Hon. T. A. CRERAR (Minister of Mines and Resources):
I wish to table an order in council relating to certain changes that are being made in the present arrangements with the United States government and Imperial Oil Limited with respect to oil development in the Northwest Territories, and in doing so to give the house a somewhat lengthy statement of the whole mattet as it stands at the present time.
In tabling a copy of an order in council that has been passed relating to the development of the oil resources in the Northwest and Yukon Territories, I wish to make for the government the following explanatory statement. The members of the house will recall the exchanges of notes between Canada and the United States in reference to the Canol project. They were the following:
1. Exchange of notes June 27-29, 1942.
2. Exchange of notes August 14-15, 1942.
3. Exchange of notes December 28, 1942-January 13, 1943.
4. Exchange of notes January 18, February 17, March 13, 1943.
May I point out that the Canol proposals were first considered early in the year 1942. Less than six months before, the United States fleet had suffered heavy losses at Pearl Harbor; the disastrous losses of Hong Kong and
Singapore followed, and the menace of Japanese submarines appeared on the west coast of North America. Shipping losses were heavy and tankers scarce. Japanese forces were in the Aleutians. The prospect of intensified submarine warfare and the possibility that it would be concentrated in an attack against coastal tanker shipments became a vital and primary consideration. In the circumstances the Canadian government readily acquiesced in the proposals of the United States government.
Under the first and second exchanges of notes approval was given to the United States government to:
(a) enter into contracts with a Canadian company to be selected by it, to drill wells on the leases and permits the company held or might later acquire, in order that the necessary supply of oil might be found;
(b) construct a pipeline from Norman Wells to Whitehorse in the Yukon, capable of carrying 3,000 barrels of oil daily;
(c) erect refinery facilities at Whitehorse:
(d) erect oil storage at Prince Rupert and construct a pipeline from Skagway to Whitehorse.
Under the third and fourth exchanges of notes approval was given to the United States to carry out an extended exploratory and drilling programme throughout the Northwest Territories and Yukon for the purpose of endeavouring to find additional sourdes of oil capable of producing from 15,000 to 20,000 barrels daily to supplement the supply from Norman Wells.
I have only briefly summarized the exchanges of notes as they are available to any member who may wish to read them.
The members of the house are familiar with the oil development that had taken place at Fort Norman. A number of petroleum locations were staked in 1914 some fifty miles below Fort Norman on the Mackenzie river and leases of certain of them were acquired by the Northwest company, a subsidiary of the Imperial Oil Limited. During the period between 1920 and 1925 that company drilled wells on its leaseholds and oil was discovered in commercial quantities. Owing to the distance from markets these wells were capped and remained closed until 1932 when they were opened to meet the demand for fuel oil and gasoline created by the mining of radium-bearing ores at Great Bear lake. An increase in consumption also arose from the opening of the Yellowknife mining field and as a result the company drilled further wells and installed additional refinery equipment.
Canol Project-Oil Resources
At the beginning of the year 1942, five wells had been drilled and a refinery capable of processing S00 barrels of oil a day had been installed. By that time the [DOT] company had expended approximately $1,500,000. The average production from 1932 to 1942 was about 20,000 barrels a year, or approximately 340 barrels a day during the summer season.
Following the understandings reached by the two governments, the United States War Department entered into contracts with Imperial Oil Limited. These contracts required the company to deliver 3,000 barrels of oil daily at stated prices, the United States government financing under certain conditions the costs of developing the additional deliveries of oil.
To facilitate the carrying out of the terms of the contracts, an area within a radius of fifty miles surrounding Norman wells was reserved and new regulations for the disposal under permit of petroleum and natural gas rights were established to, apply to the reserved area. Subsequently, for the purpose of facilitating the search for the additional supplies of oil, the scope of the new regulations was extended to cover all of the Yukon Territory and that portion of the mainland of the Mackenzie district, Northwest Territories, lying west of a line seventy-five miles east of and paralleling the Mackenzie river from its mouth to Fort Providence and thence south to the northern boundary of Alberta. In view of the special nature of the development that was contemplated under the new regulations, provision was made that one-half of any location upon which oil was discovered, and any improvements thereon, would remain in or become the property of the crown.
In order to carry out its extended program of drilling and search for additional supplies of oil. Imperial Oil Limited acquired under these special regulations permits covering in all about 140,000 acres in the vicinity of the original discovery wells. An intensive drilling programme was carried out in the area immediately adjacent to the producing wells and as a result a proven field of oil has been delimited, comprising approximately 4,500 acres, estimated to contain from 30 to 60 million barrels of oil. The opinions of geologists differ as to the amount of the recoverable oil. The actual size of the pool will only be determined as further wells are drilled and it is found how much of the oil lying under the Mackenzie river can be recovered. Since the commencement of the Canol project, 40 wells have been drilled and of these 33 are producing oil. The present daily output of the field is about 3,900 barrels, which will be increased as additional wells are drilled.
Approximately one-third of the proven field is included in the old leases held by the company and two-thirds in the permits acquired under the special regulations, in which the crown has a one-half interest. Considerable exploratory work was carried out on the permit area outside the proven field. Some drilling was done on one likely structure but no oil was found.
While the drilling programme and the search for oil was going on, the United States War Department proceeded with the construction of the pipelines from Norman and Skagway to Whitehorse and also the supplementary pipelines and, as well, erected the refinery at Whitehorse and the storage facilities at Prince Rupert. During last summer an extensive geological exploratory programme was also carried on around the Norman wells and elsewhere in the Northwest Territories. The United States War Department has reported that $134,000,000 has been spent on these projects.
The above is a brief summary of the situation as it existed a few months ago when the United States government informed us that it desired to modify the original plan it had in mind for the finding and development of large sources of oil in northwestern Canada. Representations were made that because of the change in the military and strategic picture in the north Pacific-in fact in the whole eastern Pacific-the project from a military point of view had become of less importance. The pipeline from Norman Wells to Whitehorse had only a daily capacity of from three to four thousand barrels. It was suggested there were now no military considerations which would necessitate increasing its capacity. It was further suggested that there was no justification for the United States government continuing the exploratory and drilling programme, other than the drilling necessary to maintain the supply of oil for the existing pipeline. The proposal involved the withdrawal of the United States from the exploratory programme and a renegotiation of the contracts with the Imperial Oil Limited. The United States government considered that in view of the very large expenditures that had been made, it should be entitled to obtain from the company an option to purchase after the war at a fixed price a substantial amount of oil from the proven field and from new fields to be found by the company.
The company was prepared to renegotiate the contracts and to grant the option, but first wished to reach an understanding with the Canadian government as to the method by which the respective shares of each in the proven field and the area under permit would
Canol Project-Oil Resources
be developed and, as well, to ascertain the terms of the regulations to be established for the development of the oil resources of the rest of the Northwest Territories and Yukon.
It has already been pointed out that the present pipeline has a capacity of from three to four thousand barrels daily or, in other words, not more than one million barrels a year can be transported to market. It is obvious that a much larger pipeline would be required to make a commercial operation feasible. In view of the difficult country through which it passes, the costs of operation and maintenance will undoubtedly be very high. For the same reason the cost of constructing a larger pipeline will be great. It has been estimated that it would cost at least 860,000,000 to construct a pipeline of the size required to permit commercial operation. It is also estimated that a reserve of not less than 300,000,000 barrels would have to be found to warrant such a large expenditure.
It therefore became necessary for the government to consider what regulations should be established for the exploration and development- of the oil resources of this hitherto little developed part of Canada. There are approximately 100,000,000 acres of land warranting exploration for oil. May I remind the members of th-e house that Fort Norman is near the arctic circle, more than 1,100 miles by air and nearly 1,500 miles by land and water north of Edmonton. The closest outlet for oil is across the mountains to the Pacific, 700 miles away. Even when it reaches the coast it will have to be transported by tanker as far south as southern British Columbia before it reaches any substantial market and then it will come into competition with the oils of southern California. Because of the remoteness of the region from markets, the climatic conditions, and the difficulties of transportation, very much heavier expenditures will have to be incurred in exploring for and developing new fields than in the more settled parts of Canada. Regulations should therefore be established which will encourage exploration and development on a sound economic basis. Canada is dependent upon the outside world for more than 85 per cent of her requirements of oil. It is therefore important that new sources should be discovered. To the extent that the oil" of the Northwest Territories can meet the requirements along the Pacific coast, so it will assist in easing our dependence on supplies from the United States.
The order in council which has been tabled sets out briefly the arrangement proposed to be made with the Imperial Oil Limited in regard to the proven field and the rest of the area now under permit. It also briefly
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summarizes the conditions to be imposed in the new regulations which will be passed immediately for the future development of the oil resources in the Northwest Territories and Yukon. '
The agreement with the company will fix the share of the dominion in the proven field at one-third. The field shall be developed by the company as a unit operation, the company to furnish all the funds necessary therefor and the government to pay its one-third share of the actual direct cost of producing the oil, plus a management fee of 10 per cent. In addition to receiving a one-third idiare of the oil, the government is entitled to a royalty of 10 per cent on the one-third share included in the old leases. For accounting purposes it was decided to make the royalty applicable to the company's two-thirds share and the rate therefor was fixed at 5 per cent.
The government also has agreed that the company may give an option to the United States government to purchase for its own use but not for resale at cost plus 20 cents a barrel, an amount up to one-half of the oil recovered from the proven area, not exceeding 30,000,000 barrels, and that, in making up this one-half, the company may draw upon the government's share to the extent of one-third. The option is to be subject to the prior and preferred supplying of all the local requirements for oil and oil products. It should be mentioned that under the option the United States government will be required to take its oil currently as the field is produced, at the rate of 20 per cent of the total amount currently produced from the proven area for export.
The option is also subject to the condition that if the United States government does not desire to take its share currently, then the company shall be entitled to sell such oil on its own-account, in which case the United States government would be entitled to any difference between the cost of production, plus 20 cents per barrel, and the average sale price received by the company for oil sold by it during the period in question.
In respect to the balance of the permit area, it is proposed that the company shall be entitled to exchange the permits now held for a new exploratory permit to be issued under the proposed new regulations. Such permit shall be subject to the terms and conditions thereof, except that in addition to paying the royalties to be provided for therein, the company will pay to the government 10 per cent of the net profit derived by it from any operation carried on within.
Canol Project-Oil Resources
that area, the profit to be computed as part of the royalty before the payment of income' tax.
The government has also agreed that the company may include in the option to the United States government the -right to purchase 10 per cent of any oil that may be found in the remainder of the permit area or in any other areas that may be taken up by the company under the new regulations, until a total of 60,000,000 barrels is reached, including that to be obtained from the proven field. The same conditions as stated above will apply to the United States government taking the oil at the rate of 20 per cent of the total amount currently produced. The total option, therefore, is limited in time; that is, it will expire approximately twenty years after a commercial pipeline has been constructed.
In respect to the new regulations to be established, the order in council sets out briefly some of the more important conditions that will be imposed. It is to the general advantage of Canada that an active program of exploration and search for oil should be carried out in order that new sources may be found and developed. The regulations will make available to all companies and individuals the opportunity of exploring and developing these resources.
In drafting the regulations it was necessary to keep in mind the remoteness of the country and the difficulties of operation. They must be sufficiently attractive to encourage exploration and development but at the same time the interest of the crown must be protected. Provision is being made for exploration permits of substantial size, provided a real effort is carried out to search for oil and to develop it when found. Very large expenditures will have to be made before a sufficient quantity of oil is found to warrant the building of a commercial pipeline to the nearest market. It may be many years before there will be any return on the capital invested. Further, there is no definite assurance that the required reserve of oil for the larger pipeline will ever be found. The rate of royalty, therefore, is being fixed on a somewhat smaller scale during the initial period of the development, the rate for the first five years being 7^ per cent for the second five years 10 per cent, and thereafter 12| per cent.
The regulations will also provide for development being carried on in accordance with the best conservation practices. In addition, provision is being made to control the prices to be charged for petroleum and petroleum products sold for use in the territories.
The right is given to any lessee to construct and operate pipeline to the nearest market and for the purposes thereof a free right of way will be granted over crown lands. All pipelines shall be operated as common carriers under such, regulations as the governor in council may impose.
Finally, the government will reserve the right to take possession at any time of all or any part of the areas held under permit or lease, together with the improvements, buildings and equipment thereon, including any pipelines that may be constructed, compensation being paid to the owner. Failing an agreement as 'to the amount of compensation it will be fixed by the exchequer court.
In conclusion may I say that now the urgency for finding new supplies of oil in the northwest for immediate military purposes has diminished, there are reasons why we should facilitate the withdrawal of the United States from those activities which were commenced when the urgency was critical. We are fully compensating the United States for the expenditures on the airfields constructed in the northwest which were made use of in connection with the Canol project. Upon the completion of the arrangements I have just outlined the participation of the United States in the exploratory and drilling programme, except in the proven field, will be terminated. The United States will still be interested, with the company, in maintaining the necessary supply of oil from the proven field for the existing pipeline and, as well, will operate and maintain the pipelines, refinery and storage facilities. All these operations will probably continue until the end of the war, when they will be dealt with in accordance with the conditions set out in the exchanges of notes.
I would like to add one further word. The government appreciates its responsibilities in doing everything possible to augment the supplies of petroleum on the north American continent. A country such as Canada which imports 85 per cent of its oil must energetically carry on the search for new sources of supply. I have confidence in the prospects of finding additional large fields in the northwestern part of Canada. While it is unfortunate the field developed at Fort Norman is too far away at present to supply the needs of central Canada and particularly the needs of the prairie provinces, there is reason to expect that favourable structures may also be found in the vicinity of Great Slave lake, close enough to justify the construction of a pipeline to the south. So far as this government is concerned, we propose to assist and facilitate the development of these resources in every way possible.
Subtopic: DEVELOPMENT OF OIL RESOURCES OF NORTHWEST AND YUKON TERRITORY