Anonymity and Ambivalence: The Canadian and American Oil Industries and the Emergence of Continental Oil

[Oil] was “Americanization” and we loved every minute of it. America was big time. The big league. Suddenly we were somebody, we were somewhere, and we were getting a piece of the action. Deep down, no Albertan who grew up in the 1950s could ever be truly anti-American. The Americans introduced us to the big time. They made it possible to be first-class Canadians for the first time instead of just the dumb hicks from the West. —John J. Barr, director of public affairs, Syncrude Canada, 19841 The transformation of Canada from being completely dependent on U.S. oil imports to being a major global producer of oil is astounding. Until 1947 Canada relied almost exclusively on imports of crude oil and refined products from the United States to run its industry, fuel its cars, and heat its homes. The discovery of oil at Leduc (in the province of Alberta) in 1947 marked the turning point when the flow of oil in North America began to reverse course, and Canadian oil exports found their way into American markets. Since 2000, Canada—not Saudi Arabia, Iraq, or Venezuela—has been the largest single supplier of crude oil to the United States, and the relationship is mutually beneficial: the United States is Canada’s best customer, importing 97.6 percent of Canada’s daily exports of 2.59 million barrels.2 The history of the integrated North America crude market is dominated by two self-reinforcing narratives: one of anonymity and one of ambivalence. For much of the twentieth century, informal ties and ad hoc policies rather than formal trade agreements guided Canadian petroleum development, providing cheap and reliable supplies for consumers. Laissez-faire attitudes in both Canada and the United States left the details of development—exploration and production, allocation of market share, and the creation of refining and marketing networks—in the hands of the private sector with some oversight provided by federal authorities in Washington, D.C., and Ottawa until the formalization of the relationship by the Canada–United States Free Trade Agreement in 1988, and its augmentation with Mexico as part of the North American Free Trade Agreement in 1994. Periodically, however, industry, government, and private citizens in Canada and the United States display ambivalence about the economic and environmental effects and the extent of Canada-U.S. petroleum integration. Barring significant structural and systemic changes, however, cross-border trade in oil will likely persist well into the twenty-first century. For nearly a century after Edwin L. Drake established the first oil well at Titusville, Pennsylvania, U.S. oil companies dominated the upstream (exploration and production) and downstream (transportation, refining, and marketing) sectors of the North American oil market. Most of Canada’s petroleum wealth—approximately 80 percent—resides in the province of Alberta. Even before widespread exploration for oil and the production of it began in the mid-twentieth century, surface oil seepage and gas flares hinted at the mineral wealth below. In the late eighteenth century, the explorer Sir Alexander Mackenzie documented the presence of bituminous sands along the banks of the Athabasca River. Until the twentieth century, however, the region remained too distant and remote for serious exploration, and the Canadian oil industry remained economically marginal and regionally focused. When Alberta entered the Canadian Confederation in 1905, most of its small population (fewer than 200,000) made a living in agriculture. Meanwhile, the province’s two largest cities, Edmonton and Calgary, were little more than frontier towns with just over 20,000 residents between them; approximately 8,000 citizens lived in the new provincial capital in Edmonton, while 12,000 called Calgary home. Production and marketing of natural gas was only economic when located close to urban centers. Discoveries of oil remained modest. Unable to raise enough capital domestically to sustain exploration and production, the nascent Canadian oil industry depended on foreign oil companies to furnish the necessary capital and expertise to develop Canada’s petroleum resources.3 Until 1920 however, federal petroleum policies were contradictory. While future prosperity depended on developing the country’s economy, artificial limits restricted the development of the petroleum industry. Section 40 of Canada’s Petroleum and Natural Gas Regulations, initiated in 1914 by the British Foreign and Commonwealth Office seeking energy security for the British Empire, prohibited leasehold rights to any company directly or indirectly controlled by Americans or American corporations. Until it was amended in 1920, section 40 of the regulations discouraged U.S. corporations with their capital, technology, and experience from operating in Canada. Prior to World War I, despite federal oil production subsidies as high as 52 cents per barrel, the industry struggled to make even modest discoveries of oil in Ontario, New Brunswick, and Alberta. The poor quality, limited volume, and erratic production of oil from the fields could not displace U.S. imports.4 Restrictions on American oil firms and their affiliates were eased in 1917, in part because of the fuel crisis experienced by the Allied powers but also because of fears that American supplies would soon be depleted. Between 1917 and 1947 independent drillers and major drilling companies established 567 exploratory wells—an average of one well per 1,000 square miles—87 percent of which were dry. Imperial Oil, an affiliate of Standard Oil Company of New Jersey, spent $23.2 million on exploration but drilled 133 consecutive dry holes in Alberta and Saskatchewan. With little success in adding production, Imperial Oil and the McColl-Frontenac Oil Company focused their investments in refining and marketing instead.5 Until midcentury, many observers believed that the future of the Canadian oil industry lay in the development of the three massive oil sands deposits in northern Alberta. By current estimates, these deposits contain 1.3 trillion barrels of oil with 169 billion barrels recoverable. Commercial development of the oil sands nevertheless presented a number of daunting challenges. The oil did not flow easily or, in some cases, did not flow at all because it was embedded in a mixture of sand, clay, water, and other materials. Convinced that the oil sands might contain the key to Alberta’s economic future, the province funded Dr. Karl Clark’s research on hot water separation beginning in the 1920s until 1948 when Clark advised that the next step—commercial application—was necessary to determine the overall feasibility of the process. Although technically feasible, the oil sands lacked the economies of scale to compete with conventional oil from the United States. With glutted oil supplies and plummeting demand during the Great Depression, the private sector had little ability or need to pursue commercial development of Alberta’s oil sands during the 1930s.6 During World War II Ottawa established a state-owned oil company, Wartime Oils, to assume control of industry operations and stimulate exploration with low-interest loans, but the company provided few new discoveries. Production from Turner Valley, south of Calgary, peaked at 20,000 barrels per day in 1942 before entering a slow and steady decline. By war’s end Canada still imported 80 percent of its petroleum from the United States. More distressing for Alberta was the failure of the oil sands industry to furnish any oil, magnifying concerns about Canada’s petroleum future. By 1943, the Wartime Oil Company had taken control of Abasand Oils, a modest separation facility that was plagued by difficulties. The federal experiment ended in 1945 with the destruction of the Abasand facility by a fire. Surveying the wreckage from the House of Commons, C. D. Howe, the venerable minister of munitions and supply, grimly concluded that the plant’s failure proved unequivocally that commercial development of the oil sands would never take place. The provincial government of Ernest Manning, premier of Alberta, disagreed and quietly resumed research and development.7 While the United States was a reliable source of crude, importing 220,000 barrels per day at an annual cost of $500 million contributed greatly to Canada’s postwar trade deficit. Temporary Canadian fuel shortages between 1945 and 1946 provided the impetus for Canadian governments to kick start domestic petroleum exploration. Provincial and federal governments offered generous incentives for producers to renew exploration for conventional oil. Tax provisions allowed oil companies to write off as much as 40 percent of losses for exploratory wells and up to 50 percent of costs for “deep difficult” tests. Moreover, the federal government also waived import duties on particular drilling equipment brought from the United States.8 After an amazing string of dry holes, Imperial Oil’s management and specialists met with advisers from Standard Oil of New Jersey to determine a course of action. The group decided to make one final exploration effort in Alberta. Beginning in 1946, Imperial’s seismic crews conducted surveys between Edmonton and Leduc, a small farming town thirty miles south of the city. Although the geophysical techniques used to conduct oil surveys were still somewhat primitive, they revealed a weak but nonetheless promising subsurface anomaly. Desperate after decades of failure, Imperial’s management approved drilling the anomaly, which lay fifty miles from the other closest well. Drilling started on November 20, 1946; results initially suggested that it was most likely a gas well, but at 5,019 feet the drill began to show signs of striking oil. The long shot paid off when on the bitterly cold afternoon of February 13, 1947, Leduc No. 1 produced the first of its more than 259 million barrels of oil and 415 trillion cubic feet of natural gas.9 The Leduc discovery dramatically transformed the province from a predominantly rural, agrarian economy to a booming, increasingly urban, petroleum powerhouse. Virtually overnight, every major oil company and 260 independent oil producers rushed to establish operations. Calgary became the unofficial corporate headquarters of the Canadian oil and gas industry. Edmonton’s proximity to the oil fields transformed it into western Canada’s refining and transportation hub. During the next ten years, a flurry of exploration and drilling activity pumped $2.115 billion into the provincial economy. Canadian and American companies turned to the United States for technical expertise in exploration as demand for skilled oil-field workers and equipment spiked. Imperial Oil and British American Oil Company repatriated most of their Canadian personnel from Latin America and the United States, facilitating the transfer of industry knowledge. Meanwhile, federal and provincial development policies aimed to stimulate the growth of the petroleum industry as quickly as possible, which largely meant leaving development to the private sector and strengthening cross-border ties between the Canadian and American industries. In the aftermath of the Leduc discovery, Ottawa relaxed restrictions on the entry of U.S. rigs. As a result, American crews helped drill over one thousand wells in 1950 alone. Their experience slashed the average time it took to complete a well in half. By 1953 the increased activity and investment brought in twelve new producing fields totaling 2.2 billion barrels of oil reserves, cementing Alberta’s status as a major petroleum producer. For those who lived through it, such as the Edmontonian John J. Barr, the changes wrought were both tangible and sublime. “Suddenly on the streets of Edmonton, there were all these swaggering, superconfident Marlborough Men with Oklahoma or Texas accents who winked at the girls, drove big cars, and came from a different world.”10 By 1951, Alberta was producing enough oil to supply all of Canada’s daily demand. Some debate took place about reserving Canadian markets for domestic producers, but the lower production costs enjoyed by producers in Venezuela and the Middle East prohibited painless displacement of those supplies from the market. The possibility of constructing an efficient transportation network, however, suggested that the Alberta oil sands could become a significant regional supplier of oil to select markets in the United States and portions of Canada. The discussion therefore quickly morphed into one over pipeline routes: Should the pipeline linking Alberta’s oil producers and Ontario’s refineries follow a Canada-only route or should it pass through the United States? The debate broke down along party lines. Howard Green, a conservative member of Parliament, argued that the development of a national (east–west) energy market would best serve the national interest. Meanwhile, Minister of Trade and Commerce C. D. Howe argued that efficiency came from economies of scale and comparative advantage along a north–south (continental) rather than an east–west (national) axis. “Pooling” national resources would promote greater national and the to consumers. Alberta’s proximity to the and markets of the and the refineries of the region from northern Texas to suggested an economically that would the growth of Alberta’s oil industry while the of Canadian to from foreign Canadian policies with the of the U.S. domestic and foreign oil that corporate to determine development The of Canadian lay in their and in the companies that controlled their with the of could supply regional U.S. in the and in portions of the control by American companies to nearly percent of Canadian crude Texas and Oklahoma to that the United States remained an producing but these fields did not supply markets of the provided the oil for most of the but the growth of the market after World War II its ability to supply other along the in the Between 1950 and major pipeline for oil and three for natural producers in Alberta to U.S. markets. In 1950 the pipeline provided to the Ottawa and the U.S. with the 1953 of the pipeline to British and the the of oil and gas markets. dramatically the and of Canadian crude, provided a source of imports for the United States, and the of the Canadian and U.S. petroleum market. Canadian daily crude exports to the United States grew from approximately barrels in to barrels by an annual Although Canadian petroleum remained (in U.S. exports of crude to Canada barrels per day and were at million the was that Canadian oil American The was in to the Canada quickly oil exports to an average barrels per day to supplies for oil after the crisis North American oil In the of from foreign petroleum in the Middle domestic petroleum producers in the United States and Canada used national security to to both Washington, D.C., and Ottawa for from independent producers who were for 40 percent of U.S. production, the (in and (in on imported Although the crude from the Middle the initially did not Canadian crude, Canada-U.S. With producers market industry from million in to million in and the province of Alberta’s produced from a well a that the Oil would Canada’s independent producers began the federal government to an of the pipeline to barrels of Alberta crude per day to The government in by the on by to the of the Canadian oil and gas industry. After from the oil industry and of by the Canadian government, the an for all oil to the United States by the Canadian oil. While close between Washington, D.C., and Ottawa a small part in the they were not Mexico and for more from the than did Canada. Canadian oil exports to the United States increased 40 percent to barrels per day by the end of but Mexico its exports percent to barrels per day during the Meanwhile, the indirectly Venezuela by the of the pipeline to for approximately percent of daily production, barrels per D. on the of Canada’s import which produced barrels per day to million by the of the on and the results of the Minister John of the Oil through the Canadian House of in The established the for the growth of the Canadian oil industry, the into two oil at the Ottawa Alberta’s producers would the of the Ottawa of the Ottawa Valley, would to on imports from the United States, and the Middle Alberta producers for the of the the Canadian production to U.S. supply the by the crude production in western Canada nearly from barrels per day in to million barrels per day in the of Alberta’s conventional In the Great Canadian Oil a of Oil from the Alberta Oil and Gas in to of a The plant’s in marked the beginning of the Canadian to oil oil that is to and oil sands to the U.S. limits on the of conventional domestic production peaked in next of for the North American oil industry would increasingly on oil, such as that from oil as Oil Company J. Howard at the of Great Canadian Oil is the of group that the North American is to oil to its in the oil from the Athabasca of an oil firms In the Syncrude in by Imperial Oil, the Oil of Canada, and the Company as from the Alberta Oil and Gas to of a In the a number of structural and changes the of informal and attitudes cross-border petroleum as a as Canadians grew increasingly about the of U.S. investment in the oil industry. By the U.S. corporations and their Canadian controlled percent of the Canadian petroleum industry and percent of the petroleum products in Canada. the discovery of the billion at by and some to Canadian crude would still U.S. markets. in the United States, grew increasingly about the economic and on foreign crude imports crisis In the end of Canada’s and a the a percent on oil and were to a formal energy but only to Canadian about the of their most Between and the Canadian federal government Minister with a of for domestically produced crude and a in that domestic crude producers approximately 80 percent of in and after the of Canadian producers only 40 percent of in also in the market by all Canadian exports of oil and natural gas to the United States to domestic In the state-owned oil company to the federal government a on the industry. such as the Foreign began foreign investment in Canadian industry to of Canadian firms by U.S. The by the Ottawa of supply and in the of and the to complete the of the Canadian oil industry by and provisions for providing capital for of and industry to the off the of and in the to but it is to the as other than a complete a billion in investment percent of Canada’s national the ten of the U.S. in the Canadian oil industry by percent to Even with the of the Canadian oil industry during a time of high the that between and creation of the the of crude and the the Canadian industry percent in and a percent in drilling a percent in exploration and the of Provincial peaked at percent in but percent until the Alberta economy a billion as investment capital and drilling were to the United States and as skilled and workers there between and or, after increasingly found in other The of conservative government in marked the end of and initiated the formal of Canada into the economy. and increasingly the Canadian oil industry to the cold of the The Canadian energy minister the of the federal government in petroleum development, new agreements with producing eased government restrictions on and the and with the by Minister the of the of in the federal changes just as conventional production from the western Canadian began the of Alberta’s petroleum industry to the oil As the most of oil produced to was to in and the economies of high and the long before and ten on for oil sands operations to be market for Alberta the Canadian petroleum industry of a with the on the Canada–United States Free Trade Agreement began in and one with a formal The provided the for a formal the United States to Canadian petroleum and natural gas in for to U.S. markets and the of a formal for The North American Free Trade Agreement the energy provisions of the and the of oil and gas markets to in the late and brought about an the Canadian industry to become more efficient and to The therefore the of new such as drilling and and the development of new in such as by Imperial Oil for their Canada, to Alberta’s oil sands industry. The was a of oil sands barrels per day in to over million barrels per day in Meanwhile, between and investment in the oil sands billion Canadian Since in the United States about the of oil sands development and its in some as concerns about the of the U.S. market as at the federal and restrictions on imports of Canadian oil Canadian and industry to Americans about oil Meanwhile, the of the and to the billion pipeline to Canadian oil sands producers to U.S. refineries along the the debate of the about Canadian markets to a greater of production for Surveying the of petroleum trade in Minister that and over the the of Canadian trade but that did not the end of over a century of mutually oil The minister that the of Canadian and American energy markets is a not just economically but and for both be more than a of any of in the oil The of Canadian and American petroleum the that oil will the fuel source through the of the U.S. market for Canadian petroleum the of Canada’s proximity to the United States, the status of the oil sands as the the of fuel for the transportation and the of to oil sands production from Alberta to a long way to before it could the United States as the largest market for Canadian is likely that the of anonymity and ambivalence will to North American petroleum trade well into the twenty-first century.

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