Revoking Of Canada Crown Reserve Order Adds New Element Of Uncertainty To Arctic & Offshore Development
By: Carl O. Nickle, Publisher, Daily Oil Bulletin
This week the Canadian Government revoked a nine year old Order covering federal owned oil and gas rights in the North and along the Offshore continental shelves. It scrapped, without public explanation, in a terse, one-paragraph memo to holders of Exploration Permits, the ground rules by which permittees earned the right to get the Crown Reserve portions of the lands they explore, by paying extra royalties on production.
The now scrapped Order No. 1-1961 has been a strong influence in getting over the past decade the spending of some quarter of a billion dollars on exploration of Canada federal rights. For 1970 alone the forecast has been for over $100 Millions of risk capital spending, rising substantially over the next several years. At first glance, the Ottawa action this week puts the forecasts in jeopardy, In fact, unless Ottawa quickly clarifies and justifies its action, and establishes what its new ground rules will be, the good name and reputation of Canada internationally, and internally, can be hurt.
The holders of Exploration Permits covering some 800 million acres of Canada Rights in the North and Offshore received the following very brief memorandum this week, on the joint letterhead of the Department of Northern Development and Energy & Resources, signed by H. W. Woodward and D. G. Crosby, the Chiefs of the Resource divisions of these departments:
"Please be advised that Oil and Gas Land Order 11961 under the Canada Oil and Gas Land Regulations was revoked on 15th April. 1970, by the joint order of the Hon. Jean Chretien, Minister of Indian Affairs & Northern Development, and the Hon. J.J Greene, Minister of Energy, Mines & Resources."
The memo has landed on the oil industry like a sledgehammer. While it has been known that the Canadian Government has been reviewing its land regulations, the revoking of a key feature of the rules in the manner it has been done has shocked, not only because of its timing and content, but because of its implications as to the trustworthiness of government policies upon which major financial investment decisions have been made.
The scrapped Order was first adopted by the Deifenbaker government in 1961, to encourage explorers to take the 'long shot' gamble in Arctic exploration, and the equally high-risk gamble in Offshore exploration. It was continued by the Pearson and Trudeau Governments, through years when only a few hardy souls were willing to take the gambles on exploration, and through the more recent period when the Prudhoe Bay oil discovery on Alaska's Arctic Coast, the joint industry government program of Panarctic Oils, and broader interest in Atlantic Offshore oil search, sparked a massive play. Today some 800,000,000 acres of federal oil and gas rights are held under permit, by a host of companies, big and small.
In January came the Imperial Oil discovery on the Arctic Coast of Canada, following up last summer's Gas discovery on Melville Island by Panarctic. In the southerly part of the Yukon and Northwest Territories, large gas reserves have been developed by Amoco, and off the Atlantic Coast non-commercial shows of oil and gas have been giving a taste of encouragement to Shell and others. More and more it is being recognized that the North and Coasts of Canada possess a vast potential.
So, putting it rather bluntly, the risk takers have been well sucked in under the incentive ground rules set by government, are row heavily involved through scores of millions of dollars spent or committed and the government, in mid-game, has started to change the rules.
Under the Regulations governing Canada lands, Exploration permits are issued covering large, solid blocks of federal rights, which require spending of between $2.70 and $2.90 per acre during the life of the permits. To maintain one million acres, for example, up to $2,900,000 must be invested. If all the permits now issued were retained to maturity, a rather staggering $2.3 Billions would have to he put into exploration. In addition to permit fees, the Canadian treasury would collect royalties on oil and gas production starting at 50% gross in first three years after discovery brings marketing of resources, then rising to 10% gross value.
When and if the development brings profit, the government would collect of course, income taxes.
Under the Regulations the Exploration Permits can be partly converted into Leases if exploration results warrant. The Permit holder is entitled to a maximum of 50% of the Permit area, in checkerboard blocks of 15 or 16 sections, or in blocks separated by a section. The balance becomes Crown Reserve; to be disposed of by the Government as it sees fit.
The 1961 Order, now scrapped, was designed as an extra incentive to capital riskers, and to recognize the economic benefit of unitized or single-owner operation of a field in remote high-cost regions. Where ownership is widely divided, there is a tendency to drill far more wells that may actually be required to more economically recover the underground resources. At the time, that factor outweighed the benefits implied in cash bonuses from Crown Reserves, and the opening to others of opportunity to share in the fruits of someone else's discovery.
The 1961 Order granted an option to a permit holder to acquire the Crown Reserve lands created within his permit, on payment of an additional Royalty which varies with location and production rates. The additional Royalty, which in effect would replace Crown Reserve bonus cash, would be from 50% of, to as much as four times the normal Royalty. The added Royalty on oil would be from 5% to 40% of gross revenue, and on gas would be from 5% to 15% of revenue. Between royalties, and taxes on ultimate profit, the government would collect considerably more than the potential net profit to be realized by those taking the capital risk.
That 1961 Order is now dead, by decision of the Canadian Government. The other Regulations remain. Serious questions now face those who are expected to provide literally billions of dollars needed to find and develop the oil and gas potential under Canada's federal lands; Does killing of the 1961 Order by government without consultation with industry mark a new trend in a nation whose honour has kept Canada in sharp contrast to certain banana republics and AsianAfrican oil states? Will Canada's government replace what it has killed, with new oil and gas policies for federal lands that will attract risk capital?
A few months ago, the government issued an excellent book called "Prospectus North of 60" designed to stimulate northern development by making a host of facts available. Here are some direct quotes from that government publication:
"Today, the Canadian north is one of the most inviting regions on earth for the daring, for the entrepreneur looking for challenging enterprises the international corporation looking for major sources of resource material, the small businessman pioneering a new venture, the young and curious filled with the spirit and adventure ... The Government of Canada has opened the door to its northern regions, it invites the potential investor, the potential citizens of the North ... As the custodian of the resources North of 60 the Government of Canada is actively encouraging these developments. It has formulated a series of policies and programs designed to assist the private investor in utilizing his capital and his individual talents."
For Canada's sake, the government must not permit the words of its own Prospectus for our Frontier Regions to become empty, or to be dishonored by government policy changes, made without opportunity of advance discussion with those to whom the Prospectus was addressed.