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	REMARKS TO THE TORONTO BOARD OF TRADE “THE U.S. PETROLEUM INDUSTRY: RESTRUCTURING FOR EFFICIENCY AND VALUE” TORONTO JANUARY 28, 1985

7:00 P.M.

IT’S AN HONOR TO BE HERE THIS EVENING. BEFORE I GO ANY FURTHER, I’D LIKE TO SET THE RECORD STRAIGHT ON THE PURPOSE OF MY VISIT. ON JANUARY 8, THE GLOBE AND MAIL REPORTED THAT MY VISIT WAS. . .QUOTE. . .“THROWING A SCARE INTO DOZENS OF CANADIANS WHO FEAR THEIR COMPANIES ARE RIPE FOR A TAKEOVER.” BELIEVE ME, THIS IS PURELY A PEACE MISSION. THERE ARE PLENTY OF COMPANIES IN THE U.S. TO STRAIGHTEN OUT BEFORE WE START ON FOREIGN COUNTRIES.

BESIDES THAT, MESA HAS ALREADY DONE ITS DEAL IN CANADA. WE CAME TO CANADA IN 1959, AND BY 1975, WE WERE CANADA’S MOST ACTIVE OPERATOR. WE SOLD OUR CANADIAN INTERESTS IN 1979 FOR $600 MILLION, WHICH ISN’T BAD CONSIDERING THAT WE CAME IN WITH $35,000. TODAY, $35,000 WOULD GET YOU A BUS TICKET FROM AMARILLO, TEXAS, TO CALGARY AND A WEEK IN THE CALGARY INN.

TONIGHT, I’D LIKE TO PLACE THE ACTIVITIES OCCURRING IN THE U.S. PETROLEUM INDUSTRY IN PERSPECTIVE TO THE GLOBAL ENERGY PICTURE. I KNOW THAT THE MERGER AND ACQUISITION ACTIVITY AMONG U.S. PETROLEUM COMPANIES HAS GAINED A LOT OF ATTENTION IN CANADA, NOT ONLY BECAUSE OF THE POTENTIAL EFFECT ON CANADIAN OPERATIONS OF U.S. COMPANIES, BUT ALSO BECAUSE MANY CANADIANS HAVE BEEN INVOLVED IN THESE ACTIVITIES. HY, SAM AND BILL BELZBERG WERE PART OF THE GULF INVESTORS GROUP AND PLAYED A KEY ROLE IN THE LARGEST CORPORATE ACQUISITION EVER—THE PURCHASE OF GULF CORPORATION BY CHEVRON.

BUT THE ACTIVITIES OF AMERICAN PETROLEUM COMPANIES ARE ALSO IMPORTANT TO CANADA IN LIGHT OF THE CHANGES YOU HAVE MADE IN NATIONAL ENERGY POLICY. THE LOOSENING OF GAS EXPORTS TO THE U.S. AND WHAT EFFECT THAT WILL HAVE ON THE MARKET IS LARGELY TIED TO U.S. GAS MARKETS AND THE HEALTH OF THE AMERICAN PETROLEUM INDUSTRY. SO IT’S LOGICAL THAT CANADIANS SHOULD TAKE INTEREST IN OUR ACTIVITIES.

IF YOU FEEL PUZZLED BY WHAT YOU SEE, DON’T FEEL ALONE. I HAVE SPENT A GREAT DEAL OF TIME OVER THE LAST COUPLE OF YEARS EXPLAINING WHY THE INDUSTRY IS UNDERGOING THIS VOLATILE PERIOD. IT’S GENERALLY MISUNDERSTOOD BY THE PUBLIC, PRESS AND EVEN MEMBERS OF THE AMERICAN PETROLEUM INDUSTRY.

THE BASIC MISCONCEPTION IS THAT THE ACTIVITY WE’RE SEEING IS A PROBLEM. THIS ACTIVITY—WHETHER IT’S MERGERS, ACQUISITIONS, ROYALTY TRUST SPINOFFS OR RECAPITALIZATION PROGRAMS—IS NOT ITSELF A PROBLEM, BUT THE RESPONSE TO A PROBLEM. THAT PROBLEM IS THE WORLD OIL PICTURE AND HOW THE U.S. PETROLEUM INDUSTRY FITS INTO IT. AND THE DOMINANT FEATURE, OF COURSE, IS OIL PRICES.

WE HAVE AN INSTABILITY IN THE PRICING STRUCTURE THAT IS CAUSED BY A CONTINUING SURPLUS OF CRUDE IN THE MARKET. THE GLUT IS STILL WITH US, AND ALONG WITH IT, A SURPLUS OF REFINING CAPACITY. U.S. REFINERS HAVE RESPONDED TO THIS SURPLUS BY SCALING BACK THEIR CAPACITY, CLOSING OVER 100 REFINERIES SINCE 1980. THE CANADIAN REFINING SECTOR HAS SEEN AN EQUALLY SIGNIFICANT CONTRACTION. BUT WHILE WE ARE TRIMMING OUR OPERATIONS, THE OPEC COUNTRIES, EGYPT AND MEXICO ARE INCREASING CAPACITY. THEY PLAN TO ADD AT LEAST 1.2 MILLION BARRELS PER DAY OF REFINING CAPACITY BY 1988.

THIS EXCESS ABILITY TO PROCESS CRUDE, ALONG WITH THE SURPLUS OF CRUDE ON THE MARKET, WILL SIMPLY ADD TO PRICE INSTABILITY IN THE FUTURE. WE COULD SEE SOME SERIOUS EROSION IN THE PRICING OF CRUDE, AND THAT SIMPLY MEANS THINGS ARE GOING TO GET TOUGHER, NOT EASIER.

UNTIL PRICES STABILIZE AND RISE, EXPLORATION WILL NOT BE AGGRESSIVE. DEPRESSED OIL FIELD ACTIVITY IN THE U.S. IS A PROBLEM OF ECONOMICS. AND CANADA IS IN THE SAME POSITION. GRANTED, U.S. DRILLING COSTS HAVE DECLINED IN RECENT YEARS. ACCORDING TO THE JOINT ASSOCIATION SURVEY, U.S. DRILLING COSTS ARE 36% LOWER, AND CANADIAN DRILLING COSTS HAVE DECREASED, AS WELL. YET, WE ARE TRYING TO PRODUCE A PRODUCT WHOSE VALUE ON THE MARKET CONTINUES TO FALL. THE MARGIN IS BEING SQUEEZED.

THIS IS A PARTICULARLY CRITICAL PROBLEM FOR THE U.S. WE ARE A MORE MATURE INDUSTRY THAN CANADA. WHILE CANADA STILL HAS GREAT POTENTIAL FOR DISCOVERY OF NEW OIL FIELDS IN BOTH CONVENTIONAL AND FRONTIER AREAS, THE UNITED STATES’ ONLY HOPE FOR FINDING ANY BIG FIELDS IS IN THE FRONTIER. AND FRONTIER DRILLING FOR THE U.S. WITH CURRENT OIL PRICES IS SIMPLY NOT FEASIBLE.

I HAVE NOTHING AGAINST FRONTIER DRILLING, BUT IT MUST BE ECONOMIC. AND IF IT IS NOT ECONOMIC TODAY, THEN WE SIMPLY SHOULDN’T DRILL IT. THE OIL ISN’T GOING ANYWHERE; IT’S BEEN THERE FOR MILLIONS OF YEARS. AND IT WILL BE THERE WHEN THE ECONOMICS JUSTIFY DEVELOPING IT.

THE U.S. INDUSTRY MUST REALIZE THAT IT IS IN A DIFFERENT POSITION THAN OTHER PRODUCERS. WE ARE FARTHER ALONG IN DEVELOPING OUR PROSPECT INVENTORY. OVER 80% OF THE WELLS DRILLED WORLDWIDE HAVE BEEN DRILLED IN THE LOWER 48 STATES OF THE U.S. THAT, ALONE, MEANS THAT OUR FINDING COSTS ARE GOING TO BE HIGHER THAN ANY OTHER COUNTRY.

THE U.S. INDUSTRY HAS PLENTY OF MONEY TO DRILL, BUT IT DOESN’T HAVE ENOUGH GOOD INVESTMENT OPPORTUNITIES. IT’S NEARLY IMPOSSIBLE FOR THE U.S. PETROLEUM INDUSTRY TO REPLACE ITS RESERVES. AND THE RESERVES FACTOR BECOMES THE FOCAL POINT, BECAUSE FOR PUBLIC-OWNED COMPANIES, THOSE RESERVES REPRESENT THE SHAREHOLDERS’ PRIMARY ASSET. WHEN THOSE RESERVES AREN’T REPLACED, THE ASSET BASE IS ERODING. THE MARKET RECOGNIZES THIS AND PLACES A LOWER VALUE ON THE COMPANY THAN THE TRUE VALUE OF THE RESERVES DICTATES. THE DIFFERENCE IN APPRAISED TO MARKET VALUE REPRESENTS BILLIONS OF DOLLARS OF LOST VALUE TO SHAREHOLDERS. AND UNLESS THE MARKET SEES THAT MANAGEMENT IS WILLING TO MAKE SOME INNOVATIVE CHANGES TO RETRIEVE THAT VALUE, THE PRICE REMAINS DEPRESSED.

THERE’S NO QUICK FIX TO THIS. INCREASING YOUR EXPLORATION BUDGET TO ATTEMPT REPLACEMENT IS UNECONOMIC. YOU HAVE TO APPLY CREATIVE MANAGEMENT—TO CHANGE THE STRUCTURE OF THE COMPANY TO GET THAT VALUE TO SHAREHOLDERS. AND THAT CAN BE ACCOMPLISHED IN SEVERAL WAYS: MERGERS, ROYALTY TRUSTS, ASSET SPIN-OFFS, STOCK REPURCHASE PROGRAMS OR A COMBINATION OF THESE TECHNIQUES. THE U.S. COMPANIES THAT HAVE APPLIED THESE TECHNIQUES HAVE BROUGHT MORE VALUE TO THEIR SHAREHOLDERS.

WHAT ARE THE IMPLICATIONS OF THE U.S. PETROLEUM INDUSTRY’S RESTRUCTURING IN CANADA? THIS PROCESS SHOULD RESULT IN A MORE EFFICIENT U.S. INDUSTRY THAT INVESTS ITS CAPITAL MORE WISELY AND RETURNS BETTER VALUE TO ITS SHAREHOLDERS. WE ARE LIKELY TO SEE MORE CONSOLIDATION WITHIN THE U.S. INDUSTRY AND MORE INNOVATIVE APPROACHES TO SOLVING THE INDUSTRY’S PROBLEMS. HOPEFULLY, WE’LL BECOME BETTER COMPETITORS, BUT THAT’S NO DIFFERENT FROM WHAT THE CANADIAN INDUSTRY IS TRYING TO DO TODAY, AS WELL.

THE RESTRUCTURING PROCESS MAY TOUCH CANADA MOST THROUGH THE DIVESTITURE OF THE CANADIAN OPERATIONS OF U.S. COMPANIES. I DO NOT EXPECT THAT U.S. COMPANIES WILL GAIN MORE CONTROL OF CANADIAN ASSETS THROUGH MERGERS. IT’S MORE LIKELY THAT THESE OPERATIONS WILL BE DIVESTED, AND THE LOGICAL OUTCOME IS MORE CANADIAN CONTROL.

MORE IMPORTANT IS THE IMPACT THAT THIS RESTRUCTURING PROCESS WILL HAVE ON THE COMBINED U.S. CANADIAN OIL INDUSTRIES’ PRESENCE IN THE CAPITAL MARKETS. THESE ARE VERY CLOSELY LINKED, AND IT’S IMPORTANT THAT THEY REMAIN HEALTHY. THE POOR HEALTH OF THE AMERICAN PETROLEUM INDUSTRY HAS LED TO SOME EROSION OF INVESTOR CONFIDENCE IN THE BUSINESS. BUT THE RESTRUCTURING PROCESS SHOULD RESTORE THAT CONFIDENCE, AND THAT WILL BENEFIT BOTH OUR COUNTRIES.

IN SUMMARY, THERE IS NOTHING TO FEAR FROM THE TRANSFORMATION OF THE U.S. PETROLEUM INDUSTRY. THIS IS OUR FREE MARKET RESPONSE TO GLOBAL OIL AND ECONOMIC CONDITIONS. IT SHOULD LEND STABILITY TO AN INDUSTRY THAT HAS SUFFERED A GREAT DEAL OF UNCERTAINTY IN THE LAST FIVE YEARS. AND STABILITY IS SOMETHING THAT CANADA IS INTERESTED IN, AS WELL. THE CHANGES BEING PROPOSED IN CANADA’S NATIONAL ENERGY POLICY ARE AIMED AT THE SAME GOAL—A MORE STABLE CANADIAN ENERGY INDUSTRY.

I’M A STRONG BELIEVER THAT A HEALTHY AMERICA IS THE BEST BET FOR A HEALTHY CANADA, AND VICE VERSA. AND THE RESTRUCTURING PROCESS SHOULD RESTORE HEALTH TO ONE SEGMENT OF AMERICAN INDUSTRY TO WHICH CANADA IS CLOSELY BOUND.