Canada faces harsh reality as U.S. firms buy up oil, gas assets

TORONTO -- For two decades, Canada worked hard to nurture a homegrown oil and gas industry.

A National Energy Program, begun in 1980, restricted foreign ownership and helped persuade some foreign companies to sell their Canadian assets to a new state-owned energy concern, Petro-Canada.

Jean Chretien, now the prime minister, in 1993 tried -- unsuccessfully -- when he was leader of the opposition to have Canadian oil and gas be excluded from the North American Free Trade Agreement. More recently, his Liberal government has pumped billions of taxpayer dollars into new projects off the Atlantic coast.

Such policies helped drive down the proportion of Canada's oil and gas production controlled by foreigners from 74 percent in 1977 to 43 percent last year.

But there has been a sharp turnaround in the last 12 months as one Canadian producer after another has fallen into the embrace of American suitors.

Since October 2000, companies from south of the border have spent more than $20 billion for acquisitions in Canada, pushing foreign ownership up to 48 percent, according to the Canadian Association of Petroleum Producers.

Surprisingly, there has been little protest, either from the government or the public.

"It reflects the new reality," said Michael E.J. Phelps, chief executive of Westcoast Energy, a gas pipeline operator based in Vancouver, British Columbia, that is being bought by Duke Energy of Charlotte, N.C., for $3.5 billion, plus the assumption of debt. "This is not a matter of Canada versus the United States. This is a matter of what makes the most sense."

For American companies, the main attraction is the vast reserves of natural gas, mostly in Alberta, British Columbia and the Northwest Territories, to replace fast-diminishing domestic supplies.

Power utilities have been among the most active shoppers in Canada. Besides Duke, big buyers include Calpine Corp. of San Jose, Calif., which has spent about $1.7 billion in three deals during the last year and is also building a power plant near Calgary, Alberta.

Canada's National Energy Board, in Ottawa, estimates Canada's gas resources at 555 trillion cubic feet, equal to about 25 years of U.S. consumption at current rates.

Mark E. Fischer, senior analyst at Banc of America Securities in Houston, said the Canadian basins have the extra advantage of being nearby, in a politically stable, English-speaking country with reasonable taxes and royalties.

To be sure, some Canadians remain unhappy about what they consider a strategic industry falling into the hands of foreigners. They cite a string of drawbacks, including the removal of authority from Canadian executives to a distant home office; layoffs as operations in Canada are dovetailed with those in the United States; and lower tax receipts for Canada as the new American owners deduct interest on the debt used to finance the acquisitions.

"Twenty years ago I thought something could be done," said Stephen Clarkson, a political science professor at the University of Toronto. "But it's end-game now. We're compelled to remain in the hewer-of-wood and drawer-of-water position."

Clarkson chiefly blames the 1988 free-trade agreement between the United States and Canada which, augmented by NAFTA six years later, has created a continentwide energy market.

Alan Alexandroff, a Toronto trade lawyer, said that "the real difference between now and 1980 is that the federal government no longer believes it has to direct industrial strategy.

"It recognizes that a continental energy strategy is perfectly reasonable," Alexandroff continued.

The sense that foreign ownership is bad for Canada has also dissipated. Brian A. Prokop, an analyst at Peters & Co., a Calgary-based brokerage firm, said that American companies pay pipeline tariffs, wages and royalties, as well as hire local contractors for drilling and other services. He predicted that the recent spate of takeovers would create opportunities for Canadian entrepreneurs, as the new American owners sell unwanted bits and pieces of their acquisitions.

The American buyers, in their rush to lock up future reserves without the risk and cost of new exploration, may have overpaid for their acquisitions, some analysts say. Natural gas prices have fallen sharply since the beginning of the year, and most of the recent deals have been done at hefty premiums to prevailing stock prices.

For example, Houston-based Burlington Resources recently offered $2.1 billion for Canadian Hunter Exploration. The cash offer of $53 a share represents a 36 percent premium over the share price the day before the announcement, and Canadian Hunter stock had already shot up 30 percent in the prior six weeks on takeover speculation.

Fischer, the Houston analyst, calculates Burlington's offer at the equivalent of $1.66 per thousand cubic feet of Canadian Hunter reserves, plus 43 cents in operating expenses, putting the total not far below prevailing gas prices of $2 to $2.50 per thousand feet. "You need a pretty substantial margin to make this a profitable venture," he said.

Bobby S. Shackouls, Burlington's chief executive, responded that "you can't buy a Mercedes for Ford prices."

Whether Ford or Mercedes prices are justified will be determined over the next few years, but few industry experts doubt that the pace of acquisitions will continue.

Among the expected takeover targets are PanCanadian Energy, which has had no single controlling shareholder since it was spun off by Canadian Pacific earlier this month, and Alberta Energy, one of western Canada's biggest producers.

Even the Liberal government is toying with putting its remaining 19 percent stake in Petro-Canada on the block -- the clearest sign yet of how attitudes have changed.

Methane in Montana

Bush's drive for Western balance -- By William Perry Pendley DENVER In the 2000 election, President Bush carried the nation's prairie and Western counties, from the Mississippi to the Pacific, for one reason: Bill Clinton's anti-Western policies.

Westerners, concluding that Mr. Clinton cared little about their need for federal policies that allowed for economic activity while protecting environmental quality, voted for a change. They did so believing that Mr. Bush's statement, "I understand the Western mentality, and I want the Western mentality represented in this administration," means he intends that his policies will recognize the realities of the rural West and his officials will act as if someone lives there.

Westerners remember Clinton's 1996 closing of 1.7 million acres of federal land in economically hard-pressed southern Utah. Clinton's edict turned an area that had been used for decades for multiple-use activities - such as grazing, motorized recreation, and exploring for and developing energy and minerals - into a de facto wilderness area, to kill plans for an underground coal mine. This mine would have provided 1,000 local jobs and $20 million annually to the local economy, plus clean-burning coal for power generation. Clinton was "troubled" by the job loss, but said, "We can't have mines everywhere."

Clinton's Utah decree was only the most highly publicized of his anti-Western policies. In 1993, while Clinton publicly sympathized with loggers in the Pacific Northwest, his officials schemed privately to end logging, ostensibly to "save" the northern spotted owl.

Later, Clinton's lawyers demanded control of Alaska and Idaho waters. Interior Secretary Bruce Babbitt plotted to put wolves in Wyoming, Idaho, and Montana, and grizzly bears in Idaho and Montana. He also sought to drive ranchers from federal land and prevent miners and oil and gas operators from using multiple-use lands. Clinton adopted illegal rules for a seven-state region the size of France, shut 60 million acres of national forest, and closed millions of acres of federal lands with illegal monuments.

These actions were in clear violation of a host of federal laws setting forth the manner in which Congress intended federal lands to be managed.

All Americans share an interest in the third of the country owned by the federal government. However, Westerners say, "A chicken is interested in what you have for breakfast; a pig is affected." Thus rural Westerners are affected when denied the ability to use that land, in full compliance with federal and state environmental laws.

Libby, Montana, where 78 percent of Lincoln County lies in the Kootenai National Forest, is an example. For decades, locals worked in the forest as miners or loggers, jobs lost largely to Clinton's policies. Ironically, local plans to convert to tourism with a ski hill were killed by Clinton's forest lockup.

Lincoln County is not alone. Nearly 800,000 acres in Montana's Lewis and Clark National Forest, which experts say have enormous potential for energy development and which federal officials admit could be used without harming the environment, were closed because of their "spirituality."

In southeastern Montana, Mr. Babbitt refused to transfer federal coal, as required by Congress, to revitalize Montana's poorest region. In north-central Montana, lands on which wells are already producing natural gas were closed by one of Clinton's last-minute monument decrees. Further west, land mined since the region's earliest days was closed for 20 years! Vast areas in Montana face devastating forest fires because of Clinton's antilogging policies; he diverted funds from firefighting to build his "land legacy."

Thus far, President Bush has ordered a halt to Clinton's last-minute flood of regulations, asked his officials to review Clinton's policies, and convened a panel to respond to the nation's energy crisis. That is correct, given the president's constitutional duty to "take Care that the Laws be faithfully executed." In addition, US attorneys-general have maintained for decades that presidents possess the power, "after [a] further investigation," to rescind orders found "not in the public interest or consistent with the efficient operation of the government."

Further, notwithstanding the Chicken Little cries of environmental groups, the draft documents being reviewed by the Bush administration do not even consider searching for energy in parks or wilderness areas.

Congress put those areas off limits; in fact, only Congress may open the Arctic National Wildlife Refuge. While protecting parks and wilderness areas, there are vast areas of the West where multiple-use activities, including forestry and the search for much needed oil and gas, could take place in a prudent and thoughtful fashion, just as Congress intended and Westerners planned.

Rural Westerners love the land; they value it and they wish to protect it. However, they also must use it to provide a living for themselves, their families, and their communities. In addition, they wish to enjoy those lands. To date, it appears President Bush does understand Westerners and intends to use Western federal lands to meet the nation's need for natural resources as well as scenic and recreational lands, the West's desire for economic activity that protects the environment, and Americans' wish for a prudent balancing of economic growth and environmental goals.

o William Perry Pendley, who was born and raised in Wyoming, is president and chief legal officer of Mountain States Legal Foundation in Denver.

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