Introduction to the Petrochemical Game

The Canadian Petrochemical Industry and Related Government Policies

Canada is the world’s fifth largest energy producer in the world. The country exports 98 percent of its energy resources to the United States, and as demand for these resources continues to grow, management and regulation of same becomes more complex. Canada is also a net importer of energy resources, and has experienced a long and challenging history managing resources which has required much cooperation and coordination amongst the federal government, provincial government and other stakeholders such as members of big business and international market players.

These relationships have shaped how the nation’s energy resources and industries have developed into the present. Understanding the progress of Canada’s rich and detailed history in this area begs the question, has Canada asserted itself as an energy superpower or rather as an energy satellite for the international market?

Undeniably, the world has become reliant on petrochemicals for almost every aspect of day to day life. However, dependency on non-renewable resources such as oil and gas has not always been characteristic of the human relationship with these commodities. Early documented uses of crude actually included caulking (for boats and buildings), lubrication, and even wound dressing. Initially, the odour emitted from petroleum was considered too foul for the product’s use as fuel.

As the refining process developed over the mid to late 1800s, however, it allowed for the removal of sulphur and kerosene (the main agents contributing to the foul smell), and increased the demand for petrochemicals as an energy source. In 1898, Imperial Oil acquired its Sarnia refinery from Standard Oil New Jersey (now Exxon Mobil) along with other Canadian assets, in exchange for Standard Oil’s majority interest in Imperial Oil. Although interest in the petrochemical industry in Canada increased, it wasn’t until the 1940s when great potential was seen in this industry.

On February 13, 1947, after much exploration and following several small discoveries of oil in Western Canada, Imperial Oil struck it big in Leduc, Alberta. With this discovery, it seemed that Canada need no longer rely on imported fuel to meet domestic needs (in 1946, 90 percent of Canadian domestic demand was met by imported goods). The Leduc discovery, which left Imperial Oil, Alberta and Canada energy rich, also necessitated great structural transformation.

The United States became a major player in the Canadian resource game during the early 20th century, and a marked increase was seen in U.S. investments, specifically in the Canadian manufacturing industry. Both Alberta and the Canadian Government supported several projects aimed at developing Western Canadian oil and gas, specifically the tar sands, but the oil boom in the late 1940s temporarily slowed these efforts as oil companies began to witness the potential and wanted access to these benefits.

Following the Leduc discovery in 1947, discoveries were made in Redwater (1948), Pembina (1953) and Rainbow Valley (1965). Although production had yet to increase considerably, it illustrated the great potential that existed for Canada to establish itself as a mass exporter while maintaining energy self-sufficiency.

The growth in industry potential led Imperial Oil to propose a 720 kilometre pipeline that would stretch from Edmonton to Regina, where Imperial Oil had a refinery. This pipeline would be completed over five months in 1950 and would extend through the United States (Wisconsin and Michigan), as Imperial Oil, backed by Standard Oil and the U.S., advocated against a purely Canadian route. The pipeline was extended many times, including the Sarnia extension in 1953 and the addition of the Chicago Loop in 1967.

Throughout this process Canada and its provinces encountered a jurisdictional issue related to the interprovincial pipeline, as provincial jurisdiction falls over the exploration, development, management and conservation of resources, whereas federal jurisdiction extends to interprovincial and international trade and commerce related to the management of resources, specifically non-renewable resources, found on federal lands. This complex issue of jurisdiction led Imperial Oil to incorporate and with this approval the federal government passed the Pipelines Act of Canada, which afforded the federal government exclusive jurisdiction over current and future pipeline developments.

In 1951, Premier Manning showcased the oil sands potential and offered incentives and leasing deals for companies willing to move in and develop these new found resources. This saw a substantial increase in U.S. ownership of these lands. In 1964, Great Canadian Oil Sands (GCOS) won approval for the first modern oil sands project which began in 1967 and produced high quality synthetic oil. This caused substantial geographic change in Western Canada as small cities quickly evolved into large centres of business and trade.

This growth was mirrored in the expansion of the pipelines through Western Canada and the Western United States. The Trans Mountain Oil Pipeline (TMOP), incorporated in 1951 by Imperial Oil and Canadian Bechtel Ltd. (whose parent company was Standard Oil) connected Edmonton to Vancouver and south to the Puget Sound area. This led to an increased number of refineries in the Puget Sound area, as well as increases in Canadian exports to the U.S. The pipeline was built to serve the needs of the U.S. during the Korean War and served well during the 1956/1957 Arab-Israeli War which compromised California’s access to oil via the Suez Canal.

After the Suez Canal reopened and the Korean War ended, California no longer required Canadian oil and the demand for oil in the Puget Sound area slowed, as the U.S. developed reserves and ultimately a surplus, marking a temporary slowdown in demand for Canadian oil. This left Canada, Alberta and independent oil producers at an extreme disadvantage, desperately calling for the federal government to acknowledge the hardships being faced by the limited ability to export.

The government considered limiting foreign imports, and this led to a very unstable period. In doing so, the government would be acting contrary to the international markets which the oil companies had established, and further contributed to domestic political tensions between Eastern and Western Canada as the East relied on imported oil. At this point the suggestion coming from the independent oil producers was to build a pipeline linking Alberta to Montreal.

Three proposals were put forward with regards to the proposed pipeline, representing three separate factions of the industry. The first proposal made by Home Oil (representing the independent faction), called for the construction of a pipeline parallel to Imperial Oil’s pipeline from Edmonton, in an effort to break Imperial Oil’s monopoly on the market. They wanted a citizen’s line that had expansive distribution of ownership, which corresponded with the Borden Commission created by Prime Minister Diefenbaker and his government to address the issues facing domestic oil producers. The second proposal was made by Imperial Oil to simply extend its pipeline from Sarnia to Montreal. The third proposal was that of a completely Canadian route which the Borden Commission viewed as conducive to serving national interests. This caused U.S. firms in Alberta to protest, refusing to sell to an all Canadian line. The Borden Commission appointed Canadian Bechtel Ltd. (one of the original interests backing the Imperial Oil pipeline) to evaluate the costs and benefits associated with each of these proposals.

The displeasure of U.S. companies, paired with the speculation that there would be no market in Montreal for Alberta oil, forced Alberta and Canada to re-examine export potential again, in efforts to secure a common U.S./Canada market. In a bold move, the Borden Commission agreed that there would be no market in Montreal and sided with international oil. However, in making this decision the Borden Commission demanded that the U.S. reopen its border to Canadian oil. This demand was met with the condition that the pipeline would not go forward, thus exempting Canada from import control restrictions. Yet, because the United States government introduced its quota incentive program, this gave U.S. domestic crude a clear advantage over Canadian oil on the American market.

Essentially, the National Oil Policy (NOP, 1961) was anything but national. Instead of a pipeline being built to Montreal, uniting the Canadian oil market, the NOP maintained the East/West divide in Canada, ultimately serving the interests of Standard Oil and the U.S., entrenching a period of continental rather than national strategy.

The role of the U.S. in the Canadian oil and gas industry and related policies would become further complicated in the 1970s when the U.S. surplus began to decline, causing the country to abandon its import control program. This era, fraught with crisis, would become one of mutual dependence – on the one hand dependence on a commodity, on the other, dependence on a market.

An Era of Change and the Loss of Control – Part 2
Energy in Canada – Superpower or Satellite? – Part 3

January 23, 2019, 10:08 PM EST