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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.

(TIME: 8 MIN.)

THANK YOU, PETER (GODSOE).

IT[Text stricken: S] [Handwritten addition: is] AN HONOR TO BE HERE THIS EVENING.

[Handwritten addition: Having trouble maintaining i[Handwritten addition: 1. Beatrice Field story]
dentity]
[Handwritten addition: 2. Liz 24 yr old daughter [Text illegible: envolve ment] “Grandfather or Uncle”] [Handwritten addition: Nationwide Director “Youth for Reagan Bush” Her goal was to register 150,000 & she registered 264,000—Washington Post.]

[Handwritten addition: As most of you know, I lived in Canada in the mid-60s and I have always been a staunch supporter of this country—almost an ambassador-at-large at times.]

[Handwritten addition: I know about supporters. In my business I need everyone I can get. I have many friends in Canada. One of our directors, Harley Hotchkiss, is a native of Ontario and lives in Calgary. Harley & his beautiful wife Becky are here tonite.]

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 [Text stricken: COUNTRIES.] [Handwritten addition: companies.]

[Text stricken: WE] [Handwritten addition: And we brought MSA to Canada in 1959] SOLD OUR CANADIAN INTERESTS IN 1979 FOR $600 MILLION, WHICH ISN’T BAD CONSIDERING THAT WE CAME [Text stricken: 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. [Handwritten addition: But that is better than it was in 1981 at the height of the boom.]

[Handwritten addition: We were Canada’s most active operator in number of wells drilled in 1975.]

[Handwritten addition: Three factors convinced us to sell our Canadian properties in 1979. First, the uncertainty of the duration of Prime Minister Clark’s minority government, coupled with the negative implications of the prior Trudeau energy and business policies concerned us. Second, the Foreign Investment Review Act did not bode well for foreign investments in Canada. Third, finding costs were accelerating rapidly for the industry.]

[Handwritten addition: At this time, Prime Minister Mulronney’s government may create a more favorable climate, However the industry is facing even greater uncertainties—primarily pricing for oil and marketing for natural gas.]

[Handwritten addition: The industry has coped with these factors in the past, but government policies must be clarified. The industry will not make big commitments to exploration without knowing the government’s policy. We cannot afford the risk.]

[Text stricken: TONIGHT I’D] [Handwritten addition: I would now] 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.

[Text stricken: SAM AND BILL BELZBERG] [Handwritten addition: The Belzbergs] WERE PART OF THE GULF INVESTORS GROUP [Text stricken: AND PLAYED A KEY ROLE IN THE] [Handwritten addition: that brought about the] LARGEST CORPORATE ACQUISITION EVER—THE PURCHASE OF GULF CORPORATION BY CHEVRON.

BUT THE [Text stricken: ACTIVITIES OF] [Handwritten addition: condition of the] AMERICAN PETROLEUM [Text stricken: COMPANIES ARE] [Handwritten addition: industry is] 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 [Handwritten addition: taking place today] 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, [Handwritten addition: plus] 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[Text stricken: .] [Handwritten addition: for the industry.]

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[Text stricken: .] [Handwritten addition: to a lesser degree.]

[Handwritten addition: Canada has more attractive exploration prospects than the U.S.]

GRANTED, [Text stricken: OUR] 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 [Text stricken: SIMPLY] [Handwritten addition: likely] 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.

[Text stricken: THE OIL] [Handwritten addition: If the is there it] 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 [Text stricken: PROSPECT INVENTORY.] [Handwritten addition: reserves of oil and gas.]

OVER 80% OF THE WELLS DRILLED WORLDWIDE HAVE BEEN DRILLED IN THE LOWER 48 STATES[Handwritten addition: .] [Text stricken: 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[Text stricken: .] [Handwritten addition: meaning good drillable prospects.]

IT’S [Text stricken: NEARLY] IMPOSSIBLE FOR THE U.S. [Text stricken: PETROLEUM] INDUSTRY TO REPLACE ITS RESERVES[Text stricken: .] [Handwritten addition: with our present level of activity—we haven’t replaced since the early ’70s.]

AND THE RESERVE[Text stricken: S] 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[Handwritten addition: .] [Text stricken: DICTATES.]

[Handwritten addition: In other words] 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 [Text stricken: RETRIEVE] [Handwritten addition: realize] THAT VALUE, THE PRICE REMAINS DEPRESSED.

THERE’S NO QUICK FIX TO THIS.

INCREASING YOUR EXPLORATION BUDGET TO ATTEMPT REPLACEMENT IS [Handwritten addition: likely] UNECONOMIC.

YOU HAVE TO APPLY CREATIVE MANAGEMENT [Handwritten addition: techniques] 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[Handwritten addition: .] [Text stricken: TECHNIQUES.]

THE U.S. COMPANIES THAT HAVE APPLIED THESE TECHNIQUES HAVE BROUGHT MORE VALUE TO THEIR SHAREHOLDERS.

(PAUSE)

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

WE ARE LIKELY TO SEE MORE CONSOLIDA’T’ION 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 [Text stricken: CONTROL.] [Handwritten addition: ownership.]

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.

THANK YOU.

(WAIT FOR APPLAUSE)