New Conservative Government Changes Policy : Canada Opens Its Doors to U.S. Oil Producers

Canada’s Conservative government, elected last fall, has a new message for U.S. oil producers. Led by Prime Minister Brian Mulroney, a former corporate executive, the message is “Canada is open for business.”

The change in attitude since Mulroney came to power has already led to improved relations with the United States, Canada’s biggest trading partner. The visit of President and Mrs. Reagan is the most recent example.

The new “open door” marks a sharp shift from the nationalistic--and restrictive--energy policies of his predecessor, Prime Minister Pierre Trudeau.

Trudeau’s controversial National Energy Program, begun in 1980, was designed to increase oil and natural gas assets held by Canadians while reducing the presence of foreign companies.

Discriminatory Measures

Through a variety of discriminatory measures, U.S.-owned oil companies were singled out and relations between the two countries began to deteriorate.

As the main opposition to Trudeau’s Liberal Party policies, the Conservatives railed against the unpopular National Energy Program. This indignation turned out to be good politics in Canada as well as America.

One of the first steps Mulroney plans to take is to end the current pricing rules, set by the government for the past 20 years.

The majority of oil produced in Canada today receives about $22.35 at the wellhead--about $5 below the world price.

This oil will rise to the world level, as set in Chicago, under the new plan. Prices paid for other types of oil production, however, may decline.

The Canadian consumer will feel only minor effects from the shift to world prices. Canadians already pay about one-third more for gas at the pump than Americans, thanks to sharply increased prices in recent years.

The big winners in the switch will be the large foreign-owned companies, because they hold the largest petroleum reserves here. They can ride out the ups and downs of the world market better than the Canadian-owned firms that have not built up reserves of comparable size.

Another Trudeau measure likely to change soon is the “back-in.” This allows the Canadian government to take a 25% share in the production of oil found on federally owned offshore areas of the Arctic.

The “back-in” was considered by companies to be a form of confiscation. It stirred more angry opposition to Trudeau in American board rooms and the U.S. Congress than any other part of the National Energy program.

‘Cash Cow’

The Mulroney government has also indicated its intention to return gradually to tax deductions for oil companies. These incentives, which paid cash grants to encourage oil exploration in the northern frontier and offshore areas, favored Canadian-owned companies.

The oil industry would also like to see the Canadian government decrease the huge revenues it collects from petroleum production. Until now, oil has been a “cash cow” to both the central government in Ottawa and the province of Alberta, where 80% of Canada’s oil is produced.

Although Mulroney has promised to leave more money in the pot in the future for the oil industry, the Alberta government has adamantly refused to cut its substantial tax take.

The Alberta government, which has fought protracted battles with Ottawa in the past over resource jurisdiction, has limited Mulroney’s bargaining position with the oil industry.

An additional complicating factor is his government’s need to trim Canada’s $27-billion budget deficit. Although only 15% of America’s current deficit, it is large by Canadian standards. It’s a bad time to stop milking the “cash cow.”

The Canadian and American oil industries can certainly count on brighter days ahead. How much brighter is the big question.

Conflicting internal pressures--such as federal versus provincial needs in the face of mounting budget deficits--present Mulroney with a dilemma. His promises for expanded opportunities for business in Canada, particularly to the foreign oil firms, could cause him to choose between external and internal forces.

Political observers are watching the current Ottawa-Alberta talks on energy issues--slated to be completed in the next few months--very carefully for clues to the direction the government will take.