IN THE NEWS / Amoco Canada - The Once Arctic And Future Play
With Amoco Canada's formal withdrawal from the Arctic last week, the region's oil and gas reserves will remain frozen in the ice until it once again becomes commercially viable to develop them
The Financial Post
The fervor that once fed Canada's Arctic oil boom resurfaced briefly in nostalgic speeches here last week. The occasion was a ceremony to mark the end of more than two decades of involvement in the Arctic by Amoco Canada Petroleum Co. and its predecessor in the region, frontier exploration giant Dome Petroleum Ltd.
The parting gift, handed to the Inuvialuit Education Foundation in the ceremony hosted by Amoco, was a $100,000 cheque for an endowment to fund educational awards in the region.
"We always try and leave behind something of a lasting legacy," says Amoco Canada chairman and president Gregory Rich.
Rich, a Californian who has travelled the world for Chicago-based Amoco Corp. and who took over Amoco Canada's helm last January, leaves little hope his company would resume oil and gas activity in the region any time soon.
With so many other opportunities around the world and oil prices still slumping because of excessive global supplies, it'll probably be 10 to 15 years before the Canadian Arctic again offers competitive oil and gas exploration and production opportunities, he says.
Amoco's departure from the Canadian North was not unexpected.
Oil and gas industry activity in the Arctic peaked around 1981 because of generous federal government tax incentives for frontier exploration. Expectations of long-term increases in energy prices, initially fuelled by the Organization of Oil Exporting Countries' crisis of 1973, encouraged plans for pipelines and extensive development.
But that year, the Liberal government of Pierre Trudeau outraged the industry with the imposition of the National Energy Program, an attempt to manage resource development that granted significant federal grants and incentives, along with increased taxes and royalty fees.
Following the NEP, the northern industry went into a long-term decline from which it has never truly recovered. Today, the Arctic is unattractive as an oil and gas producing region because there are too many other areas offering cheaper, easier to produce reserves, says Vince Rodych, Amoco public affairs vice-president.
They include Western Canada's heavy oil and oilsands deposits, and large East Coast developments like Hibernia, Terra Nova and Sable Island.
"The [Arctic] activity, in a sense, was ahead of its time," says Rodych.
Amoco took over Dome's Beaufort Sea/ Mackenzie Delta operations, the largest in the region at the time, with its $5.5-billion acquisition of the debt-crippled company in 1988. Soon after, Amoco put an end to Dome's spending in the Beaufort area in order to reduce debt.
"Amoco Canada needed cash immediately," says a new book by Peter McKenzie-Brown, The Richness of Discovery, published this year to mark the company's 50th anniversary in Canada.
"[It] could not afford the luxury of extensive exploration on its own behalf in the frontiers."
Amoco Canada itself, Canada's largest producer of natural gas, is now becoming a part of a much larger entitity the new BP Amoco PLC.
The new oil company was created this summer as a result of the US$59-billion merger of Britain-based British Petroleum Co. and Amoco Corp. of the U.S. the largest yet in the industry.
The great Arctic exploration experiment contributed greatly to Dome's demise. It also proved extraordinarily costly for Canadian taxpayers. Between $7 billion and $8 billion in federal incentives was poured into the region.
But ultimately, there was little to show for the spending. Lavish base camps built by Dome, Imperial Oil Ltd. and Gulf Canada Resources Ltd. on the brownish tundra just outside Tuktuyaktuk have been locked up for years. At the height of the boom, they housed hundreds of workers.
Amoco has just finished packing its last shipload, mostly scrap metal, from McKinley Island, one of the artificial sand islands that were created by dredging up the shallow bottom of the Beaufort Sea.
McKinley Island once boasted a landing strip, living quarters, transmission towers and storage facilities. Now it's all gone, including one of the island's landmarks, a welded palm tree created by construction staff.
What remains is a bare accumulation of white sand that is now a fraction of its former 5.5-hectare size as it slowly disappears under the Beaufort's icy waters.
Standing upright near its shores is another landmark of that era a large, floating drilling unit, known as the Kulluk, left behind by the new owers of once mighty Canadian Marine Drilling Ltd.
Dome Petroleum's state-of-the-art drilling fleet was once the world's largest fleet of Arctic vessels. Under Amoco, it kept busy with third-party work until last year when it was sold to a consortium of Cyprus-based shipping companies.
Even the locals, many of whom were antagonistic to all the development at the height of the boom, now speak of the industry with nostalgia.
Very little has replaced it in the Northern economy, says Nellie Cournoyea, chairwoman and chief executive of Inuvialuit Regional Corp., headquartered in Inuvik.
"One of the biggest problems we had to face was the impact of not having that industry to rely on," says Cournoyea, who represented the Western Arctic in the Northwest Territories' government from 1979 to 1995.
"You have the expectations and the involvement and the excitement and the choices. Then, all of a sudden, it isn't there any more."
Efforts are under way to develop tourism and big game hunting, but as Cournoyea admits, it's hard to inspire people and to compete with the level of activity that once accompanied the drilling rigs.
The exploration slumber that has fallen on the region has been so deep and so prolonged the Arctic Institute of North America, based at the University of Calgary, is archiving thousands of government and industry consulting reports to ensure the technological advances of Arctic oil and gas exploration aren't lost forever.
Some of those advances have been recorded in a recent book Breaking Ice With Finesse, written by U of C students and financed by the oilman who started it all former Dome chairman Jack Gallagher.
"Something had to be done to preserve the technology that so many people had worked so hard to develop," Murray Todd, former president of Canmar and Gallagher's top man in the Arctic, and Jim Robinson, executive director of the Arctic Institute, write in an introduction to the book.
The oil and gas industry's Arctic adventures started with Gallagher, who, as a young geologist, had worked on the geological mapping of the Northwest Territories.
His passion for the area found a receptive audience in Ottawa. Aside from economic development and the prospect of US$100 a barrel oil by the 1990s politicians were concerned about the U.S. challenge to Canadian sovereignty in the region.
"There was a great deal of uncertainty with respect to oil and gas" at the time, Todd writes."This created a lot of anxiety. All countries that had oil and gas potential were anxious to develop it and not be dependent on imported supplies of oil, which had become unpredictable."
While the potential of Arctic reserves had long been recognized, one stumbling block was developing the necessary technology to get oil and gas out of the ground in a region where the drilling season lasts about 100 days.
In the end, companies working in the Arctic were able to bring down the cost of producing a barrel of oil to about US$22. Just for the sake of comparison, it costs roughly US$8 today to produce a barrel of crude from Alberta's oilsands.
Another major hurdle for northern exploration and development was financing. The cost of a well typically ranged between between $50 million and $100 million.
In 1977, Gallagher persuaded the federal government to introduce the Frontier Exploration Allowance for wells that cost more than $5 million to drill. The incentive allowed companies to add $200 to their tax pools for every $100 they spent beyond $5 million for a single well.
The system was replaced three years later by Petroleum Incentive Payments under the NEP. The PIP grants paid up to 55% of frontier exploration expenses for Canadian oil and gas companies, 25% of expenses for foreign-controlled companies.
"At one point, we had four drill ships, a fleet of 15 to 20 vessels, two major dredging projects on the go and we were building the harbor," recalls Nick VanderKooy, who was responsible for Dome's environmental operations in the Arctic at the time.
"At the height of the season we had 1,500 to 2,000 workers and a [Boeing] 737 that flew in for crew changes seven days a week, and did a second run in the evening for cargo transport," he says. "It was a major operation."
He's now applying much of what he learned to another oil frontier in Azerbaijan, part of the former Soviet Union. VanderKooy is participating in a plan to set up an oil spill response organization in the Caspian Sea for Azerbaijan International Operating Co.
The grants kept some Beaufort activity going until 1995. That's when the NEP was abandoned by Brian Mulroney's Conservative government, along with the search for Arctic oil and gas.
Which is not to say it isn't there. According to the Geological Survey of Canada, the region is known to hold 10.4 trillion cubic feet to 12.6 trillion cubic feet of natural gas, and between 1.5 billion and two billion barrels of oil.
"There is a lot of potential in this area, relative to any basin, in the frontier or already producing," says Jim Dixon, a research scientist with the Geological Survey.
Only 250 wells have been drilled, making it a relatively virgin exploration area, he says.
Based on the area's geology and what is already known, the region could hold reserves of 47.1 trillion cubic feet to 60.6 trillion cubic feet of natural gas and 4.7 billion to 5.8 billion barrels of oil.
The major companies still keep an eye on the region, among them Shell Canada Ltd., Esso, Gulf, Mobil Corp. and Chevron Canada Ltd.
But production has never reached commercial levels and the pioneers have moved on to other plays.
Todd is now helping to lead operations on Canada's East Coast as president of Canada Hibernia Holding Co. which manages the federal government's stake in the Hibernia oil development.
Any revival of the industry in the Arctic would have to involve again a collective will on the part of the industry and governments, he says. "It's not a question of whether it's going to be developed. It's a question of when."
Todd points out that East Coast oil and gas exploration took off in part because of a greater political will to exploit large discoveries like Hibernia.
The East Coast also offers much larger reservoirs than those discovered in the North, reducing exploration risk.
While Dome's operation was the Arctic's largest, other Canadian majors like Imperial Oil and Gulf were also involved.
Imperial has put the Arctic on a low boil. "It's a future project," says spokesman Hart Searle. "It's hopefully a resource that at some point we can more intensely develop."
But Gulf Canada, the other major protagonist of the Arctic oil boom, is seriously reviewing the region's natural gas potential.
President and CEO Dick Auchinleck recently set up a group to look at developing natural gas reserves from an area called Parsons Lake.
"It's a priority here," he says. "As early as five years from now, you could see Arctic gas flowing."
Gulf has 6.3 trillion cubic feet of saleable natural gas reserves in the Arctic region, which could produce 1.2 billion cubic feet of gas a day or about 10% of Canada's entire production, he says.
It's even being suggested in some quarters that Arctic gas could supplement Western Canada's reserves to fill planned additions in pipeline capacity to the U.S.
But Auchinleck says significant gas production would have to be orchestrated with other majors that have interests in the region, like Imperial, Chevron and Shell.
And this time, he says, development would require the backing of local communities.
Opposition to energy industry development was one of the major reasons the famous inquiry into the development of a pipeline along the Mackenzie Valley, headed by Justice Thomas Berger, forced a 10-year moratorium in 1980.
When the moratorium expired, the industry was too preoccupied with its own survival from another low-commodity price cycle to indulge in the Arctic.
"They were difficult days," says Cournoyea. "Each time we dealt with industry we had to fight to get our foot in the door, to participate in the opportunities.
"It seemed that just when we stabilized the relationship, that everything was finished."
That's why the local community is now so preoccupied with education. The oil and gas reserves will be needed eventually but next time around educated locals will have a better crack of participating in the boom.
"I don't think anything ever gets closed in the Arctic," says Cournoyea.
"There are so many things that are left to be explored whether it's cultural, traditional or reserves. It's always an open book."
But not for Gallagher, who at the age of 82 now lives in a Calgary hospice. Despite his failing health, he remains both a pragmatist and a dreamer, accepting of the fact that other oil and gas plays in more accessible places have for now eclipsed the Arctic, but convinced the region's time will someday come.
"Don't lose faith," he says.
And he adds an unexpected footnote. His interest in the region was first piqued by geology, but in the end it was the people who provided the inspiration.
"There's something about the people in the Arctic, especially the Inuit. They have accepted that death is part of life."
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