development. This also helps explain why the public-sector share of funding became so high for offshore activities. A similar argument about jurisdictional uncertainties affecting resource development could also be applied to Northern Canada, where the government of the Northwest Territories seemed to believe that it had the right to tax artificial islands in the Beaufort Sea as if they were land.42 The competitive nature of Ottawa-Alberta relations and the uncertainty surrounding the Canada Lands placed the industry in a favourable position to extract concessions from each level of government. Ironically, Ottawa's imposition of a much tougher land-management regime in the Canada Lands actually helped render the federal state's policies vulnerable to industry reactions. Petro-Canada's frontier strategy changed from one aimed basically at exploration to map Canada's resource base to one that promoted rapid oil and gas production and exports. As Pratt argued, Petro-Canada's strong emphasis on the most attractive frontier areas would undermine Ottawa's ability to control the future rate and location of oil and gas development in Canada because Ottawa would become committed to the rapid production of known frontier reserves before a proper resource mapping had been carried out. Given this scenario, in the future Ottawa's ability to choose among fuel sources would be weakened, leading the federal government to 'jump over' less costly fuel sources. The NEP's revenue distribution effects were also limited. The NEP essentially failed to enhance the federal government's power in relation to the oil industry, including its foreign segment. In aggregate terms the industry experienced a significant drop in net income between 1980 and 1984, but the largest decrease happened in the downstream, not the upstream. Also, the small companies generally fared worse than the oil MNCs, which did not lose much in the upstream. Further, in the period 1981-4 the largest losses resulting from the international oil price decrease were carried by governments, not the oil industry.

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The NEP was significantly revised and modified, at times even before individual measures came into effect. Several modifications were made to the proposed COGA in May 1981. For instance, the original proposals did not provide for any payment by the Crown for the acquisition of production rights; the 25 per cent Crown back-in provisions were later revised to include a payment. Other changes included modifications in the progressive incremental royalty (PIR). 43 The most important single modification to the NEP, however, was the Canada-Alberta Energy Agreement of i September 1981, which was followed by agreements with the other producing (or potentially producing) provinces: British Columbia (24 September), Saskatchewan (26 October), and Nova Scotia (2 March 1982). The Canada-Alberta agreement was the result of renewed federal-provincial negotiations in May 1981, after the first round had originally broken off in October 1980; it was scheduled to expire on 31 December igSG.44 The agreement related specifically to matters of energy pricing and taxation and introduced important modifications to the 1980 NEP: a set of new pricing schedules, all of them higher and with steeper increases than those in the NEP; and a new category of oil, 'conventional new oil,' which was subject to a new oil reference price (NORP) and which encompassed conventional oil in Alberta discovered after 1980, synthetic oil (including existing Suncor and Syncrude production), and oil from Canada Lands.40 This pricing schedule, which was intended to reach parity with the international oil price, also removed the uncertainty in the original NEP about frontier oil. But the higher pricing schedule and steep gradient also tied future Canadian oil prices to an even more unrealistic outlook regarding the oil market; it was introduced at a time when the world oil market was glutted and spot prices had declined. It rendered the NEP's pricing scheme even less flexible, because extending the NORP to more categories of oils meant that a decline in the international oil price would have an impact on larger segments of the NEP scheme. The new agreement introduced important changes to the PIP. The government of Alberta would administer and pay the incentives under the program for activities within Alberta. Alberta considered it important to ensure that it had jurisdictional control of the PIP,4 even though this was costly and involved making concessions to private-sector actors. In 1982 Alberta introduced a $5.4 billion incentive program, thus footing a higher portion of industry incentives. Once again, actions by one or the other level of government to preserve or strengthen its powers resulted in concessions to industry actors.

180 Oil, the State, and Federalism The requirement for provincial agreement extended to Ottawa's concern with 'leakage rules.' Ottawa was concerned that companies with low COR rates (therefore not eligible for the highest grants) might start farming out their land to companies with high COR rates, on unfavourable terms. The relevant government would then end up paying for the exploration work from which the low-COR company benefited. Further, Ottawa retained a say in the incentive rates in provincial lands; this was an attempt to ensure itself that no 'incentive bidding war' would start between the two levels of government. Again, this illustrates how the 'two competing petroleum regions' philosophy influenced federal officials. In terms of taxation, Ottawa agreed to set the PCC to a level commensurate with, but not in excess of, the amount needed to finance oil import compensation. In doing so, it reneged on its initial pledge to collect additional revenues from the PCC. It also modified the PGRT, removing it from the wellhead but retaining it as a tax on oil and gas production revenue. Except for the Alsands and Cold Lake synthetic oil projects, the rate was increased to 16 per cent, but now combined with a 25 per cent resource allowance. The PGRT rate was raised because the price schedule had been increased, which further demonstrates the strong link that existed between the NEP's tax and price components. The industry reacted negatively to this change. Other tax changes included the introduction of an incremental oil revenue tax (IORT). Following Alberta's challenge and the court decision disallowing the NGGLT, the tax was set to zero for exports of natural gas and natural gas liquids throughout the term of the energy agreement (this did not apply to exports of propane and butane, the export of which would continue to be taxed) ,47 The agreement also introduced certain income tax changes. The resource allowance in the Income Tax Act was to be restructured and applied to total production profits before the deduction of royalties, unless such royalty income was liable for nondeductible provincial levies. Earned depletion in the Canada Lands was to be phased out after 1984. This move, a concession to Alberta, placed the provinces on a more equal footing with the Canada Lands. If Ottawa wanted to promote frontier development, it would now have to grant more generous concessions. Such moves would further undermine the interventionist thrust of the land management regime in the Canada Lands. Again, intergovernmental interactions were undermining federal measures to control industry activities. According to some observers, the agreement was a clear indication of the degree to which energy policy-making in Canada had become oriented along intergovernmental lines. In the agreement, according to

Petro-Canada and the Effects of the NEP 181 Scarfe, the federal government exchanged 'substantially higher producer prices for oil and natural gas than those contained in the NEP' for Alberta's acknowledgement of'the federal government's ability to collect substantial new forms of tax revenues from the provincial oil and gas sector.' This meant that the agreement went 'a considerable way to rectify the pricing problems created by the NEP. Although the first priority in any compromise solution should have been to re-establish an appropriate fiscal framework for the industry, and only after accomplishing this should one have worried about the distribution of public-sector revenues between governments, in retrospect it is pretty clear that this was not really achieved.'48 The Canada-Alberta Energy Agreement of 1981 contained a number of clauses that would preclude one level of government from introducing changes unilaterally. These clauses, viewed in light of the complex policy package that had emerged, not only encouraged or enforced intergovernmental co-operation, but also cemented the structure that had emerged. Each level of government would find it more difficult to initiate policies unilaterally, and the emergent broad network of policy interdependence that tied the governments' hands was reinforced. The most important effect of this complex policy interdependence related to the industry. Helliwell and his co-authors note, with application not only to this agreement but also to later agreements: 'The energy agreements constrain both levels of government from altering taxes and royalties in a manner which would significantly reduce the aggregate revenue flow either to the oil and natural gas producing industry or to the other level of government. However, both levels of government are free to make changes that have the reverse effect, and both Alberta and the federal government introduced changes in 1982 that served to improve the position of the producing industry.'49 The governmental actors recognized the unsettling nature of the competitive wrangling. Still, at this point they did not completely walk away from the NEP, but retained the program almost intact. Although analysts tended to disagree on the projected effects of the Canada-Alberta agreement, they did agree on one point - namely, that it improved producers' netbacks, especially as compared with the original NEP.5° Pratt, while observing that the industry's position was somewhat improved, found that 'Alberta and the federal government each made concessions to achieve an outcome that [permitted] the province to protect its jurisdiction, Ottawa to extend its Canadianization program and both sides to collect more revenues (at the expense of energy consumers).'51 The agreement not only extended the federal Canadianization

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program, but also maintained Ottawa's expanded jurisdictional role, which was backed up by a web of policy instruments introduced in the NEP. A study by Helliwell and McRae essentially confirmed Pratt's statement regarding the distribution of revenue among the actors involved, but found that in relative terms the industry was the largest beneficiary.02 Still, the oil MNCs were not assuaged. Doern and Toner note: 'When it became clear that the September 1981 Canada-Alberta Agreement would not provide the sorts of improvements in their fiscal arrangements that they had hoped for, the foreign majors responded by maintaining their exploration budget cutbacks.'03 At the end of May 1982, Ottawa's NEP Update included a $2 billion assistance plan designed primarily to aid the Canadian junior oil companies; it also announced the reduction or suspension of a number of federal taxes. The rate of the PGRT was reduced; the IORT was reduced to nil until the end of May 1983 on conventional oil; a special price for oil discovered after 1973 was granted producers; small producers were granted an annual credit of up to $250,000 against their PGRT liability; existing tertiary recovery projects, experimental projects, and suspended wells were granted NORP; and enhanced recovery projects were granted earned depletion. The NEP Update estimated that the total value of the measures introduced in the package would exceed $2 billion until 1986. The program was so structured as to deliver roughly half of this amount in the period 1982-3, when the companies most needed an enhanced cash flow. Ottawa proved willing, albeit grudgingly so, to restore or improve the industry's financial position in light of the significant economic downturn of the early 19805. In June 1983, Ottawa and Alberta agreed on another set of amendments to the 1981 agreements.54 The NGGLT was reduced to zero effective i February 1984. It was predicted that this amendment would cause a drop in federal revenues from $760 million in 1983 to $30 million in 1984.°° Clearly, the biggest loser from all of these changes was Ottawa. The federal and provincial initiatives of 1981-3 served to lessen the industry's burden. Helliwell and his co-authors note that between 1981 and 1983, when world oil prices dropped by 25 per cent, federal revenues declined by more than $10 billion, provincial revenues declined by $6 billion, and the industry's share remained at about the same level - all as a result of Alberta's and Ottawa's measures in 1982.° The two levels of government carried by far the largest part of the alleged revenue losses. Ottawa ended up granting significant concessions to the oil industry, and the industry, for its part, managed to adapt to the NEP.

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The Liberals walked away from the NEP before they left office in 1984-37 In early 1984 the question was no longer whether the NEP had failed. That answer was clear. What remained to be learned was how many of the individual measures introduced in the NEP would be kept on into the future. The NEP: An Assessment

The basic causes for the decline of the NEP were not primarily related to the power of the oil MNCs; rather, they were associated with changes in the international oil market, which were produced mainly by states. The altered world oil market in the first half of the igSos undermined the premises of the policy. Indeed, events in Canada were driven directly by and even mirrored events on the international oil market in this period, during which OPEC's enhanced influence resulted in an increasingly statecentred world oil market. But these two trends - increased OPEC influence, and a state-centred oil market - rather than reinforcing each other, proved to be largely incompatible, because of tensions among OPEC member states. As a result, OPEC's hold on the world market was severely weakened. A few years into the 19805, policy analysts were beginning to see that the NEP had been based on a greatly exaggerated view of the influence of OPEC. It was clear as well that the highly interventionist course taken by the Canadian government - one that was based on the notion of oil as a strategic commodity - diverged sharply from U.S. energy strategy. The course adopted by the Reagan administration was based on deregulation and on the notion of oil as an ordinary commodity to be moved and regulated much like any other trade item. Not surprisingly, the U.S. government's reaction to the NEP was negative. While Ottawa for a time stood firm with its energy policy, it soon provided concessions to the United States in the area of investment control,0 abandoning the planned expansion of FIRA's powers, although it retained the agency's existing powers. Further, the Liberals guaranteed that the interventionist posture established in the energy sector would not be expanded to embrace other sectors of the economy. Ironically, this discrepancy - between the federal government's defence of its neomercantilist energy policies on the one hand, and its willingness to isolate oil from other issues on the other would later generate considerable pressure in Canada for uniformity of trade relations between the two countries. In the early 19805, not long after the NEP was introduced, the emer-

184 Oil, the State, and Federalism gence of a less politicized world oil market deflected attention from intrastate to state-society relations. The less combative world oil scene, and the actors' heightened recognition of the harm done by intergovernmental conflicts, combined to produce a strong general opinion in favour of reducing conflict in the intergovernmental and state-society arenas. The result was a considerably reduced federal presence in Canadian energy policy after the mid-1980s. The declining power of OPEC, the trend toward privatization of NOCs (a trend reinforced and partly driven by a more general process of state downsizing and retreat from the market), and the much closer ties between Canada and the United States effectively undermined the potential for NEP-like federal neomercantilist strategies.59 The changes during this period were driven partly by a new conception of oil, one that began to find acceptance almost immediately after the NEP was introduced. Very soon, oil was no longer viewed as a strategic good requiring special state attention and action. This made it more difficult to fashion policies aimed explicitly at the oil sector. With oil concerns no longer viewed as significantly different from other energy concerns, the issues centred on the oil sector became largely absorbed into the energy sector as a whole, and trade in oil came to be viewed as part of the nation's general trade concerns. This change in the status of oil served to limit the scope of action available to the federal government. The economic recession and strong domestic opposition, both from provinces and from the oil industry, were important factors in the rapid demise of the NEP. That being said, the NEP was not defeated - rather, it collapsed. In essence, the NEP failed because it was based on a set of critical premises that either faded away or never fully materialized. But the architects of the program were not fully at fault either. In the end, it was the larger setting, the interaction of a number of different actors, that produced an unsatisfactory policy outcome. The key, surely, to understanding the NEP's fate lies in examining how the variable interests and perceptions of these actors were shaped and transformed, and then were translated into policy measures that failed to produce the desired results. While some analysts, such as Pratt, have seen the NEP as federal intervention 'on behalf of Canadian capital,'60 it seems more likely that the NEP was shaped by state officials acting relatively independently of societal actors. Several analysts have emphasized Trudeau's centralist vision of Canadian federalism as an important factor. Doern further notes how Liberal priorities and larger concerns made energy an intrinsic part of a larger Liberal approach. There is little doubt that central federal offi-

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cials played an important part in framing the NEP. It is widely recognized that state elites in Canada possess considerable power to formulate comprehensive policy schemes, and that they face few institutional obstacles when formulating policy. But we cannot assume from this that federal unilateralism or even federal state-building was the result of a federal grand scheme or master plan. Nor was the NEP simply a federal power grab in response to Alberta. Rather, it is more appropriate to view the NEP as the result of a stream of different processes that converged into a coherent program. Clearly, the learning process that the Trudeau Liberals and the entire state - at both levels - went through during the 19705 helped shape policy formation. State elites in Canada went through parallel but closely related learning processes in the intergovernmental arena - dealing with other governmental actors - and also in society at large, in their dealings with various societal actors and with substantive issues. The NEP explicitly combined jurisdictional and energy concerns. The program was an instrument for reworking Ottawa's relations along both intergovernmental and state-society lines, in direct response to the process of deconstinationalization of energy policy in the 1970s. During the second half of the 19708, in the period leading up to the NEP, the constitutional agenda expanded, drawing in energy issues as an intrinsic part of the process, and energy policy and constitutional change became increasingly tightly fused. Trudeau had become focused on patriation and the Charter of Rights and Freedoms; the provinces - especially the Western provinces - were more concerned with traditional federalism issues related to the division of powers - issues which included the field of naturl resources. 62 Energy isues

could be construed as closely linked to the larger issue of protecting provincial rights against an encroaching federal government. In this setting, actions to strengthen federal powers were easy to construe as a power grab by Ottawa and as a violation of the 'inherent' rights of provinces. But energy issues could also be construed as an important guide to the relative attractiveness of the federal bargain to Quebeckers. These two approaches were contradictory and pitted producers against consumers. If Ottawa was going to assure Quebeckers of the benefits of federalism by protecting consumers, it had to strengthen the federal government's role in the energy field; in turn, this meant taking actions that infringed on the rights of producing and potentially producing provinces. These actions would not greatly infringe on the constitutional claims set forth by the province of Quebec. By the early igSos, in the complex Canadian constitutional setting, it was virtually impossible for Ottawa to take decisive actions aimed at

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addressing the issue of Quebec separation, and the wider question of Quebec's role in the federation, without simultaneously generating and encountering opposition from other quarters. The Quebec question aside, the Trudeau Liberals were also reacting to their past decade's experience in dealing with the producing and potentially producing provinces. Again, this suggests how the experiences of state elites in the arena of constitutional change overlapped with and became fused with lessons drawn from the process of addressing various substantive concerns in the energy field. In introducing the NEP, federal officials sought to avoid repeating the mistakes they had made in responding to the first OPEC oil shock, when the producing provinces had been quick to introduce new and comprehensive interventionist measures. In 1980, rather than responding in an ad hoc fashion to events, as they had done during 1973-5, federal officials now addressed jurisdictional concerns 'up front,' unilaterally introducing a new, comprehensive package of energy policies in conjunction with the budget. In doing so, they prevented the producing provinces from gaining the initiative and from benefiting to any great degree from changes in the international oil market. In 1980, the newly elected Trudeau Liberal government drew a number of important lessons from its own experience, and also from the experience of the short-lived Conservative government of Joe Clark. Clark's vision of Canada as a 'community of communities' had not helped him in his negotiations with Alberta before his government was defeated in Parliament in December 1979. The Liberal government noted carefully from this that the negotiations proved to be difficult even after Clark had shown his willingness to make significant concessions at the outset to speed up the process of negotiations.b3 The fact that many of the federal decision-makers of the period after 1973 were still around during the second oil crisis, facing the same actors in Alberta, also aggravated the federal-provincial conflict: both sets of leaders had fresh, and bitter, memories of the conflicts during the 19705. In general, deep and traumatic historical memories tend to provide a fertile learning ground for state elites. The Trudeau government's vision was of a more centralized federation with considerable federal powers over the economy. The Liberals had also decided that if the federal government wanted to increase its powers over the oil industry, while ensuring increased future supplies of oil, it would have to take measures that infringed on the rights of producing provinces. Part of this realization stemmed from the intergovernmental

Petro-Canada and the Effects of the NEP 187 conflicts. But another important factor had to do with the learning that was taking place within the public apparatus. The emergence of EMR as a central bureaucratic player in the energy arena in the 19708 had resulted in that department holding considerable expertise in energy policymaking. This meant that much more relevant information and analysis was available to decision-makers about past events, present status, and future trends. This increased state capacity facilitated the learning process, by making lessons from the past more readily available and by linking the lessons of the past to assessments of the present and the future. At the same time, however, various public officials were frustrated with the inadequacy of established federal policies during this period. Further, a number of these officials had been exposed to the policy measures adopted by other countries. This meant that when the Liberals sought to adopt a more centralist policy program in 1980, they faced a far greater accumulated policy and administrative capacity than had been the case in the 1970s. While federal officials conditioned by personal and institutional learning played an important role in generating complex federal interventions such as the NEP, they were caught up in a much larger setting and constrained by the requirements of office, by other actors, and by the situation at hand. State Structures and Patterns of Politics The policy-making events of the 19705 and early 19805 cannot be adequately represented simply as moves by the state toward or away from centralism. Canada's eleven separate governments, after all, were all capable of and actively involved in pursuing their own objectives.h4 Facing the federal government in the 19705 were a number of oil and gas producing provinces, each with a premier who had his own concerns and ambitions relating to the future of his province in the Canadian federation. The federal government's choice of strategies for strengthening its presence reflected its role in the federation and its relationship to other governmental actors. In introducing the NEP, the federal government was intervening foremost to strengthen its role and position as a state actor, rather than as a central or national government. The NEP was a comprehensive policy with a high degree of intrajurisdictional co-ordination. It was introduced unilaterally, and it focused on the Canada Lands, which promised to provide Ottawa with an independent and federally owned resource base

i88 Oil, the State, and Federalism sometime in the future. But at the same time, Alberta and Newfoundland introduced legislation aimed at controlling oil production in accordance with provincial objectives. Thus, while the NEP was a relatively aggressive act, it was also a defensive strategy aimed at protecting the federal government against encroachments by other governmental actors and at heightening federal independence within the federation. It was in the field of energy that the external threats were most visible, and it was also here that Ottawa had considerable capacity to increase federal independence, partly through its possession of the Canada Lands. As a statist impulse, the NEP was a logical extension of and response to the province-building efforts being undertaken by provincial governments to capture maximum benefits from the changes on the world oil market. These efforts involved both current and potential producer provinces: namely, British Columbia, Alberta, Saskatchewan, Prince Edward Island, Nova Scotia, and Newfoundland. The NEP was designed both to capture a larger share of economic benefits for the federal government and to establish Ottawa as an independent oil-producing government. The fashioning of these objectives was facilitated by structural features of the overall Canadian state. Ottawa could seek to strengthen its role along two different dimensions: through incursions into areas generally considered to be subject to provincial jurisdiction; and through the promotion of the Canada Lands, physical areas that could be placed under federal jurisdiction. The push to control development in the Canada Lands was not foremost a push toward centralization; rather, curiously, it was a move toward duplicating the province-building efforts of provincial actors. The Canadian state had another structural feature that enabled federal officials to introduce strong state interventionist measures: the particular power of various parliaments and the constitutional division of power. The fact that the Canadian constitution does not include a due process clause for the entrenchment of property rights enabled a sovereign parliament to alter or 'destroy the rights acquired under a tenure agreement with the State. ° Canada's Parliament was not, like the U.S. government, constrained by legal obstacles that prevented it from changing licences once they had been awarded. The federal government was thus able in 1980 to introduce a new and much more interventionist system of rights issuance and land management in the Canada Lands. This policy could be brought forward even though legal experts had found that the old system of leases did confer certain vested rights upon the industry. Ottawa had the power to institute a much more stringent federal landlord role in the Canada Lands.

Petro-Canada and the Effects of the NEP 189 Institutional factors - that is, factors associated with the structure of the Canadian state - related to the existence in Canada of the Westminster model of parliamentary democracy at both levels of the state. The imposition of the Westminster model of parliamentary government upon a federal structure concentrates power in the hands of the prime minister at the federal level and in the hands of the individual premiers at the provincial level. This particular structure of government enabled a determined governmental elite with a majority in Parliament and strong party discipline to pursue its objectives. This heightened the role and importance of the prime minister and his close associates in policy formation. The duplication of this model at the provincial level enabled individual premiers to formulate clear objectives as well, and also provided them with a ready apparatus for pursuing those objectives. Each of the eleven governments in Canada had considerable autonomy in goal and policy formulation - a structural aspect that tended to encourage competitive goal formulation and provided little room for cooperation in the policy process. Chandler and Bakvis note: 'It is the particular intersection of parliamentary institutions with federalism that 66 They results in the economic problems currently faced by Canada. elaborate: By emphasizing one-party majority rule and by concentrating power in the hands of the prime minister/premier, this model has helped to create eleven strong governments with little interest in such forms of cooperative concertation [as are found in European federalisms] ... The Westminster tradition also involves a broader matrix of legal and social institutions and practices (e.g. the courts, collective bargaining), all premised on adversarial relationships. What the structure of the Canadian federal system has wrought is the concentration of these adversarial forces among a limited number of political actors and within a limited number of arenas. The number of actors is sufficiently small that each has a meaningful share of power, but not small enough to facilitate cooperation. Consensus among the eleven governments is a very elusive commodity. All have strong incentives to intervene directly in their economic environments. In doing so, they invariably come into conflict with one another.'17

In the oil sector, with the divisions clearly drawn between producing and consuming provinces, intergovernmental conflicts were almost inescapable. The Westminster model ensured also that the level of conflict was heightened rather than reduced. The imposition of the Westminster model upon a federal structure, according to Chandler and Bakvis,

190 Oil, the State, and Federalism resulted in the existence of two different 'rules of the game' for the conduct of politics in Canada. One set of rules applied to the making of policy by (usually) majority governments, within individual jurisdictions; the second set of rules applied to the central role of power-sharing in federal systems. 9 All eleven governments had means by which to curtail the actions of other governmental actors, and they experienced few institutional obstacles to doing so. The net effect was to generate policy stalemates and interventions aimed at curtailing the power of other governmental actors. Cairns notes: 'The nature of the federal system, with its fuzzy lines of jurisdictional demarcation and extensive overlapping of the potential for government response, means that in innumerable fields there is, in fact an intergovernmental competition to occupy the field, and slackness by one level of government provides the occasion for a pre-emptive strike by the other.' 70 The parliamentary system of democracy, then, favoured competitive goal formulation at each level of government; and this tendency was further encouraged by the constitutional framework, which also encouraged state intervention. These structural factors may not have been critically important in themselves, but they assumed importance because of more specific contextual factors. The considerable overlap in constitutional powers generated an expansionist dynamic and increased governmental uncertainty. In the oil sector a number of interventionist measures had either been in place for a long time or been recently adopted, and their effect was to infringe on the jurisdictional rights of the other level of government. Examples of these measures form a long list: • The Albertan system of prorationing.71 • The Alberta Petroleum Marketing Commission. • The 1974 Saskatchewan interventionist package, which ended in the CIGOL court case. • The federal government's 1974 decision not to allow provincial royalties to be deducted for federal tax purposes. • The federal and provincial systems of rights issuance and land management on Canada's East Coast, which generated a dual set of land management regulations, in the absence of a Supreme Court ruling on ownership rights. • The federal natural gas export tax in the NEP. • The PGRT, which in effect enabled Ottawa to tax provincial Crown corporations.

Petro-Canada and the Effects of the NEP 191 • The Alberta government's legislation to regulate oil production according to provincial needs. These measures contributed to the 'insecurity of governments,' because each of them encroached upon the rights of the other level of government and undermined the authority of the constitution as a proper device for dividing federal and provincial powers. Further, and perhaps equally important, the adoption of these measures meant that each actor had large and sometimes critical parts of its regulatory system placed on an uncertain constitutional footing; at any time a measure could be subjected to a court challenge by industry or by the other level of government. The increased willingness of governmental actors to initiate legislation that might infringe on the rights of the other level of government testifies to the diminution of respect for the constitution in the period 1973-84. This further increased the insecurity of governments.72 The insecurity of governments also heightened problems between governments in Canada relating to rule, order, and control. In 1979, before the NEP was introduced, Cairns stated: The diminution of respect for those constitutional procedures and rules of the game capable of policing the boundaries of federal and provincial jurisdiction adds to the insecurity of governments. The security and certainty of jurisdictional responsibilities that cannot be gained by reference to the constitution are sought by the exercise of sheer power, the staking of claims for popular support by the manufacturing of constituencies of allegiance tied to free-wheeling policies and expenditures to a government seeking to maintain its position.7^

The insecurity of governments in Canada was clearly heightened by external shocks that threatened to alter the existing fragile balance of power that had emerged between the actors on the domestic scene. In this, international factors acted as vital triggers, setting in motion processes of jurisdictional defence and expansion that often included unilateral actions. Predictably, this resulted in recurrent claims for constitutional change from the provinces. Ottawa thus found itself confronted with an expanding crisis in the natural resource field and also, after the electoral victory of the Parti Quebecois in 1976, with the issue of Quebec separation. The fusion of international and domestic tensions exacerbated conflicts. The question of public ownership of land was yet another factor in the

192 Oil, the State, and Federalism efforts of governments to prevent encroachments by other levels of government. The province of Alberta took the most extreme position here.74 With 85 per cent of Alberta's oil located on Crown lands, that province could introduce legislative changes to set the laws pertaining to Crown lands on their strongest constitutional footing, and do so without altering the property rights of private-sector actors. A state actor could also make constitutional arguments of limited validity to further its own interests. Alberta claimed that the schedules (s.i of the Constitution Act, 1930) transferring resources to the province 'have the force of law "notwithstanding anything in the British North America Act, 1867."'7o This approach testified both to a limited respect for the constitutional framework and to high levels of tension in the intergovernmental arena. Ottawa's constitutional jurisdiction over the Canada Lands, with their promising resource prospects, affected energy policy in ways that differed from what could be expected in cases of overlapping jurisdiction. Ottawa could act as a direct competitor to the province of Alberta by channelling federal intervention to the Canada Lands; at the same time, it could act as a federal counterpart to Alberta, using its unique federal government powers to influence activities within the province. This structural attribute of the Canadian federation created a strong temptation for Ottawa to favour the Canada Lands, the NEP being the clearest example of this. In following this approach, in entering into direct competition with the oil-producing provinces, Ottawa simultaneously pursued and distorted some of its nationwide responsibilities as a federal government, as well as its role as a national balancer. The 1967 Offshore Reference established the principle of federal ownership of offshore mineral rights on the West Coast of Canada. But as revealed in the Georgia Strait Reference by the British Columbia Court of Appeal of 1977, upheld by the Supreme Court ruling of May 1984, this right did not apply to the lands underlying the Strait of Juan de Fuca, the Strait of Georgia, Johnstone Strait, and Queen Charlotte Strait, which were held to belong to the province of British Columbia.75 Thus, the general implications of the 1967 Offshore Reference, while essentially favouring the federal government, were somewhat unclear. The ambiguous nature of this reference heightened uncertainty about offshore ownership on Canada's East Coast. Further, the provinces opposed the basic implication in the ruling that 'Canada's attainment of national sovereignty has significantly expanded the powers of the federal government. Throughout the judgment it is assumed that "Canada" means the federal government.'77

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This ruling sparked conflict in regard to where sovereignty was ultimately to be based, as the provinces claimed that the Supreme Court was biased in favour of Ottawa. Throughout the 19708 the Western provinces claimed many times that the Supreme Court had a strong centralist bias. As a result, Ottawa was often equated with Central Canadian dominance - a claim based partly on the fact that few of those representing Western Canada in Parliament were Liberals. Ottawa was confident that the ownership issue would be settled in its favour; however, in the absence of a Supreme Court ruling the provinces on Canada's East Coast were able to introduce their own systems of rights issuance and land management. This meant that industry actors found themselves subjected to two different sets of regulations guiding their activities in the areas offshore of Newfoundland. The insecurity of governments, then, had many sources; some of these related to the issue area of oil, while others had far deeper roots. Of critical importance was the fundamental question, not yet resolved, of where in Canada sovereignty was ultimately located. This conflict helped generate and crystallize competing visions of governance. To Trudeau, as Cairns observed in 1991, 'The constitutional struggle of the previous twenty years had been a contest between the rights of the people and the rights of governments, with the Charter as the instrument - admittedly imperfect because of the notwithstanding clause, and incomplete because of the absence of a referendum provision in the amending formula - to establish the sovereignty of the people over all levels of government.' 7 Thus, the Trudeau Liberals from the latter part of the 1970s increasingly came to challenge the notion of the 'governments' constitution' - the idea that governments were harbingers of constitutional change. The Western provinces in particular fought for provincial rights, and sought constitutional changes that would guarantee those rights, as well as federal institutions more strongly reflective of provincial interests and conceptions of Canada. The insecurity of governments emerged from increasingly conflicting constitutional visions that sparked competitive efforts by governmental actors to fashion and mobilize communities of support for federal and provincial positions. Note also that the agenda for constitutional change in the late 19705 had become so lengthy that it held a great potential for new and powerful issue linkages; these threatened to upset relations among the actors and to expand the conflicts so as to include new actors and issue areas. The insecurity of governments, therefore, was also heightened whenever substantive issues became fused with thejurisdictional and constitutional concerns of the actors involved.

194

Oil, the State, and Federalism

Policy Instruments and State Capacities A constitutional structure that establishes parliamentary government on two levels, then, provides policy-makers with considerable capacity to intervene - to forge policy instruments -and locates the intervention of each governmental actor in a competitive intergovernmental setting. In this setting of overlapping federal-provincial jurisdiction, the large scope of intervention available to each governmental actor also generates different sets of interdependent policy instruments.7-' This type of policy interdependence can in turn encourage further intervention by each level of government and exacerbate intergovernmental and state-society conflicts, creating a concomitant pressure to unravel the intervention. As well, in a setting marked by uncertainty, conflict, and numerous critical unsettled issues, the particular policy instruments established form a guide to actors' intentions. Federal policies can in themselves produce 'instrument overload.' In pursuing a wide range of objectives that pertained to both the state-society arena and the intergovernmental one, Ottawa tended to saddle many of its policy instruments with a wide range of tasks. The federal government's objectives were often incompatible, especially when they pertained to both substantive and jurisdictional concerns. Single instruments forged to fulfil a wide range of sometimes incompatible goals produced contradictions, uncertainties, and inefficiencies. The mixed signals did more than cause confusion: they also generated suspicion and cynicism about the federal government's motives, as well as widespread debate among analysts as to what the government was 'ultimately' up to. For instance, the government introduced price regulation in an attempt to ensure both intergovernmental redistribution and resource development. Also, it used tax measures to redistribute revenues between levels of government and between government and industry, while simultaneously encouraging resource development. The resulting policy overload expanded the process of deflection and amplified its effects. The policy instruments initially tailored to secure both jurisdictional concerns in the intergovernmental arena and substantive concerns in the energy arena became oriented toward addressing jurisdictional concerns; this exacerbated the jurisdictional conflict while making substantive problems more difficult to solve. The government also introduced rapid and frequent changes in often very comprehensive regulatory, tax, and fiscal systems designed to cover several jurisdictions and devised to ensure intergovernmental agree-

Petro-Canada and the Effects of the NEP 195 merit across a range of concerns. This increased rate of change also created considerable uncertainty, both in industry circles and at the other level of government, because it meant there was little time for the affected parties to assess or digest the effects of one set of policies before another set was introduced. Industry actors could exploit the uncertainty to extract benefits and concessions because of the great amount of political capital invested by governments and the high political visibility of governmental commitments and actions. In these conditions of intergovernmental strife and competition, the oil industry gained a source of power. This was probably less directly related to the industry's own ability to influence policy than to the governments' need to re-establish relations of trust with the industry following the many rapid changes and reversals. Competition between governments also helped undermine Ottawa's strongest interventionist measures, because the direct measures available to Ottawa could only be used in the Canada Lands. To strengthen its position vis-a-vis the oil industry, as well as in relation to the producing provinces, Ottawa had to favour the Canada Lands. But the fact that they were favouring these lands before a viable resource base had been proved up left little 'room' for stricter regulations. The policy instruments in place interacted with a host of other factors to generate additional federal and provincial intervention, thereby increasing the likelihood of conflict and stalemate. Ottawa's policy of regulating oil prices below world levels generated pressure both in industry quarters and in Ottawa for additional policy measures to ensure a certain level of industry investment and rate of development. Price regulation and various concessions to the industry also served to drive Ottawa to adopt a stronger Canada Lands thrust. The high-cost nature of Canada's future sources of oil and gas, the development of which depended on favourable trends in international prices, was a crucial variable. With price regulation a matter for negotiation between governments, and with the uncertainty surrounding future prices, intergovernmental competition placed a premium on governmental actors seeking to 'capture the future' by actively taking steps to prepare for it today. Note here that control over oil prices is practically impossible to achieve, as the erratic changes in world oil prices over the past two decades have made abundantly clear. The promotion of future sources of supply connected to the intergovernmental competition increased the likelihood that cheaper sources of oil and gas would be 'stepped over,' and also made governmental actors

196 Oil, the State, and Federalism promote large-scale projects that had uncertain futures. Some of these projects were so large that they had the potential to consume all the financial resources of a single company or even a consortium of companies, in effect tying the companies to an uncertain future and reducing their flexibility of action. Increased intervention at the federal level spurred the process of intrajurisdictional policy co-ordination, which in turn had an impact on the level and intensity of intergovernmental conflicts. Policy co-ordination was the result of a complex process affected by multiple federal objectives and concerns, the learning experiences of state elites, and the many unanticipated and undesired effects of previous policies. Another source of policy co-ordination stemmed from the emergence of 'political federalism,' which had the effect of centralizing decision-making capacity in the hands of politicians and bureaucrats with jurisdiction-wide concerns.80 As Cairns notes: 'There will be a tendency for intrajurisdictional clashes to be controlled or moderated at the expense of flexibility in handling interjurisdictional concerns. 81 The NEP, in bringing together a wide range of federal objectives, lessons from the past, and responses to previous policies, was an excellent example of how comprehensive intrajurisdictional policy co-ordination tends to heighten interjurisdictional conflicts. The net result was an intergovernmental stalemate that increased the need for concessions to the oil industry and subsequent policy revisions to re-establish trust and working relations. Intrajurisdictional policy co-ordination can also generate different regulatory systems; these in turn may heighten intergovernmental competition and render intervention vulnerable to international events and changes, interest group influence, and pressure to undo the regulation. For instance, in the new systems of rights issuance and land management in the Canada Lands introduced in 1980, the federal government - partly in response to the provinces on the East Coast - adopted a range of policies that were unfamiliar to large segments of the oil industry and to the Western provinces. The new policies, which were both comprehensive and unfamiliar, increased uncertainty and heightened intergovernmental and state-society conflicts. Because the new federal system was much more interventionist than the systems in Western Canada, it created a stronger need for federal funds to make up the difference, since the verdict on the size and nature of the resource base was still not in. This difference was made up by PIP grants. But when negative changes occurred in the resource prospects of the Canada Lands, or profitability forecasts were lowered, or international oil prices declined, pressures mounted for

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regulatory uniformity across Canada, and measures were taken to dismantle the most interventionist measures. Intergovernmental competition had significant effects on pricing and revenue distribution. Faced with sudden increases in the value of oil and gas, both levels of government, possessed with powers to extract the wealth and good reasons for doing so, were concerned with ensuring 'their' share of the pie. The competitive setting made governments emphasize the distribution of current and anticipated future wealth. The size of the pie, however, would largely depend on the industry's ability and willingness to extract the resources. In the competitive context, both levels of government attempted to extract higher tax returns from the industry; at the same time, both levels showed considerable willingness to grant concessions to ensure that development continued. The industry was able to utilize this intergovernmental competition to its own advantage and extract concessions and regulatory reversals. The 'policy mobilization' resulted from intense intergovernmental conflicts, which pulled into their orbit policy instruments that were of less direct relevance in the intergovernmental arena. One prominent example, Petro-Canada, was given the right to back in on Hibernia in 1977; this placed it in the middle of the conflict on Canada's East Coast. Both prior to the NEP and in the NEP, Petro-Canada was perceived as one of Ottawa's most important instruments in the Canada Lands, and its active promotion of oil and gas production rather than resource mapping in the Canada Lands was partly an extension of the federal Canada Lands strategy. This kind of policy mobilization therefore also tended to thwart the federal government's initial objectives in energy policy. The actions taken by a number of provinces and Ottawa to strengthen their landlord roles focused on other governmental actors even more than on the oil industry, which further increased intergovernmental conflicts. Ottawa and Newfoundland both adopted the North Sea model, with Newfoundland's regulations being even more interventionist than the federal ones. For instance, the province required 40 per cent state participation. The adoption of the North Sea model enabled these two governments to regulate the oil industry's access to land and resources; introduce state participation; regulate exploration and production rates; issue work requirements and rental fees and set royalty rates; and establish national sourcing requirements. But in producing outcomes, the intervention was far less effective than anticipated. Although they made several attempts, the two governments were not able to reach an agreement on resource management until after the issue of jurisdiction of the

198 Oil, the State, and Federalism offshore had been resolved, and this lack of agreement represented a serious obstacle to offshore production. The existence of two sets of regulations pertaining to the same area, each with considerable ministerial discretion and state participation, tended to heighten the uncertainty about future oil and gas developments on Canada's East Coast. The federal (in the NEP) and Newfoundland concession-based systems were much more interventionist than the auction-based systems of Western Canada. But in Western Canada as well, the provinces took a range of measures that increased their land management and entrepreneurial roles. Alberta introduced the APMC in 1973, and introduced legislation to regulate oil production in 1980. Saskatchewan nationalized all freehold oil in the province, but also granted leases to the former owners and tried to force them to continue production. These provincial actions were aimed explicitly against Ottawa, which again made it clear that the expanded landlord roles of state actors were aimed toward other governmental actors even more than toward the oil industry. The existence of different interventionist models, and the fact that Ottawa adopted the most interventionist but least familiar model, served to maintain a large measure of uncertainty. The competence of the governmental actors in choosing and applying policy instruments influenced the stages in the rise and demise of the NEP and Petro-Canada; and the policy instruments themselves helped to shape outcomes. But the context in which the instruments were applied was decisive. In a general context favourable to state intervention, the structure of the Canadian state, heavily influenced by fundamental unresolved problems relating to both federalism and individual state actors, helped produce comprehensive interventionist programs. But that same structure also channelled intervention and conflicts along intergovernmental lines, and the various factors at play strengthened the oil industry's bargaining position. This system had essentially collapsed by 1984, before the new team of leaders took over. The Mulroney Conservatives had a wide mandate for change, but the direction of that change had by then already been determined - by the changing international context, and by structural factors associated with the aggregate Canadian state.

6 Oil in a Changing International Context and Conservative Energy Policy

By the time the Liberals left office in 1984, the issue was not whether the NEP would be changed, but what would be left of it. The Clark and Mulroney Conservatives had been opposed to the NEP all along. Their task of doing away with it was greatly facilitated by the continued strengthening of the international developments that had served to undermine the NEP in the first place, and also by the mobilization of countervailing forces, primarily in the oil-producing provinces and in the business sector, that had been hostile to the NEP from the start. In response to what they saw as the centralist NEP, the provinces and territories mustered forces and mobilized against all sorts of vestiges of federal power and intervention. The dismantling of the NEP began early in the Mulroney government's first term. Indeed, soon after he was elected, Mulroney travelled to New York to announce the end of the NEP, declaring that 'Canada is open for business.'1 The new Conservative government dismantled the NEP in a series of accords reached with the oil-producing provinces and regions accords that essentially abandoned most of the Trudeau government's NEP policies, more or less turning them upside down. Very quickly, instead of a national policy there was now a series of federal-provincial agreements that diverged sharply from the approaches of the NEP. In fashioning this policy the Conservative government largely accepted a system of regionalized - meaning provincialist - systems of oil and gas management, which became increasingly oriented along the North-South rather than the East-West axis. The process of privatizing Petro-Canada would be more 'slow and deliberate' (as Allan Tupper and Bruce Doern put it) and the privatization bill was not passed until 1991. In the long and well established Canadian statist tradition - albeit in contrast to the heated policy-making of

2OO Oil, the State, and Federalism the Liberal regime - the Mulroney government chose to take a cautious, pragmatic approach rather than a strongly ideological one. Most Tories recognized that Canadian public opinion was 'not overly critical of the current level and form of public enterprise.'2 The initial step, in 1984, was to grant the NOC a new market-oriented mandate. The newly elected Conservatives directed Petro-Canada to operate in the same manner as any other private-sector oil company in Canada and indicated that the company was no longer to be perceived as an instrument of public policy. The government would no longer provide the corporation with capital infusions or other privileges. Under the Liberal administrations of the 19705, much importance had been assigned to corporate accountability through increased government control and stiffer reporting requirements alongside the question of which policy functions - if any - a public enterprise can and does pursue. Under the Conservative administrations of the 19805, the corresponding issue became whether the government should interfere in the workings of the marketplace through Crown corporations or public enterprises whether, as the minister of state for privatization put it a few years later, 'the public policy goals that led to establishing Crown corporations in the past either might have changed, or might be better achieved through other policy instruments.'3 The ground of public policy formation was clearly shifting. Terms such as 'efficiency,' 'drain on the public purse,' and 'inflexible and uncompetitive' were coming into play, and special attention was now being paid to the need for 'competition' in the rising new 'global marketplace.' The Conservatives saw the best approach as involving, among other things, a push toward reliance on market forces combined with privatization and increased government 'restraint.' The issue became one of establishing clear guidelines as to which activities were best handled by the public sector and which by the private sector; a central question for government became how to make this kind of assessment - that is, what criteria to use. Now, for a Crown corporation to remain intact, it would have to be demonstrated that it had a public purpose that could not be satisfied in the realm of private enterprise.4 For the Conservatives, this question went far beyond energy policy concerns, stretching out to the status and role of the entire Crown corporation sector of the economy. A Crown corporation that did not manifest this distinct public purpose would be sold into the private sector. Likewise, the emphasis on economic efficiency was not simply part of a move toward increased market responsiveness; it was also - and perhaps

Oil in a Changing International Context 201 even more so - a reaction to the politicized nature of Petro-Canada and its policy functions as related to the NEP. Here, the Tory approach was part of the larger reaction against the NEP. For instance, academic analysts such as Helliwell were far more sceptical of the economic rationale behind the Liberal government's Canada Lands thrust than of the possibility of Petro-Canada escaping from government supervision and control. The Canada Lands had been one of the cornerstones in the Liberal strategy for ensuring future oil self-sufficiency in Canada and for promoting the federal government as an oil-producing government. In fact, to a large extent it was Petro-Canada's extraordinary efforts to promote Canada Lands development that made Helliwell so sceptical of the Liberal Canada Lands policy. Critics of Petro-Canada directed their attention more toward the political and policy roles attributed to the corporation by the Liberal government than toward the corporation's ability and willingness to pursue its mandated functions. Certainly, until 1984 the corporation had had a highly politically charged role in federal energy policy. The Liberal government, especially within the context of the NEP, had seen Petro-Canada as an instrument for undertaking a wide range of political and policy goals. The Liberals had seen Petro-Canada as a spearhead of federal assertiveness, and the corporation had formed an integral part of a much more comprehensive federal interventionist energy policy apparatus set up to reverse the various developments of the 19705 that had seemed so pressing. Conservative Energy Policy: Changing Federal-Provincial Relations

In a sense, the Mulroney government had a unique opportunity to make its imprint on the Canadian energy sector. The newly elected government faced a domestic and international scene in 1984 that was significantly different from the one the Trudeau Liberals had addressed in 1980. For one thing, the NEP depended largely on the fortunes of the international commodities market. As Stephen McBride and John Shields point out: 'To sustain the strategy and support the energy megaprojects, oil prices had to keep rising, a scenario that failed to materialize.'5 Between 1979 and 1985, OPEC's share of the world oil market fell from 49.2 to 29 per cent, non-OPEC production increased from 50.8 to 70.9 per cent, and oil consumption fell significantly. In response to a rapidly declining market share, and armed with an increased surplus production capacity, OPEC countries in early 1986 significantly increased supplies, which drove the price of oil down to as low as $8/b in August 1986. OPEC did this

202 Oil, the State, and Federalism to increase its market share and to combat 'a strategy of "draining" all resources outside OPEC first. The cartel's share of Canadian oil imports fell from 93 per cent in 1975 to 37 per cent in 1986. Because of its seemingly loosened grip on the market, the cartel could no longer use oil as a political weapon; this reduced the West's vulnerability to OPEC's actions and weakened the political rationale for ensuring self-sufficiency and security of supply. It thus became more difficult to justify state intervention in the oil sector, as well as easier to attack Petro-Canada's usefulness as a vehicle for ensuring security of supply (i.e., through the development of indigenous, high-cost oil and gas and state-to-state contracts). As well, OPEC's apparent decline reversed the trend toward a world oil market operated by states, and helped generate a strong resurgence of faith in the market as the most appropriate means of balancing supply and demand. In the 19708 and early 19805 the oil market constituted an arena of international trade that most states considered to be too important to be left to private interests. By the mid-1980s, however, international economic conditions had begun to change dramatically. OPEC had been weakened, and the world oil market was less politicized. Nations were now seeking to strengthen their economic interdependence and to liberalize the oil market through privatization and deregulation. State-to-state trading was becoming largely irrelevant as a number of countries abolished their principal agents. As the journal Petroleum Intelligence Weekly observed: 'The tenet that a government's energy policy needed to be built around a fully state-controlled oil company was once a sacred cow throughout most of Europe. But that conviction is succumbing - sometimes in an orderly manner, sometimes chaotically - to immediate budgetary needs. The huge assets of energy firms are providing bait for spending appetites that is nearly irresistible.'7 In the 1970s there had been a wave of government intervention to protect and bolster domestic oil markets; now, in the mid-igSos, there was a trend toward liberalizing the oil market through privatization and deregulation. With the rise to power of neoconservatives in Britain and the United States and the altered world oil market, Mulroney's Conservatives were able to pursue less independent and interventionist federal policies. The need for federal—provincial reconciliation to resolve the conflicts spurred by the NEP reinforced the federal government's commitment to deregulation and state retrenchment, a stronger reliance on market forces, and closer links with the United States. Later, in 1990, Energy Minister Jake Epp outlined his government's objectives, which he said were much the same as in 1984:

Oil in a Changing International Context 203 To promote the efficient development and use of Canada's energy resources; to increase the flexibility, diversity, and competitiveness of the Canadian energy economy; to assure security of supply; to assure that energy production and use occurs in an environmentally responsible manner; to provide opportunities for increased Canadian ownership and control of the domestic petroleum industry; and finally, to ensure that energy contributes to national reconciliation.8

Some of his key words and phrases - 'diversity,' 'security of supply,' 'increased Canadian ownership and control' - would be familiar to readers of Liberal policy documents. Others - 'efficient development,' 'flexibility,' 'competitiveness,' 'national reconciliation' - struck a markedly different chord. The Conservatives, as had the Liberals before them, stressed the need to ensure security of supply - a commitment not only voiced by the federal energy minister but also stated explicitly in the accords passed with regions and provinces. However, for the Mulroney Conservative government, security of supply could be achieved, according to Epp, 'in the dynamic operation of the marketplace,' not through government intervention. As Epp put it, it would come 'in the aggressive development by industry of new supplies and the efficient use by consumers of the presently available ones.' The Conservatives stressed 'the diversity and adaptability of the energy's economy, and the ability of consumers to shift to new sources of supply and to make other economic adjustments when alternative supply sources are not available.'9 Perhaps the most important stated difference between Liberal and Conservative energy policy was this: the Conservatives' policy came to be characterized by a much stronger reliance on market forces. Another difference related to the low importance given by the Conservatives to a federal government's capacity to make independent decisions in the area of energy policy. Instead, Tory energy policy was marked by a strong intergovernmental - both multilateral and bilateral - approach. The Conservatives retained a commitment to Canadianize the oil and gas industry, but it could be problematic balancing this commitment with a much more market-based and decentralized energy policy approach. The Conservative government - while doing more than simply paying lip service to Canadianization - retained the least interventionist policy elements, which did not conflict with its other goals, and removed all the ones that could conflict with those goals. The push toward ever closer trade links with Canada's southern neighbour would lead to the free trade initiative, first unveiled in 1985, a policy

204 Oil, the State, and Federalism move tightly linked to the government's vision of federalism. The agreement, according to Simeon and Robinson, was 'another way of alleviating regional tensions': To put the final nail in the coffin of the National Policy would end the historic grievances rooted in the idea that resource producers were forced to sell their products in volatile world markets, or to artificially shielded domestic markets, while they were simultaneously required to pay higher prices to tariff-protected central Canadian manufacturers. Now, it was argued, this unfairness would be ended and each region would buy and sell where the price was best. Central power would no longer be used to distort the terms of trade among regions and Ottawa's ability to discriminate would be reduced. 10

The Conservatives' commitment to deregulation and privatization affected the shape and conduct of federal-provincial relations; in fact, to a large extent that commitment was driven by those relations. Part of the dynamic stemmed from provincial demands for an increased say in the overall conduct of Canadian energy policy, in response to the NEP and as a continuation of the provincial policies of the 19705. Closely linked with its more strongly market-based approach was the Mulroney government's commitment to co-operative federalism. In an election speech in Quebec in August 1984, Mulroney noted: 'Our first task is to breathe a new spirit into federalism. The serious deterioration of federal-provincial relations is not exclusively the result of constitutional deficiencies. Centralistic and negative attitudes are much more to blame ... Let us replace the bias of confrontation with the bias of agreement.'11 The Tory government, ambivalent about some and hostile to other elements in the newly adopted Canadian constitution, had no choice but to confront the many issues and concerns that had appeared on the political agenda during this critical phase of the nation's history. Although the new federal leaders had no direct experience with the conflicts of the 19705 and 19805, they were highly optimistic that they would be able to foster more harmonious federal-provincial relations; they were also committed to a program that would 'convince the Quebec National Assembly to give its consent to the new Canadian constitution.'12 The Mulroney government's commitment to constitutional change to accommodate the demands of Quebec was part of its overall conception of co-operative federalism. 'It was difficult to imagine a clearer rejection of the Trudeau model, or a more explicit statement of politics as elite accommodation,' Simeon and Robinson noted. The collaborative ap-

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proach was intended to put an end to federal unilateralism and to foster federal-provincial policy co-ordination. Besides committing the federal government to consultations with the provinces, the Mulroney government also signalled its willingness to reduce the scope of federal intervention and to stop federal incursions into provincial jurisdiction. Mulroney emphasized the need for his government to avoid duplicating provincial programs or launching programs that were 'incompatible with provincial programs.'13 The Tory government's approach to federal-provincial relations was bound to have profound effects on the oil sector - it was in the field of oil, after all, that the Liberals had launched the most interventionist programs, and that the most blatant federal incursions into provincial jurisdiction had taken place. For their part, the provinces possessed significant constitutional powers to offset federal interventions, and they had already shown a readiness to use them. In general terms, the Mulroney government embraced the view of the industry and the producing provinces that Ottawa had been the main culprit. Its approach was 'anticipatory' - highly sensitive to provincial demands for change, and interested in accommodating those demands as it fashioned its policy. Pressing economic problems heightened the perceived need for federal-provincial reconciliation. As Milne points out: 'It was in the field of energy policy that the Mulroney government made its ideas about the mutually supporting goals of co-operative federalism and economic renewal most clear. It did so with dramatic new initiatives that reversed the direction of federal-provincial politics in this sector, diminished intergovernmental rivalry and competition, and cleared the way for private sector reinvestment.'14 In its first two to three years in power, the Conservative government negotiated a number of federal-provincial agreements with regions and individual provinces. In February 1985 the Conservatives signed the Atlantic Accord with Newfoundland; in March they agreed on a Western Accord with Manitoba, Saskatchewan, and Alberta; and in October they passed a natural gas agreement. According to Milne: Each of these measures reflected the private sector's impatience with federalprovincial obstacles to economic development and the Tory government's sense that no federal concessions were too great to see these obstacles removed and the economy started again. At bottom they rested on a belief in the ultimate compatibility of federal and provincial objectives if these were pursued with mutual goodwill and along mutually profitable functional relationships.15

206 Oil, the State, and Federalism On 26 August 1986, the Tories took matters another step forward with the Canada-Nova Scotia Offshore Petroleum Resources Accord. Finally, in September 1988, Ottawa signed the Northern Accord; this accord involved 'enabling agreements' with the two territorial governments aimed at (a) devolving the responsibility for managing the oil and gas resources north of 60 degrees to the territorial governments, and (b) establishing revenue-sharing regimes. The Atlantic Accord was based on an agreement-in-principle that Newfoundland's premier, Brian Peckford, had reached with Mulroney on 14 June 1984, while the latter was leader of the opposition. The accord embraced the notion of joint management of the pace and mode of development, subject to self-sufficiency requirements. Further, the federal government accepted the principle of provincial taxing power of offshore resources 'as if the resources were on land.'17 The accord defined national self-sufficiency in oil in a different and more restrictive manner than had been the case during the Liberal regime: National self-sufficiency is achieved in any calendar year when the volume of suitable crude oil and equivalent substances available from domestic Canadian hydrocarbon productive capacity is adequate to supply the feedstock requirements of Canadian refineries necessary to satisfy the refined product requirements of Canada. Security of supply is realized when the achievement of self-sufficiency as defined above is anticipated in each of the next ensuing five calendar years, giving full consideration to anticipated additions to productive capacity, and anticipated adjustments to refining capacity.1

This definition of self-sufficiency was fully compatible with a continentalist system of oil and gas supply and trade. An increasing portion of Canadian domestic oil production would be heavy oil and tar sands oil, most of which could not be used by Canadian refineries and did not qualify as suitable crude. These hydrocarbon sources would therefore not be figured into the equation.19 Thus, there was no direct relationship between this notion of self-sufficiency and actual Canadian oil production. As well, the United States exported large quantities of refined product to Canada. This definition was therefore more directly linked to the needs of industry and the provinces than to any overall conception of national

Oil in a Changing International Context 207 needs. Federalist considerations as to which level of government would have ultimate say in management decisions took closely into account the need to ensure an open, continental energy flow. The Atlantic Accord found its parallel in the Canada-Nova Scotia Offshore Petroleum Resources Accord, which applied an almost identical definition of self-sufficiency. The definition of self-sufficiency, as presented in the two accords, was sufficiently flexible that exports could take place without any action being required to replace those exports with Canadian products. The American exports to Canada reduced the demand for Canadian crude to Canadian refineries. Thus, even on the downstream side this definition of self-sufficiency did not require that a direct link between aggregate Canadian product demand and Canadian refining capacity be established. Both accords also provided for a specific federal-provincial procedure for establishing whether security of supply had been achieved in a given year. The agreements stipulated that this issue was to be decided by a three-member arbitration panel, which was to consist of one federal and one provincial official and a third member to be appointed by the two. If the parties could not come to an agreement, the Chief Justice of Newfoundland or Nova Scotia, respectively, would appoint the member.20 At least during the first years of the Tory government's tenure, federal energy policy was driven mainly by the need to establish a new federalprovincial consensus and working relationship. To some extent this was a matter of governments responding to societal needs and economic imperatives, as Milne suggests. This response was possible because the governmental actors were in agreement on the need for a common and co-ordinated plan. But to some extent as well, state-society relations were reponding to federal-provincial relations themselves, especially as influenced by cases of intergovernmental strife. Tory energy policy was profoundly influenced by that party's recognition that the petroleum industry was vitally important to Alberta. To the Tories, this recognition was not simply a matter of political expedience, nor was it based only on notions of a more decentralized federation. The Tories in Ottawa were seeking to eradicate Alberta's image of Ottawa as an expansionist and self-aggrandizing entity. This process of reconciliation through federal reduction and dismantling was facilitated by an important change in Alberta's approach to Ottawa. As Simeon and Robinson put it: With its own resource base now weakened, it was more important for the West to

208 Oil, the State, and Federalism establish a claim for assistance from Ottawa. The focus shifted from independence from the centre to the need for influence over it. It is thus not surprising that support for an elected Senate which would institutionalize such influence grew rapidly and that the Alberta government, hostile to intrastate federalism as a threat to provincial freedom of action in the 19705, now joined the movement for a 'Triple E' (Elected, Equal, Effective) Senate.21

The growing provincial interest in wielding direct influence over decisions at the political centre was most clearly evident in the pressure for Senate reform. This meant that constitutional reform continued to be part of the political agenda. The altered provincialist position on constitutional reform affected the potential for linkage between substantive energy policy concerns and the jurisdictional concerns of governmental actors. The Western provinces' embrace of intrastate federalism was premised on an increased provincial say in policy formulation at Ottawa, in line with what Cairns has termed the provincialist intrastate federalism version.22 This notion of co-operative federalism - which highlighted the critical role of first ministers and the apparatus of intergovernmental relations in policy formulation - was a highly elitist version of federalism. Enhanced provincial influence at the centre of the policy process would enable provincial leaders to promote their interests during the process of federal policy formulation; this had the potential to reduce the need for jurisdictional defence through intrajurisdictional co-ordination and comprehensive policy formulation at the provincial level. Increased provincial influence in Ottawa would therefore help to decouple provincial demands relating to energy policy from provincial jurisdictional concerns. This would give provinces more freedom to develop their own policy stances in relation to the oil industry. The adoption of a more consultative and co-operative approach by the Conservative government had several important implications. In the energy sector, as well as in other sectors of the economy, it ensured that the concerns that mattered most in the intergovernmental arena would get attention. While Conservative policy clearly favoured producing interests, the producing provinces were more concerned with decentralization and federal deregulation than with privatization, for instance. One of the main concerns of the producing and potentially producing provinces was to make sure there would never be another NEP; this meant eliminating a host of federal policy measures that had been intended to promote the development of the Canada Lands and render Canada less dependent on OPEC oil.

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Security of Supply For Jake Epp, security of supply depended on establishing 'effective planning to deal with any emergencies that may arise - a form of insurance policy.' Epp added: 'According to the market view, which I share, Canada's present position as a net oil exporter and our ample supplies of other energy sources give us many choices and reduce our vulnerability to any physical supply disruptions that might occur.'23 Under the Conservatives, the notion of security of supply was no longer related primarily to oil, as had been the case under the Liberals; instead, it related to the larger issue of interfuel substitution and economic flexibility. Canada, given its abundant energy resources, could achieve security of supply by mobilizing all types of energy sources so as not to rely mainly on oil. The status of Canadian oil reserves in the mid-igSos was not viewed as a major cause for concern. This was partly because of the costly efforts past governments had made to prove up additional reserves that could be developed if prices rose and the supply situation worsened. The Conservative government's emphasis on flexibility of fuel sources, which amounted to a criticism of the Liberal government's strategy, was based on the realization that the Liberal notion of security of supply had focused too narrowly on oil. Further, the new strategy represented a sharp departure from the NEP, the goal of which had been to shelter Canada from international oil price developments through the setting of a 'made in Canada' price of oil. The new strategy recognized that a madein-Canada price could operate only as long as international oil prices were high and on the increase, because a rising proportion of Canadian crude oil production would come from high-cost sources. Once the international oil price fell below the cost of domestic supplies, Canada would be left with energy prices higher than those of its competitors. Oil selfsufficiency would then prove to be a competitive burden to Canada, rather than a competitive advantage. For Canada to benefit from an unstable oil market and its own large resource endowment, the Conservatives argued, considerable flexibility would have to be developed with regard to fuel sources. But the ultimate success of such a strategy would hinge on the ability to shift to sources other than oil - at least in the long term - because almost all of Canada's remaining reserves of oil were of the high-cost type. There were obvious political benefits associated with the Conservative strategy. The Conservatives couched the notion of security of supply within the

21O Oil, the State, and Federalism framework of promoting a range of fuel sources - a rhetorical stance that was intended to alleviate the concerns of consumers as well as those of producers, and thereby reduce the strong regional tensions that had emerged between oil-producing and oil-consuming provinces. Further, the Conservatives' emphasis on flexibility of fuel sources enabled them to argue that security of supply was not incompatible with oil exports, even though Canada was still dependent on oil imports to the eastern and central provinces.24 A more market-based federal energy policy was popular with the Western provinces, which stood to benefit from oil and gas exports. The increased importance of natural gas also contributed to the change in focus away from oil toward a wider range of fuel sources.20 Canada's reserves-to-production ratio of natural gas was approximately thirty years; for the United States, the figure was only about ten years. The United States, with its rapidly declining natural gas supplies, became a large natural gas market for Canada. Natural gas also came to figure as a more important revenue source for the oil companies; this further increased the pressure for gas exports. Thus, the heightened importance of natural gas as a fuel source, and the greater U.S. interest in and reliance on Canadian gas supplies, would benefit Canadian producers over Canadian consumers and help change the concerns of policy-makers from security of supply to market access. As their concern with market access increased, the Conservatives downplayed the importance of a single Canadian market for oil and gas. The manner in which key concepts such as self-sufficiency and security of supply were defined in the agreements, and the vital provincial role in the definition and application of those concepts, demonstrate the degree to which the Conservatives embraced joint management and provincial co-determination in energy matters. The net result was that Ottawa was heavily constrained from developing a consistent and coherent Canada-wide definition of security of oil supply that could then be used to justify federal intervention. The strengthened North-South orientation only reinforced this approach. The accords provided for joint federal-provincial determination of the pace and mode of exploration and development. The provision granting Ottawa final say until selfsufficiency was reached would not prevent Newfoundland, for instance, from developing a province-first strategy. The newly established CanadaNewfoundland Offshore Petroleum Board - consisting of seven members, three of them appointed by the federal government and the fourth, the chair, jointly appointed by both levels of government - was granted

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wide powers, which might well depoliticize resource management. Even for fundamental decisions - that is, decisions for which the board did not have final authority - the close overlap of powers, and the emphasis on intergovernmental co-operation in the accord, made it unlikely that the decisions of the board would be overruled. Clause 25 of the Atlantic Accord stated: 'Where a fundamental decision is made by the Board, notice of that decision will be transmitted to both governments before the decision becomes final. Both governments will then consider the decision and advise the Board whether its decision may stand and be put into effect or whether one or both of the governments disagree with the decision.'16 While the federal government had final say, the accord included a number of provisions that strongly discouraged unilateral moves by Ottawa (or St John's). In pursuing its own position, Ottawa could not help but be fully aware of the position of both the other government and the board. Also, if Ottawa wanted to veto the board's decision, it would have to do so openly; and in doing so, it would be politicizing the issue at hand and overruling at least one of its own appointees. Clearly no government would want to do this unless absolutely necessary. On balance, the accords depoliticized resource management in Canada by leaving most of the decisions to a team of federally and provincially appointed officials. In a political setting congenial to provincial rights, this created strong political and formal obstacles to federal managerial predominance. The Conservatives, then, essentially abandoned Liberal notions of selfsufficiency and did not seek to use security of supply to justify federal intervention. On the contrary, they reduced the scope for direct federal intervention. Still, although they argued strongly that the market had to be allowed to work, they did not refrain entirely from intervening in it. They took a wide range of measures to help oil companies search for oil and also encouraged the development of synthetic fuel sources; in these ways, they went beyond simple reliance on market forces. As a general observation, the more dependent on oil and gas a given country is, the more effort and resources are required to introduce alternative fuel sources. This means that a strategy aimed at letting the market work will not be enough to ensure interfiiel flexibility. This is largely because of the 'structural bias' in favour of oil, as evidenced in the established infrastructures of road systems, gas stations, oil-fuelled powergenerating plants, automotive production plants, and other parts of society that have come to depend on oil.

212

Oil, the State, and Federalism

The measures introduced by the Mulroney Conservatives do not appear to have been motivated by a coherent philosophy or policy program. As many critics have pointed out, the federal government seemed to adopt measures for interfuel substitution on an ad hoc basis rather than on the basis of a coherent program. Certainly, an interventionist approach to interfuel substitution must be aimed at altering structural barriers to substitution as well as actively fostering substitution through public means. In its degree of internal consistency, the Conservative program differed from the NEP, which was internally consistent in the sense that its objectives were tightly linked so as to foster intrajurisdictional policy co-ordination. The Conservatives did not present a coherent federal energy policy; instead, they based their energy policy on a joint federal-provincial approach -joint in the sense of multiple federal-provincial bilateralisms - in which there was considerable room for each province to develop its own set of resource management strategies. Thus, the Conservative energy program contained within it tensions between a market-based stance that could serve as a homogenizing influence on the one hand, and a more clearly province-based strategy that could generate different strategies from one province to the next on the other.27 The Conservative government, in response to provincial pressures, committed itself to a policy that did not favour or discriminate against any particular region in the way that, for instance, Liberal policy had favoured the Canada Lands. The Western Accord stated: 'The Government of Canada agrees that tax-based incentives designed to stimulate investment in Canada's oil and gas industry shall be of general application to the industry without discrimination as to the location of the activities in question or as to ownership and control.'2 The same accord contained a range of measures aimed at altering the administered pricing and tax system associated with the NEP. The accord set out to deregulate the pricing and marketing of oil; it also eliminated a large number of the measures associated with the NEP, such as the Petroleum Compensation Charge (PCC), the Controlled Prices on Conventional Old Oil (Co-op), the New Oil Reference Price (NORP), the Oil Import Compensation Program (OICP), and the Crude Oil Export Charge. The accord relaxed the rules guiding crude oil export licences. It also contained a clause to phase out the Petroleum Incentives Program (PIP) by 31 March 1986, thereby eliminating one important means by which the NEP had favoured the Canada Lands. Thus, the Western Accord did away with most of the NEP's measures, including the strong government-sponsored Canada Lands thrust through the PIP and Petro-Canada. Still, the Conservative government was willing to provide federal funds

Oil in a Changing International Context 213 to support oil and gas development, a point that maintained continuity with the Liberal administration and meant that at times different regions could indeed be favoured and energy development subsidized. For instance, in October 1985 Ottawa introduced a range of new measures to stimulate exploration and development of the geographical frontiers. The new measures relied on the tax system to provide exploration incentives on the geographical frontier, 'tying expenditure and revenue streams from specific projects for the purposes of taxation.'29 In effect, as Helliwell and his co-authors pointed out a few years later, the Tories were 'continuing the trend of having the public sector assume a large proportion of the risks associated with frontier oil and gas activities.' The system could also 'prove costly to the public purse, ... [increasing] the pressure for concessions by proponents of projects exhibiting questionable economic viability ex ante, in order to allow them to proceed with development and production and thus realize the full value of the benefits 'earned' by the exploration activities. If the federal government were to yield to such pressures, an even greater proportion of the risks associated with oil and gas megaprojects on the geographical frontier would end up being borne by the public.'30 Indeed, the Hibernia Statement of Principles in 1988 revealed that Ottawa was willing to provide very generous concessions to help start up frontier production, even while stressing the need to reduce government spending in order to lower the federal deficit. Ottawa would provide up to $1.04 billion in grants, and as much as $1.66 billion in subsidized financing, and $106 million would accrue from the federal and Newfoundland governments. Provided oil prices remained low, interest assistance and additional loan guarantees for temporary financing would be provided. Finally, the Newfoundland government agreed to exempt capital spending from the provincial retail sales tax and to reduce sales tax payable on operating costs.31 Thus the Conservative government continued the long-standing tradition of favouring frontier development through public infusions of capital and through tax rebates to oil companies.32 In effect, the Mulroney Conservatives were continuing to pursue a critical part of Petro-Canada's mandate - to develop the geographical frontiers - but with other means and in a far less systematic fashion. After the dismantling of the NEP, the federal government was no longer willing or able to affect provincial royalty systems through the petroleum and gas revenue tax (PGRT); this meant that the provinces could introduce their own royalty relief and tax breaks to stimulate oil and gas development in the areas under provincial jurisdiction. But federal subsidies had long been an important instrument for the

214 Oil, the State, and Federalism federal government to spur regional development. Later on, the Conservatives would fight successfully to protect this instrument during the free trade negotiations with the United States. Given that subsidies by their very nature interfere with the workings of the market, one can only conclude that the Conservatives were not completely willing to set the market above everything else. Thus, as is often noted, the reintroduction of the primacy of market forces may represent a reorientation or restructuring of the state's intervention rather than a complete halt to that intervention. A major redesign of the means of intervention does not necessarily reflect a major change in the direction of policy. The Conservatives defined self-sufficiency in a way that made it subject to market forces, federal-provincial agreement, and a continentalist rather than a nationalist approach to oil and gas supply. The government's commitment to security of supply was mainly symbolic; it did, however, serve to undermine the political rationale for the neomercantilist strategy that had led to the establishment of Petro-Canada. The elimination of the interventionist framework associated with the NEP also in effect removed the supportive network from around Petro-Canada, forcing the corporation to adapt to an even greater degree to a competitive operating environment. Canadianization and Revenue-Sharing

The Conservative government expressed support for the goal of Canadianization, which during the Liberal regime had served as the most powerful justification for federal intervention; but again, its conception of that goal differed from that of the Liberal government. The Liberals had seen security of oil supply as closely linked to Canadianization; the Conservatives did not. In its approach to private-sector Canadian ownership and control of oil and gas companies, the Conservative government did more than simply pay lip service to Canadianization. Both Canadian ownership and control increased after 1984. Canadian ownership rose from 40.4 per cent in 1984 to a peak of 48.2 per cent in 1985, and then remained around 45 per cent for the rest of the decade. Canadian control rose from 32 per cent in 1984 to a peak of 42.7 per cent in 1985, before falling to 38 per cent by iggi.33 Thus, Canadian ownership and control grew during the first year of the Conservative government's tenure, but afterwards levelled off. By far the most important single reason for the initial increase was the sale of Gulf

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Canada to Olympia & York and to Petro-Canada in 1985.^ The Conservatives were divided on the Gulf take-over, in particular with regard to what role Petro-Canada was to play in the process. Nationalists within the Conservative Party - Pat Carney, for instance - wanted to retain Petro-Canada in the public sector. The Gulf acquisition, by bolstering Petro-Canada's downstream role, helped Petro-Canada weather the crisis caused by the collapse in oil prices that occurred in 1986.^° In that light, it was possible to view the Gulf take-over as a means of preparing the corporation for privatization by making it more attractive to future buyers. But such a move had its risks; for example, it might alienate the proponents of privatization inside the party. Both proponents and opponents of privatization could criticize the government for being inconsistent. The Conservatives did not, then, entirely abandon the Liberal government's commitment to Canadianization with regard to private-sector Canadian ownership. They retained the least offensive of the Liberals' Canadianization measures. However, they abolished the most potent: namely, the Canadian Ownership Account, the 25 per cent Crown share, and the PIP. These actions reduced both Ottawa's role and that of smaller, Canadian-owned companies. In 1986, G. Toner predicted that the elimination of the PIP and the reinstatement of tax-based incentive systems would make it harder for the smaller Canadian oil companies to operate in the frontiers and thus could end up favouring the large oil MNCs.36 With regard to Canadianization, the most visible difference between Liberal and Tory policy related to the role of public ownership. Besides abolishing the 25 per cent Crown share and removing the Canadian Ownership Charge, the government altered the mandate of PetroCanada and cut off the public infusions of capital. However, the privatization legislation also restricted foreign ownership of Petro-Canada shares to 25 per cent. Ottawa's ability to initiate and carry out Canadianization measures was also affected by factors relating to federalism, most notably by the federalprovincial accords that were struck. The Western Accord contained no reference to Canadianization; instead, it stated: 'The Government of Canada agrees that tax-based incentives designed to stimulate investment in Canada's oil and gas industry shall be of general application to the industry without discrimination as to the location of the activities in question or as to ownership and control.'37 This agreement signalled a significantly reduced federal (and provincial) commitment to Canadianization. It also

216 Oil, the State, and Federalism had the potential to reverse the trend toward increased Canadian ownership and control, because most Canadian-owned companies were small and could not effectively utilize tax breaks to finance comprehensive resource-development projects. The federal-provincial agreements on the East Coast did not include a strong commitment to Canadianization. The Canada Petroleum Resources Act (CPRA), which formed the new federal legislative framework guiding rights issuance and land management in the Canada Lands, represented a significantly watered down commitment to Canadian ownership at the production stage. Further, this legislation did away with the discriminatory system in the NEP, which enabled the federal government to favour Canadian goods and services. Thus, while the Atlantic and Canada-Nova Scotia Accords stipulated that Ottawa could make decisions regarding Canadian ownership on its own, in the legislation governing most of the Canada Lands (some settled Aboriginal claim areas were exempted) the federal government left itself little room for pursuing a coherent Canadianization program.3 This applied to all three aspects of Canadianization identified here - namely, private-sector Canadian ownership and control, public-sector Canadian ownership and control,39 and Canadian spin-offs. The spirit of the 'equal treatment provision' in the Western Accord also informed the federal government's approach to foreign investment. The Conservatives abolished the FIRA, set up a new agency called Investment Canada, and liberalized the rules guiding foreign investment. With regard to government-industry redistribution, Ottawa's program to dismantle the NEP was highly favourable to the oil industry, especially to the oil MNCs. Toner noted that the Western Accord, for instance, could end up costing the federal treasury up to $9 billion over a five-year period.40 The Liberals had emphasized 'fairness' of revenue-sharing in the NEP; Conservative energy policy, on the other hand, contained no stipulations regarding the need for federal-provincial or interregional redistribution. Evidence of this is the broad-based program of deregulation of oil prices and altered fiscal principles found in the Western Accord. Further, the Atlantic and Canada-Nova Scotia Accords stated that the provinces would receive all royalties and taxes as if the resources were on land. Clause 36 of the Atlantic Accord stated, 'The principles of revenue sharing between Canada and Newfoundland with respect to revenues from petroleumrelated activities in the offshore area shall be the same as those which exist between the Government of Canada and other hydrocarbon producing provinces with respect to revenues from petroleum-related activi-

Oil in a Changing International Context 217 ties on land.' The same agreement stated that even when offshore royalties were flowing to the province of Newfoundland, that province would not lose all of its equalization payments.41 Federalism, Energy Accords, and the Canada Lands

A number of factors, such as pressure from the Western provinces which were bent on eliminating the NEP and intent on achieving deregulation in the oil sector - coinciding with oil market changes, oil industry pressures, closer Canada-U.S. ties, and Tory deregulation, resulted in the establishing of a new and less interventionist system of rights issuance and land management at the federal level. This system placed constraints on the scope and magnitude of intervention available to the provinces. Ottawa accepted a joint federal-provincial approach to resource development in the Canada Lands, though it was an approach with a strong province-oriented bias. As Simeon and Robinson note with regard to the two offshore accords: 'There could be no clearer indication of Mulroney's vision of renewed federalism; henceforth, offshore oil development would be developed according to provincial priorities.'42 During the Liberal regime, the provinces on the East Coast - most notably Newfoundland - had adopted the highly interventionist North Sea model of resource management. The Conservative government's embrace of a more clearly province-based regime in the post-NEP period raised the possibility that federal retrenchment, rather than simply reintroducing the market and eliminating regional differences, might enable the provinces to retain a number of different resource management systems that differed considerably in scope and magnitude of provincial intervention. The most important difference would then be between the more market-oriented approach of the Western provinces and the more interventionist approach of the East Coast provinces. The provincialist interventionist orientation, however, was somewhat tempered by a more pronounced market-based orientation to rights issuance and land management at the federal level; this served to make the resource management regimes on the East Coast much more similar to those in the Western provinces. Ottawa's main instrument, Bill C-92, which became the Canada Petroleum Resources Act (CPRA), which applied to the entire Canada Lands, provided a means of binding the different accords together into a more coherent and uniform framework. If federal-provincial harmony was going to prevail over time, differen-

2l8

Oil, the State, and Federalism

tial treatment of the industry in various parts of the country would have to be prevented. Also, there was strong pressure for harmonization of federal and provincial resource management systems. The industry, aided by the producing provinces, and faced with an oil market in which prices were declining, pressed hard for harmonization. This would be easiest to carry out through deregulation and state retrenchment, at both levels. The Atlantic Accord and the Canada-Nova Scotia Accord (and, later, the Northern Accord of 1988) introduced new federal-provincial systems based on the principle of shared management. These accords were political rather than constitutional settlements. The Canada-Nova Scotia Offshore Petroleum Resources Accord stated: 'This political settlement of the issues between the Parties has been reached without prejudice to and nothwithstanding their respective legal positions. It is the intention of the Parties that this settlement survive any decision of a court with respect to ownership or jurisdiction over the Offshore Area.'43 The two federal-provincial accords went a long way toward satisfying Newfoundland's claims for jurisdiction of the offshore, in spite of the Supreme Court ruling in 1984 that granted offshore jurisdiction to the federal government. For political reasons, Ottawa chose not to exercise itsjurisdictional rights. The strategy of the producing provinces and potentially producing provinces post-NEP was to tie Ottawa down by establishing joint-management regimes. In time, a number of federal-provincial joint-management boards, such as the Canada-Newfoundland Offshore Petroleum Board (CNOPB) and the Canada-Nova Scotia Offshore Petroleum Resources Board (CNSOPB), would contribute to the management of the Canada Lands. The devolution of powers to the federal-provincial boards may have fostered political stability, but in administrative terms, it made management of the lands more complex. The Federal System of Rights Issuance and Land Management

The parliamentary secretary to the Minister of State (Mines), summarized the Conservative government's intentions with respect to Bill C-92: 'The Canadian Petroleum Resources Bill is entirely consistent with our approach to energy. It is market-responsive, and that is important. It is internationally competitive, and that is very important. It is free of excessive Government intervention, and that is something for which we fought. It is sensitive to regional interests.'44 The two most important changes the Conservatives made to the Liberal

Oil in a Changing International Context 219 regime related to decentralization and increased reliance on market forces. Besides introducing a number of important legislative changes relating to the specific terms under which the industry was to operate, the CPRA also provided a stronger legislative foundation for protecting the contractual rights of the industry. The new rights-allocation structure in the CPRA was based on a modified three-step allocation process in which success in the first stage basically ensured future success. This clearly set the CPRA apart from the NEP's Bill C-48 (the Canada Oil and Gas Act, COGA), in that it reduced an important aspect of the federal power to regulate industry access. A new exploration licence was introduced to replace the exploration agreement in Bill C-48. Section 22 of the CPRA stated: An exploration licence confers, with respect to the frontier lands to which the licence applies, (a) the right to explore for, and the exclusive right to drill and test for, petroleum; (b) the exclusive right to develop those frontier lands in order to produce petroleum; and (c) the exclusive right, subject to compliance with the other provisions of this Act, to obtain a production licence.45

This constituted an important reduction in ministerial power and discretion, since the minister no longer had the right to issue exploration agreements without prior notice. It also gave the industry a much greater say in the rate of exploration. The provision in the Liberal regime had referred directly to 'the 'the need need totoact actexpeditiously.'46 expeditiously.'4 A.R. A.R. Thompson Thompson referred directly characterized the legislative change as follows: [A] shift in attitude away from ministerial discretion to a clearly defined process for the acquisition of rights and conduct of petroleum operations on Canada lands ... Under the new Act, a competitive bidding system will be fostered and industry will be provided with the necessary information upon which to tailor their proposals. A clear example of this shift in attitude may be found in the provisions which require any terms and conditions of licences not specified in the Act to be based upon the agreement of the interest holder.47

A successful explorer was granted the right to obtain a 'significant discovery' licence, which allowed the operator to continue exploration in the area for an indefinite time. If the economics and technology justified commercial production, a production licence might be issued at that time. The production licence conferred the exclusive right to produce oil and gas from that area for as long as it was capable of commercial produc-

22O Oil, the State, and Federalism don - there would be no need to seek renewal of the licence.48 Also, within the framework of the exploration licence, operators were allowed to drill as long as they wished under the significant discovery licence. The legislation retained the provision for direct rights issuance, but its role was so circumscribed that it would have little or no effect on the industry. Thus, the new act eliminated one of the provisions in the COGA that was considered most detrimental to the competitive bidding process. The CPRA retained the 50 per cent Canadian ownership provision, but only at the development stage and only for post-1982 discoveries. This was a significant concession, in particular because it altered the means by which the minister could ensure that the companies would retain the 50 per cent Canadian ownership level. Under Bill C~48, when the COR rate of one or more participants dropped below 50 per cent, a share in the production licence commensurate with the difference between the actual COR rate, as determined by the minister, and 50 per cent would accrue to the Crown. The federal share would be taken equally from all the participants, including those with a 100 per cent COR rate. This share could then be sold by public tender. Bill C-gs eliminated this provision, which meant that Ottawa could no longer interfere with contracts among private-sector parties. With respect to the Crown share, Bill C-92 eliminated the 25 per cent Crown share concept, which had been such a contentious issue in the NEP. This change was consistent with Petro-Canada's new mandate: it was now a profit-based enterprise rather than a policy instrument. The 50 per cent COR requirement was also far less offensive to the industry than had been the 25 per cent Crown share provision. For one thing, the COR requirement did not affect the resource base of the companies because it involved shares, not oil and gas resources. Most of the companies had obtained a COR rate that was sufficiently high that they were able to continue operating in Canada. The abolition of the Crown share concept might make it more difficult for companies applying for a production licence to obtain a 50 per cent COR rate, and this might lead to more pressure on the relevant land managers to exercise the COR requirement leniently. The termination of the 25 per cent Crown share also meant that Newfoundland's objective of state participation, as specified in the 1977 provincial regulations, was no longer available. House noted: 'The 1977 Newfoundland regulations provided for the Newfoundland Petroleum Board to take "an undivided 40 percent interest" in every lease. This participation was to provide both a major source of revenue and, more

Oil in a Changing International Context 221 importantly, a direct say by the province of Newfoundland through 40 percent representation "on any management or operating committee relating to the lease area."'49 The CPRA worked against Newfoundland's objective of direct control over the rate of development, by eliminating two vital aspects of the North Sea Model - namely, Crown share and voting rights. The Newfoundland government found that after the federal Conservatives introduced the CPRA - which was after the Atlantic Accord had been signed provision 40 of the Accord, which related to the Crown share, in effect granted Newfoundland a 50 per cent share of nothing.50 This was hardly a surprise to the province: it had known as early as 1985 that the Crown share concept was under review and could be abolished. At no point did Premier Peckford make this an issue. L. Barry, who left Peckford's government in a row over energy policy, noted: Mr. Mulroney accepted the arguments of the oil companies, who had complained that this legislation [the 25 per cent Crown share] was a change in the rules after the game had started. He ignored, however, the fact that the oil companies had started exploration off Newfoundland and Labrador under permits of the Newfoundland government also, and that those permits were subject to regulations granting the Newfoundland government the right to claim up to 40 per cent of any discovery. The companies, therefore, could not convincingly say that the giving up of 25 per cent of a discovery was a term they were unprepared for off Newfoundland. The original Newfoundland regulations recognized that the maximum revenue would be available to Newfoundland only if the right to participation in a discovery was provided for, as well as the rights to royalties and taxes. Mr. Mulroney's commitment to the oil companies will ultimately result in less revenue being available for sharing with the province.5'

Clearly, this important federal concession to the industry resulted in Newfoundland having less scope for future action. The removal of the Crown share would clearly restrict the province's ability to set its imprint on future development, because when that share was removed, so was the opportunity for the province to vote on operating committees - a provision that would have given the province a direct say, through its Crown corporation, in the deliberations of the private holders of production licences. But the province's acceptance of the removal of the Crown share was probably a necessary concession for gaining other provisions in the Atlantic Accord - in particular the provisions relating to the province's right to collect royalties as if the resource were on land, and to its

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right to determine the mode of development (though not the rate of development). In terms of the control over industry operations provided for in Bill C92, the legislation introduced the so-called single-criterion bid: 'Under this Bill, the Government of Canada will introduce a simple, competitive bidding system for exploration rights to prospective lands based on a single-criterion, one in which the best bid wins. This will ensure the maximum return to Canadians as resource owners. It will ensure fair treatment of the companies bidding for exploration rights.'52 The legislation also set out clearly what a call for bids would specify. The introduction of the single-criterion bid eliminated an important discretionary element and would almost inadvertently force more conformity among the various administrators than had been the case in the old regime. When one criterion has been established in one area, industry players can remind other managers of the terms set out, and pressure the relevant managers to apply uniform standards.53 In a complex bidding system in which many criteria are involved - as was the case in Bill C-48 and in which the government can negotiate further on the terms after the bids have been submitted, it is clearly much more difficult for industry actors to pressure administrators to accept uniform standards for each bid. Somewhat ironically, the old regime allowed for considerably more regional sensitivity, because the act empowered the particular minister to establish almost any single or composite set of criteria desired. Within the framework of the CPRA, however, the single-bid process would force administrators to trade one objective off against another. The situation was further confounded by the fact that under the new regulations, ministers were more restricted in their ability to reject bids. Thus, especially in the exploration stage, this new provision would limit the ability of native groups and provinces to enforce their priorities on the industry. In fact, this provision was bound to exaggerate the dilemma facing native groups - of how to benefit from development while at the same time ensuring adequate protection of the renewable resources that were so crucial to their lives as a whole.54 In terms of spin-offs or industrial benefits from oil and gas activities, applicants for a production licence had to submit a development plan that would include a Canadian benefits plan 'for the employment of Canadians and for providing Canadian manufacturers, consultants, contractors and service companies with a full and fair opportunity to participate on a competitive basis in the supply of goods and services used in any proposed work or activity referred to in the benefits plan.'55 The act thus

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specified provisions for Canadian sourcing more clearly than Bill C-48 had done. These provisions, however, stated explicitly that Canadian bids had to be competitive - a provision not included in the NEP's Bill C-48. The new legislative framework clearly provided provincial administrators with more say in the administration of the regime, because the bill formed part of a comprehensive system based on a new division of responsibility between the two levels of government. At the same time, the fact that Bill C-92 was much less interventionist than Bill C-48 automatically reduced the scope of provincial intervention available and served to harmonize provincial resource management systems in all parts of Canada. Bill C-Q2: Responses to the Bill

Although it had triumphantly announced the Atlantic Accord as a victory for the province, the Newfoundland government was silent about the CPRA. Clearly, the bill compromised its objective of controlling the rate of development. The loss of the Crown share could potentially provide Newfoundland with less future revenue. However, Newfoundland did obtain control over the spin-offs of development or the sourcing requirements. But even that control was more circumscribed in Bill C-92, because it required Canadian goods and services to be competitive. Finally, the single-bid criterion was bound to restrict the bidding options available. Industry reactions to Bill C-92 were quite favourable - not surprisingly, given that the industry had been consulted on the bill from very early on. The large actors were most enthusiastic. The bill reduced the amount of government intervention and clarified the conditions for awarding licences. IPAC and several Canadian independents were more sceptical about the bill than were the oil majors. Several independent Canadian oil companies complained that, largely because of the new royalty regime, they were having to terminate In terminate their theiractivities activitiesin in Canada's Canada'sEast EastCoast Coast areas.56 areas.5 In choosing a tax-based incentive system over a grants-based system, the government was increasing entrance barriers to the oil and gas sector in the Canada Lands; this is because only the large, integrated oil companies would be able to extract the full benefits of the new system. In that sense, the new bill, although intended to free up the market, actually reduced competition among industry actors; only the large, integrated majors had the financial capacity to operate in the high-risk Canada Lands. If there

224 Oil> the State, and Federalism was going to be adequate market competition, the government would have to intervene. The reaction of the First Nations to Bill C-92 was generally negative. The native groups involved in land claims negotiations resented both the content and the timing of the CPRA. Georges Erasmus, speaking for the Comprehensive Claims Coalition, proposed that 'all areas subject to aboriginal rights negotiation be exempt from application of this bill and that the moratorium on alienation of lands be continued in order to protect our lands and provide an incentive for all parties to resolve quickly our outstanding claims.'57 Ottawa, in the process of introducing legislation that ensured the oil industry a large number of rights, had built an alliance with the oil industry that native groups would find difficult to break or bypass during their own negotiations with the government. The native groups also resented the abolition of the Crown share. The Tungavik Federation of Nunavut (TFN) noted: When the federal government first instituted the Crown share there was, arguably, an element of expropriation involved but only with respect to those interests held under the old regulations which were 'rolled-over' to exploration agreements under the Canada Oil and Gas Act (ss.6l-72). However, there is clearly no expropriation involved with respect to new rights issued under that Act. The Crown share is simply part of the cost of doing business on Canada Lands. With respect to the 'rolled-over' interests however, the damage has already been done. Those companies affected have continued to do business on Canada Lands and arguably they have been adequately compensated by the 25% Crown share PIP grants. If the Crown share is retroactively abolished, not only does the federal government lose an important element of flexibility in its negotiations with aboriginal peoples as it was one means by which it could guarantee Inuit a share in northern development, but it also confers a windfall benefit on the oil and gas companies who have already received PIP grants, and who conducted their operations in light of the 25% reservation.5

CPRA would deprive the Tungavik Federation of Nunavut (TFN) as well as Newfoundland of the potential to benefit from direct participation - a potential that the 25 per cent Crown share embedded in the COGA had offered. By introducing a less interventionist regime, the CPRA would be thwarting provincial and territorial efforts to achieve greater control over the operations of the oil and gas industry. For the provinces, this issue was clear and unambiguous, given the Supreme Court's unanimous ruling in 1984 that affirmed federal jurisdiction over

Oil in a Changing International Context 225 offshore resources. Federal legislation could always establish the framework for resource management in the Atlantic provinces. For native groups, the issue was more complex, because these groups were demanding both land ownership (including ownership of the subsurface) and management powers. Clearly, in the areas where native groups had been granted ownership, they could establish their own regulations, irrespective of the federal government. It was inconceivable that this would cover many of the potential oil and gas finds, however, because that portion of the claim settlements had been by far the smallest. Bill C-g2 excluded only those native rights which had been established, not outstanding claims. This meant that in the areas still covered by federal legislation, the native groups would be deprived of the powers of the state that were inherent in Bill C-48. This weakened their bargaining powers in relation to the oil industry. The legislative change benefited the oil and gas industry more than any other single set of actors. The reduced intervention at one level of government had an obvious impact on the ability of the other level of government to intervene in industry operations. Further, the legislative change would also make it much more difficult for native groups involved in negotiations to ensure themselves of direct participation and control of industry operations. Native groups noted that in some specific instances, their interests were compatible with those of the oil and gas industry. As a general rule, however, their positions were incompatible or even contrary to each other, because the industry wanted as little government interference as possible, and as clear and consistent a regime as possible. The new legislation clearly established a new framework that was less interventionist than that in the NEP. The rights of industry were better secured under the new regime through the automatic granting of production licences, the new tenure rules, the abolition of the Crown share, and the establishing of a single-criterion bidding process. Also, the legislation reduced state intervention by greatly reducing the minister's discretionary powers. The specification of bidding criteria and their publication added a new measure of accountability to the regime. Negotiations between land managers and industry after bids were submitted would no longer take place. Still, although the new act differed considerably from the COGA introduced in the NEP, it did not represent a total retreat to the old, pre-NEP regime. For one thing, under the CPRA it was still possible for the government to vary the royalty provisions. Also, the new bill reaffirmed that Parliament held supremacy over the contractual rights of industry. Note here

226 Oil, the State, and Federalism finally that since it was accepted by both levels of government, the CPRA eliminated the dual system in the NEP, which had involved different federal and provincial regulations. The CPRA provided less scope than the COGA for provincial and native actions. It was also less flexible in terms of the bidding criteria available for land managers. It seems doubtful that the Atlantic Accord provided adequate compensation to, for instance, the province of Newfoundland for the loss of the Crown share. In terms of royalties, however, Newfoundland could now collect revenues as if the resource were on land, and thus would receive adequate compensation. This was possible because Ottawa was relinquishing its right to collect royalties as the proper owner of the resource. Ottawa granted this concession without immediately adjusting the equalization grants, which made it even more attractive to Newfoundland. Although the joint management accords were steps in the direction of a more regionally oriented resource-management regime in the Canada Lands, some of this momentum was arrested through the establishment of the new rights structure. The rights structure reflected the continued emphasis on traditional federal values associated with rapid resource development, over and above the interests of native groups. In terms of the role of the frontiers in Canada's future energy-supply picture, the new legislation placed the frontiers on a more equal footing with Canada's other petroleum regions. The Tory government's changes in land management in the Canada Lands were beneficial to the oil industry. This was reflected in the federal government's relationship to the industry. In more general terms, Ottawa's basic interventionist thrust shifted away from attempts to assert federal control over industry behaviour, and toward subsidization of energy megaprojects, without steps being taken to ensure control commensurate with this involvement. For the provinces and territories, the gravity of the loss of the Crown share provision would depend on a number of factors, such as the size and quality of the resource base, future oil and gas prices, the nature of the royalty regime, and the specific nature of the division of responsibility between the federal and provincial levels of government in the management of future resources. The elimination of the Crown share provision saved the provinces the cost of furnishing their respective state oil companies with the capital necessary to operate together with the large oil companies. The federal government placed the needs and objectives of the oil and

Oil in a Changing International Context 227 gas industry high on its list of priorities, together with the needs and interests of the Western provinces. The federal-provincial energy agreements weakened the scope of direct federal - and provincial - intervention in energy policy development in Canada, both upstream and downstream. The two federal opposition parties were understandably critical of a number of the Mulroney government's energy policies. Their main contention was that the Mulroney Conservatives had failed to develop a coherent energy strategy for Canada. The nature of the federal government's objectives made it difficult for Ottawa to develop a coherent and comprehensive oil policy framework. The absence of a clearly defined framework that explicitly stated what the government's current and future role would be - both with regard to ensuring the proper functioning of the market and with regard to intervention in case of market failure - clearly enhanced the Conservative government's control over the energy agenda. Oil and energy issues were all the more easily subsumed under general trade issues, and claims for government intervention in the energy field were more easily discarded as unnecessary. The Conservative government lacked a more clearly defined energy policy stance mainly because of the imperatives it faced in the intergovernmental setting. Ottawa tried to walk a fine line between a provincefirst approach - favouring provincial needs and slowing down the pace of development on the East Coast, or, in Western Canada, channelling Canadian oil and gas to the United States - and a market-based and less interventionist approach that might undercut province-first strategies. The federal government opted to combine the two approaches: it used the market to reduce the scope of intervention available to provincial governments, in particular on the East Coast. This costly strategy met with approval in the Western provinces and the oil industry. It was also accepted in the provinces on the East Coast because of the significant concession that came with it — namely, that Ottawa would effectively give up the constitutional rights it had recently won vis-a-vis the offshore. The deregulation strategy was compatible with this because it was in line with Alberta's approach and consistent with the approach to resource management that that province had grown accustomed to. In fact, it could be argued that it was partly Alberta's deregulation thrust that had so clearly driven Ottawa to delimit the powers of the provinces on the East Coast. Alberta's fear of another NEP could easily be extended to a fear that there would be comprehensive interventionist systems on the East Coast. The federal approach basically eliminated this possibility.

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From Neomercantilism to Continentalism

The partial unravelling of state intervention in the international oil market took place around the same time that loose regional blocs were emerging on the global stage. These regional blocs, such as the EU, NAFTA, and AFTA, represented efforts to achieve increased economic integration by internally inducing patterns of negative and positive integration, and possibly also by erecting barriers to the external world. NAFTA will also most likely strengthen regionalization in the oil sector.09 The emergence of regional supranational entities reflects a widening discrepancy between political and economic structures. The increased divergence between economic and political bounds increases the tensions between them, and this generates pressure for structural and institutional changes to accommodate the divergence. Such changes include policies either to sell off NOCs or to alter their role and behaviour so that they conform to the norms and rules that regulate trade and privatesector behaviour. International forces and the international linkages of individual states affect a given state's political system and its capacity to develop and implement policies. In themselves, international forces may have a homogenizing or a differentiating effect on domestic processes. Thus, states enter into a dynamic relationship with their external environment, and this relationship affects policy. It is noteworthy, however, that a state relates to its surroundings through a multitude of different links. When one of these links becomes stronger, it often strengthens the relevant institutional connection or policy sector on the domestic scene, thus affecting relations among organizations and institutions and policy sectors. The dual international energy orientations of Canada (i.e., Canada's vulnerability to events and trends on the international oil market), and its close relationship with the United States and the American-based oil MNCs, were increasingly reflected in domestic politics, in the different partisan stances regarding free trade with the United States. The national caucus of the Liberal Party labelled the agreement that was reached between Mulroney and Reagan as 'a radical departure from our history as a country committed to internationalism and a strong public economy, [which] moves us to one buffeted by North American market forces.' John Turner's short-lived Liberal government had shown an interest in a sectoral free trade agreement with the United States, but as Doern and Tomlin observe: 'It is unlikely that a re-elected Turner government would, or could, have adopted a comprehensive free trade policy.'61 The

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main reason for this was the strong position within the party held by supporters of state activism. In the partisan arena, the dual international pressures facing Canadian energy policy, especially oil policy, were viewed at least partly as a struggle between the continentalist and marketoriented Conservatives and the more nationalist and statist Liberals and New Democrats. The collapse of the NEP, a weakened OPEC, and a more continentalist Canadian energy policy strengthened the role and power of the provinces and the oil industry. Consider here that a politicized world oil market tends to enhance the decision-making capacity of federal policy-makers, while a depoliticized world oil-market serves to weaken federal powers and strengthen continentalist pressures and provincial and oil-industry power. Canada's traditionally close links with the rising North American trading bloc, and its decision to sign a free trade agreement (the ETA) with the United States - an agreement based mainly on the basic principles of the GATT - raised important questions about the future of Canadian energy policy. The FT A and Petro-Canada

One way to summarize the changes that have taken place with regard to oil's altered status in the Canadian setting is to argue that an important change occurred 'from security of oil supply to security of access for Canadian goods to the U.S. market.' The most important formalization of this change was the FTA. Although the main economic problem facing Canada may have been the interprovincial barriers to trade, the willingness of Canadians to enter into a comprehensive free trade agreement with the United States suggests that the need for an open domestic market was complemented by a concern for access to the large American market. The Mulroney government's resolve to open up energy markets for trade and to reintroduce market pricing was a response to several important national and international changes in the early and mid-igSos. The first was the deep economic recession of the early 19805, which was felt in both countries. During this recession, 'Canadian capital and enterprise began to move south in astonishing magnitudes.' The second was the spectre of growing American protectionism.63 These and other factors would help convince large segments of the business community to accept the need for better and more secure access to the vital American market.

230 Oil, the State, and Federalism Third, the Conservatives were being strongly pressured by the Western provinces and by Quebec to negotiate a trade agreement with the United States. In Quebec, both the Liberal premier, Robert Bourassa, and the PQ leader, Jacques Parizeau, lobbied hard for a free trade initiative. Doern and Tomlin note: 'Free trade did not lead the Conservative policy agenda, although it was nicely congruent with the general thrust of the programs for economic renewal and national reconciliation that the Tories were developing during their first year in office. '64 For the Western provinces a free trade agreement with the United States would ensure market access for oil and gas, and would also eliminate the prospect of a new NEP. Courchene noted: The last-minute inclusion of energy into the agreement amounts to a political 'tour de force.' The FTA is now much more than a Canada-U.S. free-trade agreement. In effect, it is also a repudiation of the NEP and as such effectively muzzles much of Ontario's potential criticism. Peter Lougheed made the point most forcefully when he asserted the energy provisions in the FTA were Alberta's 'auto pact.' In the view of many, perhaps most, westerners, Ontario's opposition to the FTA cannot be disassociated from Ontario's role in the promulgation of the NEP itself.65

The Canadian initiative of September 1985 to start negotiations with the United States was the result of a process with roots going back to the Liberal regime of the early igSos. The negotiations opened in April 1986 and lasted until 10 December 1987, when an agreement was finally reached. While it took a long time to resolve the many complex issues in the broad agreement, as early as March 1985 Mulroney and Reagan, at a summit in Quebec City, had agreed to open up their domestic energy markets by reducing the bilateral barriers to trade.66 This was the first step in the major reorientation of Canada's federal energy policy following the collapse of the NEP. The FTA did not constitute the main change, however. The Conservatives' actions in the period prior to the signing of the FTA to deregulate gas and oil prices, eliminate the NEB thirty-year protection clause, and relax the foreign investment regime all served to remove regulatory barriers to open trade in energy between the United States and Canada. Even before the FTA was signed, the federal government had revised the system of land management and rights issuance in the Canada Lands. Also, the CPRA had eliminated the back-in clause and the discretionary powers that were part of the NEPbased COCA regime.

Oil in a Changing International Context 231 The FTA did not establish an entirely new framework of interactions between the United States and Canada; rather, it formalized a number of previous Conservative policies. But while unilateral policies are always more or less reversible - perhaps in particular when they concern single issues that are laden with high-politics content - the signing of a formal agreement covering a wide range of issues and concerns makes dramatic policy changes less likely in the future. The most important aspect of the FTA was its contribution to the definition of energy, both in trade terms and as a commodity to be regulated by the GATT provisions. Battram and Lock note: If the current relatively unfettered, if fragile, world market in oil and oil products does continue, oil may, over time, start to be treated as a more normal commodity, subject to international trade rules like any other commodity. The Canada/ United States Free-Trade Agreement (FTA) should give a considerable boost to that development, certainly insofar as it subjects the not insignificant Canada/ U.S. bilateral trade in oil to a far more explicit regime of trade rules that build heavily upon, and expand upon, those in the GATT ... Energy trade issues are weaved by the FTA into a complex web with other trade issues that touch many aspects of the two economies. No longer can either country afford to address energy trade issues, however strongly contested, without also addressing their impact upon the whole bilateral trade relationship. 7

Thus, it could be argued that the FTA helped formalize a recasting of oil from a high-politics to a low-politics concern - that is, as a matter to be regulated by the same rules as govern trade in other commodities. Further, this step toward treating oil as a commodity like any other also meant placing greater emphasis on market access over security of supply or self-sufficiency. Perhaps the main contribution of the FTA, then, related to the manner in which, as a formal agreement, it 'froze' a particular relationship between the parties involved at the time of its signing. The agreement, depending on its provisions relating to scope of interference, flexibility in rule application, and recourse for complaints and dispute settlements, would provide a critical frame of reference for current and future decision-makers. As such, it was a manifestation of the manner in which the reaction to the NEP had expanded to the international arena, to include the whole range of Canada-U.S. trade relations. The FTA was an important means of depoliticizing energy matters and a vehicle for developing a much tighter fusion between energy and trade policy. The FTA was in that sense a regulatory and conceptual frame-

232 Oil, the State, and Federalism work that necessarily excluded something like Petro-Canada's public policy rationale. The FTA would serve as an alternative frame of reference for energy issues. It would downplay not only the current and future power of OPEC as a factor in policy, but also the role of regulatory instruments associated with a politicized oil market dominated by oilexporting countries. The embrace in the FTA of a GATT-guided and market-based energy strategy meant that oil would be subjected to the rules guiding trade in other commodities. Oil would no longer be viewed as a strategic commodity to be singled out from other energy sources. A market-based energy strategy, it was argued, was a flexible strategy. Once such a strategy was accepted, it was hard to argue in favour of retaining a relatively specialized state enterprise that actively pursued high-cost energy resources that could be displaced by other and less costly sources. In the NEP, Petro-Canada had been touted as a means of ensuring self-sufficiency in oil; its role in interfuel substitution and conservation had been minimal, both substantively and symbolically. It would therefore be difficult for those opposed to privatization to argue convincingly that the company could be used as a vehicle for ensuring interfuel substitution and conservation. The closer formal ties between Canada and the United States, besides influencing the policy and political functions of Petro-Canada, amounted to a step toward greater harmonization of organizational structures and forms. Because the United States lacked a strong tradition of public enterprise, it would become harder for Canada to find justifications for this particular organizational form. The FTA also affected Petro-Canada more directly, in that the agreement reduced Ottawa's scope for intervening in the energy arena. The FTA prevented Ottawa from introducing an incentive system, such as the PIP, when the system would discriminate against American companies. Because of the FTA provisions that prevented governments from discriminating on the basis of nationality, the FTA also reduced the importance of the corporation as a vehicle for promoting Canadianization. 9 In theory, a government could instruct its Crown corporations to not export important natural resources, which would undermine the proportionality provisions in the FTA. Privatization would eliminate such a possibility. But although the FTA no doubt made it easier to justify the privatization of Petro-Canada, it is quite clear that the agreement was signed after the Conservative government had already decided to privatize Petro-Canada. Several important changes on the world energy market affected Can-

Oil in a Changing International Context 233 ada's global outlook and orientations in the second half of the 19805. The collapse of OPEC (which altered the status of oil) and the growing support for protectionism in the United States (which helped produce the FTA) converged to strengthen Canada's orientation toward the United States. The FTA, being consistent with the producing provinces' demands, did much to assure the Western provinces - and the United States - that there would not be another NEP in the future. The FTA demonstrates that the reaction to the NEP was not confined to Canada, but included efforts on the part of various actors to link Canada much more closely to the United States. The spectre of American protectionism did not turn Canadian provinces against each other. Canada was dependent on access to the American market. Once this was generally accepted, it was possible to subsume energy concerns under the broader heading of bilateral trade and market access. Thus, one of the most important changes in Ottawa's stance during this period can be summed up as a 'change from a preoccupation with security of oil supply to a heightened concern for market access. The FTA did more than orient Canadian oil and gas development in a continentalist direction; it also contained provisions that reduced Ottawa's ability to introduce a national market in oil and gas. The FTA precluded Ottawa from introducing export taxes that would make export prices higher than domestic ones. Ottawa could introduce an export tax, but it would have to also apply to domestic consumption. As noted, the proportional access clause (article 9O4a) prevented Ottawa from imposing quantitadve export restrictions unless such restrictions also were applied to domestic supply. The FTA precluded Ottawa from instituting a system of price discrimination that favoured domestic over foreign customers. Further, the FTA required that foreign users be treated equally with domestic users in terms of taxation. The FTA precluded Ottawa from requiring foreign companies to surrender to the Crown a share in a foreign-held licence prior to going to production. This latter restriction clearly restrained Ottawa's ability to intervene directly in the oil and gas sector through a strengthened entrepreneur and landlord role. Conclusion The push toward a market-based policy and free trade, besides fostering deregulation and privatization, altered the status of oil in Canada; it was now less a strategic good and more an ordinary commodity - that is, a

234 Oil, the State, and Federalism commodity to be traded like any other good. This change affected not only the nature and conception of the commodity itself, but also the status of the oil sector and the relationship between oil and other sectors of the economy. But for core actors such as the United States, the geopolitics of oil did not so much change as become strategically less important. A number of lesser actors on the world stage, including Canada, downplayed the strategic importance of oil and instead (a) relied more on America's power to keep oil flowing from the Middle East, (b) sought other means for addressing their dependence on imported oil, (c) relied more on the international system of emergency oil allocation in times of crisis, and (d) accepted a lower degree of security of supply and self-sufficiency. The underlying assumption, it seems, was that a functioning market would alleviate the problems of supply and self-sufficiency by mobilizing other energy and fuel sources. During the period 1973-90, Canadian energy consumption increased, but oil's relative share fell from 52.6 per cent in 1973 to 35.9 per cent in 1990. From 1985 to 1990, oil's absolute share increased again, and the NEB predicted that oil consumption would continue to rise in the coming decades, from 3328.1 petajoules in 1990 and to 4105.8 petajoules in 2010. While this increase would be lower than the projected aggregate rise in energy demand, if achieved it would mark an important reversal of the trend between 1973-85, when oil demand fell.70 Such a continued increase in the projected demand for oil raises doubts as to the actual increase in flexibility of fuel sources. Given the NEB's predictions of future demand, it would seem that the Conservatives' commitment to stimulate the development of fuel sources other than oil was suspect. It could be argued that it was the economic recession in the early 19805 that caused the drop in oil demand, and that increased enhanced recovery and heavy oil development positively affected Canada's oil-supply picture in the mid-igSos. One effect of this was that the declining reserves of conventional light oil in the Western provinces were not drawn down as rapidly as the Liberals had predicted in the NEP. The low world oil price in the latter half of the 19805 served to stimulate oil demand; but it also acted as a brake on extensive efforts to expand the reserve base in the short term. This increased the depletion rate. This increase could be balanced off by increased domestic imports of cheap crude oil, but this would heighten the dependence on imported oil. After 1986, when world oil consumption began to rise, so too did OPEC's share of production. This reflected a stronger concentration on

Oil in a Changing International Context 235 the Middle East. It seemed that the OPEC countries might again over time recapture their lost market share and, according to EMR's assessment, create 'an oil market once again significantly dependent on potentially unstable producing regions.'71 OPEC was clearly not as severely weakened as it had seemed in the earlier 19808, especially with regard to the distribution of oil reserves and the reserves-to-production ratios in various parts of the world. OPEC's future power would depend on its reserve base and its political coherence, and on a few other considerations such as the ability of the largest oil importers to shelter themselves from OPEC's price and supply decisions, and oil's future share of energy needs. While oil's share of aggregate Canadian energy consumption had declined significantly, it still made up one-third of Canadian energy consumption. Given current consumption patterns, Canadian dependence on OPEC oil supplies would most likely increase over time, due to the high depletion rates of other non-OPEC countries. Further, OPEC seemed to have learned an important lesson after oil prices skyrocketed in 1979-81 - namely, that when oil prices get too high, countries suffer economic recessions and launch oil substitution programs that reduce the pressure on OPEC supplies and force prices down. In the future, OPEC would probably recover some of its price-setting powers, but those powers would be more limited than before. Also, the Gulf War had demonstrated that the United States and its allies were willing and able to intervene directly in the Middle East to safeguard their broader strategic interests when these were threatened by regional actors.72 In the end, the more market-based approach, emphasizing price flexibility and interfuel substitution, not only greatly reduced the special status of the oil sector but also left that sector more open to influence from other sectors and concerns. Because the political justification for PetroCanada's existence was based on the notion of oil as a strategic commodity and as a linchpin in a broader neomercantilist approach to oil development, the net effect was an undermining of the corporation's political and symbolic importance.

7 The Privatization of Petro-Canada

By February 1990, when it finally announced the decision to privatize Petro-Canada, the Conservative government had been in power for six years. From the start, the party's heavyweights had pondered selling the Crown corporation. Even before being elected, in 1983, Mulroney had appointed a five-person task force on privatization. Although the committee's report was never made public, according to DJ. Savoie it became 'widely known' over time that it 'recommended selling numerous crown corporations, including Petro-Canada, CN, Air Canada, and AECL.'1 During the 19805, it seems, privatization was never far from the minds of Tory policy-makers, who carefully and systematically sought to privatize PetroCanada though no formal decision had yet been made to do so.2 Perhaps the future of Petro-Canada was in roughly the same category as that of Air Canada, the privatization of which Langford and Huffman saw as 'a decision in search of a rationale.'3 In Canada the public debt and deficit reached new heights in the 19805, prompting concerns about public spending and deficit reduction. The Conservatives, in their 1984 election campaign, had stressed the need to reduce the rapidly rising federal deficit.4 These issues were again linked with the larger issues of government financial accountability and government effectiveness and efficiency. In the 19805, privatization was an international trend in developed and developing countries alike, indicating that the boundary between domestic and international policy determinants can be a hazy one. The 19805 were being touted as a new 'age of globalization,' of a new global economy. According to political scientist James Laxer, at such a time 'old associations are dissolving, and new ones are forming.' A key characteristic, according to Laxer, is the proliferation of economic blocs.5 Thus, privati-

The Privatization of Petro-Canada 237 zation can be viewed as a part of this wider international movement to delimit the role of the state. Undoubtedly, increased economic interaction ties states closer together, and the closer proximity will most likely have a harmonizing and homogenizing effect on the economic and political structures of countries. Close contact and interdependence facilitate the diffusion of policy and pull national elites - both state and nonstate elites - toward the international current. State officials, both elected and unelected, formulate policies and undertake actions that either magnify ongoing changes or undermine them. As states become increasingly interdependent, international factors excercise a greater influence on state policy, and domestic factors exercise less - although the international influences are rarely felt on the domestic scene in their original forhm and content. Rather, as Pratt underlines, changes in the international oil market have a local impact when public officials take actions that encourage those very forces. Vernon and colleagues, on the basis of a study of a number of countries, attribute the privatization of public enterprises to problems associated with the greatly expanded role and presence of the state in the economy. Vernon concludes: 'In interpreting the significance of the surge of privatization programs all over the world, my colleagues and I have been strongly inclined to discount the possibility that the movement represents a basic ideological shift among the countries concerned. Instead, we see the programs as the result of a learning process stretching over two or three decades, a process that has given the governments involved a keener appreciation of the costs and benefits associated with their ownership and management of various enterprises.'7 This interpretation downplays the role of partisan ideology, and emphasizes political and administrative learning related to the more general economic health of the government sector in the overall economy. The overall size of the public debt and the government's annual budget deficit are considered to be of particular importance. Vernon and colleagues argue that the almost global thrust toward privatization was related to the larger problems associated with a vastly expanded public sector rather than with the state's direct involvement in the economy: 'Where governments have been reasonably competent and responsible, and where comparisons between private enterprises and state-owned enterprises have been possible, the technical performance of state-owned enterprises has not appeared much different from that of private enterprises. The problem, according to this view, rests with the overall level of state involvement in the economy and with the general

238 Oil, the State, and Federalism competence and responsibility of the government, rather than with the state enterprise. But this issue of competence raises questions about which factors contribute most to the generating of deficits and which role exactly state enterprise takes on. Part of the problem, surely, has been the strong temptation on the part of elected officials to burden NOCs with tasks that involve added economic costs and lead to inefficiencies. Vernon and colleagues further argue that government's administrative and political learning processes involved the adoption of managerial philosophies that converged with those of private-sector firms. This could only mean that governments would become more attentive to the demands and needs of private-sector actors. Governments began to embrace the goal of efficiency, and to take related measures to refashion policy measures and institutional arrangements. If in Canada there was, indeed, a widespread acceptance of the nature and magnitude of the problems associated with the federal deficit, and a widely held recognition that the public sector was inefficient, then after the problems became manifest in the early 19805, we would not expect to find large changes in how those problems were perceived from one set of government leaders to the next - that is, from the Liberal to the Conservative regime. Further, we would expect that the government's main thrust would be to get rid of money-losing and inefficient firms. The emphasis on economic efficiency would effectively crowd out other, more clearly defined political goals. In the case of Petro-Canada, this could mean either a commercial mandate and the removal of preferential rights to ensure transition from policy instrument to commercial enterprise, or a dismantling and/or partial or complete privatization. Interestingly, while the Liberal government and other federal and provincial governments had seen Crown corporations as flexible instruments for fulfilling a wide range of different policy functions, the Conservatives' approach placed more onus on the corporate entity itself, demonstrating that it was indeed fulfilling a clear purpose in public policy. The government was providing itself with a certain leverage: it could choose to support a public policy purpose, or it could implement privatization as a viable alternative. This leverage in turn became an element of control: by specifying which public policy purposes it would support and which ones it would not support, the government could influence the behaviour of Crown corporations. In effect, the government had equipped itself with new powers over Crown corporations. In making its choices, which would be based on new evaluation criteria, the government would be less bound to past policies and practices.

The Privatization of Petro-Canada 239 The criteria the Tories applied were deeply informed by a definition of corporate accountability that was directly linked to the principle of economic efficiency; they were also less focused than before on political accountability. Indeed, the buzzwords of accountability and efficiency were used almost interchangeably - so much so that they could presumably justify actions that differed significantly in their policy and political implications. The underlying assumption was that once a corporate entity was being subjected to the rigours of the market, it was in effect being held accountable. It could be argued, then, that privatization was not only a means of enhancing economic efficiency but also the best way of ensuring corporate accountability. Certainly, as we've seen, the factors on the international scene in the 19805 also undermined the political rationale for Petro-Canada and weakened its sectoral affiliation. The changes in the international energy market interacted with and reinforced the larger trend to reduce the economic role of the state; they also encouraged economic restructuring, deregulation, and privatization. The Conservative government, in its attempts to placate the producing provinces and the industry, removed most of the vestiges of the NEP and reduced Ottawa's capacity to intervene. The new, market-based approach to energy development coincided with international developments to reduce the distinctiveness of the oil sector; this made it easier to perceive and address oil-related issues and concerns as part of other issues and concerns. Since so many important changes took place soon after 1984, removing many of the political and policy-based justifications for the corporation, we need to identify not only those factors which contributed to the change in the corporation's status, but also look at those factors which delayed until 1990 the announcement that Petro-Canada would be privatized. The Conservative administration had to consider many factors before moving ahead with privatization: (a) the strength and intensity of political commitment to privatization; (b) the nature of the interventionist framework surrounding the corporation, from which the corporation derived an added political and policy justification; (c) the potential legal barriers to sale, as well as the number of changes that needed to be made in the corporation before a sale could be conducted; (d) the absence of a privatization program that would provide such a politically important and contentious program with continuous political and administrative attention and support; (e) the need for mandated changes - that is, changes in the policy role of the corporation in the direction of the market; (f) the role of the corporation's managers (which includes their support or

240 Oil, the State, and Federalism opposition to the restructuring and sale); (g) the need to increase the corporation's saleability (that is, to prop up its market value and reduce its debt load); (h) the ability of the stock market to absorb such a large transaction; and (i) the strong likelihood that various types of opposition - for instance, to an increased degree of foreign ownership - would follow such a decision. While the Conservatives managed to lower the public deficit in their first years after taking office, the deficit as percentage of GNP would soon start to rise again.9 Further, Ottawa would have a decidedly mixed record in reducing the deficit in the energy sector. In fact, given the Conservatives' strong and repeated emphasis on deficit reduction, there was perhaps little real difference between the records of the two main political parties. Not only was the Conservative government willing to dish out significant subsidies to various energy development projects, including the Hibernia development program, but it also gave the Reichmann brothers a $1 billion tax break to help them purchase Gulf.10 These moves suggest that the federal government was not driven by a clear and consistent concern with eliminating the federal deficit, at least not in the energy sector. The Conservatives continued to prop up the corporation to make it a more attractive candidate for privatization; at the same time, however, to prevent criticisms, they sought to refrain from saddling the corporation with added tasks - a direction admittedly facilitated by the Conservatives' strong dislike of the corporation. They could find other means by which to pursue their pet projects. Petro-Canada had long been on the government's long list of potential candidates for privatization. The Conservatives had been opposed to Petro-Canada since its inception. Now, in power again and with a wide mandate for change, they finally had a chance to do something about it. The Federal Government's Privatization Program

Canada has a long tradition with public enterprise - a tradition that, according to Stanbury, precedes Confederation by half a century.11 The number of federal Crown corporations in 1980 was 464, including subsidiaries. The total assets of federal Crown corporations grew from $19.6 billion in 1973 to $59.9 billion in 1987. As of March 1982, federal Crown corporations employed 263,225 people.12 The federal government assuming it was serious about privatization - was facing a large, multifaceted, and important segment of the Canadian economy. Clearly, to undertake the comprehensive - and politically very divisive - program of

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restructuring that privatization represented, the Conservatives would need more than political commitment and ideological fervour. As Laux and Molot observe, the Conservative government's privatization policy: reflects neoconservative ideology everywhere, which sees public enterprises as symptomatic of an intrusive state and accepts as axiomatic the benefits to be derived from their transfer to private ownership ... In addition to ideology, however, there was a strong pragmatic element in the Conservatives' privatization policy. Rather than being explicitly linked to programs with an impact on market structures, such as deregulation, the sale of Crown corporations was initially presented as just one in a series of initiatives to 'realize further cost savings through more efficient management across the entire federal government.'1-^

Laux and Molot thus argue that the Conservative government's approach was both ideological and pragmatic. But was this pragmatism simply a convenient cover for a deeper ideological commitment? If the Conservatives were indeed primarily driven by ideology, given the country's past they would most likely be ahead of public opinion and would need to seek to influence the structure of public opinion. Thus, we would logically expect to see an announcement of the candidates to be privatized, followed by an increase in public support for privatization over time. We would also expect to see the presentation of a coherent program of privatization - an approach signalling that this issue would be given ongoing political attention. According to public opinion polls, between 1979 and 1983 support for the privatization of Petro-Canada increased among supporters of all three parties, however slightly. But in 1983 it was only among Conservative voters that there was a clear majority in favour of privatization. Further, between 1983 and 1984 Conservative and Liberal support for the push dropped somewhat, reflecting increased voter uncertainty.14 In the same period, public support for privatization increased in the West but fell in Quebec, Ontario, and the Atlantic provinces.15 It is clear from the polling data that as early as 1984 most Conservative voters were in favour of privatization (50 per cent for, 23 per cent against). Liberals (37 per cent for and 37 per cent against) and New Democrats (43 per cent for and 43 per cent against) were divided evenly.16 Polls from the mid-igSos reveal that the government had failed to act on a policy that had wide public support in all three parties. By the late 19805 the overall figures had not greatly changed. In general, the

242 Oil, the State, and Federalism Canadian public favoured privatizing the corporation, and support for the privatization of Petro-Canada was stronger than for other companies such as Canada Post, VIA Rail, CN Railways, provincial hydro corporations, airports, AECL, and hospitals.17 Thus, based on the polling data, it would seem that the government was not moving ahead of public opinion. Rather, in 1990, after six years in office, the government announced a decision that the public had been expecting for a long time. The nature, extent, and political and administrative importance of the federal government's privatization program are reliable indicators of the government's commitment to privatization. By establishing a program with the mandate to consider all public enterprises, the Conservatives were indicating that factors far outside the oil sector would be relevant to the decision as to whether Petro-Canada would be retained as a public enterprise. The growing scope of the federal government's privatization program suggested that forces and concerns outside the energy sector were important in the decision to privatize the corporation. In almost any reform effort, one of the main factors worth noting is the degree to which, and the manner in which, the program is given not only political but also institutional and organizational recognition. March and Olsen note: Experience with institutional reform suggests that successful comprehensive reform may depend on expanding the time horizons of reform efforts and buffering them from short-term fluctuations in attention. The political implication is to give institutional reform higher status and priority through attention from top levels in the political hierarchy and through linkage with key policy issues. The organizational implication is to establish institutional reform as a program or policy of its own. When institutional reform is made a policy area of its own in these ways, reform issues are seen as continuous rather than episodic. Permanent attention to reform issues is augmented by creating special offices and roles responsible for reforms. Rules regulate the access of participants, problems, and solutions. Larger reforms are divided into smaller, planned steps with which the political system can cope.19

In Canada, the Conservative government of Joe Clark in 1978-9 set out to privatize Petro-Canada and announced its intention to sell a number of other Crown corporations as well. The government appointed a task force that produced a report and also had a program for how this privatization was to proceed. Thus, long before Petro-Canada had become a large and integrated company, plans existed for its privatization, and a large - albeit

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highly regionally skewed - political constituency supported this idea. Clark's idea was to give $100 in Petro-Canada shares to every Canadian.20 The second OPEC oil shock forced the Clark Conservatives to reevaluate their plans with regard to Petro-Canada. The Conservatives' electoral defeat, the re-election of Trudeau, and the introduction of the NEP resulted in a change in course. The Trudeau Liberal government bolstered the role of Petro-Canada in the context of the NEP, although it did consider selling off other Crown corporations. The Liberals set in motion a process to sell Nordair, Northern Transportation, and Eldorado Nuclear,21 though in the end only Nordair found a new owner. After Clark lost the leadership of the Conservative Party in 1983, Mulroney, as the new leader, appointed a task force on Crown corporations to assist the party in the development of a coherent strategy for managing federally owned Crown corporations.22 Still, as Doern and Atherton noted at that time, the Conservatives were concerned about improving the management of Crown corporations, not about privatization.23 Even so, the Conservatives did initiate negotiations to sell several Crown corporations, albeit without a formal policy statement to that effect. The problems associated with those sales negotiations led the government to realize that it had to centralize the process. The Conservative government initially couched the process as one of rationalization; this enabled them to promote privatization as one means of ensuring greater government efficiency. By strongly equating government efficiency with rationalization, and rationalization with privatization, the federal government forged a strong issue linkage that aided it in its subsequent efforts at privatization. The amendments in 1984 to the Financial Administration Act were an important step in this direction. These amendments 'required Crown corporations to submit annual business plans to the Treasury Board, to seek government approval for new subsidiaries, and to undergo a "value for money" audit every five years to determine whether the firm had managed its resources economically and efficiently and had carried out the operations effectively.'24 The centralizing of the privatization process was formally announced in the May 1985 budget statement, at which time the Conservatives established a ministerial Task Force on Privatization. Petro-Canada was clearly among the government's many candidates for privatization. Initially, the Task Force on Privatization was chaired by the president of the Treasury Board and had three other members - the Minister of Energy, Mines and Resources, the Minister of Regional Industrial Expan-

244 Oil> the State, and Federalism sion, and the Minister of State for Finance. The government also set up a privatization secretariat to support the task force. Thus, early in its tenure, the Conservative government had established an agency committed to privatization, in effect creating specific roles and offices to ensure that the reforms were carried out. This served to make the party's concern visible. In 1986, the task force was converted and expanded into the Cabinet Committee on Privatization, Regulatory Affairs, and Operations.2c) The political importance of privatization was further confirmed by the establishment, in the Department of Finance, of an office of Privatization and Regulatory Affairs, headed by a Minister of State. The office of Privatization and Regulatory Affairs was to support the Cabinet Committee on Privatization, Regulatory Affairs, and Operations and to be responsible for policy development and program co-ordination concerning both ownership of Crown corporations and regulatory intervention.2 Formerly, the responsibility for policy development and program co-ordination for Crown corporations had been shared among a number of government departments - the departments to which each Crown agency belonged - whereas regulatory reform activities had primarily been the responsibility of the Privy Council Office and the Treasury Board Secretariat. The formation of the cabinet committee and the Office of Privatization and Regulatory Affairs ensured central control of the process as well as ongoing political attention. The establishing of specific criteria for making each decision further facilitated the process. The criteria served to enhance the perception that the government was accountable; they also provided symbolic reassurance of due process and rational decision-making. The May 1985 budget statement also included the Conservative government's principles for privatization; the main premise was to be that 'a Crown corporation should be sold unless it can be shown to be fulfilling a policy purpose.'27 Thus, a process had been established for closely scrutinizing all Crown corporations, its objective being to determine whether each corporation had a public policy purpose. Further, because it is often difficult to specify which policy functions a public corporation really is meant to pursue, and which it actually does pursue, the introduction of evaluation criteria meant that the government was equipping itself with new and sweeping powers to define the agenda. The government now had a means to combat the de facto inertia that inheres in all established organizations - that is, their propensity for finding justifications for their existence. By setting criteria to guide the process the government also lent legitimacy to a process that necessarily had to encounter suspicion and opposition.2

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In the case of Petro-Canada, the government made the task of evaluating the policy purpose of the corporation easy for itself by declaring as early as 1984 that Petro-Canada would no longer serve any policy role. From this, it followed quite logically that since the corporation served no policy purpose, it might as well be sold. Further, given the early date of this announcement, the corporation had time to adjust its behaviour to that of its competitors so as to become a more attractive candidate for privatization. Other principles of privatization related to the need to consult with management and employees prior to any decision to sell, and guidelines related to the level of competition and the role of consumers after a sale had been carried out. To prevent conflicts, the government would also have to consult with the provinces. The sale price was also a concern, in the sense that corporations should not be sold at distress prices. Another principle was that large corporations could be sold in stages. During interim periods of shared ownership, the government would guarantee shareholders that its ownership share would be guided by the same principles that applied to private shareholders. Finally, the government noted that it would retain the right to impose ownership restrictions, such as restrictions on foreign ownership.29 These criteria were sufficiently firm to prevent business uproar about possible 'golden shares' and the government later re-entering as an active shareholder; yet they were also sufficiently weak that the government enjoyed considerable leverage in determining which assets to sell, and when. In addition, the principle that large companies could be broken up could turn out to be a useful means of defusing political pressure (that is, by retaining parts of companies). According to Stanbury, between 1984 and April 1988, Ottawa completed thirteen privatizations, of which nine were of Crown corporations.30 In 1988 the government also introduced legislation to privatize Air Canada, which existed in a highly competitive environment. One of the main obstacles to privatizing Petro-Canada was its sheer size. In this context, the privatization of Air Canada no doubt helped prepare the ground for the subsequent privatization of Petro-Canada. Air Canada needed cash infusions even more than did Petro-Canada, and the former energy minister, Marcel Masse, remarked in 1987 that Air Canada would go first. R. Bott observed: 'Selling equity in Air Canada would test the waters for a larger, more complex and possibly more controversial sale of Petrocan shares.'31 As early as 1985, then, the federal government had launched its privatization program and equipped itself with all the necessary tools for carry-

246

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ing out a decision regarding Petro-Canada. After the successful privatization of Air Canada, the staff at the privatization office were confident that a program could be carried out on a large scale.32 The slow and steady nature of the federal government's privatization program helps explain the timing of the decision to privatize the oil company. But the timing of the decision was also deeply influenced by the corporation's specific role as well as by its specific features, including its size. For instance, while changes in the international oil market clearly lent succour to the proponents of privatization, it took time for these changes to produce results in Canada. Doern and Atherton noted: 'The sharp fall in oil prices since 1985 and the uncertainty created by Amoves to deregulate the gas industry ... made it virtually impossible in the 1985 to 1987 period to time a possible public offering of Petro-Canada shares.'33 This meant that the government would not get a high return for PetroCanada; it also meant that it could be accused of producing yet another concession to the oil MNCs, which had benefited greatly from the Conservative administration's frontal attack on the NEP. Petro-Canada's New Mandate Petro-Canada's 1984 Annual Report stated: In the first nine years, Petro-Canada was directed to work towards Canada's energy security effectively and efficiently, without overriding concern for profitability. The Corporation has now been given a new mandate by its shareholder to operate in a commercial, private sector fashion, with emphasis on profitability and the need to maximize the return on the Government of Canada's investment. In this regard, Petro-Canada is not to be perceived in the future as an instrument in the pursuit of the Government's policy objectives. However, the Government maintains the right as the shareholder to formally direct Petro-Canada to carry out certain activities in the national interest.-^4 The altered mandate no doubt reflected the Conservative government's emphasis on the role of the market and the need for rationalizing and improving public-sector economic performance. The new mandate was a clear sign to the corporation that it faced a government with priorities and goals that differed from those of the Liberals. The corporation was no longer to act as a policy instrument, actively exploring for and developing high-cost sources of oil. Another important change was the Tory government's decision not to

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provide Petro-Canada with any further infusions of public equity. However, since Petro-Canada was retained as a Crown corporation, the federal government would still act as a guarantor for its debt. The federal government also demanded that Petro-Canada start paying taxes. Further, in 1984 the government directed Petro-Canada to dispose of Canertech, which had been intended to serve as a vehicle for promoting alternative fuels. This directive provided further evidence of the government's intention to streamline the corporation; the Conservative government viewed Petro-Canada as a self-sustaining commercial oil and gas company. The government instructed Petro-Canada to operate in a private-sector manner but did not rewrite the legislation governing the corporation. Strictly speaking, this was not necessary in order to bring about the desired change, because the legislation was sufficiently broad that a change in its operations could be declared in this way. But the fact that the government did not change the legislation also meant that the extensive system of controls established by the Liberals was still in place. This meant that the Conservatives possessed considerable power to nudge and push the corporation in the direction it wanted. This power was heightened rather than reduced by the new commercial mandate. The new corporate objective was essentially to maximize profit; the corporation's relative success in meeting this objective could be measured easily now that the corporation had been instructed to behave like a private company. No longer could it balance one objective against the others and claim it was pursuing all. With profit maximization as the main goal, it would also be easier to measure the corporation's performance over time, because the criteria for assessment would be fixed. Petro-Canada would now be measuring its performance in the same manner as did private-sector companies. This necessitated changes in accounting practices. The corporation, as both a public enterprise and a market-based actor, would be subject to stringent controls, both from its government shareholder and, increasingly, through the market, because it would be compared with its competitors and directly and indirectly pressured to act in the same manner. The fact that the government kept the initial legislation in place also meant that it or a later government could alter the mandate and give the corporation a new policy mandate. However, it is worth noting that the new mandate was set for the corporation before the Conservatives had had enough time to deliver on their electoral promises. The corpora-

248 Oil, the State, and Federalism don's role in the early phase of the Conservatives' tenure - with the federal government emphasizing the establishment of a new and more cooperative federal-provincial setting - created considerable uncertainty for Petro-Canada with regard to its future role. This uncertainty is revealed in the company's somewhat mixed portrayal of itself in early 1985. The corporation still sought to present itself as a unique corporate entity on the Canadian scene. Petro-Canada emphasized its contribution to Canadians and as such continued to promote itself as an instrument for Canadianization, even though this objective was less important to the Conservatives than it had been to the Liberals. With regard to its new mandate, Petro-Canada's 1984 Annual Report noted: This change does not mean that the Corporation is losing its uniqueness. In the course of maturing, Petro-Canada has found ways of conducting its operations distinctly, by putting Canada first. This is much more than an advertising theme. Petro-Canada makes special efforts to purchase materials, equipment and services from Canadians and Canadian suppliers. In its day-to-day operations, the Corporation works in partnership with a whole range of Canadian companies. In addition, marketing, environmental protection and donations mark Petro-Canada as a good corporate citizen.35

Petro-Canada's mission statement in the 1985 corporate plan and capital budget took a similar tack. The company was 'to mobilize capital and Canadian skills toward the efficient commercialization of Canada's energy resources to meet the energy requirements of Canadians and Canada's energy goals.' The company listed its corporate objectives as follows: To become an increasingly profitable energy company; Consistent with sound commercial practice, to engage in the exploration and development of long-term sources of hydrocarbon supply in Canada, particularly from the Canada Lands, to help assure a stable and secure supply base for Canada in the iQQO's; To continue the development, at a pace consistent with national and regional economic priorities and with sound commercial practice, of Canada's very large but higher cost resource base of heavy oil and oilsands in Western Canada; To stimulate where appropriate the development of new, long-term sources of supply for Canada;

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To maintain the goal of increased Canadian participation in the oil and gas industry, where appropriate and consistent with the national interest; To promote, to the greatest extent consistent with sound business practice, the development of Canadian skills and industrial capabilities in Petro-Canada's activities; To develop and manage a self-sustaining and increasingly profitable refining and marketing business by providing hydrocarbon-related products and services to Canadian consumers, with the emphasis on Petro-Canada's unique Canadian identity; and To develop and manage a Corporation that is judged to be financially sound by the financial investment community, and that is capable of becoming financially self-sustaining through an appropriate mix of upstream and downstream activities and short and longer-term investments.3

The corporation's stated objectives were an attempt to strike a new balance between a watered-down public policy role - with emphasis on Canadianization - and a profit-maximizing role. Compared to the 1984 Annual Report's mandate statement, the corporate plan placed greater emphasis on continuity with the policy mandate given to it in the NEP. In the last of those corporate objectives, the company was appealing to and seeking support from the financial investment community. Possibly, the corporation was expressing its willingness to co-operate with the government in the event that privatization was carried out. The corporation, faced with uncertainty as to the government's actual priorities, was seeking to appeal both to Canadian nationalists and to the supporters of privatization in the Tory government. The main objective of the corporation's management appears to have been to protect the existence and future integrity of the corporation, whether it was privatized or not. Given that the change in Petro-Canada's mandate was not accompanied by any changes in the formal legislation governing the corporation, this expression of its new mandate could have been the corporation's own interpretation of the government's intentions - its anticipated reaction to an altered situation in which its own status was still uncertain and as such an attempt to prevent privatization by emphasizing rationalization. But it could also have been, as Petro-Canada clearly stated, an expression of the federal government's intentions. If so, the government was either intent on rationalizing its corporate holdings, or the statement represented the first step in the direction of privatizing the corporation.^7

250 Oil, the State, and Federalism In one of the most influential analyses of Petro-Canada's role in this period, Pratt argues: It was the deteriorating business environment - unstable oil and gas prices, weak demand, a continuing surplus of natural gas in North America - and the end of government equity funding of Petro-Canada (negotiated with the outgoing Liberal government) and not the election of the new Conservative government in September 1984 that led Petro-Canada to adopt a much more conservative strategy of optimizing existing assets for cash flow and shifting from the frontiers to conventional oil and gas properties in the west.^

Also according to Pratt, 'Petro-Canada was re-orienting itself away from its long-term assurance of supply mandate and learning how to adapt to deregulation and a market-driven energy policy.'39 He attributed this change in the corporation's behaviour to larger changes in the international oil market in the early igSos - in particular, to what he termed 'the restructuring of the world oil industry in the direction of fast-moving, short-term flexibility, with decreasing emphasis on traditional security of supply concerns, [which] meant that it would be more difficult for government to regulate and also that there would be less intervention by the state in industry.'40 Pratt concluded that the changes in the corporation's role were the result of its adapting to a changed context, the main factor here being changes on the world oil market. This argument is based mainly on changes taking place within the oil sector, rather than changes occurring between sectors in Canada as a result of a significantly weakened concern about the strategic importance of oil. In another influential study, Halpern and colleagues argued that the change took place even earlier: It appears to us that this change in Petro-Canada's mandate represents the latest in a chain of events that began with Petro-Canada's unsuccessful attempt to acquire Husky Oil in 1978 ... The Crown firm's behaviour has since then been increasingly influenced by 'bottom-line' considerations. In other words, Petro-Canada's corporate strategy has progressively shifted towards that of private-sector firms. Basically, the change in mandate legitimizes this process, and further relieves PetroCanada's management of the responsibility to take the government's policy objectives into consideration when developing the corporation's overall strategy.41

According to these authors, Petro-Canada's entry into the downstream, which marked 'a change in the orientation of the corporation, in terms

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of the scope of its activities and the notion that some of the activities would now create a competitive relationship between Petro-Canada and private firms,'42 was the main reason for this change. The corporation was placing its emphasis on becoming similar to the main players in the oil and gas industry. Certainly, as both Pratt and the Halpern group point out, PetroCanada had undergone key changes well before the formal change in its mandate - that is, it had undergone restructuring and was already becoming quite similar to the integrated oil majors. This was consistent with the large degree of operational freedom that Crown corporations tend to experience in a competitive environment. It was also consistent with the Liberal government's emphasis on corporate flexibility. But political factors also played an important role. The corporation's outlook and operations had changed greatly between the late 1970s and the mid-igSos, mainly because the NEP had done so much to politicize the corporation. Petro-Canada had been reorienting itself to the provinces in the late 19705, but the NEP had reversed this direction. The corporation had also played a vital role in the federal government's Canadianization program, becoming more a federal agent than an oil company. The rapid collapse of the NEP then forced the company to alter its orientation and operations in order to survive. The changes on the national or federal state level - including those relating to the practice and structures of federalism - that contributed to the failure of the NEP also had a significant impact on Petro-Canada's direction. The political changes in the international oil market were greatly reinforced by larger changes in the role of the state that affected the range of available policy choices and made privatization a more prominent option. But the changes in the Liberal government's political priorities, as the NEP collapsed, also played a key role. Petro-Canada had been granted an important political as well as policy role in the NEP through the process of 'policy mobilization.' When the NEP faltered, in order to survive Petro-Canada had to downplay its political importance and distance itself from at least some of the program's objectives. The Liberal government, no doubt, accepted this. The strong frontier thrust of the corporation's NEP mandate depended on large infusions of public funds. In the absence of federal funds, the corporation simply could not maintain its involvement in the Canada Lands. Further, Petro-Canada could often not make such decisions alone; it depended on decisions made by its partners. No company could finance such an extensive program out of its own, internally generated funds.

252 Oil, the State, and Federalism It was the Conservative government's comprehensive and rapid dismantling of the NEP and the deregulation of oil and gas prices that had the most decisive impact on the future of Petro-Canada. The Tories' extensive program of deregulation was not easily reversible, and certainly could not be influenced by Petro-Canada. The dismantling of the NEP profoundly changed the corporation's long-term operating premises. These changes cemented what to Petro-Canada had been necessary adjustments to the economic recession of 1981-2. The collapse of the NEP, the altered status of oil, and the closer energy ties between Canada and United States all pulled the corporation in the same direction, greatly weakening its political and policy justification. Petro-Canada was being forced to modify its role and actions largely because of rapid changes in the political context, and many of these changes had been under way before the Conservatives came to office. The Conservatives' main contribution was to carry the process of change even farther in the same direction - and, perhaps most crucially, to make it irreversible. But the Conservative government's intention to privatize the corporation, while that intention had not yet been publicly expressed, also clearly influenced Petro-Canada's corporate priorities. The Mulroney Conservatives' policy program, while it pursued a careful and incrementalist approach, was driven by market-related factors to a much greater and more consistent degree than would have been the case under the Liberals. Members of the Liberal Party were more sceptical of privatization and deregulation; later on, for instance, the Liberals officially opposed the decision to privatize Petro-Canada. Their opposition to free trade was also motivated in part by considerable scepticism about the benefits of the free market.43 The specific criteria introduced to evaluate the role of public corporations became of critical importance for the Conservatives in their decision to proceed with privatization. Although they were motivated at least partly by ideology, the Conservatives were also deeply concerned about the potential political costs of their actions. For that reason the government, even with its profound dislike of Petro-Canada, did not immediately announce its decision to privatize the corporation. Note here also that organizational entities are not easy to change or abolish, especially when they are as large and popular as Petro-Canada. The uniqueness of the Canadian energy scene also played an important role in Petro-Canada's fate. For instance, as a system of resource management along the lines defined by Klapp, the NEP could only be applied to the Canada Lands; this meant that as a public corporation,

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Petro-Canada was less securely 'protected' than NOCs in other countries. Petro-Canada's management was fully aware of this and was always seeking to balance its frontier activities with those in the provinces. Under the Liberal regime Petro-Canada's strong presence in the provinces could not provide it with any preferential rights; but in the post-NEP period, if it could manage to transform itself into a successful oil company that same presence could at least provide some protection against the possibility of suffering the same fate as the NEP. The Operations of Petro-Canada In a comprehensive report on the privatization of state-owned enterprises, (SOEs) the World Bank lists a range of important requirements for preparing SOEs for privatization. One such requirement is an 'enterprise diagnosis,' a thorough examination of the public enterprise's finances and operations. As the World Bank report states: 'Following this examination, preliminary values should be established for assets or shares and an initial determination on the relevant privatization method or methods should be made.'44 Petro-Canada went through a number of such evaluations - only some of them made public - and these over time gave the corporate management and the government a better sense of the corporation's preparedness for the market. The first publicly available assessment, in 1984, compared Petro-Canada with its two main integrated competitors, Imperial Oil and Shell. A Senate report in 1989-90 provided yet another comparison of Petro-Canada and Imperial and Shell. The reports revealed that Petro-Canada, while scoring lower on a number of counts, did not deviate that much from its competitors in the private sector. A second requirement, according to the World Bank report, is for the public enterprise to satisfy certain legal requirements, which apply in particular to corporate debt guaranteed by the government. Debtors will normally seek assurances that such loans will be prepaid or that alternative guarantees will be provided when the enterprise is converted to the private sector. A third requirement is to convert the legal form of the corporate entity; a fourth is to modify the overall legal framework; a fifth is to undertake a financial restructuring, that includes such elements as asset write-down, actions with regard to debt, recapitalization, and balance sheet modifications. A sixth requirement involves physical rehabilitation, which refers to the question of whether the government should consider and undertake a rehabilitation of the corporation's physical assets prior

254 Oil, the State, and Federalism to privatization. As applied to the case of Petro-Canada, and interpreted widely, refinery shutdowns and the Gulf acquisition were examples of rehabilitation. The Gulf acquisition gave the corporation a nationwide network of marketing outlets, which represented a major rehabilitation of its distribution network. A seventh requirement is to carry out a wholesale change of staffing. According to the World Bank report, 'Privatization sometimes means a drastic reduction in the work force as a precondition of sale.'45 Finally, the report argues for the importance of ensuring co-operation from the corporation's management. The World Bank report states: In very large multibusiness, multiplant operations, it is a must that the preparation starts with assuring the full commitment of the enterprise's board of directors and top management. They would normally be given the task to prepare and implement the privatization plan or to provide extensive assistance and-support... The often read and overly simple conclusion that SOE management is generally hostile to privatization does not bear out in practice. Petro-Canada's Size

The most important indicators of size are revenues and personnel; oil and gas production and reserves; and landholdings. Following the Gulf Canada acquisition in 1985, the corporation carried out significant staff reductions (see Table 5.1). Some of these reductions were no doubt directly linked to the Gulf Canada downstream acquisition, which forced the corporation to eliminate gas stations and rationalize and streamline its downstream operations. But important staff reductions took place in each of the following years as well, and these were clearly not related to the Gulf acquisition. With regard to the staffing issue, there is little doubt that the corporation took quite substantial measures to adapt to a more competitive environment. A similar reduction was carried out in the corporation's asset base, which had to be cut back before any privatization could take place. The status of some of the assets was unclear, and before any privatization the company's asset accounting would have to correspond with that of other private-sector companies. If the government's valuation of the corporation exceeded the sale price, privatizing the corporation would increase the federal deficit; the result would be exactly the opposite of what the government said it intended to achieve through privatization - namely, a reduction in the federal deficit.

The Privatization of Petro-Canada 255 Petro-Canada also began drawing down its reserves (see Tables 5.2 and 5.3), especially its reserves of synthetic oil and bitumen, for which the R/ P rate fell from 31 in 1986 to 22 in 1990. The corporation's conventional crude oil reserves also declined, but the R/P rate for these stabilized around 10—11. Petro-Canada's gas reserves declined significantly, from an R/P rate of 36.2 in 1983 to 16.5 in 1990. Thus, with regard to oil and gas reserves, the corporation was not able to replace its production. This is partly because of the adverse economic conditions facing the industry in the second half of the 19805, which reduced oil and gas investment. Another important reason is that the company was short on investment funds. Also, the corporation was financing its corporate transition (that is, making itself a leaner company) by drawing down its large oil and gas reserves. From 1983 to 1990, Petro-Canada significantly reduced the net acreage it held (see Table 5.4). This is understandable, given (a) its need to concentrate limited corporate resources and (b) its increased knowledge of the resource base. However, three developments stand out. First, while reducing its domestic acreage, the corporation significantly increased its international landholdings in the late 19805. In other words, the new mandate enabled the corporation to expand its operations beyond Canada and to balance off its Canadian operations with operations elsewhere. In 1990, Petro-Canada held 9.9 million acres outside Canada, and 15.7 million acres in Canada. The significant increase in the corporation's international activity distinguishes Petro-Canada from the oil MNCs, whose Canadian subsidiaries were most likely constrained from expanding internationally by their mother companies.47 Petro-Canada's strong international involvement parallels that of Statoil, the Norwegian NOG, which also built up a comprehensive upstream and downstream international involvement. Second, Petro-Canada significantly reduced its frontier acreage. This move hardly set Petro-Canada apart from its private-sector competitors. In the late 19805, the corporation consolidated its frontier holdings, concentrating its activities on the East Coast. It abandoned and returned almost all of its lands in the Mackenzie Valley and the Beaufort Sea. These moves were clearly related to the change of regime in Ottawa: as its large holdings - in particular on the East Coast - approached the development stage, Petro-Canada, being now highly leveraged, market-driven, and profit-oriented, did not have the financial strength to participate in all the costly plays it would earlier have gotten involved in. Third, while scaling down its frontier acreage, Petro-Canada basically

256 Oil, the State, and Federalism retained its acreage in the Western provinces, especially in Alberta. In 1988 Petro-Canada remained the largest net landholder in the Canadian the oil industry.48 Petro-Canada's Investment Activities

The altered economic environment, which was clearly related to lower and fluctuating oil prices, influenced the corporation's activities in the upstream. After the PIP was abolished, Petro-Canada notably reduced its capital expenditures on the geographical frontier (see Table 5.6). Note here also that the frontiers were approaching the development stage after two decades of exploration work. Developing frontier fields is far more costly than exploring them and requires significant infusions of new capital. Petro-Canada's extensive frontier involvement placed particularly ominous investment requirements on the corporation; consider in this regard its large stake in the Hibernia, Venture, Ben Nevis, and White Rose fields. For a highly leveraged company, the financing of those fields represented a major problem, and one that was compounded by the corporation's rapidly declining reserve base. On 2O August 1985, Petro-Canada announced that it would write down its frontier exploration assets in the Baffin and Arctic islands and Labrador regions with $486 million. This writedown was due to falling world oil prices and to the strong likelihood that the development of those properties would be postponed. The corporation, however, did not write down its assets in the Beaufort Sea, Grand Banks, or Scotian Shelf areas. At the time, a Globe and Mail business reporter argued that another reason for the writedown was that the 'cost of certain assets on its balance sheet' was connected to the company's 'previous public policy mandate,' which was 'to explore the frontier regions.'49 The change in accounting assets was a further indication that the corporation would no longer serve as a pool of patient money and that its operations would be guided more by shortterm profitability than by longer-term strategies. This formal change, which took place after the Conservatives came to power, reflected the government's interests and priorities. In the post-NEP period, the corporation's frontier involvement declined significantly. This made it part of a general trend in the industry, as revealed by the reduction in both gross and net exploration. The reduced frontier involvement was complemented by a significant increase in both exploration and development drilling internationally. The postNEP period also saw large fluctuations in the corporation's drilling activi-

The Privatization of Petro-Canada 257 ties in the provinces. The overall pattern with regard to the corporation's activities was clear: the corporation, in reserve and operational terms, was pruning itself to meet the stiffer competition posed by the oil companies. The main competitors were older and more established companies with better overall acreage, although Petro-Canada had of course benefited greatly from its prior back-in and Crown shares. With regard to both oil production and gas production, the corporation was drawing down on its reserves and producing less conventional oil than before, although the reduction in conventional production was basically made up for by synthetic and bitumen production. The corporation's downstream involvement increased significantly as a consequence of the Gulf acquisition in 1985 (see Table 5.7). But while the initial reduction in outlets can clearly be attributed to the Gulf acquisition, the comprehensive restructuring of the downstream sector continued through the rest of the decade, at a level over and above that necessary to streamline the operations after a major acquisition. Following the change in corporate mandate in 1984, then, PetroCanada emphasized short-term profitability by cutting exploration rates. It also reverted back to the mature areas in Western Canada, increased production, and restructured its downstream presence. The restructuring included a push to centralize decision-making. In the same period, the corporation's frontier involvement declined, and there were large fluctuations in the corporation's drilling activities in the provinces. By 1989, in the company's Annual Report, Bill Hopper was able to say with regard to the corporation's operating strategy: It is five years since the federal energy minister instructed Petro-Canada to operate in a private-sector fashion. Accordingly, the Corporation ceased its policydriven activities and followed only commercial objectives and strategies. These were oriented in part to realizing the potential of several frontier and oil sands interests, the results of successful investments during earlier years. While these interests provide Petro-Canada with excellent prospects for earnings and growth, they also weight the Corporation's asset portfolio disproportionately toward the long term without contributing immediate cash flow or earnings. Since the mid 19805, low and uncertain oil prices have reduced upstream cash flow and delayed major project construction. Combined with lower than anticipated downstream returns, these factors have left Petro-Canada with a short- to medium-term performance gap that management has deemed unacceptable.50

Implicitly, Hopper was indicating that the corporation's long-term

258 Oil, the State, and Federalism need, qua organization, was to acquire sufficient bridging funds to carry it over the short- to medium-term difficulties that it faced. Such funds would enable the corporation to maintain a reinvestment ratio that in the second half of the 19805 had averaged i.o8.51 In the longer term, the large resource base, once developed, would ensure healthy returns. Hopper clearly recognized Petro-Canada's dilemma, observing: As the next few years evolve, we are going to face very substantial capital expenditures - offshore, Alberta, and all those things ... There is a whole raft of expenditures that we informed the government of in our long-term plan, and we do not have cashflow to support all of those energy activities in Canada unless we have a further source of equity. The government has informed us that they are not prepared to put any more equity into Petro-Canada, and if we are to continue to develop further energy resources for Canada and energy facilities, it seems to me that the only way to go would be to sell shares.52

The moves to diversify the corporation's activities would leave it less vulnerable to the ups and downs of the world oil market. But this more long-term strategy required considerable infusions of capital. The corporations' high debt burden made this a sticky issue. The corporation's shareholder, the federal government, basically shared the views of private-sector shareholders concerning the need for short-term returns on investment, and Hopper had to go along. At about the same time, the elimination of PIP grants, the Conservatives' decision not to provide more equity, and the Gulf acquisition all served to drain the corporation of funds, and this forced it to strengthen its bottom line. The company's relatively weak financial position also made it more dependent on the government's decisions regarding its future role in Canada. In the second half of the 19805, in order to benefit from the deregulated gas market following the Federal-Provincial Agreement on Natural Gas Markets and Prices, Petro-Canada placed more emphasis on natural gas development. And, as we've seen, the corporation took a number of measures to strengthen its international position. In 1989, Petro-Canada changed its accounting method from the fullcost to the successful-efforts method. Hopper indicated that the latter, being a more conservative accounting approach, was appropriate because of the maturity of the corporation's upstream operations. In addition, Hopper said, this change would make it easier to compare PetroCanada's financial statements with those of the other majors,53 and thus easier for prospective buyers to assess the company's commercial perfor-

The Privatization of Petro-Canada 259 mance. The move would also benefit the Mulroney government, which would find it easier to determine the best time to sell the corporation. All of this restructuring made Petro-Canada more similar to the private oil companies; this made it easier to perform direct comparisons and, in turn, possibly helped undermine the corporation's credibility. The comparisons could be used to illustrate the key assumption in a marketdriven philosophy - namely, that the public sector cannot outdo the private sector in efficiency. Petro-Canada's strong frontier presence - in particular in the 19805 when the corporation scrapped a number of the high-cost and high-risk projects that involved mapping the resource base - could be construed as the corporation trying to outdo the private sector at what the private sector allegedly does best - finding and developing sources of oil. This argument highlighted a larger image problem that had plagued the corporation from the start. Because of Petro-Canada's important role in the geographical and technological frontiers in Canada, the company appeared to be an organization 'on the fringes.' This image, which the corporation fought hard to get rid of, also played into the hands of its opponents. The more the corporation sought to establish itself as a player on par with the others, the more its enemies could present it as a challenger to the private-sector companies, and an inferior and subsidized challenger at that. But if it stayed on the fringes and pursued resource mapping with little concern for costs, it could also be accused of squandering public funds and of being unable to adapt to a changing world. Either way, it would lose out. The Canadian federal government's emphasis on short-term returns represented a convergence between central government decision-makers and key industry actors, in particular the American-owned companies.54 This convergence (or, perhaps more accurately, shared management philosophy) may have contributed to the decision to privatize Petro-Canada, because Crown corporations do not fit easily into a scheme that emphasizes the short term. The issue does not simply relate to public or private ownership as such; it also refers to the presence of different philosophies of corporate control and corporate management. The notion of shareholder control can also relate to an underlying philosophical issue concerning privatization - namely, that companies run by shareholders are more democratically run than are government or management-run corporations. Such shared management philosophies and corporate views were possible to a large extent because the government was committed to privatization and had a program for it in place. In general, once privatiza-

260 Oil, the State, and Federalism tion is established as a viable option, the government's control of the agenda becomes greatly expanded, because it has an institutional framework in place that it can use to justify changes in orientation, outlook, and philosophy; and for these changes it can consistently embrace market-based alternatives over others which are possible. In this way, the legitimacy of the alternatives as the most viable options becomes open to challenge. Hopper's second-best option, when faced with a federal government that embraced a private-sector management philosophy, was to go along with the government's plans and extract as many benefits and concessions as he could get in the process.55 In such cases, the corporation becomes driven not first and foremost by its own organizational imperatives or by its management's drive for autonomy, but by the policies and political priorities of the government of the day. The corporation's highrisk exposure in the past had made it dependent on the government for additional investment funds, and this dependence in turn had made Petro-Canada adapt its behaviour to the priorities of the government. The Management and Privatization

Hopper himself had issued public statements supporting privatization. In 1990 he stated: 'Both the management and the employees of PetroCanada are supportive of our privatization. We surveyed our employees recently, and over 85% said the sale of share would be good both for the company and for themselves as employees.'5 The positive orientation of the management and employees indicated that privatization was consistent with the needs and priorities of the corporation itself. The most frequently heard argument, on the part of both federal decision-makers and company officials, was that Petro-Canada needed to be privatized to improve its financial situation.57 PetroCanada's share of the Hibernia investment would be $1 billion, Hopper said in 1990; and in addition, in the following years the corporation would be faced with additional expenses arising from its extensive Terra Nova and White Rose holdings, from its involvement in the Alberta oil sands, and from its large downstream involvement, as well as from the new environmental plan. The corporation's current debt load placed clear restrictions on its ability to reinvest earnings. Hopper noted that the corporation had to take up new loans in 1990 to finance its activities.58 The corporation's cash flow problems were not likely to be solved by

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privatization alone. The anticipated revenue from the initial share issue that is, 19.5 per cent of the shares, or roughly $540 million - would accrue to Petro-Canada.59 But the government's intention was that the next and remaining share issues would all go to the Treasury. The Conservatives, however, indicated that even this decision could be reversed and that even more of the proceeds could be funnelled into the company, though this would weaken the credibility of their deficit reduction argument. Rather than underscoring the bargaining power of the corporation, this point only underlined the corporation's high degree of financial dependence on the federal government. Even with additional equity infusions, privatization was no panacea, because it would lower the credit rating of the corporation, partly as a result of its loss of the Crown agent status, which had guaranteed payments of its debts by the Crown. Most likely, the loss of this privilege would make it difficult for the corporation to arrange additional loans in the future, without reducing its current high debt load to any great degree. With regard to the timing of the decision to privatize the corporation, the credit rating would figure as an important concern. For instance, it would be reasonable to assume that privatization could take place only after a certain favourable credit rating had been obtained, in order to make the share offering as attractive as possible. Privatization and Public Exposure Privatization would reduce the corporation's exposure to negative journalists, government officials, and others. Privatization would also eliminate most of the controls available to the government; this would leave the corporation more free to determine the balance between its Canadian and its rapidly growing international involvement. For the corporadon's often beleaguered management, reduced public exposure would be a blessing. Once the supportive apparatus in the NEP had been removed, and once Ottawa had decided not to provide the company with any more equity infusions, the management's hands were closely tied. Privatization and State Structural Factors

The devolution of decision-making powers to the provinces also made it more difficult - and in the long run probably more costly - for Ottawa to retain Petro-Canada, because a large portion of the corporation's future

262 Oil, the State, and Federalism returns could end up in provincial coffers. By continuing to provide the corporation with cash infusions, the federal government might have ended up further subsidizing provincial and territorial energy policies, and this on top of federal concessions already granted in the federalprovincial agreements. There is little doubt that provincial leaders in the producing and potentially producing provinces wanted to see Petro-Canada in the private sector. Ottawa would be one step further removed from their backyards, yet would still be able to subsidize petroleum activities. Without a federally owned Petro-Canada, it would be more difficult for the federal government to unilaterally launch comprehensive initiatives in energy policy. In the much more decentralized yet tightly interwoven federalprovincial energy policy setting of the post-NEP era, Petro-Canada represented a federal policy instrument with unique mobility, because the corporation was able to operate in all parts of Canada. But while the overall trend in Canada's complex energy scene was toward decentralization and deregulation, any decision regarding PetroCanada threatened to be controversial. Superficially, it could be argued that whether the corporation had a policy mandate or not, the Conservatives would lose credibility in the West, especially in Alberta, if they retained Petro-Canada. But as Doern and Atherton note, the regional dynamics, 'delicately balanced' as they were, would make a decision to partially privatize politically difficult: As a large pan-Canadian integrated company, its investment and disinvestment choices would produce a series of regionally difficult problems no matter which option the Tories choose to follow. If the Conservatives do not supply direct equity capital to the company then, given low energy prices, the company can only acquire the cash flow it needs by cutting back on its exploration activity (with adverse effects on Alberta) or its downstream activity (with adverse effects on central Canada, but especially Quebec, where the Tories are politically vulnerable but anxious to consolidate their political base). Indeed, in 1985-86 PetroCanada eliminated over 2OOOjobs. If the government, on the other hand, allows the company to be a price leader and Petro-Canada raises prices to garner more revenue, the government will be the object of intense criticism as to why Canada's oil prices are going up further while world prices are going down. In this scenario, Ontario consumers would be the political minefield. Finally, if PetroCanada is not allowed to prune itself still further it will not be able to behave like a commercial entity and therefore will be unattractive to investors in a partial share offering.

The Privatization of Petro-Canada 263 In other words, the government would face costs whichever decision it made. The costs of acting at that point in time thus played a part in the government's de facto decision to postpone the decision to privatize Petro-Canada. On balance, then, the complex regional composition of the Canadian energy scene acted as a barrier to any rapid decision to privatize the corporation. The decentralization of energy policy-making, which involved the elimination of the supportive policy network in which Petro-Canada had been couched, forced the corporation to alter its operations and prepare for privatization. But decentralization as such represented less of a direct threat to the corporation's status as public enterprise or Crown corporation, largely because of the complex regional dynamics of the Canadian political scene. The regional pressures, which related to jobs and to the corporation's role as Crown corporation and public enterprise, diverged; and they had little to do with the corporation as a state oil company. Provincial pressures to deregulate the oil market and reduce the supportive interventionist network helped remove much of the policy and political rationale for retaining the corporation as an instrument of federal energy policy. The Privatization Decision When the government finally announced the privatization of Petro-Canada, on 2O February 1990, the decision was hardly a surprise. The media had speculated about possible privatization ever since 1984, when the Conservatives announced their commitment to rationalize the Crown corporation sector. Indeed, several internal task forces had studied the question at various times even before the Conservatives came to office.62 The Conservatives introduced the Petro-Canada Public Participation Act in the House of Commons on i October 1990; the act received Royal Assent on 1 February 1991. Because of its large size, the corporation was to be sold in a number of stages. The first share offering of 42,004,784 common shares, or 19.5 per cent of the common shares, was sold in June 1991. 3 By late 1994, 246.6 million shares were outstanding. The timing of the privatization was based on several factors, including the government's willingness to proceed with such a large share offering, after assurances by business leaders that the stock market would be able to absorb the share offering, and the recent success of Air Canada's share offering. The Air Canada privatization was something of a test case for

264 Oil, the State, and Federalism Petro-Canada; after that share offering succeeded, it seemed probable that a Petro-Canada issue would also succeed. Although Petro-Canada was to be privatized in stages, the government made it abundantly clear that its intention was to sell all of its shares. This meant that the government would no longer be able to use the corporation as a policy instrument. The decision to sell the corporation off in stages raised the question of positive and negative 'golden shares,' which refer to the restrictions that a government can impose on a privatized company. Negative shares, which are government-imposed regulations that restrict companies or prevent them from doing something, are quite common. Positive shares refer to the Crown's authority to impose on a privatized company the obligation to undertake certain measures or actions that the company would not otherwise have undertaken. These shares are not widely used, though they are in fact available to a government. 4 The privatization legislation contained a series of -negative golden shares but no positive golden shares; this meant that the government would not be able to impose such obligations later on.65 The act to privatize Petro-Canada contained a number of restrictions. The first restriction was that the company could not be split up. The legislation provided no specific time limits on this restriction, which left open the question whether the government was protecting the integrity of the company or providing private-sector actors with the means to break up the company. Conceivably, the corporation could create a number of subsidiaries, register these with a province, and transfer assets to them — and, as a provincially incorporated entity, be free from the restraints in the bill. F.H. Sparling, the director general, Corporations Directorate, Department of Consumer and Corporate Affairs, noted that it was certainly not the intention of the legislation to permit this, but it was unclear whether the legislation could stop something like it from happening.66 Regarding the downstream sector, John McDermid, then Minister of State for Privatization and Regulatory Affairs, noted that the Competition Act would not come into play in the privatization of Petro-Canada, which meant that the privatization would not lead to any required sales of the corporation's 3,300 or so retail outlets. 7 The legislation did provide for the removal Petro-Canada International Assistance Corporation (PCIAC) from PetroCanada; it authorized the transfer of PCIAC's shares from Petro-Canada to whomever was designated by the Governor in Council.68 Another restriction in the act was that foreigners could own no more than 25 per cent of the corporation's shares. Further, no single shareholder could hold more than 10 per cent of the corporation's shares. It

The Privatization of Petro-Canada 265 was noted that if share ownership was sufficiently widely spread out, it might be possible for one person to control the corporation; however, the 10 percent ceiling was so low that this was unlikely. 9 The government sought to justify the privatization decision by referring to the needs of the corporation. McDermid stated: 'Continued government ownership serves only to limit the company's ability to raise new equity to finance its exploration and development activities ... It is the government's view that giving Petro-Canada access to private-sector equity privatization will enhance the company's ability to play a major role in frontier exploration and development.'70 The decision to privatize the corporation sparked little political and public opposition. This lack of debate and opposition stands in marked contrast to the period 1973-84, when every proposal and legislative piece that involved Petro-Canada was contested and hotly debated in Parliament and elsewhere. Until August 1995 the federal government retained a large majority of the common shares (roughly 70 per cent), but a major change took place in September 1995, when Petro-Canada offered 118 million common shares for sale. The entire proceeds of this sale would accrue to the federal government. This share offering would reduce the federal government's ownership from 70 per cent to 20 per cent.71 The federal government committed itself not to sell any more of its shares before 22 September 1998. This large share offering, the company later observed, increased the interest of international investors in the corporation. The share held by nonresidents was 22.1 per cent and, if allowed to, might quite easily increase. Petro-Canada's management, believing that 'its share performance would be enhanced by increasing its non-resident ownership capacity,' therefore looked for ways to bypass the 25 per cent foreign ownership restriction. To this end, it introduced 'variable voting shares.' These shares, according to the company: will carry between one and 1/3 vote per share depending on the number of Variable Voting Shares which are outstanding compared to the number of Voting Shares outstanding, subject at all times to the non-resident voting constraint... As the number of Variable Voting Shares outstanding increases beyond 25 per cent of the public float of Voting Shares of the Corporation, the votes per Variable Voting Share will decrease so that the Variable Voting Shares as a class do not carry more than 25 per cent of the aggregate outstanding votes attached to all Voting Shares in the public float. This structure will allow non-residents to hold up to 50

266 Oil, the State, and Federalism per cent of Petro-Canada's public float without breaching the legislative non-resident ownership restriction.72

This proposal was accepted at a shareholder meeting on 30 April 1996. This decision underlines how far the corporation has now removed itself from its initial commitment to Canadianization. The federal government's strategy of co-operative federalism was an attempt to alleviate the intense conflicts and tensions in the intergovernmental and state-society arena - conflicts and tensions not caused but clearly heightened by the NEP. The federal deregulation and retrenchment that took place in response to provincial demands largely undercut the prominent role of EMR and other important federal policy agents and policy instruments. Much of the federal capacity for making energy policy was aimed at reducing OPEC and American influence in Canada and hence had to be reduced or disbanded to facilitate closer federalprovincial co-operation and closer ties with the United States. That meant eliminating the supportive network surrounding Petro-Canada - a supportive network that had contributed to the greatly politicized role of Petro-Canada in the NEP. With this interventionist apparatus removed, Petro-Canada, as a flexible entity, could adapt to an altered and less politicized energy setting. The dismantling of the NEP and federal deregulation were part of a federal commitment to re-establish intergovernmental trust and cooperation. The net effect was to greatly reduce the scope for federal action and place serious constraints on Ottawa's ability to defend and promote federal jurisdictional concerns in the field of oil. Federal retrenchment therefore also reduced the insecurity of governments. Oil policy concerns were delinked from the jurisdictional and constitutional concerns of governmental actors. One reason for this delinking was the altered status of oil, which reduced the point of potential contact between jurisdictional concerns and policy substance at both levels of government. Another was the reduction, through federal and provincial deregulation and joint federal-provincial management regimes, of the scope for unilateral actions and intervention. As well, key producing provinces such as Alberta altered their strategies for constitutional change, from an interstate federalism strategy of jurisdictional defence to a more intrastate type of federalism strategy aimed at strengthening regional and provincial influence at the political centre. The altered nature of provincial constitutional demands - as illustrated, for instance, by the pressure for Senate reform - also deflected attention from the pro-

The Privatization of Petro-Canada 267 vincial arena to the national arena as the proper locus for settlement of provincial demands. This change further reduced the need for a comprehensive defence of provincial jurisdiction; and in itself had the potential to significantly weaken Ottawa's capacity to intervene in a coherent and pre-emptive fashion. With the apparent collapse of OPEC and the global trend toward privatization and deregulation together undermining the notion of oil as a strategic resource (as the 'exception'), the producing provinces demanded better access to the large American market; this eventually led to the wider process of strengthening ties between Canada and the United States. The net effect of the signing of the FTA and later NAFTA was for energy policy to become increasingly linked to the more general context of bilateral trade; again, this served to divest oil of its high-politics content. These events converged with the embrace by Canada's Conservative government of a program of enhanced government efficiency and accountability - a program that was subsequently linked with privatization. Given these and other factors, government policy toward Petro-Canada moved slowly from 'a decision waiting for a rationale' to the ultimate decision itself. Given the pragmatic and careful approach of the Conservatives, it took time for Ottawa to develop the necessary apparatus for making such an important change to a large and powerful corporation. The period 198490 was a time of preparatory implementation - a time when Petro-Canada could only prepare itself for an inevitable federal decision. The specific timing of the decision to privatize the corporation can be explained by the incrementalist nature of the privatization program, the federal government's approach to privatization, the complex regional dynamic surrounding Petro-Canada, the large size of the corporation, and the stock market's relatively low capacity to absorb the share offering. In the end, because of the depth and breadth of the changes that had taken place since the corporation was formed and the NEP was introduced, there was relatively little conflict surrounding the final decision to privatize.

8

Conclusion

The twisted and tangled threads of the federal government's massive intervention in oil policy during the first two periods under scrutiny (1973-84) were not abruptly snipped away in the last period (1985-91). Rather, they were unravelled in a cautious and prolonged process lasting until at least 1990. The rationale for Ottawa's intervention, and the unravelling of that intervention, were closely connected. At first the federal government responded in a neomercantilist fashion to the sudden and dramatic rise in the price of oil and to the threat of future supply disruptions arising from OPEC's actions. Ottawa emphasized the need to develop the nation's indigenous sources of oil, and took a number of different steps to increase federal control of the dominant societal actors in the field of oil, the multinational corporations. This intervention, which included the creation of Petro-Canada and later the NEP, at first rendered the aggregate state less dependent on the oil industry; but the strategy ultimately backfired on the state, at both levels. The federal government's goals, which focused on creating the capacity for independent action, diverged from the goals of the dominant players in the oil industry. Ottawa's approach was to build up its own policymaking and evaluative capacity, most notably in EMR and in the Department of Finance. The government established Petro-Canada and a new system of rights issuance and land management in the Canada Lands; soon it became increasingly oriented toward the Canada Lands, shoring up its interventionist powers in competition with the producing and potentially producing provinces. As it turned out, the intervention sowed the seeds of its own demise, by intensifying numerous and deep-seated constitutionally sparked intergovernmental and state-society conflicts and opposition. Indeed, the very

Conclusion 269 intensity of the conflicts arising from the intervention was a key characteristic of the Canadian case. It was the pressure that built up around oil policy during the Liberal regime which as much as anything else dictated a significant reversal of policy when, as it happened, the world oil market entered yet another transitional period in the 19805. It didn't help that the intervention - and in particular the intervention of the NEP - was based on a deterministic reading or interpretation of the future direction of the world oil market. In other words, the intervention was based on predictions that did not turn out. Indeed, the extent to which the NEP was premised on capturing the future is amazing. The result, essentially, was a failure to achieve the original energy objectives in the field of oil. The end of the sweeping rationale for change was the privatization of Petro-Canada in 1990. In contrast to a number of federal states such as the United States, in Canada individual state actors face few structural barriers to comprehensive intervention. At the level of policy formulation, state elites in Canada have considerable leverage in translating their preferences into policies. Also, the federal nature of the overall state has tended to foster intrastate conflicts more than state-society ones. In this case, federal energy policy was subsequently driven not by the logic of Ottawa's energy policy concerns but by the structural logic of the aggregate Canadian state. When one level of government sought to become more independent of dominant societal actors, such as the oil industry, the issues surrounding the intervention, whether so intended or not, became increasingly channelled along intergovernmental lines of conflict rather than along statesociety ones. The nature of the issues also changed as distributional problems became subsumed under and driven by the jurisdictional concerns of governments. This shift increased the policy interdependence between the two levels of government. It squeezed out industry interests from intergovernmental deliberations and generated interventions aimed at curtailing the power of the other level of government. Ottawa's neomercantilist strategy, based as it was on an active state role in indigenous oil development, placed inadequate emphasis on developing energy sources other than oil - an alternative path that might over time have provided the state with the widest range of policy options, especially if the activity involved a transition to renewable resources. Conceivably, such a transition could have greatly reduced the state's dependence on OPEC and the oil MNCs, but it did not take place. While the federal government did on many occasions act independently of the oil industry, it had a limited capacity to sustain such inter-

270 Oil, the State, and Federalism vention; also, the nature of intergovernmental interaction was such that it tended to exclude societal actors, and this restricted the ability of individual state actors to pursue coherent and consistent programs of action. Because of the intergovernmental conflicts, the retreat from intervention was marked by a recognized need to re-establish relations of trust in both the intergovernmental and state-society arenas. One part of this process resulted in an assurance, which included the signing of a formal agreement with the United States, that no similar federal intervention would be launched in the future. With regard to Petro-Canada, the corporation adapted to an altered political reality as the government carefully prepared for its eventual privatization. It seems that by the mid-iggos, over two decades after the first OPEC oil crisis, Canada had come almost full circle in the field of oil. The Elusive Role of State Autonomy

As Skocpol and others have argued, federal officials have latitude in relation to societal actors and theoretically can fashion goals independently of the dominant actors in the oil industry. In Canada the goals of selfsufficiency, Canadianization, and fairness were all oriented toward increased federal control of the oil MNCs; however, these goals were not pursued consistently over time. While Ottawa, especially through the NEP, took quite drastic measures to curtail the power of the oil MNCs, in a number of instances the government also provided important concessions to the oil industry, including generous tax and fiscal conditions. The Liberals' energy regime engineered a zigzag pattern of intervention. Strong measures were later altered and modified to accommodate the strong industry. Distinguishing Canada from most other countries was the fact that federal goals tended to be oriented as much toward provincial governments as toward the oil industry; this was so much so that federal officials seemed less able to handle the crisis in an independent manner than were central state officials in other countries. Further, federal as well as provincial policy instruments became increasingly oriented toward the other government, which weakened the interventionist thrust. This intergovernmental dimension was central to the dynamic that drove federal intervention and eventually caused that intervention to fail. Unfortunately, neither the notion of state autonomy nor the notion of state-as-actor is entirely adequate in explaining this failure. The notion of state-as-actor, oriented as it is toward individual governmental actors, presumes that intergovernmen-

Conclusion 271 tal relations are hierarchical, with the central or federal government holding the undisputed right to handle a state's external relations. This was not the case in Canada. While the notion of state autonomy does explain to some extent why and how Ottawa intervened, it does not completely explain what it was that led to the intervention or to the subsequent demise of the intervention. Statist scholars generally attribute state retreat with societal opposition, but in the case of Canada it was the nature and pattern of intervention that played an important role in undermining governmental efforts. As we've seen, the notion of state-as-structure may prove more useful as a tool for discussing Canadian oil policy during the period 1973-91, at least when combined with insights from two other convergent bodies of work - the state-centred Canadian federalism literature (especially Cairns), and the emerging body of new institutional theory (especially March and Olsen, and Krasner, but also Powell and DiMaggio). Conceptualizing Deflection and Reverse Deflection In other countries the state's intervention in response to the OPEC oil crises of the 1970s tended to unfold along state-society lines of conflict; in Canada the intervention was deflected so that it unfolded more and more along intergovernmental lines. This condition led to a change in the cast of actors, with governmental actors taking centre stage and fashioning interventionist measures to address their concerns. Rather than being settled through closed-door, single-government bargaining with industry actors, energy issues were to a large extent addressed in the comprehensive system of intergovernmental relations. Further, the key actors in this system were the central executive officials, elected and unelected alike. This system is often termed executive federalism.1 The process of deflection also involved a change in the nature of the issues (as in how the issues were addressed), as substantive issues became subsumed under and were driven by the jurisdictional concerns of governmental actors. The interventionist measures reflected this change. An examination of policy behaviour - of how the actors addressed the issues - also reveals a shift from bargaining to positional politics. In this regard, Thorburn makes an important distinction between the dynamic of interest group consultation and the dynamic of federalism. On the one hand, according to Thorburn, 'Making policy by the process of elite accommodation between interest groups and government favours incremental policy making through continuous interaction between the inter-

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est group leaders and the policy makers of a single government, be it federal or provincial. The relationship, therefore, is biased in favour of reaching mutually acceptable policy compromises between the government leaders and the interest group representatives concerned.'2 On the other hand, the federal dynamic is quite different, revolving as it does around the concerns of governmental actors: Major considerations therefore are likely to be the reaching of settlements that respect the legal and constitutional authority of each of the participating governments, and which involve policy decisions that can be readily defended in their respective legislative assemblies and before the mass media. Therefore, it is likely that priority will be given to considerations of equity between provinces and regions over considerations of efficiency and economic viability. There will be many cases where agreement cannot be reached and, therefore, where no solution or settlement occurs. Each side stands on its 'principles' and therefore does not 'sell out.' This leads to complex negotiations, and often the striking of postures. Instead of elite accommodation, we have much more of a zero sum process. Often considerations of pride and the need to defend the integrity of one's jurisdiction prevent participants from reaching compromise solutions. Here it is legal distinctions that are at issue where policy accommodation is being sought.3

Generally, state-society relations are driven by the logic of elite accommodation, which takes place within fixed bounds. Intergovernmental relations or the federal dynamic are driven more by jurisdictional concerns; the ability to influence the bounds of interaction is a critical strategic resource. In the period 1973—84, governments at both levels sought to use their jurisdictional powers to the full, but they did not stop at that. In the field of energy, the federal dynamic was increasingly challenged by governmental actors. Thorburn underlines how the federal dynamic is oriented toward reaching settlements that respect the 'legal and constitutional authority of each of the participating governments.' But such was not the case in this period, when governments took numerous measures that were either intended to interfere with or had the effect of interfering with the powers and competences of other governmental actors. Much of the policy-making, then, was not typical of the usual workings of federalism. The underlying logic requires a further clarification. To some extent at least, energy policy became fused with the constitutional change process, and this had a great impact on the subsequent fate of the intervention.

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The Constitutional Dimension of Canadian Energy Policy

Until the 19705 the question of the role of Quebec had been the main stumbling block in resolving the issue of where in Canada of sovereignty was located. Now this question was extended to cover the 'second crisis of Canadian federalism' - sparked mainly by the oil crisis - which focused political and constitutional attention on the role of the western and eastern provinces in the federation. The uncertainties sparked by the first international oil-market crisis in 1973 caused governmental actors to focus strongly on their jurisdictional rights and dragged energy issues onto the constitutional agenda. The question of how the crisis was to be handled and who was to handle it Ottawa or the oil-producing provinces - channelled attention to the key issue of sovereignty, and this affected both the substantive and the procedural aspects of constitutional change. Betweeen 1973 and 1984, the quality of policy activity in the energy field underwent a gradual change: from strategic positional politics to constitutional malaise. 'Strategic positional polities' is found in situations where governments in effect merge substantive issues with constitutional ones, seeking to use energy policy to strengthen their future constitutional positions. This tendency generally takes place in a situation of considerable uncertainty, and the main objective is to change the constitutional rules by policy behaviour. The actors hope to be able to return to a new and stable constitutional order that more closely reflects their own interests. Strategic positional politics was evident on a number of occasions in Canada throughout the period 1973-84. Increasingly, the actors' weakened respect for the constitutional framework became a central feature of Canadian energy policy. As a result, the constitution came to be seen less as a set of metarules than as a tool governments could use to promote their interests. The NEP was the most obvious manifestation of this: the Canadian energy scene became characterized by competitive state- and province-building. Over time, strategic positional politics can weaken the actors' respect for the constitutional framework; this in turn can weaken the authority of the existing constitution to regulate the actors. Governmental actors want to be their own referees, and this can result in established constitutional rules and norms being replaced with the 'law of the jungle.' The existing constitution loses its legitimacy, and the metaframework disappears as a regulatory mechanism. The ultimate result is constitutional malaise and anomie. Once the established rules no longer hold, the players lose any assur-

274 Oil) the State, and Federalism ance or guarantee about agreement on a new set of constitutional rules; this is another way of saying that strategic positional politics heightens the insecurity of actors. The actions taken by governmental actors to fashion constitutional changes through policy behaviour, and the reduced ability of the constitution to regulate the actors, coincide to produce the 'deconstinationalization of energy policy.' In Canada, governments made numerous attempts to change the constitution through policy behaviour, and this no doubt weakened the authority of the constitution to regulate the actors. This in itself contributed to the need for constitutional change. This circumstance both reinforced and was reinforced by Quebec's demands for more comprehensive constitutional changes. In this way, the first and second crises of Canadian federalism, while seemingly unrelated, were woven together so as to help weaken the legitimacy of the constitution. It became increasingly difficult not only to view energy issues as substantive issues independent of their jurisdictional and constitutional implications but also to remove energy issues from the expanding agenda for constitutional change. Instead the issues became laden with symbolic content. As well, it was not always clear to either the actors or the analysts which aspects of energy policy should be of foremost concern; this confusion also contributed to a sense of uncertainty and the creation of conflict. Finally, in a period marked by 'deconstitutionalization' of a given policy field, the discrepancies between Thorburn's two dynamics of action became more rather than less pronounced. The juxtaposition of substantive and jurisdictional concerns associated with deflection served to confuse the two qualitatively different dynamics of action, or what Thorburn has termed bargaining and positional politics. The lack of trust, and the unilateralism, pre-emptive actions, and court rulings in the intergovernmental arena, spilled over into the state's relations with societal actors; this reinforced the intergovernmental conflicts and undermined the interventionist thrust. Deconstitutionalization as Process While the deconstitutionalization of energy policy greatly increased the insecurity of governments, this pattern was further associated with or set in motion a number of important processes that contributed to the eventual demise of the intervention. The processes included attempts not only to capture the future, as part of a jurisdictional defence and expansion in

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a period of heightened uncertainty, but also to strengthen intrajurisdictional policy co-ordination. The attempts at jurisdictional defence, which coincided with the centralization of decision-making power within each government (a process normally associated with executive federalism), helped to heighten intergovernmental conflicts and reduce the likelihood for co-operative solutions. The processes were also influenced by the learning experienced by state officials in particular. The net effect was an intervention that roused strong societal mobilization. The efforts to capture the future were related both to the uncertainty created by the world oil crisis and to the decline of the norms and rules regulating intergovernmental relations. The intervention was based on projections more than on hard facts, and this influenced the policy instruments used and generally reinforced and magnified the intergovernmental and jurisdictional bias. Capturing the future became an important motivation for constitutional change. Similarly, with uncertainty, and even more so with conflict about the basic rules and norms that guide intergovernmental interaction, comes a strong incentive to take pre-emptive measures to prevent future losses. Actors seek to set the rules and guidelines for solving tomorrow's problems. In other words, efforts to capture the future are informed by the same logic that informs demands for constitutional change. When governments argued over future revenue shares from oil and gas resources, they were often discussing resources that were not yet proved up or about which little was known regarding size or extraction costs. Such conflicts were not simply distributional: they often revolved around the need to establish new principles for how future returns would be distributed. They were therefore also exercises in rule-making. The debates and the decisions were often based on mere projections of anticipated future returns and developments, and this only heightened the actors' economic and political insecurities. Too often, these actors based their perceived interests on assumptions rather than on clearly established facts or events. This was more than a matter of slipshod or missing information: in many instances, sound information was available but not properly used. The tensions in the intergovernmental arena led to centralized decision-making and bargaining among key officials, many of whom were not overly familiar with the substantive issues involved and were more concerned about their relative position in relation to other actors. The wide range of revenue and price projections, and the significant variations in reserve and resource forecasts, served not only to heighten

276 Oil, the State, and Federalism the actors' insecurities but also to encourage actors to adopt worst-case scenarios. This was clearly the case in the NEP, which was based on the notions that OPEC would continue to play a dominant role and that the world oil market would continue to favour oil producers and exporters premises widely shared among analysts. The NEP's 'tilt' toward the Canada Lands is perhaps the best example of how the policy set out to capture the future. As it turned out, the policy was based on a narrow and deterministic view of the future. The NEP was also a clear example of an attempt to change the constitution through policy-making. The federal government established new rules and procedures in an attempt to constitute itself as a future oilproducing government, Ottawa was in effect rewriting the terms of its relations with the provincial governments and with the oil industry. The unilateral introduction of the NEP, combined with the many intrusions into thejurisdictional rights of other governmental actors, demonstrated a low regard for the constitutional framework in place. Jurisdictional defence and promotion generally led to intrajurisdictional policy co-ordination; this not only encouraged competitive interventionism and heightened intergovernmental conflicts, but also reduced the capacity of the intervention to address substantive issues. Intrajurisdictional policy co-ordination is an intrinsic feature of executive federalism, which is driven by heightened intergovernmental policy interdependence and by centralization of decision-making both at the political centre and in the hands of actors with jurisdictionwide concerns. Intrajurisdictional policy co-ordination was also encouraged by other structural factors in Canada. One principle of structure, parliamentary government, enabled state elites to initiate comprehensive policy programs, and the duplication of parliamentary government at two levels encouraged competitive goal formulation. Another principle of structure, federalism, not only produced a vague division of overlapping powers but also provided a setting in which interdependent governmental actors had considerable powers to influence and stall each other's actions. In addition to all of this, Ottawa's constitutional powers extended beyond those normally attributed to a federal government. Its control over the Canada Lands enabled it to play a more dominant role in energy policy-making than would usually be expected from a federal government. The unsettled constitutional status of the Canada Lands prior to the Supreme Court ruling in 1984 only heightened the political importance of those areas in the conduct of intergovernmental relations. What

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was particularly damaging about the NEP was that this effort at federal state-building actually reduced Ottawa's ability to act as a national government and as a balancer of different regional concerns. With the benefit of hindsight, it could be argued that Ottawa would have served most effectively as a national balancer by using its power to fashion a comprehensive program of conservation and interfuel substitution. The Liberals erred when they resorted too much to state power as a means to stimulate large-scale fossil-fuel development; later, the Conservatives erred when they resorted too little to state power as a means to promote conservation and interfuel substitution. The wide extent of provincial ownership of land and resources also enabled provincial officials to exert a large measure of direct control of oil and gas development; this reinforced executive dominance. Both Ottawa and the provinces possessed unique powers for launching competitive state-building and province-building efforts. Ottawa was particularly exposed in this regard, in that it was faced with strong and divergent pressures from the producing and potentially producing provinces. In the NEP, the strong element of jurisdictional defence and promotion produced a significant tension between the nation-building and the statebuilding components of the program. Nation-building was related to the search for popular legitimation, whereas what is generally seen as statebuilding was part of jurisdictional defence. As Milne observes, Ottawa used nationalism to promote the federal government. Milne sees this as centralization, but strictly speaking the strong Canada Lands promotion of the NEP was not centralization but part of jurisdictional defence and promotion, in a setting marked by multiple, competing interventionist governments.4 The statist and the new institutional theories place considerable emphasis on the learning processes undergone by state elites, with learning linked to state autonomy and state capacities: learning occurs as a result of autonomy and goals, and it normally increases state capacity. Clearly, the learning processes of state officials were deeply influenced by the process of deconstitutionalization. Central decision-makers in Canada undergo dual learning processes, one in the state-society arena and the other in the intergovernmental arena; and in the case of energy policy, the learning process in the intergovernmental arena contributed to the conflicts. When state elites become preoccupied with intergovernmental concerns, they often take actions that increase their capacity to curtail the powers of other state actors, even if this works against solving the substantive issues or curtailing industry influence. In the situation at

278 Oil, the State, and Federalism hand, the increasing use of policy instruments to solve issues raised by or related to other governmental actors deflected attention from the substantive energy issues. Political learning in Canada thus involves learning not only how to address substantive problems and challenges but also how to recognize the process through which substantive issues and concerns are shaped in the intergovernmental arena - and how such issues and concerns are influenced, even driven, by the pattern of intergovernmental interactions. The relevant constitutional and legal knowledge became a strategic resource in the situations of crisis, and this raised the stakes involved in intergovernmental interaction. Also, these situations were linked with disagreement and uncertainty as to the proper location of sovereignty, with considerable jurisdictional overlap, and with high future costs of failure or defeat. As a result, the political learning became jurisdictionally oriented more than problem-oriented, and the solutions clearly reflected jurisdictionally based concerns. Different situational assessments and adverse positions were developed and adopted, to the detriment of collective responses and co-operation. Thus, during this period political learning revolved around other political actors and the constitutional framework more than in most other countries, but the lessons learned did little to produce solutions to substantive problems. The relationship between tenure in office and learning was increasingly oriented toward the jurisdictional concerns of the governmental actors. The actors' learning processes also influenced their conceptions of the role of structure and structural arrangements. The key actors found only insecurity as they increasingly questioned and even challenged the rules and norms guiding intergovernmental relations and the established patterns of state-society interaction. The structural elements could not be taken as given but had to become an intrinsic part of the actors' calculations; structural changes became an integral part of the actors' struggles to establish a new basis for order and rule. The actors had to consider the effects of their own and others' actions on the structural elements in place, while constantly trying to keep track of subtle and sudden structural changes. Another set of effects relates to the role of policy instruments. Jurisdictional conflicts associated with deflection produced rapid and comprehensive changes in regulatory systems, and this provoked uncertainty as to the effects of the intervention. Measures were often altered before they had been properly tested. Further, deflection increased the propensity for actors to introduce novel and unfamiliar policy measures and inter-

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ventionist models. The most obvious example of this was the introduction in the Canada Lands of the interventionist North Sea model, which diverged considerably from the models in the producing provinces. As we've seen, the North Sea model was particularly unsuitable in the Canadian context because it embraced such a large measure of ministerial discretion, and for that reason required such a high measure of trust. That trust was not forthcoming in this period. 'Policy mobilization' entailed a range of policy measures that had hitherto been less relevant in the intergovernmental arena. This applied in particular to the role of Petro-Canada. For instance, Ottawa's capacity to ensure consistency between its energy policy goals and those of its entrepreneurial presence, Petro-Canada, was more constrained than was the case in most other countries because of the prominent role of the provinces in resource development. Further, Petro-Canada faced the same and - because of the strong provincial component - probably even stronger pressure for corporate autonomy than did other NOCs. Intergovernmental conflicts had a great impact on Petro-Canada's corporate autonomy. The process of intrajurisdictional policy co-ordination not only tended to heighten conflicts but also served to orient the emerging policy instruments along intergovernmental lines. The introduction of the NEP placed Petro-Canada more firmly under Ottawa's control; it also elevated the corporation to centre stage in Canadian energy politics, with an expanded mandate and a more highly politicized role in Canadian energy relations. Through an expanded federal landlord role, the federal incentive system, and other provisions, Ottawa ensured itself that Petro-Canada would have a strong presence in the Canada Lands. Policy mobilization in the NEP thus served to draw Petro-Canada closer to the political objectives of federal elites. In general, Petro-Canada's managers enjoyed less autonomy from Ottawa than did the managers of most other comparable NOCs - although this owed more to the highly politicized intergovernmental setting in Canada, and to the political nature of Ottawa's objectives in the energy field, than to the specific system of controls on the corporation. Instrument overload meant that individual policy instruments were overloaded with different and often divergent tasks; this resulted in contradictions, uncertainties, and inefficiencies. It also expanded the process of deflection and amplified its effects. A characteristic feature of the period, then, was a strong potential for issue linkage. The large number of possible issue linkages was a dominant factor in relations among actors and made it difficult for those actors to

280 Oil, the State, and Federalism forge agreements and arrangements that could 'stick.' Instead, there were almost constant revisions, which served only to increase actor insecurity. The net effect was a host of ineffective policy measures that heightened intergovernmental conflicts. Finally, the process of deflection had important effects on state-society relations. The NEP sparked considerable societal opposition, especially in Western and Eastern Canada. Another important effect it had, most apparent during the two oil crises, was to heighten uncertainty in industry circles about what the governments were up to. Especially during these crises, what Thorburn terms the federal dynamic overtook the dynamic of elite accommodation as the former industry 'insiders' temporarily became 'outsiders.' When this occurred, it became difficult for industry actors to be at all certain about the intentions of the governmental actors. The confusion increased in proportion with the extent to which the governments pursued strategic positional politics and undermined the relevance of the constitutional framework in place. The zigzag pattern of interventions involved concessions to industry, made to restore trust and patch up the damage done. Although the government's approach was decidedly troublesome for the oil industry, the conditions did place the industry in a particularly favourable position for reaping economic compensation. Further, the zigzag pattern illustrates the dynamic in the process of rule-making and rule-changing in a situation where there is weakened respect for constitutional rules and norms. After introducing strong legislation to capture policy space relative to other governmental actors, a government would begin to bargain with industry actors, revising the measures to ensure industry co-operation. Reversals and rapid changes tend to occur when decision-makers are not entirely certain about which policies will stick, and when. The weakened respect shown by governments for the constitutional rules and norms reduced the legitimacy of those rules and norms; governmental actors then introduced various measures to compensate for the loss of legitimacy. Thus, they sometimes sought to build constituencies of support to heighten their own legitimacy by mobilizing a wider range of societal actors. They did this, for instance, by making energy an important electoral issue and through various symbolic means, such as having Petro-Canada expand in the downstream to 'show the flag.' Ottawa also did this in the NEP by subsidizing energy consumers. The main issue - one brought forward through the 'deconstitutionalization of energy policy' - related to the question of who was essentially to decide on the proper division of powers. Was this the sole preserve of gov-

Conclusion 281 ernmental actors? The underlying question that spilled over from the process of constitutional deliberations and informed the actors' views was fundamental: Where is sovereignty located? While this question remained unanswered, Ottawa could use its special position to seek legitimation through elections. But this was a risky strategy, because it could easily spark a provincially based countermobilization founded on a different conception of Canada - namely a vision of Canada as a community of communities, in which Ottawa was remote from, and no longer reflected, the country's regional diversity. Thus, two conflicting visions of Canada were being promoted. The subsequent fate of the intervention would do much to decide which vision would win out. Further, the very intensity of the conflict meant that the supporters of whichever vision triumphed would take strong measures to ensure that their victory could not be reversed. State Retreat

The state's retreat from intervention followed the reversal of a number of the circumstances that had produced the intervention and given it such a strong intergovernmental and jurisdictional imprint. This retreat, this 'reverse deflection,' was not a simple return to normal times or the status quo after a set of protracted intergovernmental battles. While the many factors that had prompted the governments to intervene were undermined in rapid sequence, the deep-seated distrust associated with the undermining of so many of the rules and norms that had once guided the actors led to demands for more comprehensive changes. The deflection, then, was neither a simple case of an intergovernmental conflict replacing a state-society conflict, nor a return to state-society bargaining and elite accommodation. The intergovernmental conflict was deeply informed and driven by the manner in which energy issues had not only informed the constitutional concerns of the governmental actors but had also been driven by those concerns. It was marked both by the need to identify winners and losers and by the search for new rules, norms, and common frameworks of understanding that could help to reestablish new working relationships. The fusion between the substantive concerns of governmental actors and their jurisdictional and constitutional concerns had broken down because of the radical changes in the world oil market. These changes undermined the premises on which the NEP had been based, and oil issues became increasingly subsumed under the general pattern of inter-

282 Oil, the State, and Federalism national trade issues - an effect that drew Canada closer to its largest trading partner, the United States. The NEP's strong emphasis on the need to capture the future made the policy program vulnerable to rapid changes in the international oil market. A significantly altered international scene facilitated the federal and provincial moves to deregulate and privatize state assets. Reverse Deflection: International Factors

An increasingly interdependent world is one in which states and other actors are linked together in complex webs and networks of mutual need.5 States are bound to their surroundings by a multitude of ties, which can involve a wide range of issues. Institutional arrangements and policy measures reflect these ties. A wide range of state organizations, often without any formal responsibilities for international affairs, have developed direct links with the outside world. These often dense networks tie states together bilaterally, multilaterally, and through the operation of international organizations and regimes. The networks are often firmly entrenched - a factor that helps maintain and even reinforce certain established issue definitions and their supportive apparatuses at the domestic level. When the ties of different parts of a state pull in the same direction, they can be mutually reinforcing. But different parts of a state can also be pulled in different directions and linked to different international contexts. Whether these ties are mutually reinforcing or increasingly divisive, they are shaped and altered by crises, policy-borrowing, diffusion of policy, international 'fads,' and novel issue linkages. International events and developments do not necessarily expand the capacity of state officials to act in a uniform manner. Although the notion of complex interdependence reminds us of how much more tightly linked states have become, this perspective greatly underestimates the effects that states have on the nature and conduct of politics. The state is not a uniform actor; rather, it consists of a range of different actors and institutions that are linked both to one another and - to different degrees - to an external (nondomestic) environment. In the Canadian case, each province as well as the federal state is an actor in its own right; the OPEC oil crisis revealed that the provinces do not readily accept federal ascendancy in handling international crises. The OPEC oil embargoes not only forced states to place far more emphasis on their energy requirements but also forced all industrialized

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oil-importing states to focus attention on the OPEC countries, where their links had previously been nonexistent, weak, or largely neglected. OPEC's heightened profile altered the established domestic priorities of other states, often in a sudden and dramatic manner. Certain institutions at the domestic level were strengthened, to the disadvantage of others. For instance, the almost worldwide recognition of oil as a strategic commodity tended to strengthen the role and importance of political and bureaucratic apparatuses involved in handling oil-related issues and concerns. In Canada, the federal government's increased concern about oil supplies and prices greatly strengthened EMR's role and projected Ottawa into a more prominent role in drafting energy policy. Increased attention to OPEC and the recognition that this country was vulnerable to OPEC actions encouraged a rethinking of domestic institutional designs; this resulted in an increased willingness - especially in Ottawa and the Atlantic provinces - to import foreign ideas, institutional practices, and policy instruments to grapple with the new threat. The success of these novel measures depended on how familiar they were, and on how transplantable they were, and on how well they could become properly institutionalized. For a time, the federal government reaped the most benefits from these developments, because it had the largest number of, and strongest links with, the outside world. But the strengthened federal role was constantly being challenged by the producing and potentially producing provinces. Further, the provinces' adoption of different international models (American and North Sea) made it difficult for Ottawa to develop a coherent and balanced interventionist stance. The global developments did not provide a solid foundation for Ottawa's policy-making. For instance, a strengthened role for EMR, and a stronger thrust in the Canada Lands, only made sense in the context of a strong OPEC and the notion of oil as a strategic commodity. Once the political importance of oil faded, the new institutional and policy arrangements were undermined, eventually to be replaced by more familiar policies and programs. Thus, while state institutional arrangements are closely linked to their multiple environments - domestic and international - the relative importance of domestic and international environments differs from one institution or organization to another. Different parts of a state can be linked to different sets of international environments; these may supply them not only with different situational assessments, but also with different ideas and action models. Such different international orientations can -

284 Oil, the State, and Federalism on their own or in combination with other factors - encourage different evaluations of the problems to be solved and thus lead to different approaches to the conception and handling of those problems. In Canada, OPEC's decline signalled a change in strategy from neomercantilism to continentalism. This affected the links between Canada and other parts of the world, with obvious implications for domestic institutional and regulatory arrangements. In the second half of the 19805 the move toward tighter continental integration reduced the ability of individual state actors to launch comprehensive and coherent interventionist programs. The signing of the FTA meant that a number of issues that had once been settled within Canadian institutions now had to be settled in conjunction with American authorities. The concerns of federalism played a role in producing the FTA and later NAFTA, and NAFTA would affect the workings of Canadian federalism. The federal-provincial energy accords, deregulation, privatization, and the FTA and NAFTA made it more difficult, if not impossible, for the federal state to act in a coherent and uniform manner in the field of oil. An extensive, binding, interstate but bilateral agreement such as the FTA involved important reductions in aggregate state sovereignty. As the North American dimension of Canada's relations with the world became further reinforced, the trade agreements were almost certain to have the effect of harmonizing or homogenizing the wide range of international networks tying Canada to the larger international environment. Reverse Deflection: Domestic Factors

After the rapid changes on the world oil market greatly reduced the political importance of energy, the potential for energy issues to spark concerns over the ultimate location of sovereignty in Canada was greatly diminished. Another contributing factor to this was the defeat of the Liberals and the election of the Conservatives led by Brian Mulroney. Deflection had been marked by deep-seated conflict; reverse deflection was hailed by the key participants as a new era of consensus and harmony. The new federal leaders had not experienced the same traumatic events as the Liberals, nor had they had to learn the same lessons. They were less constrained by the past; therefore, at least initially, they were more concerned with and optimistic about the prospects for a Canada-wide harmony and good working relations with the various actors. Also, they felt no commitment to defend the intervention in place and were able to label it as a failure on the part of the Liberals. While Nordlinger contends

Conclusion 285 that 'officials prefer policies that help structure and heighten their autonomy,'6 not all state officials pursue autonomous goals or policy programs. For instance, the Conservative government did not pursue an autonomous course of action in relation to the dominant actors in the field of oil, the oil MNCs. One important reason for this was that many of the earlier conflicts continued to affect relations among the actors. Of particular importance was the need to establish a range of new guidelines for conducting intergovernmental and state-society relations. The actual process of change was not marked primarily by a harmonious consensus among equal parties, but rather by a logic of dismantling and by retreat from intervention, especially at the federal level. Ottawa was clearly viewed as the main culprit, and its retreat was portrayed as a set of compensatory acts to redress former wrongdoings. In this sense, the past lingered on, with the winners and losers identified. The winners sought guarantees against similar intervention in the future, and an extension of those guarantees into the international arena through agreements such as the FTA. An important objective of the producing provinces was to prevent another NEP in the future. The producing provinces, most notably Alberta, sought to tie Ottawa down by increasing provincial influence at the political centre and supporting a broad international trade agreement with the United States. The FTA subjected oil to the norms and rules governing trade in general; that agreement also made it difficult to define oil as a strategic good requiring special national attention. The provincial reaction against the perceived Liberal centralizing trend in the NEP had the effect, then, of expanding the scope of intergovernmental interaction to include the international arena and to involve U.S. government actors far more directly in Canadian energy policy. This clearly weakened the capacity of the individual provinces and, even more, of the federal state to operate as coherent actors in the energy field. Many of the provinces altered their approach to federalism from an interstate to an intrastate strategy. It was the interstate federalism strategy that lent itself most readily to jurisdictional defence and promotion at both levels; intrastate federalism would greatly strengthen provincial influence in Ottawa, at the political centre, and also greatly reduce the potential for federal unilateralism. As a result of this strong emphasis on the need for decision-makers to re-establish trust, conflict was reduced in both the intergovernmental arena and the state-society one. The significantly altered international environment and the reduced importance of oil as a front-line political

286 Oil, the State, and Federalism issue helped to delink substantive and jurisdictional concerns, especially of the federal government. However, because of the strong fusion of those concerns, and because it would be difficult to sort out the future jurisdictional - as opposed to substantive - effects of the instruments in place, this delinking had to be comprehensive. Such a delinking required comprehensive policy reversals. The process of dismantling also focused hard on the policy instruments that mattered most in the intergovernmental arena. Those instruments that had been used less directly in the intergovernmental struggle or that were flexible enough to adjust to a changing reality were less likely to be dismantled with the NEP. One such instrument was Petro-Canada. The policy reversal also tended to favour familiar solutions over novel ones: the reversal of the NEP was a matter of going back to more familiar types of intervention. It seems, then, that for intervention to succeed it must involve relatively familiar policy instruments. The process of reverse deflection resulted in a range of effects that would shape Ottawa's future conduct. Although he does not explore the conditions surrounding state retreat, Ikenberry, for instance, contends that the state's ability to withdraw from intervention may be 'as powerful an expression of state capacity as intervention was in the first place.'7 Clearly, it matters to the state's overall interventionist capacity whether the retreat involves restrictions on the state's ability to reintervene later on in a similar manner. Such restrictions, which may vary in importance, include the following: (a) political promises or vows that are seen as binding; (b) national legislation or other formal restrictions that preclude certain courses of action; and/or (c) binding and comprehensive international agreements that preclude certain types of intervention and that must be revoked or renegotiated in order to be significantly changed. All of these three forms were used in Canada in the post-NEP period. Note also that when a policy instrument is closely associated in peoples' minds with policy failure whether the particular instrument contributed to the failure or not - it can become more difficult to reintroduce such an instrument as time goes by. Conclusion Intergovernmental interaction, then, shaped but was also partly shaped by socio-economic forces. Also, the closely linked processes of deflection and reverse deflection were historically contingent and depended for

Conclusion 287 their occurrence on a range of factors. And while the range of policy and political processes and outcomes may at the time have seemed quite irrational, they are not surprising given the larger political and constitutional setting. Implicit in this analysis is a distinction between (a) federalism as the normal conduct of affairs among governmental actors, and (b) deconstitutionalism, which is associated with insecurity and change. Once key actors who possess the ability to alter the constitution actually set out to do so, the status of the constitution as a regulator of intergovernmental interactions undergoes a change. Such change feeds into how the constitution is viewed, building pressures for constitutional revisions that are beyond the normal workings of federalism. Once the individual actors see the constitution not as a set of metanorms and rules governing their conduct but as an instrument they can use to promote their own self-interests, intergovernmental interaction and state-society relations are profoundly altered - a process intensified by international developments. In the oil sector, in the interplay of politics and policy-making, the substantive concerns of governmental actors are deflected byjurisdictional ones. This deflection alters not only the nature of the state's interaction with societal actors but also the relative ability of the state - at both levels - to manage state-society relations and produce outcomes that can be seen as satisfactory and fair. In federal states, state intervention is multidimensional: intergovernmental and state-society dimensions interact. The relative importance of each of these dimensions varies over time. In the case of Canadian oil policy, the notion of state autonomy as defined by Skocpol is of less theoretical utility to the analysis of the complex Canadian political scene than might have been expected. State intervention has to be understood in terms of its combined effects on state and societal actors. Goal consistency is also problematic, because intergovernmental interaction often intervenes to shape state interests. Further, the state—society divergence of interests is less likely because intergovernmental conflicts interact to produce a far more complex political scene. Policy instruments get caught in the complex interaction of state-society and intergovernmental relations and hence are often ineffective. In order to account for the complex Canadian case, we need to revise our preconceptions of what effective policy instruments really are. State actors intervene in response to international events and other states, and they develop and use their relations with other states to favour their interests in domestic conflicts. But the state's position in the inter-

288 Oil, the State, and Federalism play between the domestic and the international arena does not necessarily enhance state autonomy. Other states and international organizations may be involved in the handling of national conflicts in a manner that serves to undermine the autonomy of individual state actors. In this analysis, history is key to an understanding of the rules and norms that constitute society and the state, and of how deflection and reverse deflection occur - to an understanding of how those two processes are related and to recognizing their effects. But another key is the actors' approach to the future and how that influences their self-assessments and their assessments of others. The actors recognize that changes in the rules and norms that guide their interactions have significant consequences, many of which are not well known, understood, or even anticipated. This affects their actions, because they can be neither sure about defining their future interests and concerns, nor sure about how effective they will be in pursuing those interests and altering the rules. The dynamic changes associated with the processes of deflection and reverse deflection suggest that there is a need to question our preconceptions of order and change. Order has been viewed as an intrinsic element of the political process, and the academic community and policy-makers alike tend to have a strong penchant for order as equilibrium. Two theorists, Orren and Skowronek, challenge what they see as the prevailing conception of stability and change: 'If the association of institutions with "order" is virtually instinctive in the study of American politics, so too is the understanding of political change as a transition between institutionalized orders, and of transition periods themselves as resolving disorder with new institutional settlements. They suggest instead a different way of viewing institutional politics: Tn any given polity, coexisting institutions manifest a multiplicity of ordering principles and ... these juxtapose various time-lines of order and change.' Rather than being preoccupied 'with order-in-periods,' they suggest that we 'turn the study of institutions into an exploration of these reflexivities of time inherent in an institutionally-bound polity.' If different institutions and institutional arrangements, each with their own ordering principles, structure the passage of time - the sequences and cycles, the changes and lulls - in different spheres at different rates, then it is unlikely that time can be neatly bound into periods. Furthermore, any single overarching or any master program that purports to figure out how the pieces 'fit together into a coherent whole' is likely to screen out much that is significant about institutions in politics ...

Conclusion 289 Accepting the premise basic to all institutional study, that institutions structure change in time, but abandoning the presumption that institutions are synchronized in operation or synthetic in their effects, alters the analytic perspective to fix on the critical problems of timing and conjuncture, on the dissonances and sequences, that are, we argue, characteristics of institutional politics.9

Orren and Skowronek, then, stress the need to identify the most important ordering principles and to establish the relationships among these principles. This observation seems particularly appropriate to the case of Canada because of the presence of critically important but as yet not properly settled historical problems that have the potential to erupt and set in motion complex processes of change. Often, analysts think more about questions of order, system, and standards of rational action than do state decision-makers. Analysts highlight intentionality and clarity of purpose to account for a complex reality; at times, however, they end up distorting matters even more, by simplifying those elements and subjecting them to one set of principles or one logic of action. Institutional politics revolves around the various ways that institutional structures shape and condition the goals, norms, and values of decision-makers, and how decision-makers themselves seek to structure and shape their own realities. Humans act, and their actions are informed by their goals, interests, and convictions. No process exists that is devoid of human intent. But ongoing processes are often deeply rooted in history and become the carriers of the intentions of the living as well as of the dead. Over time, individual intendons become embedded in structures and structural arrangements that continue to guide and influence actions. In a complex world, many influences, which often diverge, are found simultaneously. Stress, disjuncture, and tension are largely unavoidable - but the best way to begin to handle them, it would seem, is to recognize and analyse their existence. In this larger context, Petro-Canada's dual roles stand out amidst the seeming chaos of deflection and reverse deflection. The tense political situation reinforced the political profile of both these roles. On the one hand, Petro-Canada was a concrete policy instrument aimed at helping Ottawa pursue its federal objecdves in the energy field. On the other hand, it was a nadonal symbol of considerable importance. The Liberals sought, quite successfully, to combine the two roles, whereas the Conservatives - barred from initially privatizing the corporation - ended up having to separate them. Petro-Canada's ability to cast itself into these two distinct yet complementary roles enabled it to outlast its supporting inter-

290 Oil, the State, and Federalism ventionist framework. This at least partly explains why it was not privatized until 1990. Norms or Interests ?

Once we recognize that the power of individual actors must be viewed in light of the nature and pattern of intergovernmental interaction, as being often driven by factors and events in other issue areas, our analytical focus must shift to the factors that shape and condition such patterns of interaction. These factors involve more than simply the power and interests of individual actors. Given the altered status of the constitution - as increasingly an instrument through which governmental actors can promote their interests - it is tempting and seems quite reasonable to highlight actors' interests. But while the actors' motivations, their perceptions of power and influence, and the power relations among them are important, actors do not necessarily have fixed interests. The notion of fixed interests can lead to an overemphasis on the role of human agency in shaping decisions and to a relative neglect of the context, including the historical setting, in which actors operate. The larger framework plays a critical role in shaping interests, as well as perceptions of self and other. In the case of the formation of Canadian oil policy, the actors' interests were not fixed, nor did the actors consider the framework in which they operated to be fixed. In fact, the role and effects of the constitutional framework were a vital concern for most of the actors involved - especially the governmental actors, who saw themselves as the stalwarts of the constitution and constitutional change. In their calculations of self-interest, the actors were obviously concerned about how a rapidly changing international setting might alter their jurisdictional rights and their future consdtutional role and status. It took time for these issues and concerns to become fused, but once they were, this fusion resulted in interventionist measures that focused not only on substantive concerns but also, increasingly, on the jurisdictional and constitutional concerns of governmental actors. Crises that bring on uncertainty and lead to diminishing respect for the constitutional framework in which state-industry and intergovernmental bargaining takes place influence and alter the actors' conceptions of their interests. More is at risk here than their conceptions of interest and of the stakes involved. Equally important is the question of how interests will be articulated and pursued in the present and the future with regard to the opportunities and constraints brought about by changes to the

Conclusion 291 existing institutional and constitutional framework. When there is uncertainty about the future, and especially about the framework of norms and rules that will guide future interaction, actors tend to be alert, and to seek to make sure that both their interests and their conceptions of right and wrong, fair and unfair, are properly addressed. This in itself heightens the stakes and the level and intensity of conflicts. Accountability in a Situation of Shifting Rules and Norms

The story of the administration of the oil sector in Canada during the period under question is the story of a policy failure; perhaps, though, the larger underlying issue is the question of how to govern in an increasingly interdependent world. Discussions of policy failure tend to lay blame on the federal government for its centralist and interventionist policies. Indeed, establishing who or what is at fault in an issue area is an important part of larger concerns, found in all democratic societies, about trust and accountability. In the Canadian case, however, the failure was complex, and involved a great number of actors; this makes it difficult to attribute blame to one particular set of actors. Although political accountability is always important, in an increasingly interdependent world the lines of accountability are less solid. When actors are bound up in a constitutional framework that they no longer deem to be appropriate, notions of accountability can suffer. The question of accountability relates not only to individuals and single actors, but also to how, and the extent to which, the actors were bound to and felt committed to the larger system of norms and rules embedded in the constitution. The Role of NOCs as Policy Instruments A policy instrument, especially one laden with symbolic content such as Petro-Canada, must be linked to the larger political setting. On balance, Petro-Canada did not significantly evade federal control. Halpern, Plourde, and Waverman saw Petro-Canada's penchant for projects in the provinces in the late 1970s and mid-igSos as an indication of the corporation's push for managerial autonomy.10 But as Pratt suggests, the evidence shows that the corporation's attempts to balance its role in the Western provinces with its high-cost frontier mandate were more an indication of prudent corporate management and a reflection

292 Oil, the State, and Federalism of the peculiar nature of the Canadian energy scene than a conscious and consistent effort on the corporation's part to distance itself from its policy mandate. Only after the NEP collapsed did Petro-Canada distance itself from its mandate — but then so too did its political masters, whether Liberal or Conservative. Petro-Canada's actions were formed largely as responses to changing federal priorities. The peculiar nature of the Canadian energy scene - when compared with that of unitary states - reveals an interesting tension: on the one hand, we had the NOG as public enterprise, pursuing goals of a more symbolic nature (such as Canadianization) on a nationwide basis; on the other hand, we had the NOG as an energy policy instrument that was subject to federal jurisdiction and an integrated part of the federal Canada Lands system of resource management. As an instrument of energy policy, Petro-Canada was nowhere near as effective as it would have been in a unitary state. An important underlying question with regard to the role of the state relates to whether it was public ownership as such that mattered most, or the specific manner in which the public enterprise was applied as policy instrument. Which matters most to change: comprehensive deregulation in the energy sector but retention of the NOG, or privatization of the public enterprise? Klapp's model suggests that privatization matters most, but her model is ambiguous on this important question. In Canada the most important change in the role of the state was not the privatization of Petro-Canada, but rather the dismantling of the interventionist framework in the NEP, which served as the corporation's supportive apparatus in the Canada Lands. This apparatus above all else could ensure that the corporation performed the tasks that Ottawa intended. In our study of the state, it seems, we must focus less on the size and scope of the public enterprise sector, and more on determining exactly what it is that the state does - how its actions are shaped, and who or what does the shaping.

Notes

l: Introduction 1 Canada, DMR, National Energy Program, 3, 7. 2 See Canada, DMR (Energy Strategy Branch), Canada-U.S. Free Trade Agreement and Energy: An Assessment, 47. 3 Jeffrey Simpson, 'Never is heard a discouraging word about the Energy Minister, ' The Globe and Mail, 6 Feb. 1996, A2O. 4 Maude Barlow (Council of Canadians), 'The Energy Minister,' letter to The Globe and Mail, 12 Feb. 1996, A8. 5 There is a large body of research on Canadian energy policy during 1973-91, and my aim here is to modify and extend these analyses. Larry Pratt, for one, has written extensively on Petro-Canada, but his work does not cover all the stages in the corporation's history. Nor have other works placed adequate emphasis on the larger federal and federal-provincial interventionist setting in which the corporation has operated. For instance, Halpern, Plourde, and Waverman study Petro-Canada as a single instrument of intervention in isolation from other policy instruments. When they include contextual factors, they link these too closely to Petro-Canada. For instance, the authors find a significant negative correlation between oil company stocks and the decision to establish the corporation, but neglect to point out that the announcement of the decision to establish Petro-Canada in May 1974 corresponded with the highly controversial Turner budget announcement that revoked the depletion allowance and sparked a strong business uproar. See Halpern, Plourde, and Waverman, Petro-Canada: Its Role, Control and Operations. 6 See Castles, Comparative History of Public Policy, 11. 7 Ibid., 12. 8 See Tuohy, Policy and Politics in Canada, 4.

294 Notes to pages 8-18 9 See Berry, 'Oil Lobby and the Energy Crisis,' 600-35; and Doern and Toner, Politics of Energy, and Toner and Doern, 'Two Energy Crises and Canadian Oil and Gas Interest Groups,' 467-93. 10 See Doern and Toner, Politics of Energy, 466. 11 On this point, for different interpretations see the work by Pratt and by Doern and Toner, as well as Jenkins, 'Reexamining the "Obsolescing Bargain."' 12 See Evans, Rueschemeyer, and Skocpol, eds., Bringing the State Back In, 49; and Ikenberry, 'Irony of State Strength,' 134. 13 See Krasner, 'Approaches to the State,' 224-5. 14 See Skocpol, 'Bringing the State Back In: Strategies of Analysis in Current Research,' in Evans, Rueschemeyer, and Skocpol, eds., Bringing the State Back In, 9. 15 Ibid. 16 See Ikenberry, 'The Irony of State Strength.' 17 Skocpol, 'Bringing the State Back In,' 9. 18 See Krasner, Defending the National Interest. 19 See Nordlinger, On the Autonomy of the Democratic State, 20. 20 See Skocpol, 'Bringing the State Back In,' 17. 21 See Klapp, Sovereign Entrepreneur, 69-76. 22 Ibid., 131-2. 23 In Sovereign Entrepreneur, 39, Klapp defines autonomy as 'the organizational loyalties of a coalition of officials acting to fulfill the institutional goals of the state.' But while Skocpol notes that state autonomy 'is not a fixed structural feature of any governmental system. It can come and go,' Klapp finds that the 'potential for autonomy ... is not in perpetual flux over time but instead exhibits fixed, structural characteristics.' Klapp's wide-ranging study is an ambitious attempt to develop a statist perspective on direct state intervention and to apply the model to a range of different countries. 24 See Evans et al., 'The State and Economic Transformation,' in Evans et al., eds., Bringing the State Back In, 49. 25 See, for instance, Cairns, 'Embedded State.' 26 See Ikenberry, 'Irony of State Strength,' 135. 27 See Grayson, National Oil Companies, and Feigenbaum, Politics of Public Enterprise, for this term. 28 See, for instance, Feigenbaum, Politics of Public Enterprise. 29 Skocpol, 'Bringing the State Back In,' 21. Skocpol attributes this approach to Tocqueville's The Old Regime and the French Revolution and Democracy in America. 30 See Chandler and Bakvis, 'Federalism and the Strong-State / Weak-State Conundrum,' 60. 31 See Cairns, 'Other Crisis of Canadian Federalism.'

Notes to pages 18-27 295 32 See, for instance, Skocpol, Protecting Soldiers and Mothers. 33 Scott presents Skocpol as one of the historical institutionalists in political science. Other members of this group are James G. March, Johan P. Olsen, and Peter Hall. See Scott, Institutions and Organizations, 26. 34 There is a comprehensive and rapidly growing body of literature here. For a brief selection, see March and Olsen, 'The New Institutionalism: Organizational Factors in Political Life'; March and Olsen, Rediscovering Institutions; and March and Olsen, Democratic Governance. For a brief overview of the sociological approach to institutions, see Powell and DiMaggio, eds., New Institutionalism in Organizational Analysis. 35 March and Olsen, Democratic Governance, 30. 36 See Cairns, 'Constitutional World We Have Lost,' 10. 37 These points are adapted from Cairns; see Cairns, 'Other Crisis of Canadian Federalism,' 181-4. 38 For this general dynamic, see Fletcher and Wallace, 'Federal-Provincial Relations.' 39 Fletcher and Wallace note: 'From a broader perspective, the case studies suggest that the intergovernmental policy process has some general effects on the kinds of policies agreed upon. For example, shared jurisdiction and interdependence tend to narrow the range of policies considered, focussing attention on jurisdictional issues rather than substantive ones.' Ibid., 194. 40 For instance, as Fletcher and Wallace note: 'In the area of economic policy, the consensus of the case studies is that interest groups are usually frozen out of federal-provincial decision making.' Ibid., 181. 41 See Berry, 'Oil Lobby and the Energy Crisis.' 2: The OPEC Oil Crisis, Canada, and the Federal Adjustment Strategy 1 Pratt, 'Petro-Canada,' in Tupper and Doern, Privatization, 155. 2 See I. McDougall, 'Canadian National Energy Board.' 3 The tar sands of Alberta and the heavy oil deposits of Saskatchewan were considered 'technological frontiers' and are thus not referred to here as frontiers. 4 Thompson and Crommelin, 'Legal Constraints on Petroleum Policy Options in Northern Canada,' 92. 5 Thompson and Crommelin, 'Canada's Petroleum Leasing Policy,' 22. 6 See J.N. McDougall, 'Oil and Gas in Canadian Energy Policy,' 121. 7 Debanne contends that the NOP only institutionalized the basic interests of the oil MNCs. See Debanne, 'Oil and Canadian Policy,' 128. 8 A fifth company, BP, was also a factor, along with a number of other smaller, mostly foreign-owned companies. Crane found that in 1979, five foreign-

296 Notes to pages 27-31

9

10 11

12

13

14

15

16 17

controlled companies accounted for 52 per cent of Canadian oil production. See Crane, Controlling Interest, 11—12. NACOP was established in 1969 by Canada's energy minister, Joe Greene. According to Foster, NACOP served to formalize links between cabinet members and key industry officials from the major MNCs. See Foster, Blue-Eyed Sheiks, 108. NACOP was chaired by the chief of the NEB's oil policy branch. See McDougall, 'Oil and Gas in Canadian Energy Policy,' 130. Some seventy-eight countries in the capitalist world established NOCs during the 1970s. See Klapp, Sovereign Entrepreneur, 20. According to Statistics Canada, in 1972 Canada exported 341 million barrels of crude, which was 61 per cent of total Canadian crude oil consumption. In 1973 the figure was 68 per cent. See the Financial Post, Survey of Oils, 1977.c As Joe Greene indicated clearly in his speech of June 1971, the prevailing notion at the time was that Canada had ample supplies of oil and gas. See Doern and Toner, Politics of Energy, 496-7. OPEC sales of crude oil (in mmb/d) to the major oil companies declined from 21.1 mmb/d in 1973 to 14.1 mmb/d in 1979. Further, direct sales of OPEC oil, both state-to-state and commercially, increased from 2.4 mmb/d in 1973 to 12.8 mmb/d in 1979. OPEC ownership/entitlements to own crude rose from 2 per cent in 1970 to 20 per cent in 1973 and to 80 per cent in 1979. Direct OPEC exports rose from 7 per cent in 1973 to 42 per cent in 1979. The share of state-to-state deals rose from 7 per cent in 1973 to 24 per cent in 1979. The oil majors' share of OPEC oil declined from 93 per cent in 1973 to 58 per cent in 1979. The majors' share in world oil trade fell from 90 per cent in 1973 to 42 per cent in 1979. See Fesharaki and Isaak, OPEC, the Gulf, and the World Petroleum Market, 47. The official price of Saudi Arabian light marker crude oil rose from US $10.46 on i March 1974 to $14.55 on 1 April 1979, which was the last regular increase. After that the price began skyrocketing and climbed to $24.00 by the end of the year. See Lieber, Oil Decade, 16. It should be noted that government responses to crisis events and other important changes often involve considerable time lags associated with the difficult and time-consuming process of writing and passing new legislation, instituting changes in public perceptions and behaviour patterns, and challenging vested interests. See Turner, Oil Companies in the International System. In a CIPO poll taken in July 1973, 55.9 per cent of respondents thought that MNCs exerted undue influence on Canadian policies. In a CIPO poll taken in December 1973, over 60 per cent supported the formation of an NOC and about 15 per cent opposed the measure.

Notes to pages 31-7

297

18 Differences existed as to the degree of parent company ownership of the Canadian subsidiary. Imperial Oil, the largest Canadian subsidiary, was 70 per cent owned by Exxon. Texaco was 91 per cent owned by its parent company, while Mobil, Amoco, and Chevron were wholly owned by their parent companies. See Doern and Toner, Politics of Energy, 211. 19 Parent/subsidiary relations most likely differed from one Canadian subsidiary to another. The exact nature of such links would have depended on (a) the size of the parent company's holdings in the subsidiary, (b) the subsidiary's absolute size and size in relation to the parent company, (c) the assertiveness of the subsidiary's management, and (d) the importance of Canada in the operations of the parent company, among other factors. The availability of information about these relationships is limited, which makes it difficult to draw firm conclusions about the nature of parent/subsidiary relations. 20 An immediate priority was to extend the IPL to Montreal, thereby displacing 250,000 bbl/d of imported oil. In an emergency, this could be increased to 350,000 bbl/d, or about 45 per cent of total crude oil imports in 1975. See EMR, Energy Strategy for Canada, 30. But even with the pipeline in place, Canada would still need to import more than 350,000 bbl/d of oil to the Eastern provinces. 21 See Hon. P.E. Trudeau, House of Commons Debates, 6 Dec. 1973, 8479. Ottawa's projections were based on the figures presented in the newly published White Paper 'An Energy Policy for Canada, Phase I.' See EMR, Energy Policy for Canada, Phase I, which presented overly optimistic resource estimates based on a shaky statistical method in which estimates of ultimate recoverable resources were treated almost as if they were proven reserves. 22 Trudeau noted that the proposed NOG 'may choose to hold part of such resources as a reserve for the long-term security of the Canadian market. This is a function which private investors find it difficult to perform for understandable reasons, and it is a function to which the government attaches importance.' Trudeau, House of Commons Debates, 6 Dec. 1973, 8481. See also Pratt, 'Petro-Canada,' in Tupper and Doern, Public Corporations. 23 The most important source of investment funds for the petroleum industry was cash generated internally. In the period 1966—70, this portion was 73.8 per cent for the 100 per cent foreign-controlled companies; for the Canadiancontrolled companies it was 52 per cent. See EMR, Energy Policy for Canada, 241. 24 Pratt, 'Petro-Canada,' in Tupper and Doern, Public Corporations, 108. 25 Interview with senior DIAND official, 1988. 26 See EMR, Annual Report 1974-75, 2. EMR did not possess significant regulatory powers. See Doern, 'Energy, Mines and Resources,' 60.

298 Notes to pages 37-8 27 Interview with Joel Bell, March 1988. Besides writing the EMR discussion paper 'An Energy Policy for Canada, Phase I' (1973), BC^ was instrumental in writing the cabinet memorandum from then-energy minister Donald Macdonald in October 1973 - a document that related to the planned role of Petro-Canada. The Harvard-trained resource economist (and lawyer)joined Petro-Canada in 1976. 28 The notion of EMR as a 'commodity-oriented' department was confirmed in interviews with EMR officials, March 1988. 29 In 1974-5, after the OPEC oil embargo, the energy sector accounted for 177.2 person-years. The mineral sector counted 165.2 person-years, whereas the science and technology sector accounted for 2,956.5 person-years. See EMR, Annual Report 1974-75, 2O-1. Few of the technical personnel were involved in energy matters. 30 See Doern, 'Energy, Mines and Resources,' 57-8. 31 During this period, EMR's staff increased from 3,207 person-years to 3,762 person-years. Ibid., 71. 32 These powers emerge from clause 91 (2), the 'trade and commerce' power, which provides Parliament with jurisdiction over all aspects of interprovincial and international trade. Other sources are section 91 (10) (c), the federal declaratory power; the federal 'emergency power' (POGG) of section 91, section 91 (3), which grants the federal government almost unlimited freedom to employ any mode or system of taxation, apart from taxing 'lands and property' belonging to a province; the federal spending power; and the federal government's power to reserve or disallow provincial legislation, the former undertaken by the lieutenant-governor, who is appointed by Ottawa. See Doern and Toner, Politics of Energy, 159-60. Moull makes an interesting point regarding clause 91 (2): 'The ability to treat the resource industries, and particularly the energy sector, as an aspect of "general" trade throughout the country, affecting the nation as a whole, might well give the federal government previously uncontemplated authority to regulate provincial resources and resource production under section 91 (2) well before any provincial boundaries are crossed.' See Moull, 'Natural Resources and Canadian Federalism,' 420. 33 Section 109 of the BNA Act states that all lands, mines, minerals, and royalties belong to the province in which they are situated. Provincial ownership is further reinforced by clauses 92(13), the property and civil rights clause; 92(2), the power to levy direct taxes; and 92(5), the authority over the management and sale of public lands belonging to the province. See Doern and Toner, Politics of Energy, 159. The provincial role in natural resource ownership was further strengthened in the new Canadian Constitution (1982). For a more indepth analysis, see Moull, 'Natural Resources and Canadian Federalism.'

Notes to pages 38-43 299 34 The province of Alberta, for instance, owned around 85 per cent of conventional oil and gas and almost 100 per cent of the tar sands. See Leitch, 'Constitutional Position of Natural Resources,' 173. 35 See the statement by Bill Hopper to the House of Commons Standing Committee on National Resources and Public Works (HCSC-NRPW), Minutes, 14 Feb. 1984; 1:22. 36 The federal automatic depletion allowance financed cash bonuses paid by industry to provinces for exploration permits and mineral rights, rather than actual exploration and development. Ottawa's incentives thus ended up in provincial coffers instead of in increased development. See Debanne, 'Oil and Canadian Policy,' 142. 37 See Bell, 'Government Oil Companies,' no. 38 The 'Canada Lands' include all areas north of 60° and all offshore areas. This book will not address developments on the west coast of Canada because a moratorium on oil and gas exploration was imposed in the straits of Georgia and Juan de Fuca in January 1971 and extended to cover all areas of the west coast in March 1972. See Plourde, Oil and Gas in Canada, 85. 39 This combination - landlord and entrepreneur - enabled the oil-producing and oil-exporting countries to wrestle upstream control away from the oil MNCs. See Al-Chalabi, OPEC and the International Oil Industry; Klapp, 'State — Landlord or Entrepreneur?'; and Noreng, Oil Industry and Government Strategy. 40 Studies that discuss the role of the state as producer, but do not include the system of rights issuance and land management, fail to account for an important means by which the state affects the behaviour of the NOG. The Economic Council of Canada's report on Petro-Canada written by Halpern, Plourde, and Waverman does not include the system of rights issuance and land management. See Halpern, Plourde, and Waverman, Petro-Canada. 41 See Cameron, Property Rights and Sovereign Rights, 4—5. 42 See Helliwell, 'Canadian Energy Policy,' 188. 43 See Tyerman, 'Pricing of Alberta's Oil,' 427. 44 In 1972, Premier Peter Lougheed confronted the oil industry with the Natural Resource Revenue Plan (which represented a clear break with earlier Social Credit policies) by effectively removing the i6| per cent maximum royalty levels. The regulations were to take effect on l Jan. 1973. See Richards and Pratt, Prairie Capitalism, 224. In August 1972 the Alberta government announced that it intended to revise existing gas contracts. It also announced its intention to institute a two-tier pricing system to protect Alberta residents from increases in gas prices. See Plourde, Oil and Gas in Canada, 95. 45 Richards and Pratt, Prairie Capitalism, 225. 46 See Thring, 'Alberta, Oil and the Constitution,' 87.

300 Notes to pages 43-5 47 See testimony by the energy minister, Donald Macdonald, to the HCSCNRPW, Minutes, 17 April 1974, lO:ll. 48 See statement by the energy minister, Donald Macdonald, to the HCSCNRPW, Minutes, 2 April 1974, 6:16. 49 Quoted in Richards and Pratt, Prairie Capitalism, 238. 50 The Alberta government claimed that its position as a relatively young province placed it in a superior position to that of the older provinces. The reasoning was based on s.i of the Constitution Act, 1930 - that is, the schedules that transferred resources to the province of Alberta. Alberta claimed that 'the schedules have the force of law "notwithstanding anything in the British North America Act, 1867."' See Bankes, Hunt, and Saunders, 'Energy and Natural Resources,' 65. 51 Alberta's regulatory package contained the Arbitration Amendment Act, the Freehold Mineral Taxation Act, the Mines and Minerals Amendment Act (which required that all oil producers deliver to and sell their petroleum through the Alberta Petroleum Marketing Commission), and the Alberta Petroleum Marketing Act (which established the Alberta Petroleum Marketing Commission, APMC). 52 See Richards and Pratt, Prairie Capitalism, 239. See also Tyerman, 'Pricing of Alberta's Oil,' 439. 53 See Richards and Pratt, Prairie Capitalism, 294. 54 See Cairns, 'Other Crisis of Canadian Federalism,' 185, for this term. 55 The North Sea model of resource management is characterized by administrative allocation of licences, stiff licence requirements, and direct state participation. Note that the model includes direct participation by private companies and that there is an arm's-length relationship between state officials and NOG management. This is to ensure operational flexibility and policy control. The North Sea model is different from the OPEC model, in which state oil companies play a dominant role. The allocation process is heavily centralized, largely because of the dominant role of the NOG in the upstream; i.e., NOEs have a monopoly of exploration and production. See Noreng, Oil Industry and Government Strategy in the North Sea, 31—5. 56 Noreng defines the American model of resource management as one in which (a) private companies exercise considerable control over large areas and are 'sovereign in questions of development and exploitation,' (b) concessions are granted through an auction system, and (c) there is no state oil company. Noreng, Oil Industry and Government Strategy in the North Sea, 33. 57 See Richards and Pratt, Prairie Capitalism, 289. 58 Moull notes that 'Section 33(1) expressly preserved the status of leases previously granted to producers by the expropriated freehold owners - only the

Notes to pages 46-50 301 underlying fee simple rights were expropriated - and section 33(2) expressly made those leases subject to the payment of the royalty surcharge. Where an expropriated owner had been producing oil himself from his own land, section 35 [of the act] required the Minister of Mineral Resources to issue a Crown lease to him so that he could continue production. As an anti-avoidance measure, to prevent the cessation of production from these "Crown-acquired" lands, section 42 made it an offence to cease production from these lands without the consent of the Minister, except for necessary repairs and maintenance.' See Moull, 'Natural Resources,' 13. See also Elliott, 'Jurisdictional Dilemmas in Resource Industries,' 92-3, for an analysis of the provisions in the legislation. 59 See Thring, 'Alberta, Oil, and the Constitution,' 82. 60 SeeJ.N. McDougall, Fuels and the National Policy, 136-41. 61 See Government of Alberta, Harmony in Diversity, 6. 62 According to Tuschak, 'Federal Perspective on the Tax Treatment of the Petroleum Industry,' 159-60: 'The 100% write-off of exploration and development costs with automatic depletion equal to one-third of taxable income combined with deducibility and royalties resulted in few producers paying tax over the period.' 63 See Richards and Pratt, Prairie Capitalism, 227. For details, see Oilweek, 2 Dec. 1974. Oilweek (16 Dec. 1974) reported that several rigs moved from northern Canada into the Alaska region. Rigs also moved from Alberta to the United States. 64 See Tuschak, 'Federal Perspective on the Tax Treatment,' 165. 65 EMR, Energy Strategy, 34. Doern and Toner note that Alberta's PEP was estimated to cost $2.5 billion. It reduced royalties and introduced new drilling incentives. The province of Saskatchewan also introduced measures to rebate a portion of the increased tax liabilities arising from the nondeductibility of royalties. See Doern and Toner, Politics of Energy, 181. 66 According to Tuschak, relative shares of net operating income were now changed to 38.3 per cent for industry, 19.1 per cent for the federal government, and 42.7 per cent for the province of Alberta. Tuschak, 'Federal Perspective on the Tax Treatment,' 165. Clearly, Alberta's measures were the most important - a fact that is further underlined by the significant return to activity by the industry in the Western Sedimentary Basin. 67 See Richards and Pratt, Prairie Capitalism, 226. 68 See Berry, 'Oil Lobby and the Energy Crisis.' 69 The new energy framework introduced policy measures to ensure (a) appropriate energy pricing, (b) energy conservation, (c) increased exploration and development, (d) increased resource information, (e) interfuel substitution,

302 Notes to pages 50-8

70

71 72

73 74 75 76

(f) new delivery systems, (g) emergency preparedness, (h) increased research and development, and (i) greater Canadian content and participation. See EMR, Energy Strategy, 6. One of the targets was to reduce net dependence on oil imports to one-third by 1985. To meet this target, additional supply capacity was needed. See EMR, Energy Strategy, 124. See Cullen, Federalism in Action, 148. Ottawa paid $300 million for a 15 per cent share of the project, Alberta provided $2OO million for a 10 per cent share, and Ontario contributed $100 million for a 5 per cent share. See Pratt, Tar Sands, 175. EMR, Energy Strategy, 133. See Thompson and Crommelin, 'Canada's Petroleum Leasing Policy,' 24. Interview with former COGLA official, 1992. Thompson and Crommelin, 'Legal Constraints on Petroleum Policy Options,'

92. 77 See DIAND, North of 60, 1970, i. The fact that all the attractive acreage had been taken up could seriously constrain the proposed NOG. 78 See Bosnian, National Interest. See also DIAND, North of 60: Activities, 1976, 27. 79 See Harrison, 'Legal Character of Petroleum Licences,' 500. 80 See Thompson, 'Sovereignty and Natural Resources,' 284. 81 See Harrison, 'Legal Character of Petroleum Licences,' 484. 82 Newfoundland dropped out of the 1972-4 negotiations between the four Atlantic provinces, Quebec, and Ottawa 'after concluding that the federal government was not prepared to give up any ultimate control of the offshore resources.' See address by Leo Barry in Patton et al., Future of the Offshore, 21. 83 See EMR, Statement of Policy, l. 84 Ibid. 85 Other regulatory instruments included the NEB (which was granted the authority to license pipelines) and legislative measures such as the Navigable Waters Protection Act, the Arctic Waters Pollution Prevention Act, the Canada Shipping Act, the Canada Wildlife Act, the Fisheries Act, the Northern Inland Waters Act, and the Migratory Birds Convention Act. All these measures could to various degrees be used to influence the location and pace of petroleum development. See Lucas, MacLeod, and Miller, 'Regulation of High Arctic Development.' 86 See Crommelin, 'Oil and Gas Rights on Canada Lands,' 2. 87 See Harrison, 'Legal Character of Petroleum Licences,' 513. 88 See Crommelin, 'Oil and Gas Rights on Canada Lands,' 2. 89 See Harrison, 'Legal Character of Petroleum Licences,' 512. 90 See Crosby's address in Patton et al., Future of the Offshore, 33.

Notes to pages 58-61 303 91 See Crommelin, 'Oil and Gas Rights on Canada Lands,' 4. 92 See EMR, Statement of Policy, 2. See also section 23 of the defunct Bill C-2O. 93 See statement by Crosby in Patton et al., Future of the Offshore, 33. 94 For one year after the new regulations became effective, Petro-Canada could select any areas not under private tenure. The company had to pay for future obligations itself (and farm-outs to private industry were subject to ministerial approval). For up to seven years after the new regulations became operative, Petro-Canada could select up to 25 per cent of all surrendered areas. See Crommelin, 'Oil and Gas Rights on Canada Lands,' 4. 95 Interviews with officials from DIAND and EMR/COGLA. 96 See address by Crosby in Patton et al., Future of the Offshore, 32. 97 The holder of the rights could come back in after such a well had been drilled. He could then obtain up to a maximum 50 per cent interest, but had to pay a penalty of four times his share of the well costs to Petro-Canada. After a second well he would have to pay six times his share, and after the third well he would have to pay eight times his share, which was the final chance. 98 Crosby in Patton et al., Future of the Offshore, 32. 99 Ibid., 34. 100 The back-in option only applied to the exploration stage. Companies that chose the lease option were subject to the 50 per cent relinquishment rule, and Petro-Canada was eligible to select up to 25 per cent of the surrendered acreage. 101 Petro-Canada had to express its wish to exercise the back-in, and the corporation could refrain from doing so if it saw fit. It also had to exercise its back-in option within a fixed time-limit. See Section 120 (5), (6) of the COGL, amendment, Canada Gazette, Part II, Vol. Ill, No. 16, 28 July 1977. 102 Interviews with two DIAND officials who had been involved with rights issuance and land management at least since the early 1970s revealed a ready acceptance of the industry's interests and concerns. 103 The Newfoundland White Paper noted: 'Section 8 of the Act was amended in 1966 to allow drilling to take place under an interim permit issued by the Lieutenant Governor-in-Council, pending the promulgation of Regulations. Pursuant to this provision, any company wishing to undertake an offshore drilling program had to first obtain a provincial interim permit.' See Newfoundland, Minister of Mines and Energy, White Paper, 9. 104 See House, Challenge of Oil, 55. 105 See Newfoundland, Minister of Mines and Energy, White Paper, 5. The province's proposed regulations were based on the Australian system, which was 'a double-veto system giving the adjacent state and the federal government equal say.'

304 Notes to pages 62-8 106 See EMR, Energy Policy for Canada, 2:316. To rule out possible ambiguities caused by geography, in 1968 and 1969 the prime minister made several comprehensive announcements in the House of Commons to delineate federal and provincial coastal boundaries. 107 See Barry, 'Background Paper,' 18. 108 Newfoundland, Minister of Mines and Energy, White Paper, 11-12. 109 See House, Challenge of Oil, 55-6. no See Gault, 'Recent Developments in the Federal-Provincial Dispute,' 99. in See Newfoundland, Minister of Mines and Energy, White Paper, 13-14. 112 See Newfoundland and Labrador, 'Act Respecting Petroleum and Natural Gas.' 113 Newfoundland, Minister of Mines and Energy, White Paper, 18. 114 See testimony by I.T. Gault in HCSC-NRPW, Minutes, 5 Feb. 1981, 23-6. 115 Interview with former official involved in the process of developing a new system in the 19705. Section 58 of Bill C-2O set out to terminate all acquired rights without compensation. 116 Interview with former adviser to the Nova Scotia government and former COGLA official, 1992. 117 After 1974 a split emerged between the two departments that involved departmental objectives and philosophies, and actual managerial practices. DIAND viewed its main role as one of pursuing 'province building' in the territories under its jurisdiction; to this end, Northern resource development was a key vehicle (interview with senior official in DIAND). This broad objective required comprehensive private-sector co-operation. EMR was concerned mainly with energy aspects such as security of supply for the country as a whole; it viewed comprehensive state intervention as necessary to ensure this. 118 As revealed in the CIGOL case, the exact line between a direct and an indirect tax is hard to draw. See Russell, Knopff, and Morton, Federalism and the Charter, 191. 119 Moull notes that Parliament has the authority under section 92(lo)(c) 'to declare a "work" situate within a province (a mine, well or refinery, for instance) to be "for the general advantage of Canada" and thus, under section 91 (29), unilaterally to oust provincial jurisdiction and bring the work with its attendant undertaking under exclusive federal legislative authority.' Ottawa could also resort to the POGG clause. See Moull, 'Natural Resources and Canadian Federalism,' 421. 12O One of the key features of the Norwegian system, for instance, was its flexibility, which enabled the government to adapt its regulations and policies to changing circumstances and altering assessments of the geological conditions, as a" result of drilling and enhanced knowledge of the resource base.

Notes to pages 70-80 305 121 This interpretation of the Canadian strategy differs considerably from the analysis outlined by Ikenberry. See Ikenberry, 'Irony of State Strength.' 122 See EMR, Energy Strategy, 19.

123 Some consuming provinces also instituted retail price freezes in 1975: 'The situation that resulted compromised the single-price policy, led to inequities among provinces and regions of Canada, and caused severe cash flow problems for certain companies in some provinces.' See Ibid., 128. Although this document does not provide an unbiased account, there is no doubt that the actions taken by some consuming provinces, in particular Ontario, caused increased uncertainty over future oil price developments. 124 The difference between the Western Canadian crude price and the international price was (in US$) $4.61 in 1975, $5.05 in 1976, $4.36 in 1977, $3-66 in 1978, and $8.36 in 1979. The revolution in Iran generated the large difference in 1979. 3: The Establishment of Petro-Canada 1 Halpern, Plourde, and Waverman, Petro-Canada, 9. 2 Interview with Senator Jack Austin, 1992. 3 See Saywell, Canadian Annual Review, 6. 4 See House of Commons, Bill C-8, An Act to establish a National Petroleum Company, Section 3, 10 July 1975.

5 6 7 8 9 10

11 12 13 14 15

See ibid., Section 7(d),(f),(i),(j),(o). See ibid., Section 28 of the Petro-Canada Act. See HCSC-NRPW, Minutes, 24 April 1975, 15, 11. Ibid., 30 April 1975, 18, 5-6. Quoted in Pratt, 'Petro-Canada,' in Tupper and Doern, Public Corporations, 108. The static representation of Petro-Canada is most clearly seen in Halpern, Plourde, and Waverman, Petro-Canada, when they address the operations of Petro-Canada. See Halpern, Plourde, and Waverman, Petro-Canada, 38-40. See EMR minister Donald Macdonald in HCSC-NRPW, Minutes, 24 April 1975,15,8-9. EMR minister Macdonald, House of Commons, Debates, 12 March 1975, 4038. Prime Minister Pierre Trudeau, House of Commons, Debates, 12 March, 1975, 8481. Waverman notes: 'As Robert Solow suggested in his presidential address at the American Economic Association meeting last year [1976], the essential

306 Notes to pages 80-8 motivation for public ownership of extractive industries is the rate of exploitation.' See Waverman's 'Comment' to A. Tussing's article in Crommelin and Thompson, Mineral Leasing as an Instrument of Public Policy, 181. See also Pratt, 'Petro-Canada,' in Tupper and Doern, Public Corporations, for a similar point. This rationale has since become far more widely questioned among economists. 16 The NEP of 1980 repeated the importance of developing a 'safety net' of supplies. See EMR, National Energy Program, 44. 17 EMR minister Donald Macdonald, House of Commons, Debates, 12 March 1975, 4037See Pratt, 'Petro-Canada,' in Tupper and Doern, Public Corporations, 105. See U.S. GAO, Petro-Canada, ii. See Petro-Canada, Annual Report, 1976, 5. See Trebilcock et al., Choice of Governing Instrument, 79. See Jeffrey and Morton, 'Crown Corporations,' 51. Statutes of Canada, An Act Respecting the Status of the Official Languages of Canada, 17-18 Elizabeth II, Chapter 54, 1217. 24 See Ikenberry, 'Irony of State Strength.' Ikenberry views NOCs that somehow escape control and direction as an important factor in causing ineffective state intervention. 25 Restrictive Trade Practices Commission, Competition in the Canadian Petroleum Industry, 326. 26 Budget controls could enable Ottawa to direct the corporation to operate in certain areas but they could not dictate exactly where in each location or each major petroliferous area of Canada the corporation would operate. Likewise, budget controls could not really affect who Petro-Canada would operate with. The directive clause was needed to address these concerns. 27 The Norwegian government, as part of its attempt to control Statoil, the Norwegian NOG, required a corporate plan that included both next year's operations and future activities. 28 Restrictive Trade Practices Commission, Competition in the Canadian Petroleum Industry, 326. 29 Some MPs voiced concern that the hostility of many officials of private oil companies would make it hard to recruit able company officials. This fear was shown to be groundless. 30 This is normally referred to as 'managerial autonomy.' See, for instance, Grayson, National Oil Companies. 31 Feigenbaum reveals that French public energy companies have failed to perform assigned tasks and have even refused to do so. See Feigenbaum, Politics of Public Enterprise. 18 19 20 21 22 23

Notes to pages 88-91 307 32 Of this amount, $500 million was in common shares and $1 billion would become available in preferred shares and loans (to be advanced without fixed dividend obligations). See Pratt, Tetro-Canada,' in Tupper and Doern, Public Corporations, 123. 33 See Petro-Canada, Annual Report, 1979. 34 This constituted an annual production of 25,483,900 barrels, which was about 5 per cent of total annual oil production from Western Canada. See PetroCanada, Annual Report, 1979. Petro-Canada's daily production of natural gas was 11.5 million cubic metres; it also produced l,2OO barrels/day of synthetic crude oil. It had no overseas oil production. Proven reserves of oil and natural gas liquids were 48.8 million cubic metres, and the corporation had 107.5 billion cubic metres of natural gas. Finally, Petro-Canada's overseas reserves were i.O million cubic metres or 6.29 million barrels of crude oil and natural gas liquids. 35 See EMR, Energy Strategy, 27. 36 Petro-Canada, Annual Report, 1976, 5-6. 37 Petro-Canada became a participant in the Polar Gas Project. The company took over the federal government's 15 per cent share of the Syncrude Canada project and acquired the federal government's investment in Panarctic Oils. 38 See Petro-Canada, Annual Report, 1976, 5-6. 39 This terminology applies to the period prior to the new COGL regulations of

197740 Bell noted that the corporation lobbied hard for preferential rights. Interview with Joel Bell, 1988. 41 This was due partly to the sheer magnitude of farm-ins and farm-outs and the administrative costs involved in close monitoring. Hundreds of companies, small and large, operated in the provinces and in the Mackenzie Delta, but only a handful of very large companies operated on the East Coast. This affected the degree to which the government could regulate industry farm-ins and farm-outs. In the NEP, farm-ins and farm-outs were tightly regulated because of the PIP grants and the fear of 'leakage' of PIP grants to nonCanadian companies. 42 See Foster, Blue-Eyed Sheiks, 156—7, and Foster, Sorcerer's Apprentices, 69—71, for details on this takeover attempt by Petro-Canada. 43 Interview with Joel Bell, 1988. 44 Because Mobil Canada was wholly owned by American-based Mobil Oil, PetroCanada could back in with the full 25 per cent. Petro-Canada's working interest constituted 25 per cent of an area of 16,700 square kilometres, which in effect provided the company with 1.031 million net acres. See Petro-Canada, Annual Report, 1979, 5.

308 Notes to pages 92-3 45 Esso had some Canadian ownership, which effectively reduced Petro-Canada's share to 14.2 per cent of Esso's roughly 10 million acres. This figure was obtained from a COGLA and former DIAND official. See also the presentation by Meneley, HCSC-NRPW, Minutes, 12 Feb. 1981, 26:1. 46 Interviews with officials from DIAND and EMR/COGLA. 47 Interview with COGLA and former DIAND official. 48 Interview with COGLA official, March 1988. 49 These figures are taken from Petro-Canada's annual reports; but they do not correspond with the figures presented by Meneley. The Arcan acreage consisted of 5.1 million gross or 2.9 million net acres in the provinces (this includes 0.5 million net acres in the tar sands of Alberta) and 18.5 million gross or 7.7 million net acres in the frontiers. The frontier acreage consisted of 7.8 million gross or 2.8 million net acres in Hudson Bay and 10.7 million gross acres or 4.9 million net acres in the high Arctic and Northwest Territories. See Petro-Canada, Annual Report, 1976, ll. 50 Of the total 9.5 million net acres obtained in this purchase, 3.5 million were in the provinces and 5.8 million were in the Arctic, the Northwest Territories, and the Yukon and on the East Coast; 243,000 were in other countries. Financial Post Survey of Oils, 1977, 115. 51 See Petro-Canada, Annual Report, 1978, 11. 52 Total net acreage obtained in the provinces by the end of 1979 was 5.9 million net acres, of which 3.4 million were in Alberta, 1.8 million were in British Columbia, and 0.7 million were in the tar sands. See Petro-Canada, Annual Report, 1979, 8. (Note that square kilometres here have been converted to acres.) 53 Because it obtained its large provincial acreage through acquisitions, PetroCanada avoided the many and costly 'land plays' in Alberta in this period. Total land payments in Western Canada (in 1971$) rose from a low of $163 million in 1974 to an all-time high (figures include the period 1951-85) of $713 million in 1979. The Alberta system of bonus-bidding was different from the federal work commitment system, which did not include any bidding mechanism. 54 See Petro-Canada, Annual Report, 1979, 4. Of the four wells drilled in the delineation program, one was successful (Thebaud 1-94), two had minor shows of gas, and one was unsuccessful. 55 Petro-Canada was to gain a working interest in about 100,000 square kilometres of exploratory licences by spending 35 per cent of the overall $125 million exploration budget in 1979 and 1980. Petro-Canada's option was to acquire 4.94 million acres of the total 24.7 million acres. 56 The participants were Petro-Canada (with 18 per cent), Panarctic (22 per

Notes to pages 94-5

57 58

59

60 61

62

63

64 65

66

309

cent), Gulf (25 per cent), and Imperial (35 per cent). Petro-Canada, Annual Report, 1979, 6. See Pratt, 'Petro-Canada,' in Tapper and Doern, Public Corporations, 135. This argument is well developed in Pratt, 'Petro-Canada,' in Tupper and Doern, Public Corporations, but Pratt's analysis diverges somewhat from the argument presented here. The increased divergence of federal state and industry priorities was exacerbated by the pipeline moratorium in the Mackenzie Valley, which reduced the attractiveness of Northern Canada from the industry's point of view. Another important issue was the question of Native land claims. Petro-Canada, Annual Report, 1976, 5-6. In acreage terms the provinces accounted for 6.17 million net acres, whereas the frontiers accounted for 23.39 million net acres. See Petro-Canada, Annual Report, 1979. In 1976 Petro-Canada allocated $28 million out of a total amount of $35 million to the frontiers, or 80 per cent. By 1977 this share had fallen to 63 per cent. In 1978 it fell to 44 per cent, and in 1979 Petro-Canada spent $77 million of a total $253 million spent on exploration and development in Canada, or 30.4 per cent. In 1976, in response to a written policy directive, the corporation took over the federal government's interest in Syncrude. This directive saddled Petro-Canada with payments of $170 million in 1976, $89 million in 1977, and $79 million in 1978. In 1979 Petro-Canada's oil sands expenditures fell to a total of $17 million; the relative share of oil sands expenditures has continued to fall in relative terms since then. See Halpern, Plourde, and Waverman, Petro-Canada, Table 2-2, p. 16. Petro-Canada's remark that the federal government had underestimated the potential for continued conventional oil production in the Western Sedimentary Basin is supported by more recent resource estimates produced by EMR. See EMR, Oil and Natural Gas Resources of Canada 1976. See Petro-Canada, Annual Report, 1977, 7. Halpern, Plourde, and Waverman, Petro-Canada, 2O, note: 'Alastair Gillespie, then Minister of Energy, Mines and Resources, stated that Pacific's acquisition by Petro-Canada had been a commercial transaction whose main objective had been to reduce the Crown corporation's reliance on the federal government as a source of equity-financing for its investments in various projects. The cashflow generated by the Pacific assets, mainly as a result of conventional oil and gas production, would provide a source of internally generated funds with which Petro-Canada would primarily finance its frontier exploration projects.' These are closely involved with the supervision of Petro-Canada. An interview with a former EMR official who was directly involved with the supervision of

31O Notes to pages 95-7 Petro-Canada's annual budgets and corporate plans revealed that PetroCanada always submitted its corporate plans and budgets well in advance and sent copies to the Treasury Board and the finance department. 67 This point is methodologically different from the approach taken by Halpern, Plourde, and Waverman, Petro-Canada, who compare Petro-Canada's activities over time with a representation of federal goals at one specific point in time namely the statements made by key decision-makers at the time Petro-Canada was formed. My approach is to compare Petro-Canada's own definition of its role over time, to federal goals and to Petro-Canada's and Ottawa's actual activities. 68 In an interview in March 1988, Bell confirmed that there were tensions within Petro-Canada between a management that had a well-developed sense of Petro-Canada's policy orientation and of the political landscape surrounding the corporation on the one hand, and industry-recruited personnel who emphasized the bottom line on the other. Bell, however, did not draw clear lines between the two and also noted that there were prominent senior people within Petro-Canada who were recruited from the industry who managed the adaptation very well. 69 Petro-Canada's reorientation was linked to, if not caused by, the Pacific takeover. Because Pacific was a publicly traded company, Petro-Canada had to obtain approval in principle from Ottawa even before it approached Pacific's management; this demonstrates that Ottawa sanctioned the transaction. 70 See 'The Budget,' presented by the Honourable Jean Chretien, Minister of Finance, in the House of Commons, 10 April 1978, Department of Finance, Ottawa, 6. 71 See Oilweek, 4 April 1977, 4. 72 Crommelin notes: 'The 25 percent maximum will continue to apply when the private Canadian interest is 10 percent or less; thereafter the option will diminish by one percentage point with each corresponding increase in private Canadian participation, until participation is 25 percent, at which stage the Petro-Canada option will remain at the level of 10 percent while private Canadian participation ranges between 25 percent and 34 percent, after which stage the option will no longer apply.' See Crommelin, 'Oil and Gas Rights on Canada Lands,' 5. 73 If Imperial let Panarctic Oils - which was considered 95.5 per cent Canadianowned - take a 10 per cent working interest in production of a field along with Imperial, this would bring the Canadian content rate up to 26 per cent, thus effectively shutting out Petro-Canada. 74 The holder of a permit would be granted a lease provided he/she fulfilled certain criteria. Apart from the restrictions on lease selection and lease area, the

Notes to pages 97-102 311 1961 COGL did not include any regulations that enabled the federal government to regulate the conversion from exploration to production, or gave the government the power to halt production. See 'Regulations Respecting the Drilling and Production of Oil and Gas Belonging to Her Majesty in Right of Canada Under All Lands Forming Part of Canada But Not Within Any Province' and also cited as the 'Canada Oil and Gas Drilling and Production Regulations' in Canada Gazette, Part II, Vol. 94, No. 9, ll May 1960, Section 48. 75 See Berger, Northern Frontier - Northern Homeland.

76 See Gault, 'Recent Developments in the Federal-Provincial Dispute,' 97-8. 77 This group of oil companies consisted of Amerada Minerals Corp. of Canada, Aquitaine Co. of Canada, Agip Canada, Gulf Oil Canada, and Sun Oil. See Oilweek, 4 April 1977, 8. 78 Petro-Canada reportedly expressed regrets that the program had ended and noted, 'We wanted to continue ... but weren't able to reach a satisfactory arrangement with our partners.' See Oilweek, 4 April 1977, 8. Petro-Canada's Annual Report, 1977, 1O, also noted: 'No exploratory drilling took place off Newfoundland and Labrador in 1977 due to ajurisdictional dispute between Newfoundland and the federal government.' 79 Quoted in Oilweek, 4 April 1977, 8. 80 The number of wells drilled offshore of Eastern Canada declined to 2 in 1977 from a high of 30 in 1973. In 1978, 7 wells were drilled; in 1979, 6 wells were drilled. Industry exploration expenditures offshore of Canada fell from a high of $73.8 million in 1973 to $23.8 million in 1977, but rose to $204 million in 1979, reflecting the rapid increase in drilling costs. Between 1976 and 1979, the number of wells drilled offshore of Canada's East Coast was 25. In Western Canada the number was 9,081 - a ratio of 1:363. In the period 1973 to 1975, the same ratio was l:86. See Oilweek, 4 Dec. 1978, 29; 3 Dec. 1979, 36; 8 Dec. 1980, 36; and 7 Dec. 1981, 34. 81 See Helliwell et al., 'Oil and Gas in Canada,' 181. 82 See EMR, Energy Strategy, 143. Canada became a member of the IEA in 1974 (the agreement was signed in December 1974 and came into effect in January 1976). 83 See Plourde, Oil and Gas in Canada, 150.

84 See U.S. GAO, Petro-Canada, 38. This study also notes that state-to-state deals did not require NOCs. 85 See Cullen, Federalism in Action, i.

86 Unfortunately, Cullen, Federalism in Action, compares only the offshore regimes of the two countries, so his analysis does not take fully into account the presence and effects of different models of resource management in Canada in this period.

312 Notes to pages 104-12 4: International Oil Market Changes and the NEP 1 2 3 4 5 6

7 8 9

10

11

12 13 14 15 16 17 18

See Ikenberry, Reasons of State, 1. See Mohnfeld, 'World Oil Markets,' Tables l, 2, p. 329. EMR, National Energy Program, 3. Ibid. See Pratt, 'Oil and State Enterprises,' 80. Before 1979, Iran's market share of OPEC crude oil production had ranged between 17 and 19.1 per cent; by 1980 its share had dropped to 6.2 per cent. In the meantime, compensating for the decline in Iranian exports, Iraqi production increased from 8.7 per cent of OPEC production (or 2.6 million bbl/ d) in 1978, to 11.3 per cent (or 3.5 million bbl/d) in 1979 before returning to its 1978 level the following year. As a consequence of the Iran-Iraq war, Iraqi crude oil production declined to 0.9 million bbl/day in 1981; this left Iraq with a 3.9 per cent share of OPEC crude oil production. Iraqi production remained at this low level until 1983. See Griffin and Teece, OPEC Behavior and World Oil Prices, Table 1-3, p. 13. See Tetreault, Revolution in the World Petroleum Market, Table 6: 62. See Plummer, Energy Vulnerability, 267. Tetreault, Revolution in the World Petroleum Market, Table 8, p. 64. The difference in petroleum stocks in the countries belonging to the OECD between 1978 and 1980 was 15.8 per cent; the reduction in stockpiles between 1980 and 1983 was 10.1 per cent. Between 1973 and 1978, oil exploration rates rose dramatically outside of OPEC. In the developed nations the number of wells drilled rose by more than 50 per cent; in OPEC the increase was a mere 3 per cent. See Schneider, Oil Price Revolution, Table 11-3, p. 358. Oil production in OECD countries increased from 603.4 Mtoe in 1976 (which was the lowest level in the 1970s) to 757-8 Mtoe in 1983. OECD, IEA, Energy Balances of OECD Countries, 2-19. Within the OECD, total oil requirements declined from a peak of 1954.4 Mtoe in 1978 to 1564.7 in 1983. In the same period, OECD oil imports declined from 1535.8 Mtoe to 1148.3 Mtoe. OECD, IEA, Energy Balances of OECD Countries, 2-19. Helliwell et al., 'Oil and Gas in Canada,' 44. Ibid. EMR, Energy Strategy for Canada, 126. EMR, Background to a New Energy Strategy, Table 8, p. 19. See also EMR, Taxation and Revenue Sharing. See Simpson, Discipline of Power, 226-7. Plourde, Oil and Gas in Canada, 161. Simpson, Discipline of Power, 226—7.

Notes to pages 112-23 3*3 19 Interview with Bill Hopper, 1992. 20 See confidential memo from the finance minister, John Crosbie, to the Conservative caucus, quoted in Doern and Toner, Politics of Energy, 103. 21 See Plourde, Oil and Gas in Canada, 167. 22 See Helliwell et al., 'Oil and Gas in Canada,' 43. 23 See The Globe and Mail, 27 May 1980: 63. 24 See Zukowsky, Intergovernmental Relations in Canada, 64-5. 25 See Cairns, 'The Other Crisis.' 26 EMR, National Energy Program, 5—6. 27 Griffin and Teece, OPEC Behavior and World Oil Prices, 208. 28 EMR, National Energy Program, 2. 29 EMR, Canadian Oil and Gas Supply/Demand Overview, 1979, Table 3, p. 22. The data provided in the NEP on projected oil and gas production were consistent with the figures provided in this report (p. 78). 30 See Helliwell's articles published in the 19705 for several scathing critiques of the NEB's oil and gas forecasting techniques. 31 During 1977-9 a net increase of 692 million bbl. of oil was found in Western Canada. See Helliwell et al., 'Oil and Gas in Canada.' Additions from the conventional areas accounted for 59.8 per cent of total reserves added during the period 1974-80 and further accounted for 30.7 per cent of all reserves added in the period 1981-6. See Bradley, Petroleum Supply, 12-13. 32 See Bradley, Petroleum Supply, 9-10. 33 Recoverable proved and probable reserves of gas discovered until 1982 in the Canadian Arctic Archipelago were more than 16 TCF. For a listing of oil and gas discoveries in the Beaufort Sea, consult DIAND, Beaufort Sea Hydrocarbon Exploration, Figure 10. On the Scotian shelf, the Venture field revealed a significant gas show in 1979. Nova Scotia, Department of Mines and Energy, Offshore Oil and Gas, 9-10. 34 EMR, National Energy Program, 44. 35 For a different view, see Toner, 'Stardust,' 123-4; and Milne, Tug-of-War, 8990. Toner and Milne contend that the NEP was more discriminatory in its approach, but they fail to distinguish between the initial structure of the NEP and the reaction to the program, which also means that they ignore the interactions among actors after launching of the NEP. 36 See Strachan, 'Development of Canadian Energy Policy,' 148. See also Bell, 'Government Oil Companies.' 37 EMR, Taxation and Revenue Sharing, 8—9. 38 Ibid., 16. The oil and gas industry grew in size relative to the rest of the industrial sector. Petroleum companies' assets increased from 12 per cent of total industry assets in 1974 to 19 per cent in 1978. 39 EMR, National Energy Program, 21— 2.

314 Notes to pages 124-30 40 G.H. Dewhirst (former director general for the Policy, Research and Communications Branch of FIRA) noted that the purpose of the law was not to discourage foreign investment but rather to monitor it. He saw the task of FIRA as (a) to screen foreign takeovers, (b) to screen investments from abroad to set up new companies (but not to expand existing ones), and (c) to check on diversification 'into unrelated lines of activity.' See Dewhirst, 'The Canadian Federal Government's Policy towards Foreign Direct Investment,' 23-8. 41 See Johnston, Public Opinion and Public Policy in Canada, 176-7. 42 EMR, National Energy Program, 51. 43 See Skocpol's article in Evans, Rueschemeyer, and Skocpol, Bringing the State Back In; Krasner, 'Approaches to the State'; and Nordlinger, On the Autonomy of the Democratic State'. 44 EMR, Taxation and Revenue Sharing, 19. 45 Helliwell et al., 'Oil and Gas in Canada,' 44. 46 Federal revenue projections revealed that for 1985 the federal share that was 14.4 per cent under the 1977 pricing projections would decline to 12.1 per cent under the 1979 pricing projections. For the period 1980-5, the relative federal share would deteriorate from 14.7 per cent under 1977 projections to 11.9 per cent under 1979 pricing projections. Whereas the federal government's share would decline, the producing provinces' share would remain constant at 37.9 per cent, and the industry's share would rise from 47.2 to 50.2 per cent. See EMR, Taxation and Revenue Sharing, i8-2O. 47 Lalonde, 'Address,' 629-30. 48 The shortfall in 1980 was projected to be $28 million. In 1985, it would be $1,672 million and in 1990, $683 million. See EMR, Taxation and Revenue Sharing, Table 2, p. 24. 49 EMR, National Energy Program, 23. 50 The export tax on oil was to be retained in its current form, and Ottawa was to share the proceeds of this tax with the oil-producing provinces. 51 EMR, National Energy Program, 25. 52 See Palmer, 'Overview of Canada's National Energy Program,' 81. 53 Between 1981 and 1984 the price of conventional crude oil was scheduled to increase by $1 every six months, whereas between 1985 and 1986 it was to rise by $2.25 every six months, and from 1986 it was to rise by $3.50 every six months, until it reached $63.25 in 1990. 54 The price of tertiary recovery oil would start at $30 in 1981 and rise by annual increments of roughly $3 until it reached $62.85 in 1990. The tar sands oil reference price would be $38 in 1981 and rise in increments of $4-6 in the same period, which meant that in 1990 it would still be considerably higher than the other oil sources.

Notes to pages 131-41 315 55 The crossover problem marked the point in time that Canada ceased to be self-sufficient - 'that point in time when Canadian supply can no longer meet Canadian demand.' See Bradley, Petroleum Supply, 1O, 4. 56 See Scarfe, 'National Energy Program after Three Years,' 6-7. 57 See EMR, National Energy Program, 29. 58 See Helliwell and McRae, 'National Energy Conflict,' 15-23. 59 See, for instance, Helliwell, 'Economic Evaluation of the National Energy Program,' 648. 60 See Crane, Controlling Interest, 305. 61 Crane, Controlling Interest. See also Garten, 'Taxation and Royalty Problems,' 191. 62 See Price Waterhouse, National Energy Program, 13. 63 See Scarfe, 'National Energy Program after Three Years,' 11. 64 EMR, National Energy Program, 38. 65 Lacasse terms the PGRT a 'royalty-type' revenue. See Lacasse, 'Oil and Gas Revenue Sharing,' 74. 66 See Saskoil, Annual Report, 1981, 7. 67 See Scarfe, 'National Energy Program after Three Years,' 11. 68 See Helliwell, 'Economic Evaluation of the National Energy Program,' 648. 69 See Doern and Toner, Politics of Energy, 247. 70 See Lacasse, 'Oil and Gas Revenue Sharing,' 75. 71 Price Waterhouse, National Energy Program, 27. 72 Doern and Toner, Politics of Energy, 371-3. 73 See statement by Dr D.C. Crosby to the HCSC-NRPW, Minutes, 21 Jan. 1981, 17:2. Bill C-48 was primarily concerned with land management, and most of the operational aspects of resource management continued to be regulated by the 1970 Oil and Gas Production and Conservation Act. HCSC-NRPW, Minutes, 21 Jan. 1981, 20:3-4. 74 This terminology is taken from Cameron, Property Rights and Sovereign Rights. 75 Interviews in 1988 with federal officials from DIAND and COGLA confirmed the close links. Norwegian government officials appeared at the deliberations on Bill C-48 by the HCSC-NRPW. For details on the North Sea model, see Noreng, Oil Politics in the igSos, 32-4. 76 The Bertrand Report makes countless allegations of transfer pricing by the oil MNCs. See Bertrand, State of Competition in the Canadian Petroleum Industry. 77 See the statement by Tuschak, HCSC-NRPW, Minutes, loFeb. 1981, 24:17-18. Tuschak was one of the architects of the new Canada Lands tax and royalty regime. 78 The effective rate of the federal income tax was 37.8 per cent. See Price Waterhouse, National Energy Program, 1O.

316 Notes to pages 142-7 79 Statement by E.D. Best, HCSC-NRPW, Minutes, 26 March 1981, 40:5. 80 The elimination of the corridor lands concept would, on average, increase the industry's returns by around 20 per cent. This would happen because the old system required lease holders to return 50 per cent of the acreage within a specified time limit. This relinquishment rule would, on average, deprive the industry of 20 to 25 per cent of gross income, a share that would belong to the Crown. HCSC-NRPW, Minutes, 26 March 1981, 24:15. This saving, then, would probably compensate somewhat for the introduction of the 25 per cent Crown share. 81 See Memorandum from Ian Waddell to the NDP Caucus, Ottawa, 7 May 1981. 82 See EMR, Canada's Energy Frontiers, 8-9.

83 The holder of an exploration agreement could 'enter on and use any lands described in the agreement for the purpose of exploring for oil or gas, has the exclusive right to drill for oil or gas and to develop the lands in order to produce oil or gas, and has the exclusive right, if he qualifies under section 19, to obtain a production licence.' See House of Commons, Bill €-48, Section 9. 84 House of Commons, Bill €-48, Section I9.(i)(a),(b). This requirement applied to the right to produce, first and foremost, rather than to the licence. See statement by Dr D.C. Crosby, HCSC-NRPW, Minutes, 22 Jan. 1981, 18:14. 85 House of Commons, Debates, Vol. 124, No. 112, Thursday, 11 December 1980. 86 Petro-Canada's share of Hibernia, Ben Nevis, Hebron, Nautilus, and South Tempest was 25 per cent, and its share of Terra Nova 75 per cent. PetroCanada's share of the total oil reserves from these fields was 40.8 per cent. Its share of the Venture was 30 per cent, Glenelg 45 per cent, and Alma 45 per cent. Petro-Canada's share of the estimated gas reserves in these fields was 37.5 per cent. See Dominion Securities Pitfield, Petro-Canada, 17. 87 Section 16(1) of Bill C-48 states: 'Failing such renegotiation the lands under the exploration agreement, subject to subsection (3) and section 66, are deemed to be surrendered and become Crown reserve lands.' 88 See submission by the CPA, HCSC-NRPW, Minutes, 26 March 1981, 4oA:4. 89 See Section 33. (2) of Bill C-48. See also Dam, Oil Resources, for the carried interest concept. 90 See COGLA, Annual Report 1986, l.

91 See Gault, 'Recent Developments in the Federal-Provincial Dispute,' 106. 92 As the bulk of the prospective areas in the Canada Lands were covered by permits, a new regime required change in the terms and conditions of existing rights. At the end of 1981 about 300 million acres were outstanding. HCSCNRPW, Minutes, 2Ojan. 1981, 17:10. 93 House of Commons, Bill C-48, section 61. Ottawa later offered partial compensation.

Notes to pages 147-62 317 94 See Harrison, 'Legal Character.' See also Thompson, 'Overview of Oil, Gas, and Mineral Disposition Systems,' unpublished version (the article was later published in the Rocky Mountain Law Review). See also Lucas, 'Acquisition of Natural Resource Interests by the State,' 28. 95 The Canadian Parliament thus has recourse to actions that the U.S. government, for instance, has not. Thompson, 'Overview of Oil, Gas, and Mineral Disposition Systems,' 3-25. 96 House of Commons, Bill €-48, Section 38(1), (2) and (3). Where an operating agreement was in force, Petro-Canada would replace the existing operator. 97 This applied whether the Crown share had been converted or not. 98 From 1974 the Norwegian state took a majority voting share in fields developed and therefore had a dominant say in field developments. See Norway, Storting, StortingsmeUling 30 (1973-4). 99 See Palmer, 'Overview of Canada's National Energy Program,' 117. 100 See Hunt, 'Management of Federal Petroleum Lands in Canada,' 130. 101 See, for instance, Pratt, 'Energy,' 29, 57. 102 See Toner,'Stardust,' 123. 103 Toner, in stressing federal Liberal political priorities, fails to appreciate these points. 5: Petro-Canada and the Effects of the NEP 1 Dominion Securities Pitfield, Petro-Canada, Table 4, p. 9. 2 Energy Minister Marc Lalonde, in House of Commons, Debates, 6 April 1982: 16206. 3 Pratt, 'Petro-Canada,' in Tupper and Doern, Public Corporations and Public Policy, 128. 4 Lalonde, House of Commons, Debates, 6 April 1982, 16207. 5 Dominion Securities Pitfield, Petro-Canada, 21. 6 Ibid., Table 4, p. 9. 7 See Procter, Taylor, and Wade, Oil and Natural Gas Resources of Canada, 1983. 8 EMR, National Energy Program, Update 1982, 51-2.

9 See PMA, Monitoring Survey, 1983, B-lO. 10 Ibid. See also PMA, Monitoring Survey, 1984, A-g. 11 The corporation's provincial expenditures (excluding the tar sands) for the period 1976-85 were 44.7 per cent of overall expenditures. 12 See Helliwell et al., Oil and Gas in Canada, 222. 13 Pratt, 'Petro-Canada,' in Doern, How Ottawa Spends Your TaxDollars, 107. 14 Petro-Canada, Annual Report, 1984, 13; Halpern, Plourde, and Waverman, Petro-Canada, Chart 2-1, p. 17.

318 Notes to pages 163-76 15 16 17 18

Dominion Securities Pitfield, Petro-Canada, Table 16, p. 23. Ibid., Table 18, p. 24. Klapp, Sovereign Entrepreneur, 46. Pratt, 'Petro-Canada,' in Tapper and Doern, Public Corporations and Public Policy, 104. 19 House of Commons, Standing Committee on Energy Legislation, Minutes, 20 April 1982, 1:72. See also Bertrand, State of Competition in the Canadian Petroleum Industry, 1:109, °n vertical linkages and charges of monopolistic practices by the oil MNCs. Pratt and Richards made the same observation with regard to Alberta in the late 19605 and early 19705; see Richards and Pratt, Prairie Capitalism. The Bertrand Report dealt only with the period 1958-73, so its findings are limited to that period. 20 The Globe and Mail, 24 April 1984. 21 House of Commons, Standing Committee on Energy Legislation, Minutes, 20 April 1982, 1:72. 22 The impression of close contacts is based on interviews with EMR officials. 23 See Petro-Canada, Annual Report, 1982, 21. 24 For this argument, see, for instance, Pratt, 'Petro-Canada,' in Doern, How Ottawa Spends Your Tax Dollars, 105. 25 See Pratt, 'Petro-Canada,' in Tupper and Doern, Privatization, Public Policy and Public Corporations. 26 See, for instance, The Globe and Mail, 22 Feb. 1990. See also chapters 6 and 7 here. 27 Department of Finance, Budget Speech, 1982, 8; see also EMR, National Energy Program, Update 1982, 48. 28 In September 1982 Ottawa decided to apply the levy to the proposed $500 million Dome bailout package. The Toronto Star, 12 March 1983, D8. 29 Petro-Canada, Annual Report, 1983; and Calgary Herald, 17 Nov. 1983, Fl. 30 See Petro-Canada, Annual Report, 1983, 5; The Globe and Mail, 17 April 1984, B6. 31 Interview with Joel Bell, March 1988. 32 Petro-Canada, Annual Report, 1983, 2. 33 Calgary Herald, 15 Feb. 1984, AlO. 34 Winnipeg Free Press, 6 Jan. 1983, 47; Calgary Herald, 24 Feb. 1983, G$. 35 The COR rate for 1978 was not found, so the companies' COR-rating for 1985 was used. This means that the production figures for Canadian-owned companies are probably grossly exaggerated for 1978. Therefore, a significant improvement did take place. 36 In 1978 the companies' share of production was 52 per cent; by 1982 it had risen to 59.6 per cent. This was before the takeover of Gulf by the Reichmanns, which altered the production figures significantly.

Notes to pages 177-83 319 37 Alberta, Department of Federal and Intergovernmental Affairs, Eighth Annual Report to March 31, 25. 38 Doern and Toner, Politics of Energy, 209. 39 Helliwell et al., Oil and Gas in Canada, 228-9. 40 See House, Challenge of Oil, So. 41 See Gault, 'Recent Developments in the Federal-Provincial Dispute,' i l l . 42 Ibid., 112. 43 Plourde, Oil and Gas in Canada, 177. 44 See Canada, Memorandum of Agreement between the Government of Canada and the Government of Alberta, l. 45 Field prices of conventional old oil were scheduled to increase from a base price of $21.25 in October 1981 to $57.75 in July 1986, whereas the wellhead price of the NORP would start at $45.92 in January and reach $77.48 in July 1986. 46 See Scarfe, 'National Energy Program after Three Years,' 16. 47 Ottawa explicitly stated in the agreement that this did not reduce or at all affect the federal government's ability and legal basis for instituting such a tax. See Canada, Memorandum of Agreement between the Government of Canada and the Government of Alberta, 9. 48 See Scarfe, 'National Energy Program after Three Years,' 7. 49 See Helliwell, MacGregor, and Plourde, 'National Energy Program Meets Falling World Oil Prices,' 286. 50 See, for instance, Price Waterhouse, National Energy Program, Exhibit 8, p. 13. 51 See Pratt, 'Energy: Roots of National Policy,' 56. 52 See Helliwell and McRae, 'Resolving the Energy Conflict,' 14-23. Compared with the NEP, the industry's share of economic rents (net of all costs, taxes, royalties, land payments, operating costs, depreciation, and a 7 per cent real after-tax return on the replacement value of capital investment) was $15.4 billion. This was an increase of 42.6 per cent in comparison to the NEP. The share of Canadian energy users was $97.5 billion, or a reduction of 11.8 per cent from the NEP. The federal government's share was $37 billion, an increase of 2O per cent over the NEP. The share of the producing provinces was $129.2 billion, or an increase of 4.5 per cent over the NEP. 53 See Doern and Toner, Politics of Energy, 207. 54 See EMR, 'Agreement to Amend the Memorandum of Agreement.' 55 PMA, Monitoring Survey, 1984, 5-3. 56 See Helliwell, MacGregor, and Plourde, 'National Energy Program Meets Falling World Oil Prices,' 289. 57 See Toner, 'Stardust,' 122. 58 See Clarkson, Canada and the Reagan Challenge, 83—4.

32O Notes to pages 184-96 59 In this connection it is noteworthy that Keohane and Nye used the 1973 OPEC oil embargo to argue how the system of interstate relations was characterized by mutual dependence or interdependence. See Keohane and Nye, Power and Interdependence. 60 See Pratt, 'Energy,' 29. 61 See Doern, 'Energy, Mines and Resources.' 62 See Russell, Constitutional Odyssey, 92-126.

63 See Simpson, Discipline of Power, 193. The fact that Clark was a Conservative from Alberta with a strong electoral base there was of little significance. Simpson (p. 204) notes, 'Clark learned a lesson that a more experienced Prime Minister would have understood. In federal-provincial relations, premiers are colour-blind when the vital interests of their provinces are at stake; in fact it is often easier politically for them to have a federal government of a different political stripe to blame at provincial election time.' 64 See Cairns, 'Other Crisis.' 65 See Thompson, 'Overview of Oil, Gas, and Mineral Disposition Systems,' 3-2566 See Chandler and Bakvis, 'Federalism and the Strong-State/Weak-State Conundrum,' 61. 67 Ibid., 75. 68 Ibid., 76. 69 Ibid. 70 Cairns, 'Other Crisis of Canadian Federalism,' 185. 71 The prorationing scheme could impinge on the federal trade and commerce power. See Thring, 'Alberta, Oil and the Constitution,' 82. 72 Thring, 82. 73 Cairns,'Other Crisis,' 185. 74 See Bankes, Hunt, and Saunders, 'Energy and Natural Resources.' 75 Ibid., 65. 76 Ibid., 59. 77 See Russell, Knopff, and Morton, Federalism and the Charter, 146. 78 See Donald Johnston, ed., With a Bang, Not a Whimper: Pierre Trudeau Speaks Out on Meech Lake, 94-5, cited in Cairns, Disruptions, 256.

79 The notion of policy networks is useful for understanding linkages between state and societal actors. For a definition of this term, see Katzenstein, Between Power and Plenty, 19, 308. In Canada this has to include the networks that emerge among multiple governmental actors and societal actors. 80 See Cairns, 'Governments and Societies of Canadian Federalism,' 168. 81 Ibid.

Notes to pages 199-210

321

6: Oil in a Changing International Context and Conservative Energy Policy 1 Dillon, 'Petroleum Sector under Continental Integration,' 324. 2 Tupper and Doern, Privatization, Public Policy and Public Corporations, 32; see also McBride and Shields, Dismantling a Nation, 56. 3 William T. Stanbury, quoted in McBride and Shields, Dismantling a Nation, 57. 4 See Department of Finance, Budget, Papers: Securing Economic Reneival, tabled in the House of Commons by the Honourable Michael H. Wilson, Minister of Finance, 23 May 1985, 26. 5 McBride and Shields, Dismantling a Nation, 125. 6 Petroleum Intelligence Weekly, 3 Aug. 1992, 2. 7 Ibid., 5. For further details see, for instance, World Bank, 'Techniques of Privatization.' 8 See statement by the Honourable Jacob Epp to House of Commons, Legislative Committee on Bill C-84, Minutes, 7 Nov. 1990, 7:6. 9 Ibid., 7:7-8. 10 See Simeon and Robinson, State, Society, and the Development of Canadian Federalism, 309. 11 Quote from a campaign speech by Prime Minister Brian Mulroney in SeptIles, 6 Aug. 1984, in ibid., 301-2. 12 Ibid., 302. 13 Ibid. 14 Milne, Tug-of-War, 99. 15 Ibid. 16 See EMR, Atlantic Accord: Memorandum, l. 17 Ibid. 18 Ibid, 8. 19 In 1986, roughly 31.7 per cent of Canadian oil production was conventional heavy crude or non-upgraded bitumen. See Helliwell et al., 'Oil and Gas in Canada,' 170. 20 See EMR, Atlantic Accord: Memorandum, clauses 5, 27. See also EMR, CanadaNova Scotia Offshore Petroleum Resources Accord, clauses 2O.O2, 41.01. 21 See Simeon and Robinson, State, Society, and the Development of Canadian Federalism, 306. 22 See Cairns, 'From Interstate to Intrastate Federalism in Canada.' 23 See statement by the Honourable Jacob Epp, House of Commons, Legislative Committee on Bill C-84, Minutes, 7 Nov. 1990, 7:7-8. 24 Atlantic Canada imported 99 per cent of its oil needs in 1986; Quebec imported 60 per cent. EMR, Energy Security in Canada, iv.

322 Notes to pages 210-20 25 Helliwell etal., 'Oil and Gas in Canada,' 131. Note: 'The shift from oil-related to gas-related activities is one of the most prominent features of the 19705.' 26 See EMR, Atlantic Accord: Memorandum, 7. 27 See Senate of Canada, Petro-Canada, 7-9. 28 See EMR, Western Accord, Part III, clause 7. 29 See Helliwell et al., 'Oil and Gas in Canada,' 190. 30 Ibid. 31 Petro-Canada, Annual Report, 1988, 7. 32 See Helliwell et al., 'Oil and Gas in Canada.' 33 See EMR, Canadian Petroleum Industry IQQI Monitoring Report, 44. 34 The Gulf transaction was by far the dominant contributor to increased Canadian ownership and control in 1985. Olympia and York paid $2,850 million for the acquisition, whereas Petro-Canada paid $886 million. In addition, Ultramar paid $120 million for certain downstream assets. The only other takeover in 1985 was the sale of certain assets by Ocelot to Conoco. The Gulf takeover thus accounted for $3,856 million out of a total of $3,904 million worth of takeovers in 1985. Loverock, Ownership Structure of Principal Petroleum Companies, 277. 35 The corporation increased its downstream earnings from a loss of $22 million in 1985 to earnings of $115 million in 1986. In the upstream sector, the corporation's earnings fell from $197 million in 1985 to $57 million in 1986. PetroCanada, Annual Report, 1986, 1O. 36 See Toner, 'Stardust,' 133.

37 See EMR, Western Accord, 5. 38 EMR, Atlantic Accord: Memorandum of Agreement, 5. 39 The Atlantic Accord did include a provision on the Crown share, with half to be given to Newfoundland but subject to a federal decision on whether to retain the provision. The CPRA eliminated the entire Crown share provision. 40 See Toner, 'Stardust,' 130. 41 See EMR, Atlantic Accord: Memorandum of Agreement, 42 Simeon and Robinson, State, Society, and the Development of Canadian Federalism,

308. 43 See EMR, Canada-Nova Scotia Offshore Petroleum Resources Accord, \.

44 Statement by the parliamentary secretary to the Minister of State (Mines), in the House of Commons, Debates, 9 May 1986, 13137-8. See also EMR, Canada's Energy Frontiers, 1. 45 House of Commons, Bill C-Q2, CPRA, Section 22. 46 House of Commons, Bill C-48, COGA, Section 12. 47 Thompson, 'Overview of Oil, Gas, and Mineral Disposition Systems,' 3-33. 48 House of Commons, Bill C-f)2, Section 41(1).

Notes to pages 221-32 323 49 50 51 52 53

54 55 56

57

58

59

60 61 62 63 64 65 66 67 68

69

See House, Challenge of Oil, 309. House voiced this concern before the CPRA was introduced. Ibid. Barry, 'Offshore Petroleum Agreements,' 188. Statement by the parliamentary secretary to the Minister of State (Mines) in House of Commons, Debates, 9 May 1986, 13138-9. Section 15(4) specified: 'The Minister shall publish a notice in accordance with section 19 setting out the terms and conditions of any interest issued as a result of a call for bids as soon as practicable after the issuance thereof.' See Backs, Choice of Futures, 54. House of Commons, Bill C-Q2, section 121. See statements by Arthur R. Price, President of Husky Oil, and Donald Seaman, Senior Vice-President of Bow Valley Industries, to Senate of Canada, Standing Committee on Energy and Natural Resources, Minutes, 5 Nov. 1986, 3:9. Testimony by William Erasmus, Spokesperson for the Comprehensive Claims Coalition, to House of Commons, Legislative Committee on Bill C-92, Minutes, 6 June 6 1986, 4:33. Appendix 'C-92/l,' A Brief by the Tungavik Federation of Nunavut (TEN) to House of Commons, Legislative Committee on Bill C-92, Minutes, lOjune 1986, 2A:lO-l. American oil imports from Mexico were 11.5 per cent in 1989 and climbed by 17.3 per cent between 1987 and 1989. Canadian crude oil exports were 10.9 per cent in 1989, 3.8 per cent above 1987 levels. OECD, IEA, Quarterly Oil Statistics and Energy Balances, 1990, 328. See National Liberal Caucus, Reaching Out, 10. See Doern and Tomlin, Faith and Fear, 230. See Courchene, 'Free Trade Agreement,' 3. See Doern and Tomlin, Faith and Fear, 68. Ibid., 31. See Courchene, 'Free Trade Agreement,' 4. EMR, Canada-U.S. Free Trade Agreement and Energy, 7. See Battram and Lock, 'Canada/United States Free Trade Agreement and Trade in Energy,' 328-9. Meyer and Rowan, in Powell and DiMaggio, New Institutionalism, 41. Note: 'Organizations are driven to incorporate the practices and procedures defined by prevailing rationalized concepts of organizational work and institutionalized in society. Organizations that do so increase their legitimacy and survival prospects, independent of the immediate efficacy of the acquired practices and procedures.' Article 1602 of the FTA states: 'Neither Party shall require an investor of the other Party by reason of its nationality to sell or otherwise dispose of an invest-

324 Notes to pages 234-41 ment (or any part thereof) made in its territory.' This prevented Ottawa from equipping any Crown corporation or company with investments held by foreigners. However, the clause that frontier projects hold at least 50 per cent Canadian equity participation was grandfathered under article 1607 of the FTA. Ottawa was barred from any increase in the percentage share of Canadian equity participation in the frontiers above the 50 per cent share. See Plourde, 'NEP Meets the FTA,' 20-1. 70 National Energy Board, Canadian Energy: Supply and Demand 1QQO—201O, Tables A4-2 and A4-3, pp. 339-41. 71 See EMR, 'Energy Security in Canada,' iii. 72 For a brief but informative account of U.S. strategic interests and that country's role in the Persian Gulf area, see Lesser, 'Oil, The Persian Gulf, and Grand Strategy.' 7. The Privatization of Petro-Canada 1 Savoie, Politics of Public Spending, 259. 2 In an interview, an official in the Department of Finance said that Petro-Canada had been on the agenda as a possible privatization candidate from the time the program was launched. 3 See Langford and Huffman, 'Air Canada,' 121. 4 The federal deficit rose from $7 billion, or 2.1 per cent of GNP, in 1981 to $24.5 billion, or 6.3 per cent, in 1983. In the fiscal year ending March 1985 the federal deficit was $25 billion, or 5.8 per cent of GDP. See OECD, Economic Surveys 1983/84: Canada, July 1984, Table 4, p. 2O. In the period 1984-5 to 1987-8, the federal deficit was lowered by $11.5 billion (on a national accounts basis), or the equivalent of 3.5 per cent of GDP. See OECD, Economic Surveys ig87/88: Canada, 1988, Table 9, p. 35. 5 Laxer, False God, 4, 7. 6 See Pratt, 'Petro-Canada,' in Tupper and Doern, Privatization, Public Policy and Public Corporations. 7 See Vernon, Promise of Privatization, 18-19. 8 Ibid., 4. 9 The federal deficit as a percentage of GDP rose from 3.3 per cent in 1989 to 4.4 per cent in 1991. See OECD, Economic Surveys iggi/iggs: Canada, Table 7, 10 11 12 13

P-39See Doern and Atherton, 'Tories and the Crowns,' 146. See Stanbury, 'Privatization in Canada,' 273-329. Ibid., Table 5-1, 275. See Laux and Molot, State Capitalism, 191.

Notes to pages 241-9 14 15 16 17 18

19 20

21 22 23 24 25 26 27 28

29 30 31 32 33 34 35 36 37

325

Gallup Report, 17 Dec. 1984. Ibid., 26 April 1984. Ibid., 17 Dec. 1984. Ibid., 5 April 1990. Granted, the polling data for different time slots have obvious shortcomings and are not completely reliable as indices of solid trends or deeper changes. But the Gallup polls of the time do show consistent and strong support for the conclusion that the Conservatives were not ahead of public opinion. See March and Olsen, Rediscovering Institutions, 99. The scheme was estimated to cost $2.5 billion; $1 billion consisted of PetroCanada's assets, and $1.5 billion would be used to pay off the corporation's debt load. See Stanbury, 'Privatization in Canada,' 279-80. Ibid., 281-2. See Doern and Atherton, 'Tories and the Crowns,' 132. Ibid., 133. Seejorgenson, 'Managing Privatization and Deregulation,' 397. Ibid., 134. See the section on Canada in Fraser, Privatization, 157-9. See Doern and Atherton, 'Tories and the Crowns,' 133. Tupper and Doern, with reference to a Globe-Environics Poll of March 1988, note that over 50 per cent opposed the sale of Air Canada and Petro-Canada, whereas 31-33 per cent supported it. See Tupper and Doern, 'Canadian Public Enterprise and Privatization,' in Tupper and Doern, Privatization, Public Policy and Public Corporations, 44. See Doern and Atherton, 'Tories and the Crowns,' and Tupper and Doern, Privatization, Public Policy and Public Corporations, 27. See Stanbury, 'Privatization in Canada,' 284. See Bott, 'Would You Buy a Piece of This Company?' 58. Interview with Department of Finance official, 1992. See Doern and Atherton, 'Tories and the Crowns,' 145. See Petro-Canada, Annual Report, 1984, 2. Ibid., 2-3. Petro-Canada, Summary of the Petro-Canada 1985 Corporate Plan and Capital Budget, 2. See Pratt, 'Petro-Canada,' in Tupper and Doern, Privatization, Public Policy and Public Corporations; and Halpern, Plourde, and Waverman, Petro-Canada. These articles, the two most important analyses available on the role of Petro-Canada in this period, viewed the change in mandate mainly as a confirmation or reflection of changes already under way and undertaken by the corporation prior to the change in government in September 1984.

326 Notes to pages 250-61 38 See Pratt, Tetro-Canada,' in Tupper and Doern, Privatization, Public Policy and Public Corporations, 2O1. 39 Ibid. 40 Ibid., 192. 41 See Halpern, Plourde, and Waverman, Petro-Canada, 28. 42 Ibid., 2O. 43 See National Liberal Caucus, Reaching Out, 10. See also Doern and Tomlin, Faith and Fear, 230-3. 44 See World Bank, 'Techniques of Privatization of State-Owned Enterprises,' 97. 45 Ibid., 107. 46 Ibid., 108. 47 Senate of Canada, Petro-Canada, Table 2: 39. 48 Amoco - following the Dome takeover - was the second-largest landholder. Chevron ranked third, Imperial fourth. The figures, which originated in Oilweek, were presented in Senate of Canada, Petro-Canada, Figure 3. 49 The Globe and Mail, 21 Aug. 1985: B6. 50 See Petro-Canada, Annual Report, 1989, 2. 51 The corporation's reinvestment ration was 1.2 in 1986; 0.81 in 1987; 1.42 in 1988; 0.87 in 1989; and 1.11 in 1990. Petro-Canada, Annual Report, 1990, 60. 52 Statement by Bill Hopper to House of Commons, Standing Committee on Energy, Mines and Resources, Minutes, 25 June 1987, 25:17. 53 See Petro-Canada, Annual Report, 1989, 2. 54 Part of this process may relate to the increased importance of shareholder control and short-term returns that has come to characterize North American companies; Japanese companies, for instance, face weaker shareholder control. 55 One such obvious benefit was the channelling of the proceeds from the first share offer to the corporation rather than to the Treasury. 56 Statement by Bill Hopper to House of Commons, Legislative Committee on Bill C-84, Minutes, 7 Nov. 1990, 2:9. 57 See, for instance, the statement by Jake Epp to House of Commons, Legislative Committee on Bill C-84, Minutes, 27 Nov. 1990, 7:7. 58 Statement by Hopper to House of Commons, Legislative Committee on Bill C84, Minutes, 7 Nov. 1990, 2:8, 13, 9. 59 House of Commons, Legislative Committee on Bill C-84, Minutes, 7 Nov. 1990, 2:13. 60 When asked if the government might consider enabling the corporation to obtain an additional amount of funds from the sale of shares, Hopper responded, T do not expect the government to say no.' House of Commons, Legislative Committee on Bill C-84, Minutes, 7 Nov. 1990, 2:15.

Notes to pages 262-82 327 61 See Doern and Atherton, 'Tories and the Crowns,' 147-8. 62 See, for instance, 'Analysts Study Petrocan on Chance of Share Issue,' The Globe and Mail, 27 Nov. 1984, and the editorial, 'Why Privatize Petro-Canada?' The Toronto Star, l Dec. 1984. Senator William Kelly and former MP John Thompson chaired an internal Tory task force on Crown corporations before Mulroney came to power in 1984, and Petro-Canada 'was always high on their hit list.' See 'Senators Divided on Future of Petro-Canada,' Financial Post, November 1989, 26. 63 See Department of Finance, Office of Privatization, Prospectus on Petro-Canada, 364 According to F.H. Sparling (DG, Corporations Directorate, Department of Consumer and Corporate Affairs), there is no law in Canada that can prevent Parliament from imposing such obligations on a company. See statement by Sparling to House of Commons, Legislative Committee on Bill C-84, Minutes, 27 Nov. 1990, 7:31. 65 House of Commons, Legislative Committee on Bill C-84, Minutes, 27 Nov. 1990, 7:32. 66 See statement by Sparling to House of Commons, Legislative Committee on Bill C-84, Minutes, 27 Nov. 1990, 7:35. 67 Statement by McDermid to House of Commons, Legislative Committee on Bill C-84, Minutes, 6 Nov. 1990, 1:40. 68 See statement by Jake Epp to House of Commons, Legislative Committee on Bill C-84, Minutes, 27 Nov. 1990, 7:10. 69 See statement by Sparling to House of Commons, Legislative Committee on Bill C-84, Minutes, 27 Nov. 1990, 7:35. 70 Statement by McDermid to House of Commons, Legislative Committee on Bill C-84, Minutes, 6 Nov. 1990, 1:27. 71 See Petro-Canada, Prospectus, 12 Sept. 1995. In April 1996 the federal government held 49,390,104 out of the 246,830,832 common shares of PetroCanada. See Petro-Canada, Management Proxy Circular, 18 March 1996. 72 Petro-Canada, Management Proxy Circular, 18 March 1996, 13. 8: Conclusion 1 See Smiley, Canada in Question; Smiley and Watts, IntrastateFederalism; and Cairns, Charter versus Federalism. 2 See Thorburn, Interest Groups in the Canadian Federal System, 18.

3 Ibid., 18-19. 4 Milne, Tug-of-War, 88.

5 The general thrust of these analyses is to demonstrate (a) that states are no

328 Notes to pages 285-91

6 7 8 9 10

longer able to formulate a clear hierarchy of issues or concerns, (b) how force has become a less useful instrument of foreign policy, and (c) how issues, hitherto separated, can combine in novel ways to present states with new challenges. See Keohane and Nye, Power and Interdependence and 'Power and Interdependence Revisited.' See Nordlinger, 'Return to the State,' 882. See Ikenberry, 'Irony of State Strength,' 135. See also Chapter i. Orren and Skowronek, 'Beyond the Iconography of Order,' 10. Ibid. See Halpern, Plourde, and Waverman, Petro-Canada.

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Index

Accords. See Atlantic Accord; CanadaNova Scotia Offshore Petroleum Resources Accord; Northern Accord; Western Accord accountability, 291 acquisitions, Petro-Canada, 90-1, 95, 153-4, 156- 157,254,257 An Act to Amend the Petro-Canada Act (Bill C-ioi), 153-5, 169 AECB. See Alberta Energy Conservation Board AECL, privatization of, 236, 242 Air Canada, privatization of, 236, 2456,263-4 Alaska, discoveries in, 29, 54, 107 Alberta, 42-8, 126; and constitutional reform, 207-8; Energy Package (July 1980), 113; oil price negotiations 1979, 11O; and OPEC oil crisis, 43; reaction to NEP, 121. See also federal-provincial relations Alberta Court of Appeal, 177 Alberta Energy Conservation Board (AECB), 40 Alberta first, allocation policy, 44 Alberta Petroleum Marketing Commission (APMC), 44-5, 114, 198

Alsands synthetic oil project, 180 alternative fuel sources, 34, 119, 211, 247,269 American model: COGL, 65; definition of 300-56; PNGA, 63, 65; in Western provinces, 9, 45—6, 102, 140, 150, 283 APMC. See Alberta Petroleum Marketing Commission APP. Sue Arctic Pilot Project ARCAN, 88, 92-3. See also Petro-Canada Exploration ARCO, 171 Arctic Archipelago, 121 Arctic Islands, 256; Esso and Petro-Canada, 91-2; exploration in, 25-rt,29 Arctic Islands Exploration Group, 93 Arctic Pilot Project (APP), 94, 171 Atherton,J., 243, 246, 262 Atlantic Accord, 205-7, 211, 216, 2l8 auction-based rights issuance, 142 Austin, Jack, 36, 37 Australia, and Canada compared, 102 autarky, economic costs of, 51

354 Index back-in right, of Petro-Canada, 59-60, 91-2, 94, 96 Baffin Island, 256 Bakvis, H., 18, 189-90 Barry, Leo, 62, 221 Battram, S.P., 231 Beaufort Sea, 121, 158-9, 170, 178, 255, 256 Bell, Joel, 37, 39-40, 85, 164-5, 1?1 Ben Nevis, 170, 256 Berger Report, 97, 99 Berry, G.R., 22, 49 Bertrand report, 164 bilingualism, and Petro-Canada, 823, 165 Bill C-8. See Petro-Canada Act Bill C-12. See Petroleum Corporations Monitoring Act Bill C-2O, failure of, 65, 140 Bill C-48. See Canada Oil and Gas Act Bill C-92. See Canada Petroleum Resources Act Bill C-lOl. See An Act to Amend the Petro-Canada Act (1982) Bill C-123- See Government Organization Bill blended price system, NEP, 130 Bonn Summit (1978), 108 Borden line, market area, 26 Bott, R., 245 Bourassa, Robert, 230 Bow Valley, 170 BP Canada, 152 Bradley, P., 131-2 British Columbia Court of Appeal, 192 British North America Act, 38; amending formula, 2O. See also constitution Cairns, Alan, 2O, 190-1, 193,208,271 Cameron, P.D., 41—2

Canada-Alberta Energy Agreement (1981), 179, 181-2 Canadair, 112 Canada Lands, 26, 40-2, 139-46, 212, 226; Canadianization program, 216; COGL regulations 1977, 97-8; constitutional status, 1O2, 276; and federal-provincial conflicts, 50-66; jurisdiction, 22, 55; Liberal policy, 201; management regime, 126; and NEP emphasis on, 121; and Petro-Canada, 154-5; and Petroleum and Natural Gas Act, 1976, 55-61; resource management, 9, 252-3; rights issuance and land management, 7, 52—5, 67—8, 78, 129, 147, 150, 168-9; state as landlord, 14-15, 75, lOl, 188. See also North Sea model Canada-Newfoundland Offshore Petroleum Board (CNOPB), 21O11, 2l8 Canada-Nova Scotia Offshore Petroleum Resources Accord, 206-7, 216, 218 Canada—Nova Scotia Offshore Petroleum Resources Board (CNSOPB), 218 Canada Oil and Gas Act (Bill C-48), 65, 139-50, 169; and Bill C-92 (CPRA), 219-20; modifications, 179; opposition to, 142, 147— 8 Canada Oil and Gas Land regulations (COGL): (1960,26,41,53-4,56-8, 61,65,89; (1977), 96-9, 145 Canada Oil and Gas Lands Administration (COGLA), 65, 143, 146 Canada Petroleum Resources Act (Bill C-92), 2l6, 217; Conservative government's intentions, 218-19;

Index 355 impact on Newfoundland, 220-2; responses to, 223-7 Canada Post, privatization, 242 Canada-U.S. relations, 10, 228-33; and OPEC, 30-1 Canadian Industrial Gas and Oil Ltd (CIGOL),46 Canadianization: Alberta response, 176-82; Conservative commitment to, 203; of control and ownership, 214-15; industrial benefits from, 123; East Coast, 216; and multinational oil companies, 31, 35, 123, 140-1; and NEP, 122-7; objective, 7, 97, 140, 170-2; Petro-Canada and, 88, 153, 172, 248; principles of, 356; private-sector ownership, 215; public ownership, 215; and revenue-sharing, 214-17; and self-sufficiency, 169; support of Quebecers for, 125 Canadian Ownership Account (COA), 125-6, 129, 153, 170,215 Canadian Ownership Charge, 215 Canadian Ownership Rate (COR), 97, 143, 176, 180 Canadian Petroleum Association (CPA),27, 144 Canadian Petroleum Resources Act (CPRA),2i6, 219 Canertech, 155, 247 Canterra, 170 Carney, Pat, 215 Castles, F.G., 5-6 challenge system, 59 Chandler, W.M., 18, 189-90 Charter of Rights and Freedoms, 193 Chevron, 121 Chicago oil price, no

CIGOL. See Canadian Industrial Gas and Oil Ltd Clark, Ed, 40 Clark, Joe, llO-n, 114, 186; notion of Canada, 113; and Petro-Canada, 242-3 CNOPB. See Canada-Newfoundland Offshore Petroleum Board CN Railways, privatization of, 236, 242 CNSOPB. See Canada-Nova Scotia Offshore Petroleum Resources Board COA. See Canadian Ownership Account COGA. See Canada Oil and Gas Act COGLA. See Canada Oil and Gas Lands Administration COGL. See Canada Oil and Gas Land regulations Cohen, Marshall, 40 Cold Lake synthetic oil project, 180 commercial discovery, 145 commodities: as focus of EMR, 37; oil as, 183 Competition Act, 264 competitive accelerated adjustment, 12-13 Comprehensive Claims Coalition, 224 concession-based system, 8, 92, 142 conservation, 118-19, 155; competitive accelerated adjustment strategy, 13 Conservative government, 198, 284 commitment to cooperative federalism, 204-8; and Crown corporations, 2OO; energy policy, 201-8; ideological opposition to Petro-Canada, 111—12; oil pricing policy, no; opposition to Bill C-8, 73-4; dismantling of NEP, 199-201; response to OPEC, 105; security of

356 Index supply, 202-3, 206-7, 209-14; and state power, 277 constitution, 7,19, 2O, 276, 290; division of powers in, 46, 83, 115, 191; and energy policy, 69, 272-4, 276; and Petro-Canada, 165; and property rights, 147-8; and the question of sovereignty, rules and norms, 19, 102-3, 193» 2&°> 291; Supreme Court on Bill 42, 46; and upstream oil and gas activity, 38—9 Constitution Act, 1867, 137 continentalism: of oil industry, 125, 206; trend in Canada, 228-33, 2^4 continental shelf jurisdiction, 65 Co-op (Controlled Prices on Conventional Old Oil), 212 co-operative federalism, 204, 208, 266; and economic renewal, 205 corporate autonomy, 17, 95, 167 corporate controls, 84—5 corporate investment decisions, 94-6 COR. See Canadian Ownership Rate Courchene, T.J., 230 CPA. See Canadian Petroleum Association CPRA. See Canada Petroleum Resources Act crises: as opportunities for new strategies, 11-12; and state intervention response, 21. See also deflection and reverse deflection Crommelin, M., 26, 57, 60 Crosby, D.G., 58-9 Crown corporations: assets, 240—1; Conservative policy, 2OO-1; efficiency of, 173-4; Petro-Canada as, 76, 82; privatization, 236, 242-3 Crown lands: and Alberta oil, 44; reserve system, 54

Crown share, 144-5, H9> 220-1, 226 Crude Oil Export Charge, 212 Cullen, R., 102 Davis Strait/Baffin Island area, 92 decentralization, 208, 219 deconstitutionalism, 287; energy policy, 8, 69, 103, 115, 117, 129, 185, 274-86; and PGRT, 136 defensive market response, 13 deficit reduction, 236, 238, 240, 254 deflection and reverse deflection, oil policy, 5, 8, 21, 271, 278-80, 286-8. See also reverse deflection Department of Finance, Privatization and Regulatory Affairs, 244 depletion allowance, 47-8; EDA, 138; Income Tax Act, 129 deregulation, 4, 284; oil and gas prices, 2O2, 204, 208, 252, 258; U.S., 108,117, 134 developing countries, and PCIAC, 155-6 DIAND (Department of Indian Affairs and Northern Development), 60-1, 92 and COGLA, 146; tension between EMR and, 35, 40, 61 Diefenbaker government, National Oil Policy (NOP),25 DiMaggio, P.J., 271 Doern, G.B., 9, 138, 149, 169, 182, !84, 199; and Crown corporations, 243, 246; free trade, 228, 230; Petro-Canada, 262 Dome Petroleum, 99, 142, 153, 157, 159-60, 176 Dominion Securities Pitfield, 156-7 earned depletion allowance (EDA), 138,180, 182

Index 357 Eastcan. See Total Eastcan Explo. Eastcan Group, 62 East Coast: development, 255; exploration activity, 159-60;jurisdictional conflict, 55, 61-6, 97; Mobil and Petro-Canada, 91-2; Petro-Canada's landholdings, 157-9 Economic Council of Canada, 79 economic efficiency, and role of state, 200-1, 238 economic rents: conventional oil production, 131; distribution of, 132; from reserves, 120 EDA. See earned depletion allowance Eldorado Nuclear, 112, 243 enabling agreements, 206 Energy, Mines and Resources (EMR): and COGLA, 146; and DIAND, 35, 4O, 65; 'An Energy Policy for Canada, Phase l,' 37, 79; federal stance on jurisdiction, 61—2; and NEP, 4, 128; policy-making, 37-40, 283; self-reliance target, 52; Statement of Policy 1976, 55-7, 96; White Paper I9?fi, 51. 54. 65, 70, 71, 88, 100 energy consumption, 234—5 energy forecasts, NEB 1974-5, 51-2 energy issues: interfuel substitution, 209; intergovernmental conflicts, 910, 268-9, 271; as political issues, 32, 279—80; responses to, 21. See also politics energy policy, 4, 129-46; 19608, 27; Conservative government, 201-17, 227; decentralization, 263; delinking of, 266; failure of, 67-72; and foreign policy, 108, 231-2; intergovernmental, 180—1; Liberal government, 50-66; nationalist, 33; and Petro-Canada, 88, 155; post-NEP,

230; self-reliance, 50-2; self-sufficiency to self-reliance, 50—2; and U.S., 108. See also constitution; Free Trade Agreement; tax and fiscal measures Energy Supplies Allocation Board, 33 enterprise diagnosis, 253 environmental assessment, export exemption, 4 Epp,Jake, 202-3, 2O9 Erasmus, George, 224 Esso, and Petro-Canada's back-in right, 91-2 Evans, P.B., 11, 16 executive federalism, 271, 275-6 exploration agreements, Bill C-48, 144,148 exploration and development: cost estimates, 52; EDA, 138; Petro-Canada, 159-62 exports, 94; to U.S., 29, 32, 173, 233. See also tax and fiscal measures fairness objective, of NEP, 7, 127-9, 140 farm-ins and farm-outs, 145; Petro-Canada, 90-3, 170 federal government: control of oil and gas activities, 7, 42, 48, 78, 122, 126, 146-51; deficit, 236, 238, 240, 254; goal conflicts at Petro-Canada, 1667; price control, 132; privatization program, 240—6 federalism, 18, 21, 284, 287; centrist policy of Trudeau, 184-7; co-operative, 204-5, 208, 266; and deflection and reverse deflection, 8, 271, 284, 286; executive, 271; interstate, 266, 285; intrastate, 208, 266, 285;jurisdictional, 18, 114-15, 177-

358

Index

8; under Mulroney government, 204, 217; structural feature of Canada, 18, 126-7 Federal-Provincial Agreement on Natural Gas Markets and Prices, 258 Federal-Provincial Maritime Offshore Resources Board, 63 federal-provincial relations, 211; Alberta-federal, 113-14, 176-82; Canada Lands, 50-66, 67-8; Conservative energy policy, 201-17; constitutional division of power, 38, 4250, 134; energy sector, 25, 27, 11314, 179; international relations, 282-3; joint-management regimes, 2i8;jurisdictional rights, 66, 101, 114-15, 189-91, 193, 269, 276; Newfoundland-federal, 63-4, 93, 99, 101, 159, 197-8; oil and gas revenues, 48-9; and Petro-Canada, 16970, 172-5, 185-6; and petroleum regions, 174; policy co-ordination, 205; price regulation and taxation, 71, 81-2, 101, 197; resource development in Western Canada, 42-50; revenue distribution, 128-9, 197; Saskatchewan-federal, 45-6, 198; sovereignty, 280-1 Financial Administration Act, 82; amendments 1984, 243 FIRA. See Foreign Investment Review Agency First Ministers' Conference, 1974, 46 First Nations, response to Bill C-92, 224-5 fiscal measures. See tax and fiscal measures Foreign Investment Review Act, 126 Foreign Investment Review Agency (FIRA), 124, 126,216

foreign ownership: Canadian requirements, 53-4, 143; of oil and gas industries, 25, 31, 36, 122-4; PetroCanada, 264-5; share of GNP, 122 foreign policy, and energy policy, 108 France, neomercantilist adjustment strategy of, 12 free trade: and federal subsidies, 214; with U.S., 203-4, 228-9. See afcoFree Trade Agreement; NAFTA Free Trade Agreement (FTA), 284-5; energy policy under, 231; and Petro-Canada, 229-33, 2^7; retreat of the state, 1O frontier exploration allowance, 99 frontier (Canada Lands) oil prices, NEP, 131-2 FTA. See Free Trade Agreement functional federalism, 18 gas. See natural gas GATT, and oil, 28, 231-2 Gault, I.T., 63, 98, 178 Georgia Strait Reference. See Supreme Court of Canada Gillespie, Alastair, 96-7 Glenelg, 170 globalization, oil as commodity, 4, 236-7 Globe and Mail, The, 256 golden shares, 264 Good, Len, 40 Government Organization Bill (Bill C-i 23), 173-4 Grand Banks, 170, 256 Gulf Oil Canada, 27, 214-15, 240, 254, 257; Port Moody refinery, 152

Halpern, Paul, 79, 167, 291; analysis of Petro-Canada, 250-1

index 359 Harrison, R.J., 55, 57-8 Helliwell,John F., 99, no, 127, 136, 160-1, 181, 182, 201, 213 Hibernia, 91-2, 121, 177-8, 197, 240, 256, 260; Statement of Principles 1988, 213 higher-cost oil, 142; price structure, 130-1 Hnatyshyn, Ray, 112 Hopper, Wilbert (Bill), 36, 37, 85,112, 167, 173.257-60 House, J.D., 61, 63, 177, 220 House of Commons: Cabinet Committee on Privatization, Regulator)' Affairs, and Operations, 244; Standing Committee on Energy Legislation, 164-5; Standing Committee on National Resources and Public Works, 78 Huffmann, K.J., 236 Hunt, C.D., 148 Husky Oil, 91, 170, 250 hydrocarbons, Petro-Canada development of, 79 IEA. See International Energy Agency Ikenberry,John, 12-13, !§, 108, 286 Imperial Oil, 27, 143, 170, 253 incentive system. See Petroleum Incentive Program; tax and fiscal measures income tax, corporate, 141, 180 Income Tax Act: depletion allowance, 129; resource allowance, 180 incremental oil revenue tax (IORT), 180,182 Independent Petroleum Association of Canada (IPAC), 27 industry-government relations, 140 inflation: and taxing of oil and gas

industry, 47; as worldwide concern, 108 insecurity of governments, 8, 45, 69, 274, 287; and issue of sovereignty, 20,191, 193 instrument overload, federal policies, 68,138, 194,279 interdependence, and reverse deflection, 22-3, 282 interest groups and federalism, 271-2 interfuel substitution, 209, 212 International Energy Agency (IEA), 30, 77, 100 international oil market, 22, 250-1; 1979-80, 7; andNEP, 115-16, 183. See also OPEC: and the international oil market; world oil market International Pipe Line Ltd, 33 international relations, federal-provincial relations, 282—3 international trade, and NEP, 282 intervention. See state intervention intrastate relations: federalism strategy. 49. 285; and state-society, 8-10 Investment Canada, 216 IORT. See incremental oil revenue tax IPAC. See Independent Petroleum Association of Canada Iranian Revolution (1978-9), 104, 106-7, 1O9. H3 Iran-Iraq War, 104, 106-7 Iraqi production, 106 issue linkage, of policy measures, 27980 Japan, competitive accelerated adjustment strategy of, 13 Jeffrey, B., 82 joint ventures, oil MNCs and Petro-Canada, 90, 93

360 Index Klapp, Merrie, 14-17, 28, 64, 66-7, 107, 163, 252, 292. See also state: as landlord Krasner, Stephen, 10-11, 14, 271 Labrador Group, 93 Labrador Shelf exploration program, 171, 256 Lalonde, Maic, 128, 153-5, 164-5, 169 landholding, and Petro-Canada, 89-94 landlord role of state. Sec Klapp, Merrie; rights issuance and land management land management policy, 50-66; Canada Lands, 40-2, 139-40, 226. Sec also rights issuance and land management Land Order 1-1961, 54 Langford, J.W., 236 Laux,J.K., 241 Law of the Sea negotiations, 65 Laxer, James, 236 leakage rules, 180 Leitch, Merv, 44, 114 Liberal government: budget 1975, 49; budgets 1974, 47, 49; and Canadian ownership of oil sector, 31; and deregulation, 4; national energy policy > 33> !83—4; oil industry response to 1974 budget, 48; oil pricing policy, no; Petroleum Administration Act (PAA), 46-7; regulation of oil and gas prices, 7; response to OPEC, 105; and state power, 277; under Trudeau, 33, 185-7 Liberal Party, and FTA, 228-9 Lock, R.H., 231 Lougheed, Peter, 38, 43-4, 114, 176-7, 230 McBride, Stephen, 2O1

McDermid,John, 264-5 Macdonald, Donald, 43, 81; future role of Petro-Canada, 77-80, 84 McDougall, Ian, 25, 27 McDougall,John N., 27 Mackenzie Delta, 92 Mackenzie Delta/Beaufort Sea, 93, 170. See also Beaufort Sea Mackenzie Valley, 92, 97, 255 McLellan, Anne, 4 McRae, R.N., 182 management control, 64, 67 Mandatory Oil Import Program, U.S., 29 Maple Leaf logo, 165, 168 March, J.G., 242, 271 market-based policy, 217, 227, 232-3, 239 Masse, Marcel, 245 Merit Oil Company, 152, 164 Mexico deal, 1OO Milne, D., 205, 207, 277 MNCs (multinational corporations). See oil MNCs (multinational corporations) Mobil, 91-3, 170 Molot, M.A., 241 moose pasture syndrome, 91 Morton, M., 82 Mulroney, Brian, 198, 204, 230, 236, 243,284 NACOP. See National Advisory Committee on Petroleum NAFTA, 228, 267, 284 National Advisory Committee on Petroleum (NACOP), 27 National Energy Board (NEB): energy forecasts 1974-5, 51-2; and federal regulatory policy, 25, 40

Index National Energy Program (NEP), 113-29, 183-7, 269, 277; blended price system, 130; control of Petro-Canada, 166-75; failure of, 175—87; federal-provincial revenue distribution scheme, 128; intergovernmental lconflict, 9-10; objectives, 7, 117-20, 124, 140; and oil MNCs, 1O; and Petro-Canada, 125, 129, 153-66, 243, 251; policy instruments, 182, 276; price regulation, 117, 134; projections, 122-3, iS0"1133-4; report (1980), 105, 117; role of OPEC, 116; tax and fiscal measures, 121, 124, 134; world oil market (igSos), 3 nationality requirements, 53—4; rights allocation process, 58 nationalization, 28; Saskatchewan, 456, 198 national oil company (NOC); establishment of, 7,16, 33, 36; as policy instrument, 107, 291-2; similarity to private companies, 87-8; and state as entrepreneur, 14-15, 28; and state autonomy, 24, 74-96. See also Petro-Canada; Statoil National Oil Policy (NOP), 25-7 National Policy, end of, 204 natural gas, 34, 21O; agreement, 205; and conversion from oil, 119; export tax, 114; pricing under NEP, 132; Venture discovery, 93. See also reserves natural gas and gas liquids tax (NGGLT), 129, 136-7, 180, 182 NDP. S«?New Democratic Party NEB. See National Energy Board need to know, 78, 139; resource base, 52, 56, 121; and rights holders, 59

361

neoconservatives, rise to power, 2O2 neomercantilism: adjustment strategy, 12-14, 16, 31, 66; of federal government, 50-1, 69-70, 82, 183, 228-33, 268-9, 284 NEP. See National Energy Program NEP Update, 159, 182 New Democratic Party (NDP): and Canadian ownership of oil sector, 31; and FTA, 229; NOC, 73; opposition to Bill C-48, 142; Saskatchewan, 45 Newfoundland: Atlantic Accord, 205; Crown share concept, 220-1; equalization payments, 217; federal conflict with, 99, 101; jurisdictional rights, 218; management control, 64, 67; and NEP, 177; and North Sea model, 9, 63, 70; offshore resources, 51, 55, 61-6; oil and gas regulations 1977, 63, 98; response to Bill C-92, 223, 226; rights issuance and land management, 150; sales tax, 213; White Paper, May 1977, 62-4 Newfoundland and Labrador Petroleum Board (NLPB), 63-4 Newfoundland/Labrador shelf, 93 Newfoundland Petroleum and Natural Gas Act, 1965, 61 new institutional perspective, 18 New Oil Reference Price (NORP), 142, 179, 182, 212 NGGLT. See natural gas and gas liquids tax NLPB. See Newfoundland and Labrador Petroleum Board NOC. See national oil company non-OPEC oil production, 107 NOP. See National Oil Policy

362

Index

Nordair, 243 Nordlinger, Eric, 14, 284-5 Noreng, 0., 102 Norman Wells oilfield, 144-5 NORP. SeeNew Oil Reference Price Northern Accord, 206, 218 Northern Canada, 158-9, 178 Northern Transportation, 112, 243 North Sea, discoveries in, 107 North Sea model, 283; in Atlantic Canada, 9, 92, 140, 174; and Bill C-92, 221; Canada Lands, 67-8, 168-9, 174> 279; characteristics of, 300-55; Newfoundland, 63, 99, 140, 150, 174, 197; Nova Scotia, 174; resource management, 67 North west Territories, 41, 178 Norway: concession system, 142; management control, 64, 67; Statoil, 172; tax rates for oil, 142 Official Languages Act, 82-3 Offshore Reference 1967, 192 offshore resources: Canada Lands, 41; jurisdiction over, 51, 62, 98, 178, 198; Newfoundland, 61-6, 98-9; ownership, 192; provincial taxing power, 206. See also Supreme Court of Canada, Georgia Strait Reference 1984 OICP. See Oil Import Compensation Program oil: as ordinary commodity under FTA, 231; consumers, 133; as public issue, 3; reduced importance of, 285; as strategic commodity, 32, 184, 233, 267, 283; structural bias, 211 oil and gas resources: federal estimates, 34; national market for, 125;

provincial ownership of, 126; under Mulroney, 199 oil-import compensation payments, 127 Oil Import Compensation Program (OICP), 212 oil industry: and COGL regulations, 26-7; court challenge to Bill 42, 46; and federal permits, 57; and federal policy overload, 195; impact of federal-provincial conflict on, 49; response to 1974 budget, 48; response to Bill C-92, 223, 225-7; vested rights, 55, 56 oil MNCs (multinational corporations), 3, 27-8, 123, 280; challenge system, 59; and demands of producing countries, 31; as dominant landholders, 123—4, 176; and energy policy, 14, 25, 268, 270; and OPEC, 30; and Ottawa's goal of self-sufficiency, 34-5; and Petro-Canada, 156, 170, 174; retail sector, 163-4; transfer pricing, 140 oil prices: Alberta wellhead, 113-14; Arabian light, 106; federal-provincial regulation conflict, 42-7; international, HO, 132; Iranian Revolution and increase in, 106; spot market, 106. See also price regulation Oilweek, 96

Olsen,J.P., 242, 271 Olympia & York, 215 Ontario: oil prices, HO; opposition to FTA, 230 OPEC (Organization of Petroleum Exporting Countries), 3, 116 collapse of, 233, 267; federal response to oil crises, 15-16; and the interna-

Index 363 tional market, 28-32, 104-7, 234-5; oil embargo, 29, 33, 66, 282-3; oil shocks, 12, 22, 26, 29-30, 243; and role of Petro-Canada, 156; uncertainty and conflict over rights, 20 Orren, K., 288-9 ownership control: Canadianization, 214; Crown corporations, 67-8. See also Klapp, Merrie PAA. See Petroleum Administration Act Pacific Petroleums Ltd, 88, 92, 94 Panarctic Oil Ltd, 25, 80, 93 Parizeau, Jacques, 230 parliamentary secretary to Minister of State (Mines), 218 frontier, 34; and NEP, 121, 132; and Petro-Canada, 88,94-6, 158, 162, 171-5, 178, 2567, 259; versus provincial activities, 94. See also Canada Lands parliamentary system, 189-90 Parti Quebecois, 191; free trade, 230; referendum (May 1980), 113 PCC. See Petroleum Compensation Charge PCIAC. See Petro-Canada International Assistance Corporation Peckford, Brian, 99, 206, 221 PEMEX, 100 Petro-Canada, 68, 83-4, 156-66; accounting method, 247, 256, 258; acquisitions, 90-1, 95, 153-4, 156, 157, 215, 254, 257; Annual Report (1976), 8l, 89; Annual Report (1977), 93; Annual Report (1983), 173; Annual Report (1984), 246, 2489; Annual Report (1989), 257; assets, 88, 152-3, 254; and Bill C-48, 142, 148; capital expenditures, 162; cata-

lyst role, 59, 79, 83, 154, 162; controls on, 84-7, 166-75; corporate investment, 94-6; COR rate, 143; downstream expansion, 162-6; drilling activities, 161; economic role of, 6, 79, 83; enterprise diagnosis, 253; exports, 173; frontier activities, 94— 6, 158, 162, 171-5, 178, 256-7; investment activities, 256-60; landholding position, 89-94, 157-60, 160, 256; management, 95, 260-1; mandate and policy role, 75-84, 95, 152, 155, 201, 239, 246-53; megaprojects, 137, 169—71; mission statement (1985), 248-9; and NEP, 129, 243, 251; operations of, 87-96, 2536l; as policy instrument, 246, 289; political role of, 7-8, 8l; preferential access and rights, 59—60; privatization, 17, 100, 167, 215, 236, 23940, 261, 270; restructuring, 170, 257; size of, 157, 254-6; symbolic importance of, 83, 289. See also Canada Lands; vertical integration; state as entrepreneur Petro-Canada Act (Bill C-8), 73-4, 79, 168; directive clause, 86; Legal Objects' clause, 76 Petro-Canada Exploration, 92 Petro-Canada International Assistance Corporation (PCIAC), 155-6, 264 Petro-Canada/PEMEX agreement 1979, 100 Petro-Canada Public Participation Act, 263 Petrofina Canada, 152 Petroleum Administration Act, 1974, 46-7, 70 Petroleum Compensation Charge (PCC), 129, 135, 180, 212

364

Index

Petroleum Corporations Monitoring Act (BillC-i2),40, 126 petroleum and gas revenue tax, 129, 135-7, HI, 180, 182, 213 Petroleum Incentive Program (PIP), 126, 129, 138-9, 141, 145,161-2, 179; abandonment of, 212, 215 Petroleum Intelligence Weekly journal, 202

Petroleum Monitoring Agency, 126 Petroleum and Natural Gas Act (PNGA), 55-61, 63, 65 PORT. See petroleum and gas revenue tax pipeline moratorium, 99 PIP. See Petroleum Incentive Program PIR. See Progressive Incremental Royalty Plourde, Andre, 79, 291 PNGA. See Petroleum and Natural Gas Act policy instruments, 9, 286-7; federal and provincial, 270; and government actors, 21-2, 189, 198; jurisdictional conflict, 278; and jurisdictional power, 22, 32; NOCs as, 291-2; Petro-Canada, 6-8, 21-2, 87, 246, 289; and state capacities, 194-8 policy mobilization, and Petro-Canada, 8, 152, 168, 197, 251, 279 politics: Alberta and NEP, 177; as elite accommodation, 204; energy issues, 165-6, 267; of exploration and development, 132; of oil, 3, 104; of scarcity and Canada Lands, 118; and self-sufficiency, 70-1 Powell, W.W., 271 Pratt, Larry, 35, 43, 45, 48, 49, 51, 94,

95, 291; goals of Canadianization and self-sufficiency, 169, 181-2; international oil market, 105, 237; on NEP, 184; on Petro-Canada, 161-2, 164, 166-7, i?8, 250-1 preferential rights, and Petro-Canada, 90-1, 94 price regulation, 46, 117; and NEP, 134, 139; as policy measure, 7, 67, 129-35, 194-5; and self-sufficiency, 70-1; U.S., 31-2; and world oil prices, 133 private sector: ownership, 126; partnership with Petro-Canada, 173 privatization, 4, 236-40, 263-7, 284; Conservative ideology, 204, 241—2; Crown corporations, 236, 242-3; as international trend, 236-9; mid-igSos, 202; and public exposure, 261; and rationality or efficiency, 243. See also Petro-Canada; Task Force on Privatization production licence, 144-5 Progressive Conservative government. S«> Conservative government Progressive Incremental Royalty (PIR), 57, 97, 141, 179 Project Independence (U.S.), 31 property rights: Bill C-48, 147—8; versus sovereign rights, 53, 140, 192 protectionism, U.S., 229, 233 province-first strategies, lOl, 227; Newfoundland, 210 provinces: oil and gas resources, 38, 176-81; ownership of land and resources, 277; response to Bill C-92, 224 Prudhoe Bay oilfield, 29, 54 public opinion: on privatization, 2412; and public enterprise, 2OO

Index 365 public ownership, 81, 240-1; of land, 191-2; of Petro-Canada, 153; and private Canadian ownership, 125 public policy, under Mulroney government, 2OO, 238-9 Quebec: and federalism, 152, 185-6, 191, 273; and free trade agreement, 230; and Mulroney government, 204; offshore resources, 51; referendum, 113, 150; support of NEP, 125 Quebec City summit, 230 Reagan, Ronald, 230 Reagan administration, 183 recession 1980$, 169-70, 229 redistribution, of federal-provincial revenues, 127-9 regionalism, and offshore disputes, 102 regulatory systems, changes in, 8 Reichmann brothers, 240 renewable energy sources, 269; Petro-Canada, 155 reserve life index, 156, 158 reserves: conventional oil, 34, 120, 156, 158, 255; natural gas, 156, 158; synthetic oil and bitumen, 156, 158, 255. See also resource development resource development, 71; Canada Lands, 217; direct and indirect measures of control, 38; indigenous, 71, 79, 109; management of, 9, 88, 21718, 252; and NEP, 133; state role in, 118 Restrictive Trade Practices Commission (1986), 85-6 restructuring: of industry, 126; Petro-Canada, 170, 257 revenue,

federal government and provinces, 66-8, 182 revenue-sharing, 127-8; and Canadianization, 214-17. See also National Evergy Program reverse deflection, 281-2; domestic factors, 284-6; international factors, 282-4; OPEC oil shocks, 21-2. See also deflection and reverse deflection Richards, John, 43, 45, 48, 49 rights issuance and land management, 75, 101, 268; Bill C-48, 141-2; Canada Lands, 7, 52-5, 67-8, 78, 129, 147, 15O, 168-9, 19^; Canadian Petroleum Resources Act (CPRA), 2l6; and contractural rights of industry, 123; East Coast, 193, 196, 217; federal system, 39, 65, 84, 217, 218-23 Rim Gas Project, 170-1 Robinson, I., 204, 207, 217 royalties: Alberta government, 43, 46; Bill C-48, 141; and federal budgets 1974> 47; frontier oil, 129, 131-2; PGRT, 129, 135-7, 180, 182, 213; PNGA, 57; provincial, 136; Saskatchewan government, 45; under Bill C-92, 225-6 Saskatchewan: Bill 42, 45-6; nationalizing of freehold oil, 45, 198 Saskoil, 136 Saudi Arabia: embargo list, 33; production, 106 Savoie, D.J., 236 Scarfe, B.L., 136, 181 Scotian Shelf, 93, 121, 170, 256 security of supply: and NEP, 124; under Mulroney Conservatives, 202-3, 206-7, 209-14; notion of, 12;

366 Index role of Petro-Canada, 80; selfsufficiency, ll8—22 self-reliance, 50-2 self-sufficiency, 169; change to self-reliance, 50-2; economic costs of, 51; and federal Canadian adjustment strategy, 32-40, 101; under Mulroney government, 206-7, 21011, 214; objective of NEP, 7, 33-4, 137-8, 140, 176; and Petro-Canada, 80; political aspects of, 35, 70-1; security of supply, 118-22; single oil price principle, 42 Senate reform, 208 Seven Sisters, 27 share offering, Petro-Canada, 264—6 Shell Canada, 27, 93, 170, 253 Shell-Petro-Canada program, Scotian Shelf, 98 Shields, John, 2O1 significant discovery clause, COGL regulations, 97 Simeon, R., 204, 207, 217 Simpson, J., i l l single-criterion bid, Bill C-92, 222 Skocpol, Theda, 11, 13-14,270,287; notions of state, 17-22, 23-4 Skowronek, S., 288-9 Smallwood, Joseph, 61 SOEs. See state-owned enterprises sovereignty rights, 8; and constitution, 2O-1, 102-3; Quebec referendum, 150; versus property rights, 53, 140, 192 Soviet Union, and price of oil, 107 Sparling, F.H., 264 Stanbury, W.T., 240, 245 state: as actor, ll, 14, 18, 270-1; as entrepreneur, 14-15, 28; as landlord, 14-15, 55, 75, lOl, 188, 198

state as structure, n, 17-22, 23-4, 70, 187-98, 271; and privatization, 261-3 state autonomy model, 10—19, 66, 277; defined by Skocpol, 13-14, 270-1, 287-8; and NOCs, 16, 24, 74-96; and power of the oil industry, 150— i; and societal actors, 14, 17, 22-3 state elites, 16-17, 185-6, 189, 237, 269,277 state intervention, 11, 126; at provincial and federal levels, 49, 68-9; Canada Lands, 9; Clark government, 112; exporting countries, 28; and market externalities, 118; in oil policy, 4, 15, 268, 280; rights issuance and land management, 188; upstream stage, 6 state-owned enterprises (SOEs), and privatization, 253-4 state retreat, 10, 16, 281-2 state-society, 268-9, 271-2, 280; relations, 8-10,21 statism, 10-17, 23~4 Statoil, Norwegian NOC, 172, 255 Statute of Westminster, 1931, 2O Stevens, Sinclair, 112 Stewart, Ian, 40 strategic positional politics, 273-4 Strong, Maurice, 85, 94 Suncor, 179 super-depletion measure, 99 supply system, pan-Canadian, 34 Supreme Court of Canada: on constitutionality of Bill 42, 1977, 46; on export tax section of NGGLT, 137; Georgia Strait Reference 1984, 192, 224, 276-7; West Coast Advisory Opinion, 1967, 62 Syncrude Canada, 51, 80, 179

Index 367 Syncrude Levy, 131 synthetic crude, 211; pricing, i l l , 131, 179

Tuohy, C., 6-7 Tupper, Allan, 199 Turner, John, 47, 49, 228

tar sands, 121, 132-3, 170; alternative sources of oil, 34; Petro-Canada, 173; Syncrude, 51, 79-80 Task Force on Privatization, 236, 243— 4. See also federal government, privatization program tax and fiscal measures, 180; after OPEC oil shock, 127; in Bill €-48, 141; budget 1974, 47-50; export tax, 42-3, 137, 177, 180; implications of foreign ownership, 122; incentive system, 39, 123, 138-9; in NEP, 121, 124, 129, 134, 135-46, 180; offshore resources, 206; oil pricing, i l l , 114; PIR, 57; policy overload, 39, 194-5; and resource development, 38-9, 213. See also energy policy Terra Nova, 260 Texaco Canada, 27 Thompson, A.R., 26, 147, 219 Thorburn, H.G., 271-2, 274 Thring, A., 46 Tomlin, B.W., 228, 230 Toner, G., 9, 138, 149, 169, 182, 215, 2l6 Total Eastcan Explo., 93, 96, 98-9 Tough, George, 40 Treasury Board, 85 Trebilcock, M.J., 81 Trudeau, Pierre, 34, 36, 44, 125; and constitution, 193; and NEP, 33, 113, 184-5; r°le of Petro-Canada, 79-80, 243 Tungavik Federation of Nunavut (TFN),224

uncertainty and conflict: andjurisdictional rights, 20; OPEC oil crises, 2O; over constitutional rules, 19 United Kingdom: concession system, 142; and price of oil, 107 United States: access to markets in, 229-30; deregulation of oil and gas markets, 108, 117, 134, 183; exports to, 29; imports, 206; links to, 2O2; Mandatory Oil Import Program, 29; and NEP, 183; oil price controls, 30; Project Independence, 31 U.S. General Accounting Office, role of Petro-Canada, 80 Venezuelan oil, 100 Venture field, 93, 162, 170, 256 Vernon, R., 237-8 vertical integration: of oil MNCs, 28, 104; Petro-Canada, 76, 79, 152, 1635,167-8 VIA Rail, privatization, 242 Waddell, Ian, 143 Waverman, Leonard, 79, 291 Western Accord, 205, 212, 215-16 Western Canada: exploration activity, 159-60; and free trade agreement, 230; resource management, 9. See also American model Western Sedimentary Basin, 34, 92, 95, 130 West Germany, competitive accelerated adjustment strategy of, 13 Westminster model, 189-90 West Pembina oil discovery, 93

368 Index White Rose field, 256, 260 windfall profits, and oil industry, 112 window on the industry, role of Petro-Canada, 81, 89, 154-5, 164-5 World Bank, requirements for privatization, 253-4

world oil market: OPEC crises, 30, 115, 2O1-2; price, 22, 32, 2Ol; state-centred, 108-9; Syncrude Levy, 131. See also international oil market Yom Kippur War, October 1973, 29 Yukon, 41