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UBC Theses and Dissertations

French oil investments in Canada Lesage, Jean- Pierre 1969

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F R E N C H O I L I N V E S T M E N T S I N C A N A D A ' b y J E A N - P I E R R E L E S A G E E . D . H . E . C . 1968 A T H E S I S S U B M I T T E D I N P A R T I A L F U L F I L M E N T O F T H E R E Q U I R E M E N T S F O R T H E D E G R E E O F M A S T E R O F B U S I N E S S A D M I N I S T R A T I O N . i n t h e D e p a r t m e n t o f C O M M E R C E A N D B U S I N E S S A D M I N I S T R A T I O N We a c c e p t t i l l s t r e s i s a s c o n f o r m i n g t o t h e A r e j q y i r e d / s t a n d a r d T H E U N I V E R S I T Y O F B ' R / T I S H C O L U M B I A A u g u s t , 1969 i i In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f t h e r e q u i r e m e n t s f o r a n a d v a n c e d d e g r e e a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g r e e t h a t t h e L i b r a r y s h a l l m a k e i t f r e e l y a v a i l a b l e f o r r e f e r e n c e a n d S t u d y . I f u r t h e r a g r e e t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may b e g r a n t e d b y t h e Head o f my D e p a r t m e n t o r b y h i s r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l n o t b e a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . D e p a r t m e n t The U n i v e r s i t y o f B r i t i s h C o l u m b i a V a n c o u v e r 8, C a n a d a i i i ABSTRACT Three French o i l companies invested i n Canada, they are: — Compagnie Fran^aise des Petroles (C.F.P.), i n 1953> which created the French Petroleum Co. of Canada. — Societe Nationale des Petroles d'Aquitaine (S.N.P.A.), i n 1963> which created Aquitalne Co. of Canada Ltd. — Entreprise de Recherches et d'ac t i v i t e P e t rolieres (E.R.A.P.), i n 1963, which created E l f Exploration and Production of Canada Ltd. A l l these companies are located i n Calgary,Alberta. These companies came to Canada for two main reasons: — the s t a b i l i t y of the country, both economic and p o l i t i c a l . — the potential for o i l discovery. Their investments are d i f f e r e n t : — S.N.P.A. invested $58,183,4-12 (Dec. 31, 1967) or 1U% of i t s t o t a l assets. — C.F.P. invested $33,83i+,213 or h% of i t s t o t a l assets. — E.R.A.P. invested $9,l68,i+12 or 1.2% of i t s t o t a l assets. Their p o l i c i e s also are d i f f e r e n t : — S.N.P.A. and C.F.P. work p r i n c i p a l l y i n Alberta which can be considered as the most proven zone of Canada. — E.R.A.P. i s more interested i n the long term and invests much i n the A r c t i c regions of Canada. This leads to differences i n their r e s u l t s : — S.N.P.A. i s the most successful O f the French O i l Investors: Aquitaine had a production of 5,111, q.09 barrels i n 1967? i v t h i s r e p r e s e n t s 3 3 % o f t h e t o t a l p r o d u c t i o n o f S . N . P . A . f o r t h e s a m e y e a r . T h i s i s d u e t o t h e b i g d i s c o v e r y o f R a i n b o w , A l b e r t a . I t s r a t e o f r e t u r n o n i n v e s t m e n t i s 6.0%, w h i c h i s a b o v e t h e C a n a d i a n a v e r a g e o f — C . F . P . d i d n o t m a k e a n y b i g d i s c o v e r y b u t d i d m a k e s m a l l o n e s . T h e p r o d u c t i o n o f i t s s u b s i d i a r y i n C a n a d a w a s l , l l i ( . , 3 3 9 b a r r e l s i n 1967, o r .3% o f i t s t o t a l p r o d u c t i o n . I t s r a t e o f r e t u r n o n i n v e s t m e n t i s 1.9%. — E . R . A . P . i s e x p l o r i n g a n d n o t p r o d u c i n g i n C a n a d a . T h e r e f o r e i t a p p e a r s t h a t e x c e p t f o r A q u i t a i n e t h e s e i n v e s t m e n t s a r e n o t f i n a n c i a l l y p r o f i t a b l e f o r t h e F r e n c h c o m p a n i e s t o d a t e . T h e t o t a l o f t h e F r e n c h o i l c o m p a n i e s i n C a n a d a r e p r e s e n t s o n l y l.l$> o f t h e t o t a l o i l p r o d u c t i o n o f C a n a d a . T h e r e f o r e t h e s e i n v e s t m e n t s a r e n o t q u a n t i t a t i v e l y s i g n i f i c a n t f o r C a n a d a . T h e i r s i g n i f i c a n c e f o r C a n a d a i s t h a t t h e y a r e a c h a n g e f r o m A m e r i c a n c a p i t a l b e c a u s e t h e U n i t e d S t a t e s o w n e d 62% o f t h e C a n a d i a n o i l i n d u s t r y i n 1962. T h e i n t e r e s t o f C a n a d a a n d F r a n c e i s m u t u a l : t h e F r e n c h o i l c o m p a n i e s w a n t e d t o d i v e r s i f y t b ^ i r i n v e s t m e n t e , C a n a d a w a n t e d t o d i v e r s i f y i t s s o u r c e s o f , c a p i t s $ . V TABLE OF CONTENTS apter Page INTRODUCTION 1 Hypothesis 1 1 Hypothesis 2 2 Hypothesis 3 3 CHAPTER I: WHY DID THE FRENCH OIL COMPANIES INVEST IN CANADA k I . THE MIDDLE. EAST 3 A. Reserves i n the Middle East 3 B. Costs and Return on Investment 6 C. The Middle East i s Close to One of the Biggest World Markets: Western Europe 8 D. F i r s t Danger i n the Middle East: P o l i t i c s 10 I I . CANADA '. 12 A. The O i l Industry i n Canada i s i n Expansion 13 B. European C a p i t a l Welcomed and P o l i t i c a l S t a b i l i t y Offered 17 C. The Economic S i t u a t i o n of Canada i n 1963 19 D. O u t l e t s for the Canadian O i l 20 Conclusions 27 CHAPTER I I : AQUITAINE CO. OF CANADA LTD 28 I . The Parent Company: • S.N.P.A 28 I I . The A r r i v a l of S.N.P.A. i n Canada 35 I I I . R e l a t i o n s h i p Between Banff O i l and Aquitaine 37 IV. Organization of Aquitaine and R e l a t i o n s h i p With the Parent Company 39 Chapter •Page . V. Operations of Aquitaine ' 43 A. A c q u i s i t i o n of P r o p e r t i e s : Legal Aspects 43 B. Acreage of Aquitaine 47 C. The Rainbow Area 48 D. Operations i n Hudson Bay 49 E. Other Operations 50 F. H i s t o r i c a l S t a t i s t i c s of the A c t i v i t y of Aquitaine 51 G. The Influence of the A l b e r t a P r o r a t i o n Scheme on the E x p l o i t a t i o n of the Rainbow Area 53 VI. The Financing of the Company and the F i n a n c i a l Aspects 56 V I I . The Prospects of the Company 59 V I I I . The A n a l y s i s of the Investment 60 CHAPTER I I I : ELF OIL EXPLORATION AND PRODUCTION CANADA LTD 64 I . The Parent Company: E.R.A.P 64 I I . The A r r i v a l of E.R.A.P. i n Canada 69 I I I . • A c t i v i t y of E l f 70 IV. F i n a n c i a l Aspects , 72 V. Organization and R e l a t i o n s h i p With the Parent • Company 73 VI. Prospects of the Company 75 V I I . A n a l y s i s of the Investment 77 CHAPTER IV: FRENCH PETROLEUM CO. OF CANADA LTD 79 I. The Parent Company: C.F.P 79 I I . The A r r i v a l of C.F.P. i n Canada 8 l v i i Chapter ' Page I I I . A c t i v i t y of the French Petroleum Co. of Canada....82 IV. Financial Aspects 85 V. Organization and Relationship With the Parent Company 87 VI. Prospects 87 VII. Analysis of the Investment 88 CHAPTER V: ANALYSIS AND CONCLUSIONS 90 I. V e r i f i c a t i o n of the Hypotheses 90 I I . Recommendations 100 General Conclusion 102 v i i i LIST OF TABLES T a b l e Page I . P r o d u c t i o n o f Crude O i l i n Fr a n c e , Western Europe and the World ../+ I I . World O i l R e s e r v e s 1938 - 1964 3 I I I . World's Proven R e s e r v e s i n 1965 5 IV. U n i t Cost o f M a i n t a i n i n g and Expanding Crude P e t r o l e u m i n the M i d d l e E a s t and Other Areas 1930 - I960 6 V. R e t u r n on Investments i n the P e t r o l e u m I n d u s t r y . . . . ? V I . Consumption o f O i l from 1950 to 1966 8 VII. Consumption o f O i l from 1950 to 1966 ( I n c r e a s e s i n Pe r c e n t a g e ) 8 V I I I . Share o f the V a r i o u s O i l P r o d u c i n g Regions i n T o t a l Supply o f O.E.C.D. (Europe) 11 IX. A f r i c a n O i l P r o d u c t i o n 12 X. P r o d u c t i o n o f O i l i n Canada from 1948 to 1967 Ik X I . O i l R e s e r v e s i n A l b e r t a 1946 - 1964 15 X I I . C a p a c i t y of Canadian R e f i n e r i e s 1946 - 1964 16 X I I I . P i p e - L i n e M i l e a g e i n Canada a t Year-End 17 XIV. D i r e c t F o r e i g n Investments i n Canada 19 XV. Demand f o r R e f i n e d O i l i n Canada 20 XVI. Canadian O i l E x p o r t s to the U.S.A 22 X V I I . Comparison o f P r i c e s i n the U.S.A. i n 1962 23 X V I I I . Comparison o f P r i c e s i n the U.S.A. i n 1962 23 XIX. Comparison o f P r i c e s i n the U.S.A. i n 1962 23 XX. Canadian Crude O i l E x p o r t s to the U.S. Midwest R e f i n e r y Market 25 XXI. P r o d u c t i o n o f Gas i n Lacq 29 i x T a b l e Page X X I I . The S.N.P.A. Investments from 1958 to 196? 30 X X I I I . S.N.P.A. Land H o l d i n g i n France and Abroad 31 XXIV. O r g a n i z a t i o n C h a r t o f S.N.P.A 39 XXIll. b, O r g a n i z a t i o n C h a r t o f A q u i t a i n e 42 XXV. Acreage o f A q u i t a i n e 47 XXVI. H i s t o r i c a l S t a t i s t i c s , A q u i t a i n e 52 XXVI I . O r g a n i z a t i o n Chart o f E.R.A.P 65 X X V I I I . Land H o l d i n g o f E.R.A.P 66 XXIX. P r o d u c t i o n o f E.R.A.P. i n 1967 67 XXX. O r g a n i z a t i o n Chart o f E l f . R.E 74 XXXI. O r g a n i z a t i o n Chart o f E l f - C a n a d a 75 XX X I I . P r o d u c t i o n o f O i l o f C.F.P .- 79 X X X I I I . Acreage H e l d by the French P e t r o l e u m Co. of Canada. .82 XXXIV. L o c a t i o n o f the P r o p e r t i e s o f the French P e t r o l e u m Co 83 XXXV. O i l R e s e r v e s o f the Fre n c h P e t r o l e u m Co 84 XXXVI. O i l P r o d u c t i o n o f the French P e t r o l e u m Co 85 XXXVII. I n c r e a s e s i n P r i c e s i n Canada, F r a n c e , I r a q , S y r i a , V e n e z u e l a ' 91 X X X V I I I . A Comparison o f the Three French O i l S u b s i d i a r i e s i n Canada 93 A C K N O W L E D G E M E N T I am v e r y g r a t e f u l to Mr. B a i l l a r d , French Trade Commissioner i n Vancouver, who suggested the t o p i c ; to Mr. P r a d a l , E x e c u t i v e V i c e - P r e s i d e n t and Mr. R a p a c c i o l i , T r e a s u r e r , b oth o f A q u i t a i n e Co. o f Canada L t d . ; to Mr. S a u b e s t r e , E x e c u t i v e V i c e - P r e s i d e n t o f ' E l f O i l E x p l o r a t i o n and P r o d u c t i o n Canada L t d . ; to Mr. L a h e r e r r e , V i c e - P r e s i d e n t , and Mr. L a i n g , Treasurer^- both o f the French P e t r o l e u m Co. o f Canada L t d . These men k i n d l y p r o v i d e d me w i t h a g r e a t p a r t o f the i n f o r m a t i o n c o n t a i n e d i n t h i s t h e s i s . I am a l s o g r a t e f u l to Dr. Forbes who d i r e c t e d t h i s t h e s i s d u r i n g ; i t s p r e p a r a t i o n . 1. INTRODUCTION T h i s t h e s i s i s the study o f a f o r e i g n i n v e s t m e n t . Three F r e n c h o i l companies i n v e s t e d i n Canada: — L a Compagnie F r a n c a i s e des p e t r o l e s ( C . F . P . ) , which c r e a t e d t h e F r e n c h P e t r o l e u m Co. o f Canada L t d . , h e r e i n c a l l e d the .French P e t r o l e u m . — L ' E n t r e p r i s e de Recherche et d ' i L c t i v i t e P e t r o l i e r e (E.R.A.P.), which c r e a t e d E l f E x p l o r a t i o n and P r o d u c t i o n o f Canada L t d . , h e r e i n c a l l e d E l f . — L a S o c i e t e N a t i o n a l e des P e t r o l e s d ' A q u i t a i n e (S.N.P.A.), which c r e a t e d A q u i t a i n e Co. o f Canada L t d . , h e r e i n c a l l e d A q u i t a i n e . We w i l l a n a l y z e the d e c i s i o n p r o c e s s o f the French O i l I n v e s t o r s by s t u d y i n g t h e i r m o t i v a t i o n s , and- we w i l l d e s c r i b e these i n v e s t m e n t s . T h i s w i l l be done w i t h the purpose o f i n f o r m i n g the r e a d e r and to p e r m i t the a n a l y s i s and the a p p r a i s a l o f the s e i n v e s t m e n t s which w i l l c o n s t i t u t e t h e l a s t p a r t o f t h i s paper. Three hypotheses were f o r m u l a t e d , they w i l l be d i s c u s s e d throughout t h i s paper and supporte d o r i n v a l i d a t e d i n t he l a s t c h a p t e r . These t h r e e hypotheses a re as f o l l o w s : 1. Canada o f f e r s the p o l i t i c a l and economic s a f e t y needed by f o r e i g n i n v e s t o r s , p a r t i c u l a r l y by o i l i n v e s t o r s , because the amount o f c a p i t a l i n v e s t e d i s always b i g and i s g e n e r a l l y not p r o f i t a b l e v e r y q u i c k l y . They have to be guaranteed a g a i n s t r e v o l u t i o n s , n a t i o n a l i z a t i o n s , e t c . 2 We reject the "maximization" hypothesis i n favor of the " p r o f i t s a t i s f i c i n g " hypothesis 1 according to which a company does not necessarily invest to maximize a p r o f i t hut to obtain a les s substantial but safe p r o f i t . T h i s hypothesis i s not a resu l t of the investments but one of th e i r motivations,it does not depend on the investments and i t w i l l be easily proven. 2 . The p r o f i t s should not necessarily be maximized,but they have to reach a certain level.We w i l l study two r a t i o s to appraise the f i n a n c i a l p r o f i t a b i l i t y of these investments: - the production of a subsidiary as a %of the production of the group the assets of a subsidiary as a % of the assets of the group t h i s r a t i o w i l l show i f the the subsidiary i s as prof i t a b l e as i t s parent company or i f i t does not reach the average l e v e l of the group and' should perhaps terminate i t s a c t i v i t i e s . - the rate of return on investment of a company She rate of return on investment i n the Canadian o i l industry. The rate of return on investment i s equal to the ra t i o of the net p r o f i t to the t o t a l assets.The rate of return on investment i n the Canadian O i l Industry was 4 .84% i n 1965 and i+.28 % i n 1966,the figures of 1967 have not 1 Y. Aharoni,op. c i t . , p. 261 3 p y e t been p u b l i s h e d . 3. I t i s expected t h a t these i n v e s t m e n t s w i l l have a f a v o u r a b l e i n f l u e n c e on the Canadian economy. To be c o m p l e t e l y s u c c e s s f u l , a f o r e i g n i n v e s t m e n t has to be • s u c c e s s f u l both ways, i . e . , f o r the i n v e s t o r and f o r the c o u n t r y i n which the i n v e s t m e n t i s made. .The f i r s t c h a p t e r o f t h i s t h e s i s w i l l d e a l w i t h the m o t i v a t i o n s o f the French o i l i n v e s t m e n t s i n Canada; i t w i l l be a development o f the f i r s t h y p o t h e s i s . T h i s w i l l be done i n two p a r t s . I n the f i r s t p a r t we w i l l l o o k a t the o i l i n d u s t r y i n the w o r l d and see why o i l companies which were i n t e r e s t e d i n the M i d d l e E a s t d e c i d e d to i n v e s t i n o t h e r c o u n t r i e s . I n the' second p a r t we w i l l see why Canada i s one o f the c o u n t r i e s chosen as an in v e s t m e n t p o s s i b i l i t y . C h a p t e r s 2, 3 and i+ w i l l d e s c r i b e and a p p r a i s e t h e s e i n v e s t m e n t s f o r each o f the t h r e e French o i l companies which i n v e s t e d i n Canada; t h i s i s to p r o v i d e the n e c e s s a r y i n f o r m a t i o n and to v e r i f y h y p o t h e s i s 2. The l a s t c h a p t e r w i l l d i s c u s s a l l the hypotheses by a n a l y z i n g the da t a g i v e n i n the p r e v i o u s c h a p t e r s and then drawing some recommendations from the a n a l y s i s . The g e n e r a l c o n c l u s i o n and a p p r a i s a l o f the French o i l i n v e s t m e n t s i n Canada w i l l be g i v e n a t the end o f t h a t c h a p t e r . 2 Dominion Bureau o f S t a t i s t i c s , C o r p o r a t i o n F i n a n c i a l  S t a t i s t i c s , 1963 and 1966. 4 CHAPTER I TOY DID THE FRENCH OIL COMPANIES  INVEST IN CANADA The value of an o i l company i s determined by i t s reserves. As the company produces o i l - , the reserves decrease and so does the p o t e n t i a l value of the company. Therefore the p o l i c y of an o i l company i s to i n v e s t both i n e x p l o r a t i o n and e x p l o i t a t i o n at the same time"'". The French companies could explore i n France i t s e l f or abroad. But the p o s s i b i l i t i e s of f i n d i n g o i l i n France or even i n Western Europe were very l i m i t e d and the production of the area i s very small when compared to the r e s t of the world: Table I Production of crude o i l ( m i l l i o n s of tons)  i n France, Western Europe and the world Year 1929 1937 1950 1955 I960 1961 1962 1963 1964 France .29 .88 1.98 2.16 2.37 2.52 2.85 W. Europe 1 5 11 16 17 18 " 19 21 World 206 . 280 540 802 1093 1161 1259 Source: O.E.C.D., Energy p o l i c y , problems and o b j e c t i v e s , P a r i s 1966, and Le p e t r o l e en France et dans l a zone Franc. Therefore, these companies had to i n v e s t i n f o r e i g n c o u n t r i e s . La Compagnie Francaise des P e t r o l e s (C.F.P.) i n v e s t e d i n the Middle East i n the l a t e nineteen twenties. The world o i l companies seem to have been i n t e r e s t e d i n the Middle East before any other country. I t i s i n t e r e s t -i n g to see whether t h i s rush f i t s the o b j e c t i v e s defined above. 1 Mr.. P r a d a l , Executive V i c e - P r e s i d e n t , Aquitaine Co. of Canada L t d . 5 The Middle East  A. Reserves i n the Middle East The Middle East has the biggest proven reserves i n the world. Table II World O i l Reserves (Mi l l i o n s of barrels) 1938-1964 Year 1938 1950 1955 I960 . 1964 U.S.A. 17,348 24,268 30,012 31,615 38,700 Caribbean 3,050 9,650 12,860 19,700 18,800 Middle East 5,000 41,550 126,205 183,085 211,500 World 34,248 89,925 189,570 297,730 347,300 Source: Zuhayr Mikdashi, op.cit•, pp 321-322. The increase i n the reserves of the Middle East has been very important since World War II , owing to the big investments made i n t h i s area. "According to one set of estimates they rose by 170 b i l l i o n barrels i n the 1950-1964 period, as compared with a r i s e of 87 b i l l i o n barrels for the p rest of the world." In 1961 the world's proven reserves were divided as follows (millions of ba r r e l s ) : Table III World's O i l Proven Reserves i n 1961 Middle East 51,000 U.S.A. 31,613 Venezuela 17,354 Canada 3,679 2 Z u h a y r Mikdashi, op. c i t . , p.165 6 I n d o n e s i a 8,200 M e x i c o 2,458 A l g e r i a 4,600 L y b i a 3,000 S o u r c e : G u l f P u b l i s h i n g C o m p a n y , W o r l d O i l » ( H o u s t o n , T e x a s , J u l y 15, 1951 a n d A u g u s t 15, 1961). B . C o s t s a n d r e t u r n s o n i n v e s t m e n t s T h e i n i t i a l i n v e s t m e n t s i n t h e M i d d l e E a s t a r e v e r y l a r g e when c o m p a r e d t o o t h e r c o u n t r i e s ^ , b u t t h e c o s t s o f d e v e l o p m e n t a n d e x p l o i t a t i o n t h e r e a r e l e s s t h a n i n o t h e r c o u n t r i e s . A s t h e M i d d l e E a s t e r n c o u n t r i e s a r e d e v e l o p i n g c o u n t r i e s , t h e y r e q u i r e t h a t e q u i p m e n t , t e c h n i c a l p e r s o n n e l a n d s t a f f b e imported^" 1 " . B u t o w i n g t o t h e h u g e r e s e r v e s , t h e e c o n o m i e s o f s c a l e make t h e c o s t s o f d e v e l o p m e n t a n d e x p l o i t -5 a t i o n v e r y l o w . B e c a u s e . o f t h a t f a c t t h e i n v e s t m e n t p e r b a r r e l o f r e s e r v e s i s m u c h s m a l l e r t h a n i n a n y o t h e r p a r t o f t h e w o r l d . T a b l e I V U n i t c o s t s o f m a i n t a i n i n g a n d e x p a n d i n g c r u d e  p e t r o l e u m p r o d u c t i o n i n t h e M i d d l e E a s t a n d  o t h e r a r e a s 1950 - I960 ( D o l l a r s p e r b a r r e l o f c r u d e o i l p r o d u c t i o n ) Y e a r M i d d l e E a s t U . S . A . V e n e z u e l a C a n a d a F a r E a s t 1950 0.13 1.18 0.30 6.99 0 .70 1955 0.12 1.8.8 O . i f l 3-28 0 .86 I960 0.15 1.63 0.24 2.53 0 .62 A v e r a g e 0.16 1.68 6.51 S o u r c e : T h e C h a s e M a n h a t t a n B a n k , C a p i t a l I n v e s t m e n t s b y t h e  W o r l d P e t r o l e u m I n d u s t r y (New Y o r k , O c t o b e r I960 a n d No v emb e r 1961). 3 C h a r l e s I s s a w i , o p . c i t . , p .84 4 I d . , p . 5 2 5 I b i d . , p . 84 7 The r e t u r n on investment i s higher i n the Middle East than i n any other part of the world. Table V - ; Returns on investments per year i n the petroleum i n d u s t r y 1948 - I 9 6 0 (Ratio of net income to t o t a l net assets) P e r i o d Middle East Venezuela U.S.A. Canada 1948 73 23 3 . 3 1930 37 17 13-8 .25 1955 72 25 10 . 2 no p r o f i t I960 70 .16 8.5* 1 . 2 5 Average 67 21 1 0 . 8 _____ _ Source: Charles Issawi, op. c i t . , p. 112. The low cost of production i n the Middle East i s due to three important f a c t s : — t h e very l a r g e scale on which operations can be c a r r i e d out^, 7 — u n u s u a l l y favourable g e o l o g i c a l formations , Q — n a t u r e of o i l concessions : i n the Middle East, the conces-sions are u s u a l l y l a r g e (360 , 0 0 0 square miles i n Saudi Arabia) while they are smaller elsewhere (Venezuela, 38 square m i l e s ) . This avoids the d r i l l i n g of too many w e l l s on a small l o t of land and the l o s s of pressure which r e s u l t s from such d r i l l i n g . "The concessionary arrangements make i t p o s s i b l e to e x p l o i t f u l l y the favourable g e o l o g i c a l c o n d i t i o n s r e s u l t i n g i n a very high output per w e l l . The Middle Eastern average was 4510 b a r r e l s per day as compared with 271 i n Venezuela, 172 i n 6* Charles I s s a w i , op. c i t . , p^ 84" 7 I d . , p. 91 8 I b i d . , pp. 91 -95 8 Indonesia and 12 i n the United S t a t e s " (Charles I s s a w i ) . C. The Middle East i s close to one of the biggest world  markets: ?/estern Europe. The Middle East has the advantage of being close to Western Europe, whose consumption of o i l has increased very r a p i d l y since World War I I . Table VI Consumption of O i l ( i n m i l l i o n tons) from 1950 to 1966 1950 I960 1965 1966 U.S.A. 321 460 553 580 Canada 18 40 57 61 • Western Europe 532 1046 1543 1661-Source: The C e n t r a l O f f i c e of Information, World O i l , a Short  Survey, London, England. Table VII Consumption of O i l ( i n m i l l i o n tons) from 1950 to 1966  (Increases i n percentage)" 1950-1960 1960-1965 1965-1966 1950-1966 U.S.A. 43.30 20.22 4.88 80.69 Canada 122.22 42.50 7.02 238 .89 Western Europe 216.13 97.45 8.79 579.03 World 96.62 47-51 7-65 I t i s necessary to point out that the Middle Eastern c o u n t r i e s d i d not always p r o f i t by t h i s p r o ximity, as f a r as p r i c e was concerned. This i s due to the system of p r i c e s which was used u n t i l a f t e r the end of World War I I . The p r i c e s were determined i n the Gulf of Mexico, whatever the a c t u a l o r i g i n of the o i l , and the f r e i g h t charges were c a l c u l a t e d from the Gulf to Mexico to the country of d e s t i n a t i o n , again whatever the country of o r i g i n of the o i l . Therefore, the o i l producers of the Middle East, c l o s e r to Europe than the ones of Venezuela, could make a higher p r o f i t per u n i t of o i l s o l d but, as they had to charge a high f r e i g h t , they were not favoured by the shorter distance as f a r as competition 9 i n p r i c e was concerned . In 1947 the system of p r i c i n g was changed, and the Pe r s i a n Gulf was chosen as another p r i c i n g b a s i s ; t h i s made the Middle Eastern o i l competitive i n the countries east of I t a l y . At the end of 1947 the Middle Eastern p r i c e s became independent of the American p r i c e s , and the Middle Eastern o i l became competitive i n a l l the European countries i n c l u d -i n g the United Kingdom. Then the p r i c e s d i d not stop r i s i n g i n the United States, t h i s made the Middle Eastern o i l competitive on the East Coast of the United States as e a r l y as 1949. Therefore, as e a r l y as the end of the nineteen f o r t i e s the Middle Eastern countries had swallowed the European market and were competitive i n .New. York"^. In 1964, 183 m i l l i o n tons (54% of the production) were s o l d i n Western Europe and 15 m i l l i o n tons (4% of the production) were s o l d i n the U.S.A. Their second important c l i e n t was Japan which bought 56 m i l l i o n tons(l6%). Since the costs are much lower i n the Middle East, the companies have a much higher p r o f i t margin than companies working i n other c o u n t r i e s . In a competitive economy, t h i s would lead to an increase of production i n the Middle East and to a drop i n p r i c e s and production i n the U.S.A., but the s i t u a t i o n of quasi-monopoly prevented i t from evolving i n t h i s 9 Daniel Durand, op. c i t . , p. 49 10 I d . , p. 50. 10 d i r e c t i o n . Despite these important advantages, a l l of them concerning p r o f i t , the o i l companies in v e s t e d i n many other c o u n t r i e s where they hoped they could reach the t h i r d o b j e c t i v e which was to be able to keep t h e i r r i g h t s , which they could not do i n the Middle East; t h i s d e c i s i o n was also taken because of commercial problems. D. F i r s t danger i n the Middle East: P o l i t i c s The r i s k s of r e v o l u t i o n , n a t i o n a l i z a t i o n and p o l i t i c a l pressure are very high i n the Middle East. H i s t o r y r e l a t e s a l l the past t r o u b l e s i n the Middle East, beginning i n 1951 i n I r a n with the n a t i o n a l i z a t i o n of the f o r e i g n o i l companies. The tro u b l e s i n the Suez area i n 1956 were also a b i g problem f o r the o i l companies and f o r the countries s u p p l i e d by them. The Arab countries and Ir a n were much e x c i t e d by the success of Egypt and they became conscious of t h e i r power. More and more they withdrew themselves from the i n f l u e n c e of the companies and more and more exerted a p o l i t i c a l pressure on these companies and t h e i r governments. The p r i c e s of concessions and r o y a l t i e s boomed, the 50-50 system was adopted as e a r l y as 1950 and since then the share of the p r o f i t s of 11 the Middle Eastern governments has been increased . The p o l i t i c a l t r o u b l e s which happened i n Kuwait v/ere also a f a c t o r i n c i t i n g the companies to i n v e s t i n saf e r c o u n t r i e s . E. Unfavourable commercial aspects i n the Middle East The Suez Canal i s very expensive when open and i t 11 I b i d . , pp. 75 and 79 1 1 cannot accomodate b i g tankers. Therefore more and more tankers go around the Cape of Good Hope and the distance from 12 the Middle East to Western Europe becomes very long . The p i p e - l i n e s which e x i s t are expensive also and they can be closed up i n case of t r o u b l e s i n the Middle East, as they were i n 1956 and 1967. Therefore as f a r as distance and t r a n s p o r t a t i o n are concerned the Middle East i s unfavoured as compared to A f r i c a which increased i t s share of the European market at the expense of the Middle East. Table V I I I Share of the various o i l producing re; sions i n t o t a l supply of O.E .CD. Europe i 1.959 1964 Middle East 65.3 54.9 Caribbean 18.5 12.3 Soviet Bloc 5.6 6.3 A f r i c a 1.2 19.4 Far East and Others 1.1 1.1 Indigenous production 8.3 6.0 Source: O.E.CD., Energy p o l i c y , problems and  o b j e c t i v e s , P a r i s , 1966. This was due not only to the competitiveness of the A f r i c a n o i l but also to the r e l a t i o n s h i p which e x i s t s between some European coun t r i e s and some A f r i c a n c o u n t r i e s , p r i n c i p a l l y between B r i t a i n and N i g e r i a , France and A l g e r i a . The importance of A f r i c a i n the world o i l market continued to increase as the production of these countries was developed. 12 Joachim Grieg and Co., shipbrokers, Oslo, Norway. 12 Table IX A f r i c a n Production ( m i l l i o n s of tons) 1950 I960 1964 1965 1966 1967-A f r i c a 0.1 10.5 76.2 100.7 129.9 +137 L y b i a 4 1 . 5 58.7 7 2 . 3 84 A l g e r i a ( i n c l . Sahara) 8.6 2 6 . 5 2 6 . 5 3 3 - 8 38 N i g e r i a 0.9 6.0 13.4 20.7 15 Others 0.1 1.0 2.2 2.1 3-1 • f o r e c a s t Source: C e n t r a l O f f i c e of Information, World o i l , a short  survey, London, United Kingdom. The United States has a quota f o r the import of o i l , t h e r e f o r e the exports to the U.S. are much l e s s than what they could be i f i t was merely competitiveness which was i n v o l v e d . This w i l l be seen again i n the problems of Canadian exports to the U.S. Because of these problems, the most important one being the p o l i t i c a l r i s k s , the companies had the desire and the n e c e s s i t y to i n v e s t i n other countries to e q u i l i b r a t e the r i s k s . They d i d i n v e s t i n many countries where the hopes of p r o f i t s were not as high as they were i n the Middle East. They have i n v e s t e d mainly i n A f r i c a , the Far East, A u s t r a l i a and Canada. We are going to see now what i n Canada could appeal to o i l companies. I I CANADA As the French o i l companies came to Canada i n 1954 and 1 9 6 3 , the s i t u a t i o n i n these two years w i l l g e n e r a l l y be mentioned. 13 A. The o i l i n d u s t r y i n Canada i s i n expansion. Before 1947 Canada was dependent on f o r e i g n countries f o r 90% of i t s o i l s u p p l i e s . The f o r e i g n crude o i l supplied a l l r e f i n e r i e s except those of A l b e r t a , that province being able to produce enough f o r i t s own consumption. The o i l i n d u s t r y c o n s i s t e d mainly i n the r e f i n i n g of crude o i l imported from the U.S. and the West Indies"*"^. In 1946 the d a i l y production was 21,000 b a r r e l s and the d a i l y import was 201,000 b a r r e l s . The Canadian production was about 0.3% of the world production. Already at t h i s time, the biggest part of the production, about 90%, was coming from A l b e r t a " ^ . The production of A l b e r t a decreased from 10 m i l l i o n b a r r e l s i n 1942 to 7 m i l l i o n b a r r e l s i n 1946; the r e f i n e r i e s o f the province were contemplating the import of f o r e i g n crude o i l , but a number of important d i s c o v e r i e s placed Canada among the b i g o i l producers i n the world. The f i r s t discovery was made i n 1947 at Leduc, 13 m i l e s south-east of Edmonton, then i n 1950 came the discovery at Eedwater, 40 miles north-east of Edmonton, and i n 1956 the discovery of Pembina, 85 miles south-west of Edmonton. These b i g d i s c o v e r i e s were accompanied by many small ones. The f o l l o w i n g tableau shows the e v o l u t i o n of the production of o i l i n Canada from 1948 to 1967. The important years, i . e . , 1948, 1954> 1963 and 1967 are s t r e s s e d . 15 E r i c Hansom, op. c i t . , p. 2 14 I b i d . , p. 5 14 T a b l e X P r o d u c t i o n o f o i l i n C a n a d a f r o m 1948 t o 1967 Y e a r C a n a d a E a s t e r n C a n a d a W e s t e r n C a n a d a A l b e r t a 1948 11,896,107 198,360 11,697,747 10,504,928 1949 21,011,013 280,215 20,730,798 19,767,845 1950 28,645,903 267,539 28,378,364 27,149,369 1951 47,535,067 212,289 47,322,778 45,836,143 1952 61,161,442 206,507 60,954,935 58,836,653 1953 80,780,345 314,423 80,465,922 76,702,031 1954 95,959,826 425,524 95,534,302 87,593,065 1955 129,259.866 538,009 128,721,857 112,853,132 1956 171,787,281 614,498 171,172,783 143,711,783 1957 181,126,516 643,067 180,483,449 136,766,453 1958 164,686,647 793,530 163,893,117 112,478,896 1959 183,604,281 1,016,058 182,588,223 128,805,119 I960 189,505,255 1,019,176 188,486,079 130,488,999 1961 220,778,377 1,161,110 219,617,267 157,774,813 1962 244,137,680 1,144,867 242,992,813 165,131,419 1963 257,646,259 1,212,759 256,433., 500 168,234,201 1964 274,643,620 1,251,370 273,392,250 175,456,122 1965 291,760,271 1,283,265 290,477,006 183,626,020 1966 319,772,222 1,330,634 318,441,588 202,604,699 1967 349.914,971 1,248,996 348,665,975 230,210,264 S o u r c e : C a n a d i a n P e t r o l e u m A s s o c i a t i o n , 1967 S t a t i s t i c a l  Y e a r B o o k . T h e n e w d i s c o v e r i e s h a v e b r o u g h t n e w i n v e s t m e n t s a n d t h e n e w i n v e s t m e n t s h a v e b r o u g h t n e w d i s c o v e r i e s . T h e w o r l d p r o d u c t i o n o f o i l i n c r e a s e d b y 102% b e t w e e n 1950 a n d I960 a n d b y 34% b e t w e e n I960 a n d 1964. D u r i n g t h e s a m e p e r i o d t h e C a n a d i a n p r o d u c t i o n w a s b o o m i n g , i n c r e a s i n g 15 by 562% and 45% 1 5. The recoverable reserves.increased at a very high rate also. Table XI Reserves i n Alberta from 1946 to 1964 (thousands of barrels)" Year Reserves 1946 72 1950 1,100 1954 2,187 1955 2,503 I960* 3,051 1964* 5,279 •"•including B r i t i s h Columbia Sources: E r i c Hansom, op. c i t . , p. 123• Canadian Petroleum Association, 1967  S t a t i s t i c a l Year Book, p. 93• As new discoveries were made, steps were taken by the Canadian federal and p r o v i n c i a l governments and the companies to improve the capacity of r e f i n i n g and to build pipe-lines to lead the o i l to the potential markets. Before the discovery of Leduc the r e f i n e r i e s were concentrated near Calgary. After 1947, new r e f i n e r i e s were b u i l t , p a r t i c u l a r l y i n the Edmonton area, and the r e f i n i n g capacity of Canada increased rapidly as shown i n the following tableau. 15 . 2 . Mikdashi, op. c i t . , p. 322 and A.R. Plotnick, op. c i t . , p. 5. 16 Table XII Capacity of Canadian r e f i n e r i e s ( d a i l y b a r r e l s )  f r o m 1 9 ^ 6 t Q 1 9 6 Z f Years R e f i n i n g Capacity 1946 243,175 1951 412,900 1956 711,200 1960 946,700 1964 1,057,610 Source: CP.A., 1967 S t a t i s t i c a l Year Book. E r i c Hansom, op. c i t . , p. 146. Investments i n e x p l o r a t i o n , production and r e f i n i n g were accompanied by investments i n the b u i l d i n g of p i p e - l i n e s . The problems were important because of the s i z e of the country. The I n t e r - P r o v i n c i a l Pipe-Line Company was created i n 1949, the l a y i n g of the pipe s t a r t e d during the same year and was completed i n December 1950. I t l i n k e d Redwater to Superior, Wisconsin, v i a Edmonton, Regina and Gretna; i t was extended to Sarn i a , Ontario, i n 1953 and to Toronto i n 1957. According to the CP.A. 1967 S t a t i s t i c a l Year Book, i t s c a p acity i s as f o l l o w s : 516,000 b a r r e l s per day out of Edmonton 722,000 b a r r e l s per day out of Cromer 566,000 b a r r e l s per day out of Superior 287,000 b a r r e l s per day out of Sarn i a . The need f o r a p i p e - l i n e to the West was recognized as the next step i n d i s t r i b u t i n g Canadian petroleum. The B r i t i s h Columbia market represented only 40,000 b a r r e l s per day but the north-west of the United States 17 represented a p o t e n t i a l market of 2.50,000 b a r r e l s per day. The Korean'War made the need f o r crude o i l i n t h i s part of the world more and more important and contributed to the development of the r e f i n i n g i n d u s t r y i n t h i s area. In March, 1951 the Trans-Mountain O i l Pipe-Line Company was created. The c o n s t r u c t i o n s t a r t e d i n February 1952 and was completed i n September 1953- The p i p e - l i n e i s 713 miles long and l i n k s Edmonton to Burnaby, B. C. v i a Jasper, Yellowhead Pass, Kamloops and Vancouver. The capacity i s now between 205,000 and 315,000 b a r r e l s per day. In 1954 the p i p e - l i n e ..-was extended to Ferndale, Washington and i n 1955 to. Anacortes, Washington i n the Puget Sound area"^. Table X I I I  P i p e - l i n e mileage i n Canada at year-end Year 1946 1950 1952 1954 1956 I960 1962 1964 1967 Mileage 418 1,423 2,500 4,808 6,208 8,010 9,850 10,900 13,400 Source: I m p e r i a l O i l L t d . , Facts and f i g u r e s about o i l i n  Canada, June 1968. A l l these f i g u r e s show how the o i l i n d u s t r y has been booming i n Canada since World War I I . Other points appealed to the French o i l i n v e s t o r s . B. European c a p i t a l welcomed and p o l i t i c a l s t a b i l i t y o f f e r e d . This i s the b i g advantage that Canada has over the Middle East. The p o l i t i c a l s t a b i l i t y of Anglo-Saxon coun t r i e s i s very w e l l known and investments have also been made f o r t h i s reason.in the U.S.A. and A u s t r a l i a . This i s a very important f a c t f o r an o i l company. Since the f i r s t investments 1 6 E r i c Hansom, op. c i t ~ chapt. 14 18 are very important, i t i s e s s e n t i a l that the firms can be sure to keep t h e i r r i g h t s i n t h e i r investments. Moreover Canada i s a young country which welcomes f o r e i g n c a p i t a l , p r i n c i p a l l y when i t i s European, which i s a change from the huge American p a r t i c i p a t i o n i n the Canadian economy. The welcome of Canada f o r f o r e i g n o i l companies, f o r example, i s c h a r a c t e r i z e d by the f a c t that Canada i s not p r i m a r i l y i n t e r e s t e d by the r o y a l t i e s but r a t h e r by the development of the n a t i o n a l wealth. There i s no l i m i t a t i o n to f o r e i g n investments and f o r e i g n i n v e s t o r s are regarded as i f they were domestic i n v e s t o r s , i . e . , they do not have any p a r t i c u l a r advantage nor any p a r t i c u l a r disadvantage. There is'no l i m i t a t i o n to the outflow of c a p i t a l , payment of dividends to f o r e i g n shareholders, etc. There are no s p e c i a l advantages f o r f o r e i g n i n v e s t o r s since a l l i n v e s t o r s , f o r e i g n and domestic, compete 17 on the same b a s i s ' . There i s no f i s c a l d i f f e r e n c e e i t h e r between f o r e i g n s u b s i d i a r i e s and Dominion Charters financed by f o r e i g n c a p i t a l . As f a r as incomes of p o r t f o l i o s are concerned, there i s only a 15% withholding tax which i s decreased to 10% f o r companies having a degree of Canadian ownership. These r a t e s apply to the dividends and i n t e r e s t paid by a company to i t s parent ^18 company abroad In 1962, before the a r r i v a l of Aquitaine and E l f 17 Mr. Rapacciot, Treasurer, Aquitaine Co. of Canada L t d . 18 The Royal Bank of Canada, O i l and Gas Department, b u l l e t i n no. 8. 1 9 Companies, 74% of the o i l i n d u s t r y i n Canada was under f o r e i g n c o n t r o l , 62% under American c o n t r o l . The s u b s t a n t i a l American c o n t r o l i s also true i n other i n d u s t r i e s . In the same year there were $25 b i l l i o n of f o r e i g n c a p i t a l , or 35% of the t o t a l investment. 75% of t h i s f o r e i g n c a p i t a l was American and 15% was B r i t i s h . French p a r t i c i p a t i o n was n e g l i g i b l e and was e f f e c t i v e mainly i n the province of Quebec. The French investments i n the Canadian i n d u s t r y i n 1962 represented $200 m i l l i o n . The d i r e c t investments were $47 m i l l i o n i n 1962 and $83 m i l l i o n i n 1965"^ Table XIV Di r e c t f o r e i g n investments i n Canada ( m i l l i o n s of d o l l a r s ) 1945 - 1962 T o t a l U.S.A. U.K. Others 1945 2713 2304 348 61 1950 3975 3426 468 81 1955 7728 6513 890 325 I960 12872 10549 1535 788 1961 13737 I I 2 8 4 1613 840 1962 14503 11849 1706 948 Source: Notes et Etudes Documentaires No. 3462, tableau no. 14. C. The economic s i t u a t i o n of Canada i n 1963 s 1963 was a favourable year f o r fo r e i g n c a p i t a l to be i n v e s t e d i n Canada. The c r i s i s which shook the Canadian i n d u s t r y v/as j u s t over and the economy was improving again. The devaluation of the Canadian d o l l a r i n 1962 favoured exports. As f a r as o i l i s concerned, i t was i n a 19 Rg. Notes et Etudes Documentaires, no. 3462 (12 Feb. 1968), pp. 31-33, and no. 2990 (13 May 1963), p. 31. 20 b e t t e r p o s i t i o n than before on the American market. The r a t e of i n t e r e s t which increased from 4% to 6% a t t r a c t e d the fo r e i g n c a p i t a l . In March 1963 the rat e s t a r t e d to decrease, the c r i s i s of the Canadian economy was over. Therefore i n 1963, Canada was entering a period of expansion with a st a b l e currency. A st a b l e currency i s important f o r f o r e i g n i n v e s t o r s , because they are r e l u c t a n t to i n v e s t i n a country where i n f l a t i o n w i l l lower t h e i r p r o f i t s and d i l u t e t h e i r investments. D. O u t l e t s f o r the Canadian o i l The three markets considered are the Canadian, the American and European markets. 1. The Canadian market • The demand f o r o i l i n Canada d i d not cease i n c r e a s -i n g as shown i n the f o l l o w i n g tableau. Table XV Demand fo r r e f i n e d o i l i n Canada  (thousands of b a r r e l s per day) Years 1946 1931 1956 1961 1966 Demand 222 424 716 872 1,214 Source: Imper i a l O i l L i m i t e d , Facts and f i g u r e s  about o i l i n Canada, (June 1968), p. 3-Alan E. P l o t n i c k , op. c i t . , p. 10. Unfortunately the producers of A l b e r t a are not allowed to provide f o r the whole Canadian consumption. The r e f i n e r i e s l o c a t e d east of the Ottawa V a l l e y are supplied by f o r e i g n crude, p r i n c i p a l l y by the American companies working i n the Middle East and i n Venezuela. In compensation f o r t h i s l o s s of s a l e s , Canadian o i l has no quota i n the U.S.A. 21 Every time some Canadian crude passes the Ottawa V a l l e y , the exports of Canadian crude to the.U.S. are cut. This i s due to p o l i t i c a l and economic agreements between Venezuela and the U.S.A. At any rat e t h i s does not matter to any great extent because the Albertan crude i s not competitive on the 20 Montreal market and moreover i t i s too l i g h t f o r t h i s market Moreover, due to the p r i c i n g system, the o i l companies are l i k e l y to make a large p r o f i t per u n i t . -The p r i c e i s quoted by Imperial O i l Co. i n Sarnia and the p r i c e s of other companies anywhere i n Canada are merely the p r i c e of I m p e r i a l i n Sar n i a minus the cost of t r a n s p o r t a t i o n between Sarn i a and the o r i g i n of the o i l . The p r i c e i n Sarnia was $2.90 per b a r r e l of a c e r t a i n q u a l i t y of o i l i n December 1968. This system of monopoly seems good f o r both b i g i n t e g r a t e d companies and smaller companies. The i n t e g r a t e d companies do not have problems s e l l i n g the crude o i l of t h e i r a f f i l i a t e s on the Montreal market and both are i n a p o s i t i o n 21 to make a s u b s t a n t i a l p r o f i t on the Canadian crude 2. The American market While the Canadian r e f i n e r i e s were supplied with American crude before World War I I , since the war the s i t u a t i o n has been reversed and more and more Canadian crude has been exported to the U.S.A. 20 Mr. P r a d a l , Executive V i c e - P r e s i d e n t , : A u i t a i n e Co. of Canada L t d . , and A.R. P l o t n i c k , op. c i t . 21 Mr. P r a d a l . 22 Table XVI Canadian o i l production exports to the U.S.A. (millio'ns of tons) 1947 1951 1954 1958 I 9 6 0 1961 1963 Canadian o i l production 6 . 9 29 96 166 192 2 2 0 . 4 25£. 7 Exports to the U.S.A. 2 . 6 3 1 . 7 4 2 . 2 6 7 . 2 8 8 . 8 Market p r o j e c t i o n . o f Canadian o i l exports to the U.S. (thousands of b a r r e l s per day) 1967 262 1970 300 1973 339 1976 ' 3 8 4 Source: Alan R. P l o t n i c k , op. c i t . , pp. 60 and 8 2 . The i n t e r e s t i n g f a c t i s that Canada i s not subject to the American quotas, but i t i s more expensive than the Middle Eastern o i l and as a consequence the r e f i n e r i e s are f i r s t s upplied by cheaper crude w i t h i n the l i m i t s of t h e i r needs. However i t w i l l be seen l a t e r on that the Canadian crude i s competitive i n some s t a t e s . This was not the s i t u a t i o n i n 1954 when the f i r s t French o i l company, La Compagnie Fran^aise'des P e t r o l e s , i n v e s t e d i n Canada. The f i r s t American quotas d i d not appear before 1 9 5 5 . On February 2 6 t h , 1955, a U.S. decree l i m i t e d the imports of crude o i l i n percentage at the l e v e l of 1954. Since then, new programs have been elaborated many times, but always the Canadian and Venezuelan crude have been exempted because they are necessary to the m i l i t a r y s e c u r i t y of the ^3 United S t a t e s 2 2 . Table XVII Comparison of p r i c e s i n the U.S.A. i n 1962  ( p r i o r to the a r r i v a l of S.N.P.A. and E l f ) 3rn D e t r o i t , February 1962 ( d o l l a r s per b a r r e l ) Redwater (Alberta) 3 . 1 4 6 0 I l l i n o i s 3-3077 Wyoming 3 -4392 North Texas .. 3-2319 The Al b e r t a n crude i s cheaper than the American i n D e t r o i t and therefore i s competitive i n t h i s area. Table XVIII In the Puget Sound area, Washington, February 1962 ( d o l l a r s per b a r r e l ) Redwater 3 .0018 Four Corners (U.S.A.) 3 . 4 0 0 0 Guanipa (Venezuela) 3 .3162 Arabian 3 .1333 Seria-Sarawak (Far East) 3 • 3829 The Albertan crude i s i n a very good p o s i t i o n i n t h i s area, and i t w i l l be an i n t e r e s t i n g o u t l e t . But i f one looks at the p o s i t i o n of the Canadian crude i n C a l i f o r n i a i t appears not to be competitive. Table XIX ( d o l l a r s per b a r r e l ) San Francisco Los Angeles Redwater 3 . 2 3 9 4 3 . 3 1 9 1 Venezuela 3•2418 3 . 2 0 4 4 Far East 3 . 1 3 7 1 3 . 4 2 2 8 U.S. Four Corners 3 . 3 7 0 3 3 . 2 0 6 9 Arabian 3 . 3 2 1 3 3 . 1 7 3 7 22 A.R. P l o t n i c k , op. c i t . , chapt. 3 . Source: A l l these tableaus have been made by the O i l and Gas Conservation Board of A l b e r t a and have been reproduced by Alan R. P l o t n i c k , op. c i t . , pp. 67, 71, 72. Therefore i t appears from these tableaus that the two important o u t l e t s f o r the Canadian crude i n the United States are the North Western s t a t e s and the Midwest area. a) The P a c i f i c Northwest market This market now absorbs about 15% of the Canadian production. The Alb e r t a n crude i s necessary i n t h i s area f o r the m i l i t a r y s e c u r i t y of the United States. This was proved during the Korean War. Moreover i t was the Korean War which decided the c o n s t r u c t i o n of p i p e - l i n e s and r e f i n e r i e s i n t h i s area. In 1967, 183,000 b a r r e l s were exported d a i l y , but the d i s c o v e r i e s i n August 1968 of Alaskan crude w i l l c e r t a i n l y decrease the s a l e s of Canada i n t h i s region. The studie s which have been made have shown that the crude of Prudhoe Bay w i l l be competitive i n C a l i f o r n i a and therefore i n Washington St a t e , and even on the East Coast i f i t i s shipped there by tanker through the Panama Canal. b) The Midwest market This market absorbs about 25% of the Canadian output. The I n t e r - P r o v i n c i a l p i p e - l i n e has .branches going to t h i s area. The s a l e s of "Canadian crude have not ceased i n c r e a s i n g since the 1950's as shown i n the following-tableau. 25 Table XX Canadian crude o i l exports to the U.S. Midwest r e f i n e r y  market ( m i l l i o n s of b a r r e l s per day) 1955 - 1963 1955 1956 1957 1958 1959 I 9 6 0 1961 1962 1963 A l b e f t a 9 30 17 13 13 20 53 67 69 Saskatchewan 7 19 32 39 37 43 41 42 42 Manitoba 1 8 8 5 1 T o t a l 16 50 57 60 55 64 94 109 111 Source: Canadian Petroleum A s s o c i a t i o n and P r o v i n c i a l Governments, reproduced by Alan R. P l o t n i c k , op. c i t . , p. 6 3 -Moreover i t i s hoped by many producers that North America w i l l e v e ntually be only one market as fa r as o i l i s concerned, with a free flow of o i l between the U.S. and Canada. Unfortunately i t seems that the recent d i s c o v e r i e s i n Prudhoe Bay w i l l not induce the U.S.A. to r e a l i z e t h i s 2^ 5 market. . 3» The European market Already i n 1962-1963 i t was envisaged that the Canadian crude could be exported to Western Europe, At t h i s time i t was thought that only the synthet i c crude could be exported there i n competitive c o n d i t i o n s . The sy n t h e t i c crude i s produced from the t a r sands. This has not been r e a l i z e d to date, p r i n c i p a l l y because the production of sy n t h e t i c crude i s very s m a l l . The Conservation Board of A l b e r t a has authorized only one company to produce i t i n the t a r sands of Athabasca and w i t h i n c e r t a i n l i m i t s . On the other hand the d i s c o v e r i e s on the A r c t i c 23 Mr. Saubestre, Executive V i c e - P r e s i d e n t , E l f O i l E x p l o r a t i o n and Production Canada L t d . 26 Coast could make the Canadian companies l i k e l y to export to Europe because of the p o s s i b i l i t i e s of shipping the o i l cheaply v i a the po l a r route. The discovery of Prudhoe Bay l e t o i l businessmen hope that the Canadian A r c t i c Coast could be as r i c h as Alaska. The three French companies working i n Canada have permits i n t h i s area. The best l o c a t e d of them i s the French Petroleum Co. of Canada. The transport c o n d i t i o n s are improving. The distance between Alaska and Rotterdam i s only 4,000 miles by the polar route, while i t i s 12,700 miles from Kuwait to Rotterdam v i a the Cape of Good Hope. Studies are a c t u a l l y being made by a company i n Montreal on the cost of such a tr a n s p o r t . With the recent growth i n tanker s i z e and the development of the Alexbow Ice Plow, these costs should make the A r c t i c o i l competitive i n Europe^'. 2k O i l Week, November 25, 1968 27 CONCLUSIONS Therefore these are the main reasons why the French o i l companies i n v e s t e d i n Canada. They can be summarized b r i e f l y : the French o i l companies, a f r a i d of the p o l i t i c a l r i s k s i n the Middle East wanted to i n v e s t i n safe coun t r i e s and count r i e s where the p o s s i b i l i t i e s f o r o i l discovery are r e l a t i v e l y s i g n i f i c a n t . Canada had these two q u a l i t i e s . I t i s now necessary to see what these French companies d i d i n Canada and appraise t h e i r r e s u l t s . This i s the purpose of chapters 2, 3 and if. 28 CHAPTER I I AQUITAINE CO. OF CANADA LTD. I . The Parent Company: Societe Nationale des P e t r o l e s d'Aquitaine La Societe Nationale des P e t r o l e s d'Aquitaine (S.N.P.A.) was created on November 1 0 t h , 1941 by the French government which owned 51% of the c a p i t a l through " l e Bureau de Recherches du P e t r o l e " which l a t e r became "Entr e p r i s e de Recherches et d ' A c t i v i t e s P e t r o l i e r e s " (E.R.A.P.), and which i s .a wholly state-owned o f f i c e . Approximately 2 0 0 , 0 0 0 shareholders own the other 49% of the c a p i t a l . The shares are l i s t e d on the P a r i s and Brusse l s stock exchanges. The c a p i t a l now amounts to 343>098,00.0 French Francs and i t i s d i v i d e d i n t o 5 , 7 1 8 , 3 0 0 shares^. S.N.P.A. discovered a small o i l f i e l d i n Pechelbroom (Alsace)-and a small gas f i e l d i n St- Marcet ( A q u i t a i n e ) . These two f i e l d s were not b i g and i n 1946 S.N.P.A. began e x p l o r i n g i n the region of Aquitaine i n the south-west of France. In 1949 a small o i l discovery was made i n the area of Lacq. This f i e l d gave a r e l a t i v e l y small production, with a peak of two m i l l i o n b a r r e l s i n 1953 and 1954, and then a decrease to 5 7 5 , 0 0 0 b a r r e l s i n 1 9 6 7 . But t h i s discovery encouraged S.N.P.A. to continue e x p l o r i n g the area and t h i s e x p l o r a t i o n l e d to a very important gas discovery on December 1 9 t h , 1 9 5 1 . 1 Richardson S e c u r i t i e s of Canada, S.N.P.A., A p r i l 1968, and S.N.P.A. 1967 anhual r e p o r t . 29 This f i e l d was developed q u i c k l y and i t s t a r t e d producing i n A p r i l 1957. Up to I960, resources were very small but investments were very b i g . They were financed by increases, of c a p i t a l and p r i n c i p a l l y by long-term debts. The i n i t i a l reserves were estimated at 8 . 6 t r i l l i o n cubic f e e t , of which 7 t r i l l i o n were recoverable. About 25% of these reserves have been extracted. The production i n 1957 was only 35 m i l l i o n cubic f e e t per day. This production began to be s u b s t a n t i a l i n I960. I t then increased as f o l l o w s : TABLE XXI Production of gas i n Lacq ( m i l l i o n s of cubic feet) I 9 6 0 • 1961 1962 1963 1964 1965 1966 1 4 7 , 1 0 0 2 0 2 , 7 0 0 2 3 6 , 3 0 0 2 5 4 , 5 0 0 2 6 9 , 2 0 0 2 7 1 , 4 0 0 2 7 0 , 5 0 0 Source: Richardson S e c u r i t i e s of Canada, S.N.P.A. The production i s expected to r i s e u n t i l 1978 and then to enter a phase of d e c l i n e . Although the production of Lacq i s b i g , i t i s not la r g e enough to face the French demand, and France imports gas from Holland and A l g e r i a . Lacq s u p p l i e s the south-west of France, B r i t t a n y , the v a l l e y of the R i v e r L o i r e , J u r a and P a r i s . Other areas are supplied by f o r e i g n gas. S.N.P.A. has p a r t i c i p a t i o n s i n two d i f f e r e n t p i p e - l i n e systems, La Societe des Gaz du Sud-Ouest i n which i t has a 35% i n t e r e s t and La Compagnie Franchise du Methane i n which i t has a 50% i n t e r e s t . These two companies are i n charge of the d i s t r i b u t i o n of the gas of Lacq. Since the gas of Lacq i s sulphurized, France became 30 the t h i r d l a r g e s t world producer of sulphur with a production of 1 , 6 5 0 , 0 0 0 long tons i n 1967, which represents 7% of the world production. At the same time when production began at Lacq, S.N.P.A. had an i n t e r e s t i n an o i l discovery made i n the Sahara, south-west of Hassi-Messaoud, at E l Gassi. S.N.P.A. has a 51% i n t e r e s t i n t h i s f i e l d . Another f i e l d was discovered nearby i n the Agreb area. Production s t a r t e d i n A p r i l 1961 . I t i s important to no t i c e that the f i e l d entered the production phase at the same time as the production of Lacq began to be very s i g n i f i c a n t , so that the cash flow of S.N.P.A. was s u b s t a n t i a l . This induced S.N.P.A. to increase i t s e x p l o r a t i o n i n France and abroad and to enter the chemical i n d u s t r y . TABLE XXII The S.N.P.A. investments from 1956 to 1967 ( m i l l i o n s of F.F.) 1958. 1959 I 9 6 0 1961 1962 1963 1964 1965 1966 1967 T o t a l Investment 319 372 271 145 154 299 334 361 .535 562 E x p l o r a t i o n 48 50 49 43 58 79 121 154 219 252 Development 243 293 175 73 25 79 86 83 133 167 Chemical Industry 1 10 20 14 51 123 80 80 131 87 Others 27 19 27 15 20 18 47 44 52 56 Source: S.N.P.A., Rapport annuel 1967-Table XXII shows that the investments had a peak i n 1959: t h i s was the time when the f i e l d of Lacq s t a r t e d produc-i n g , and a great part of these investments was i n development 2" Richardson S e c u r i t i e s of Canada, S.N.P.A. , A p r i l 1966. 31 expenses. The t o t a l investment decreased from 1939 to 1961, to increase again when the cash-flow began to be s u b s t a n t i a l , then the investments consisted mainly i n e x p l o r a t i o n and chemical processing. The investments i n development increased again i n 1963: t h i s was the time df the Rainbow Lake discovery i n A l b e r t a . S.N.P.A. entered the petrochemical i n d u s t r y i n 1961 through an 89-52% owned s u b s i d i a r y , Aquitaine Organico. The r a t e of r e t u r n i s not so important i n t h i s i n d u s t r y as i t can be i n the o i l i n d u s t r y , but the r i s k s are much smaller and t h i s balances the aggressive e x p l o r a t i o n p o l i c y of S.N.P.A. This e x p l o r a t i o n p o l i c y was followed i n France and abroad at the same time. In France S.N.P.A. continued to increase the acreage h o l d i n g s , mainly i n 1963 and 1964, i n Aquitaine and i n the area of Montelimar. The p r i n c i p a l d i s c o v e r i e s have been made i n 1965 i n Aquitaine i n the area of St. F a u s t - M e i l l o n , south-east of Lacq. The production of t h i s f i e l d i s expected to be one t h i r d to one h a l f that of Lacq. But i t i s mainly abroad that S.N.P.A. developed i t s e x p l o r a t i o n as shown by t h e . f o l l o w i n g f i g u r e s . TABLE XXIII  S.N.P.A. land h o l d i n g i n France and abroad 1958 1959 • I960 1961 1962 held 1 t s q. ikmsJ S t 2 8 ' 5 ° ° 2 3 } 8 ° ° 2 9 ' 5 ° ° k 3 > 1 0 ° 7 6 ' 8 ° ° of which i n France 2 5 , 2 0 0 17,500 16,800 20,800 16,600 % i n France 88.4 73-5 56.9 46.1 21.6 32 1963 1964 1965 1966 , 1967 h e l d Y s q . i k ^ s ! ) S t 1 8 5 ' 1 0 0 3 3 6 5 0 0 0 3 ^ ° > 0 0 0 395,000 375,000 of which i n France 30,500 31,300 22,700 25,400 23,900 % i n France 16.4 9-3 6.7 6.4 6.4 Source: S.N.P.A., Rapport annuel, 1967-This tableau shows that from 1961-1962 onwards, S.N.P.A. f o r the most part developed i t s e l f outside France. The e x p l o r a t i o n p o l i c y of S.N.P.A. has been aggressive, i . e . , S.N.P.A. i n v e s t e d i n many unproven or semi-proven zones, where the r i s k s are higher but r a t e s of r e t u r n can also be higher. Canada was considered as a semi-proven zone by S.N.P.A. I t has many s u b s i d i a r i e s and a f f i l i a t e s i n f o r e i g n c o u n t r i e s , but Aquitaine Company of Canada i s c e r t a i n l y the most import-ant f o r eighty percent of investments and incomes are concen-t r a t e d i n France and Canada. The f o l l o w i n g l i s t of companies i n which S.N.P.A. has an i n t e r e s t of at l e a s t 50% w i l l give an i d e a of the expansion of the company. 1. E x p l o r a t i o n and e x p l o i t a t i o n percentage of the c a p i t a l of these companies held by S.N.P.A. Aquitaine Co. of Canada L t d . Calgary, A l b e r t a 93-4 Aquitaine I r a n Courbevoie, France 99.88 Aquitaine Libye Courbevoie, France 99.88 Aquit a i n e O i l Corporation Houston, Texas 100 Aquitaine Petroleum Co. (S.E. Asia) Courbevoie, France 99-88 Aq u i t a i n e - T u n i s i e Courbevoie, France 99.88 /o 33 Aquitaine Norge A/S Oslo, Norway 99-70 % A u s t r a l i a n Aquitaine Petroleum Brisbane 99-94 Coastal O i l London, United Kingdom 50.00 Lotus E n t e r p r i s e L t d . Tokyo, Japan 50.00 Mereure I n t e r n a t i o n a l Petroleum Brisbane . 99-98 New Zealand Aquitaine Petroleum Auckland 99-99 S.N.P.A. i s also e x p l o r i n g and e x p l o i t i n g i n A l g e r i a , i n the North Sea and c o a s t a l c o u n t r i e s . 2. Others S.N.P.A. has also i n t e r e s t s i n other types of companies i n the o i l business. The p r i n c i p a l are: a) Contractors and petroleum appliances b) Transport and supply of hydrocarbons Societe Bearnaise des Gaz L i q u e f i e s (Sobegal) 97-00 Pau, France Compagnie Francaise du Methane, P a r i s 49-88 c) Survey, research and a p p l i c a t i o n s Societe d'Etudes Techniques et Commerciales (SETEC) P a r i s 99-88 d) Chemical manufacture and supply Aquitaine Organico M i l a n 98.00 Aquitaine Organico Deutschland Dusseldorf 98.95 Aquitaine Organico P a r i s 89-52 Aquitaine Fisons L t d . Loughborough, United Kingdom 50.00 Prosyn St. Etienne, France 49-96 e) B u i l d i n g companies 5k f) Regional equipment Source: Richardson S e c u r i t i e s of Canada, S.H.P.A. 35 I I . The A r r i v a l of S.N.P.A. i n Canada For the reasons explained p r e v i o u s l y , S.N.P.A. wanted to i n v e s t i n Canada. Several missions came to Canada i n 1963 and at the same time S.N.P.A. u t i l i z e d the s e r v i c e s of a Canadian consultant i n order to f i n d the best way to i n v e s t . S.N.P.A. had s e v e r a l a l t e r n a t i v e s : — t o set up a company, i . e . , to acquire land, b u i l d i n g s , to engage personnel, etc. --to take over a Canadian company and have i t as a s u b s i d i a r y by owning 51% of the c a p i t a l or even l e s s i f a c o n t r o l of the company was p o s s i b l e with a smaller percentage. — t o have m i n o r i t y i n t e r e s t s i n se v e r a l companies, i . e . , a f i n a n c i a l h o l d i n g company. I t was f i n a l l y decided that S.N.P.A. would hold a p a r t i a l or a 51% c o n t r o l i n an e x i s t i n g company. By choosing t h i s s o l u t i o n , S.N.P.A. saved much time, since i t would take advantage of a company's knowledge, p r o p e r t i e s and personnel. S.N.P.A., wanted to s e t t l e as q u i c k l y as p o s s i b l e , f o r i t was a f r a i d of a r r i v i n g too l a t e on the Canadian market. In December 1963, S.N.P.A. created "Aquitaine Company of Canada L t d . " , a wholly owned s u b s i d i a r y . The c a p i t a l amounted to $1,000,000 represented by 1,000,000 shares. This company has a dominion charter. I t s f i r s t task was to make an important p a r t i c i p a t i o n i n an e x i s t i n g company as i t had been decided. The missions which i n v e s t -i g a t e d i n Canada i n 1963 found that Banff O i l L t d . was l i k e l y 36 to meet the de s i r e s of S.N.P.A. At t h i s time Banff O i l c a p i t a l i z e d $8 m i l l i o n . Banff O i l was a small company because of l a c k of funds but was l i k e l y to expand very q u i c k l y with the money brought by Aqui t a i n e . The b e n e f i t was mutual: while Aquitaine brought the funds, Banff brought the knowledge and the people. Aquitaine took over Banff by buying 1,471,390 shares which represented 40.5% of the is s u e d c a p i t a l , f o r $4,133,743, i . e . , $2.81 per share. This percentage, 40.5%, i s the r e s u l t of two c o n s t r a i n t s : — t h e percentage necessary to have an e f f e c t i v e c o n t r o l of the company. — t h e investment that S.N.P.A. was ready to make i n Canada. This investment has been financed by a U.S. $5,000,000 loan of the Royal Bank of Canada to S.N.P.A. The percentage of shares of Banff O i l held by Aquitaine has v a r i e d since that time. When Banff O i l needed some money the percentage increased to 48%, i t then decreased to 44%. In December 1968 Aquitaine owned 2,098,589 shares of Banff, and Rainbow O i l Inc., a wholly owned s u b s i d i a r y ofAquitaine,owns 233,333 shares. 3 3 Mr Ra p a c c i o l i , T r e a s u r e r , A q u i t a i n e Co of Canada L t d . 37 I I I . R e l a t i o n s h i p between Banff O i l and Aquitaine Banff O i l and Aquitaine signed t h e i r f i r s t contract on May 4-th, 1964. This contract was v a l i d u n t i l December 3 1 s t , 1964. I t has been since renewed every year on the f i r s t of January^. The agreement between Banff and Aquitaine has two aspects: 1) The o p e r a t i o n a l aspect Banff acts f o r Aquitaine as an independent contractor f o r the purposes of e x p l o r i n g for and producing petroleum, n a t u r a l gas and r e l a t e d hydrocarbons. Banff i s the operator everywhere i n Canada except i n the A r c t i c and the Hudson Bay. Banff provides Aquitaine with designs and Aquitaine has to n o t i f y Banff i f i t wants to p a r t i c i p a t e i n the operation designed. 2) The f i n a n c i a l aspect The country i s d i v i d e d i n t o two parts i n which the i n t e r e s t s of Banff and Aquitaine i n j o i n t ventures are not the same. — a r e a 1 i n c l u d e s the provinces of Manitoba, Saskatchewan and the south of the province of A l b e r t a , townships 1 to 64 i n c l u s i v e west of the fourth meridian. In t h i s area the r i s k s i n v o l v e d are not great and Banff and Aquitaine share the expenses and the p r o f i t s i n the r a t i o of f i f t y -4 I d . 38 f i f t y . — a r e a 2 i n c l u d e s the r e s t of A l b e r t a , B r i t i s h Columbia, the Yukon and the Northwest T e r r i t o r i e s . In t h i s area the r i s k s i n v o l v e d are more important than i n the f i r s t area and Banff p a r t i c i p a t e s i n the expenses and p r o f i t s to the extent of 10%, while A q u i t a i n e , which takes 90% of the r i s k s , obtains 90% of the p r o f i t s . A q u itaine pays Banff a management and consultant's fee which represents a part of the general expenses of Banff. In a d d i t i o n , Aquitaine pays Banff the fees chargeable by 5 Banff i n i t s capacity of manager operator . 5 Contract between Aquitaine Co. of Canada L t d . and Banff O i l Co. 39 IV. Organization of Aquitaine and  R e l a t i o n s h i p with i t s parent -company A. R e l a t i o n s h i p with SMPA As SNPA owns 93.4% of the shares of Aquitaine,the r e l a t i o n s h i p between the two companies i s very c l o s e . T h i s r e l a t i o n s h i p presents three a s p e c t s : h i e r a r c h i c a l , o p e r a t i o n a l and t e c h n i c a l . 1 . The h i e r a r c h i c a l r e l a t i o n s h i p The president of Aquitaine i s the head of the f o r e i g n d i v i s i o n of SNPA i n Pau ( F r a n c e ) ; t h i s d i v i s i o n depends on the e x p l o r a t i o n and e x p l o i t a t i o n d i v i s i o n , which i n turn depends on the general management i n P a r i s , as i t i s shown i n the f o l l o w i n g chart: Table XXIV Organization chart of SNPA General management ( P a r i s ) General management of manufacturing and sales ( P a r i s ) General Management (Pau) E x p l o r a t i o n and Production d i v i s i o n Foreign d i v i s i o n Aquitaine Co Canada Source:Mr R a p a c c i o l i , T r e a s u r e r . Despite t h i s close h i e r a r c h i c a l r e l a t i o n s h i p Aquitaine does not have to report to S.W.P.A. f o r i t s day-to-day p o l i c y , but i t f o l l o w s the general p o l i c y defined by i t s parent company. 2. The o p e r a t i o n a l r e l a t i o n s h i p A q u i t a i n e i s l i n k e d to S.N.P.A. from a f i n a n c i a l point of view. This aspect w i l l be examined i n depth i n the paragraph "Financing and f i n a n c i a l aspects". 3. The t e c h n i c a l r e l a t i o n s h i p When i t i s p o s s i b l e , Aquitaine uses the s e r v i c e s of S.N.P.A. i n s t e a d of other companies f o r research. They als o employ S.N.P.A. workmen for c e r t a i n operations, p a r t i c u l a r l y i n the Hudson Bay; these people who u s u a l l y work i n France f o r S.N.P.A. are sent to Canada to do a s p e c i f i c job f o r Aquitaine and then r e t u r n to S.N.P.A. S.N.P.A. i s w e l l aware of the techniques of deep d r i l l i n g s . On the other hand, l o c a l companies can be more advanced i n other f i e l d s , f o r example, computer science, and t h e i r s e r v i c e s are used. B. Organization A q u i t a i n e , which was incorporated on December 30th, 1963 by l e t t e r s Patent, i s s u e d under the laws of Canada with a c a p i t a l of $1,000,000, d i v i d e d i n t o 1,000,000 shares, has been authorized supplementary l e t t e r s Patent dated September 9th, 1968 to re-organize i t s c a p i t a l i n t o 22,000,000 common shares without nominal or par-value:,: of which 15,400,000 shares are outstanding as f u l l y paid and non-assessable s h a r e s 6 . T> Dominion S e c u r i t i e s Corporation L t d . , Aquitaine So/, of  Canada L t d . , new i s s u e , October 30, 1968. 41 The head o f f i c e i s lo c a t e d at 1300 Calgary House, 330 S i x t h Avenue S.W., Calgary, A l b e r t a . The s t a f f of eighteen people i n c l u d e s French people, E n g l i s h speaking Canadians and French speaking Canadians. The o r g a n i z a t i o n of the company i s shown i n the f o l l o w i n g chart; President (France) Executive V i c e - P r e s i d e n t (Calgary) Hudson Bay Operations Manager G-eolog i s t Chief Geophysicist Computer Man Treasurer Secretary F i n a n c i a l A s s i s t a n t Production Manager B u i l d i n g Manager Lawyer Accountants (2) o m ts H-N $0 ct H-O t$ O c+ o > rt-JU H-P CD G e o l o g i s t 1 s A s s i s t a n t Draftsman Source: Drawn by Mr. Rapgtccioli, Treasurer 43 V. Operations of Aquitaine Before studying the operations of A q u i t a i n e , i t seems necessary to have a look at the l e g a l aspects with respect to land, because there are many d i f f e r e n t r e g u l a t i o n s f o r many d i f f e r e n t types of p r o p e r t i e s . This i s an important aspect to be considered when i n t e r e s t e d i n a c e r t a i n property. Then the operations of Aquitaine i n the Rainbow area and the Hudson Bay w i l l be considered i n s p e c i a l paragraphs f o r they are the most important f i e l d s of A q u i t a i n e . Then the e x p l o r a t i o n , the development and the production of the company w i l l be s u c c e s s i v e l y considered f o r other areas. A. A c q u i s i t i o n of p r o p e r t i e s : l e g a l aspects When an o i l company i s i n t e r e s t e d i n a property, i t has to make two studies about i t : — a p h y s i c a l study — a l o c a l study, f o r i t i s necessary to knov; the r e g u l a t i o n s which apply to t h i s p a r t i c u l a r property: the length of the r e s e r v a t i o n or the lease, the p r i c e , the r o y a l t i e s , the rate of development required by the government, etc. The r e g u l a t i o n s are very complicated i n Canada. This i s due to the number of types of landowners and to the f a c t that the s u b - s o i l and the surface may be owned by d i f f e r e n t people. Companies such as the Hudson Bay, the Canadian P a c i f i c Railways and the Canadian N a t i o n a l Railway, which acquired land before 1909, s t i l l own the mineral r i g h t s , even i f they have s o l d the surface. The property can be a former n a t i o n a l park, some Indian land, i t can be owned by i n d i v i d u a l s and of course by the f e d e r a l government or by a p r o v i n c i a l government. The two l a t t e r types are c a l l e d crown p r o p e r t i e s , while the former types are known by the name of f r e e - h e l d p r o p e r t i e s . A c t u a l l y most are crown p r o p e r t i e s i n A l b e r t a where the government owns 90% of the mineral r i g h t s of the province. As A l b e r t a i s the most important province as f a r as o i l i s concerned, only i t s r e g u l a t i o n s w i l l be observed here and the main d i f f e r e n c e s from the other provinces w i l l then be shown. The companies can take a r e s e r v a t i o n or a d r i l l i n g r e s e r v a t i o n to be changed i n t o a lease i f the e x p l o r a t i o n i s s u c c e s s f u l , they a l s o can farm out a property. The f i g u r e s n shown i n t h i s s e c t i o n are of March 1, 1968 . 1. The r e s e r v a t i o n s The company has to obtain a "prospective l i c e n c e " from the p r o v i n c i a l government. This l i c e n c e i s for not more than 100,000 acres but as many r e s e r v a t i o n s as desired can be obtained. I t has to pay fees amounting to $2^0 and deposit $2500 per 20,000 acres or p o r t i o n thereof as a guarantee of performance. A plan of a p r o j e c t should be deposited f o r approval w i t h i n ninety days. The length of the r e s e r v a t i o n i s l i m i t e d to four months but i t i s p o s s i b l e to o b t a i n two renewals of four months each fr e e , then four renewals of s i x months fo r ten cents per acre and per renewal. That cannot exceed f i v e years. But i f the d r i l l i n g i s being 7 Mr. "William Drury Clark, Secretary. 1 done or w i l l be done, the l i c e n c e can be renewed for not more than s i x periods of s i x months each fo r ten cents per acre f o r the f i r s t extension, f i f t e e n cents f o r the second, twenty cents f o r the t h i r d and twenty-five cents f o r the fo u r t h , f i f t h and s i x t h extensions. I f the e x p l o r a t i o n i s s u c c e s s f u l , then the company can ask for a lease. I f some O i l has been found, the a p p l i c a t i o n f o r a lease should be made w i t h i n n i n e t y days of the discovery. A l b e r t a i s d i v i d e d i n t o two pa r t s , Block A from township one to s i x t y - f o u r i n c l u s i v e west of the fourth meridian, and the zone outside Block A which c o n s i s t s of the north of A l b e r t a . In Block A the company can change the whole r e s e r v a t i o n i n t o a lease while i n the other area, the p r o v i n c i a l government i s e n t i t l e d to hold back 50% of the r e s e r v a t i o n as crown p r o p e r t i e s . In t h i s case the company can choose the 50% they want w i t h i n c e r t a i n l i m i t s and the second h a l f i s s o l d under' sealed tender. The company and i t s competitors are on the same l e v e l for t h i s s a l e , i . e . , the company which has made the discovery has no p r e f e r e n t i a l r i g h t s . In the United States t h i s sale i s made b y auction and not under sealed tender. 2. The d r i l l i n g r e s e r v a t i o n s From time to time the p r o v i n c i a l government o f f e r s c e r t a i n acreages for sale on a bonus cash b a s i s . These acreages are known by the name of " d r i l l i n g r e s e r v a t i o n s " . They are s o l d by tender b i d . The fees amount to $250 and the r e n t a l i s twenty-five cents per acre for s i x months. 46 F i v e extensions of s i x months each can be granted f o r twenty-f i v e cents i f s a t i s f a c t o r y work has been done. A c e r t a i n r a t e of development i s imposed by the government. I f the ex p l o r a t i o n i s s u c c e s s f u l , a lease can be granted. 5. Leases A lease i s obtained f o r ten years but can be renewed as many times as necessary. The r e n t a l i s one d o l l a r per acre per year, but i t can be reduced to f i f t y cents i f the f i e l d produces some n a t u r a l gas and to twenty-five cents i f there i s no market f o r t h i s gas. In a d d i t i o n , r o y a l t i e s are p a i d on the production. On A p r i l 1, 1968, the r o y a l t i e s were: --8% of b a r r e l s produced f o r a monthly production of l e s s than 750 b a r r e l s . — 6 0 b a r r e l s plus 20% of b a r r e l s produced over 750 up to 2,700 b a r r e l s . --16 2/3% f o r a monthly production of over 2,700 b a r r e l s . 4. Farm-out This i s a s p e c i a l form which c o n s i s t s of exp l o r i n g a r e s e r v a t i o n belonging to another company. In case of discovery, the p r o f i t s are shared between the two companies i n the p r o p o r t ion of one h a l f . The same d i s t i n c t i o n e x i s t s i n the other provinces but the r e g u l a t i o n s can be d i f f e r e n t . The r a t e of development required can be greater i n some provinces and the part which i s held back by the p r o v i n c i a l government can be more or l e s s than 50%. I t i s 40, 50 or 47 60%,depending on the surface i n Saskatchewan,and i t can be 0% i n the Yukon and the Northwest T e r r i t o r i e s against i n c r e a -s e d r o y a l t i e s . T h e r a t e of these r o y a l t i e s v a r i e s with the places.The p e c u l i a r i t y of Ontario i s that most mineral r i g h t s are free-held.As f a r as cro.wn p r o p e r t i e s are concerned,in Ontario they c o n s i s t mainly of petroleum and gas r i g h t s underlying bodies of water and r i v e r s ; t h e y are of two types depending on the percentage which i s held back by the government,nothing or 50%.In Quebec and the Maritimes,most mineral r i g h t s belong to the crown but there are not many such r i g h t s . A t the present time Canada has some d i f f i c u l t i e s regarding the ownership of offshore r i g h t s . W h i l e the f e d e r a l government claims these r i g h t s f o r the crown,some provinces claim them f o r themselves.The problem e x i s t s f o r the P a c i f i c c o a s t , f o r the A t l a n t i c coast and fo r Hudson Bay.None of the French o i l companies has i n t e r e s t s on the P a c i f i c coast,but a l l of them have some i n the bay and E l f has some on the A t l a n t i c coast where the problem i s even worse,for the French government claims the offshore r i g h t s of St P i e r r e and o Miquelon i s l a n d s . B.Acreage of Aquitaine Table XXV Acreage of Aquitaine ( J u l y 1966) Petroleum and gas leases Gross acres Net acres A l b e r t a 2 3 2 , 2 9 3 100,580 Saskatchewan 316,008 6 1 , 4 6 5 B r i t i s h Columbia 11,091 9,853 8 Royal Bank of Canada,Oil and Gas Department,Bulletins 1 , 2 , 3 , 4 and 5 48 Reservations, d r i l l i n g r e s e r v a t i o n s , Gross acres Net acres l i c e n c e s and permits A l b e r t a 696,376 4 4 8 , 1 4 6 Saskatchewan 1 , 9 9 8 , 4 7 7 6 4 8 , 0 0 9 B r i t i s h Columbia 7 0 6 , 3 3 0 523,777 ' N.W.T. 3 , 2 2 0 , 4 2 0 2 , 3 1 2 , 9 4 4 Nova S c o t i a 7 1 4 , 9 6 0 172,980 Manitoba 1,362,922 3 9 7 , 1 7 1 Ontario 9 8 6 , 3 6 0 2 4 6 , 6 4 0 Hudson Bay (offshore) 3 , 9 3 4 , 2 1 5 9 8 8 , 5 5 4 Athabasca Tar Sand lease 4 9 , 7 4 2 2 4 , 8 7 1 T o t a l 1 4 , 4 4 9 , 6 1 4 5 , 9 3 4 , 9 9 0 Source: Dominion S e c u r i t i e s Corporation L t d . , Aquitaine Co. of Canada L t d . , new i s s u e , October 3 0 , 1968, p~i 6 . C. The Rainbow area The Rainbow area had been u n s u c c e s s f u l l y explored before by other companies. Aquitaine explored on a 9 2 , 0 0 0 acres farm-out from Soc'ony Mob i l O i l and. two other farm-outs from Mo b i l O i l and from C e n t r a l del Rio. A f t e r s e v e r a l unsuccessful e x p l o r a t i o n s , Aquitaine made a discovery on the f i r s t farm-out. This discovery was very'important and the f i e l d now gives the major part of Aquitaine's source of income. As t h i s land i s lo c a t e d i n the north of A l b e r t a , the i n t e r e s t s are as f o l l o w s : M o b i l O i l 50% S q u i t a i n e 45% Banff O i l . 5% This discovery was made i n February 1965, j u s t one year a f t e r the a r r i v a l of Aquitaine i n Canada. The i n i t i a l discovery was followed by two others, one i n Rainbow and one i n Keg Ri v e r . The development began i n 1965 with three development w e l l s , of which two were producing o i l i n 1966, but there k9 was no production i n 1965, p a r t l y due to the l a c k of pipe-l i n e connections. In 1966 the e x p l o r a t i o n of the area was i n t e n s i f i e d . At the end of the year twelve o i l f i e l d s and three gas f i e l d s had been discovered and t h i r t y - t h r e e seismic crew months had been done i n that year. I n 1967, twelve new exploratory w e l l s were d r i l l e d and twenty-three producing w e l l s were known at the end of the year. This i n t e n s i f i c a t i o n of the e x p l o r a t i o n was s u c c e s s f u l f o r 75% of the exploratory w e l l s became o i l or gas producers. E a r l y i n 1968 d i s c o v e r i e s were made on an 8 6 , 0 0 0 acre r e s e r v a t i o n where therefore the i n t e r e s t of the company i s 90% i n s t e a d of k5%- Aquitaine has also a 55% i n t e r e s t on a 1 3 , 0 0 0 acre r e s e r v a t i o n south of Rainbow. As p r e v i o u s l y mentioned, the gas discovered i s not s o l d but used as a secondary recovery means i n o i l w e l l s . The production of the Rainbow area represents the 9 biggest part of the Aquitaine output . D. Operations i n Hudson Bay While the Rainbow area i s the present b i g source o f income of A q u i t a i n e , the Hudson Bay represents the hopes of the company f o r the fu t u r e . In Hudson Bay, Aquitaine does not work with Banff O i l and i t i s the operator f o r other companies. Aqui t a i n e has i n t e r e s t s i n two groups of operations: — a 5 0 , 0 0 0 , 0 0 0 acre farm-out from A t l a n t i c R i c h f i e l d , a l l of them offshor e i n the north of the bay. - - 1 , 3 7 0 , 0 0 0 acres offshore and onshore i n the south of the 9 Mr. Dumestre, Vice-President E x p l o r a t i o n , and Mr. R a p a c c i o l i , Treasurer. 50 b a y , i t i s known as the Sogepet group. The i n t e r e s t s are shared among A q u i t a i n e , E l f O i l E x p l o r a t i o n and Production, the French Petroleum Co. of Canada,Sogepet Ltd,Sun Oil,Texas, Gulf,Bralorne Petroleums,'Western Decalta and Teck Co.Aquifeaine has the biggest i n t e r e s t i n t h i s group. The operations began i n the Sogepet group during the winter 1966-1967 with a d r i l l i n g onshore,at Kastkattama. This survey d i d not show many signs of oil.Th e same operation was made during the winter 1967-1968.In 1968,during the summer two important operations were made. — a g e o l o g i c a l survey was made a l l around the bay.This was done with two j e t h e l i c o p t e r s which flew two hundred and f i f t y hours each.That l a s t e d two months,from J u l y 10 to September 10,1968.They found that the area was more promising than expected. — a seismic survey offshore from C h u r c h i l l to the Belcher I s l a n d s (60 deg. North).This was done by the Compagnie Generale de Geophysique and was organized and l e d from France.As t h i s operation also showed that the area was promising,Aquitaine plans to d r i l l there as soon as . -i - i 10 p o s s i b l e . E. Other operations In the r e s t of Canada,Aquitaine has p r a c t i c a l l y no production,but i t holds i n t e r e s t i n many places. 10 Mr Rueff,Hudson Bay Proje<ct,Aquitaine. 51 1. A l b e r t a a) Zama In t h i s area l o c a t e d t h i r t y miles north-east of Rainbow, Aquitaine holds an i n t e r e s t of 25% i n two blocks of 63>000 and 124,000 acres r e s p e c t i v e l y . Only one discovery has been made to date but the area seems promising. b) Southern A l b e r t a Aquitaine holds i n t e r e s t s i n several blocks and hopes to f i n d n a t u r a l gas as other companies d i d . 2. B r i t i s h Columbia Aquitaine has i n t e r e s t s i n 619,696 gross acres, which represent 486,242 net acres. The company plans to d r i l l i n 1969-3. Saskatchewan As Saskatchewan has the same s u b - s o i l as northern A l b e r t a , Aquitaine acquired two m i l l i o n gross acres or 680,000 net acres i n t h i s province, but to date no discovery has.been made. 4. Northwest T e r r i t o r i e s A q uitaine holds an i n t e r e s t i n 2,500,000 acres which represents a net acreage of 2,000,000 acres. Some seismic operations are being made. The recent discovery of Prudhoe Bay i n Alaska encourages Aquitaine i n exp l o r i n g t h i s area. 5. The East Coast Aquitaine has j u s t acquired some property there, 32 but nothing has been done to date"'""'". F. .TABLE XXVI H i s t o r i c a l s t a t i s t i c s of the a c t i v i t y of Aquitaine 196k 1965 1966 1967 1. Gross Acreage 469,779 3,242,793 6,119,148 11,695,255 Net Acreage 341,340 1,752,982 3,034,372 5,111,409 2. Gross e x p l o r a t i o n footage 61,406 149,557 115,620 107,810 Net e x p l o r a t i o n footage 19,010 66,711 50,517 60,100 While the footage d r i l l e d was l e s s i n 1966 and 1967' than before, the expenses made i n e x p l o r a t i o n increased g r e a t l y as shown i n the f o l l o w i n g f i g u r e s ; t h i s i n d i c a t e s that most of the e x p l o r a t i o n expenditures have been made f o r g e o l o g i c a l and geophysical operations. T_ 1964 1965 1966 1967 3. E x p l o r a t i o n expenses 351,968 1,724,644 4,169,462 6,839,925 4. Gross development footage 21,625 54,634 157,765 71,926 Net development footage 5,400 24,596 66,272 28,693 5. Expenses i n development d r i l l i n g 118,384 2,051,655 4,199,203 1,465,140 6. P l a n t , production, equipment and other development expenses 46,785 649,349 1,762,992 4,208,572 11 Aquitaine Co. of Canada L t d . , 1967 annual r e p o r t . 53 1964 1965 1966 1967. 7. Production of o i l ( i n b a r r e l s ) (gross before r o y a l t i e s ) 13,507 34,231 1,011,050 3,961,337 8. Reserves (net) a f t e r deduction of i n t e r e s t s of partners and r o y a l t i e s * 358,277 31,600,000 234,840,000 224,000,000 *The s l i g h t decrease i n 1966 i s due to the r e - e v a l u a t i o n of c e r t a i n pools. Source: Annual repo r t s of Aquitaine Co. of Canada L t d . C. The i n f l u e n c e of the A l b e r t a p r o r a t i o n scheme  on the e x p l o i t a t i o n of the Rainbow area 1. The p r o r a t i o n scheme The O i l and Gas Conservation Board of A l b e r t a has se v e r a l o b j e c t i v e s , one of which i s to see that o i l and gas i s produced at a rate where i t can be e f f e c t i v e l y u t i l i z e d , based upon f u l l understanding of r e s e r v o i r c o n d i t i o n s and economic f a c t o r s . A l b e r t a owns more than 80% of the Canadian o i l reserves, while the consumption of the province i s only 5% of the Canadian consumption. The O i l and Gas Conservation Board made some estimates i n January 1968. They found that A l b e r t a produces only 30% of i t s o i l resources, 42% of i t s capacity of production, and 72% of i t s p i p e - l i n e c a p a c i t y . These f i g u r e s show the ne c e s s i t y of a p r o r a t i o n scheme fo r the province and for the companies; f o r the province, because i t avoids the waste of i t s energy and of i t s wealth, f o r the companies, because i t 12 l e t s them have a good p r i c e for the o i l they s e l l 12 R.C. McCulloch, Etudes de r e s e r v o i r et conservation des gisements dans l e cadre du systeme de p r o r a t i o n en A l b e r t a , Communication no. 13, Ref. L.F.P. 16088, June 1968. 5k The p r o r a t i o n scheme i s being changed at the present time. I t was e s t a b l i s h e d i n 1932 to regulate the production of Turner V a l l e y . I t was changed f i r s t i n 1930 and then i n 1957. I t was changed again i n 1965 and these new r e g u l a t i o n s f i r s t a p p l i e d completely i n May 1969. From 1950 to May 1969, the p r o r a t i o n scheme was based on a minimum quota depending on the depth of'each w e l l , plus a part of the r e s i d u a l demand a l l o c a t e d to the f i e l d on the ba s i s of maximum r a t e admissible. The minimum quota was determined to pay the expenses i n v o l v e d by the w e l l s and the maximum r a t e admissible was obtained by d i v i d i n g the eventual reserves by the l i f e t i m e <3<i the f i e l d . This l i f e t i m e depended on drainage e f f i c i e n c y , spacing and l o c a t i n g of the w e l l s , optimal pressure of the f i e l d , e tc. Therefore the p r o r a t i o n sckeme was based mainly on the number of w e l l s , because the sum of the minimum quotas per f i e l d almost met the t o t a l demand of the o i l market i n A l b e r t a . The change which was decided i n 196k and had i t s f i r s t a p p l i c a -t i o n i n 1965 was motivated by the desi r e to base the quota on the reserves i n s t e a d of the number of w e l l s . The new p r o r a t i o n scheme gives equal weight to remaining reserves and ulti m a t e reserves. The program which was adopted on May 1, 1969 can be described by the f o l l o w i n g equation. nomenclature: Ap = pool allowable Mda = p r o v i n c i a l adjusted market demand Up = pool u l t i m a t e reserves Pp = pool cumulative production Ua = p r o v i n c i a l u l t i m a t e reserves Pa = p r o v i n c i a l cumulative production As the reserves are the important f a c t o r i n deter-mining the quota, i t i s b e t t e r that the.companies use secondary recovery methods to increase, recoverable reserves. This decreases the r a t e of o i l wastage. The companies are also now more i n c l i n e d to f i n d new reserves than p r e v i o u s l y . The r i s e of the quota of some company means a decrease i n the quotas of others, and the changes i n the quotas are discussed between 13 the companies and the Conservation Board 13 The Royal Bank of Canada, O i l and Gas Department, B u l l e t i n no. 7, and Mr. Chaloup, E x p l o i t a t i o n Manager, Aquitaine Co. of Canada L t d . 56 VI The Financing of the Company  and the F i n a n c i a l Aspects To i n v e s t i n Canada, S.N.P.A. obtained a loan of U.S. $ 5 , 0 0 0 , 0 0 0 from the Royal Bank of Canada. S.N.P.A. had decided to spend $3 m i l l i o n i n the e x p l o r a t i o n , but one year a f t e r t h e i r a r r i v a l i n Canada, the Rainbow discovery was made. To continue the e x p l o r a t i o n and to develop Rainbow more funds were necessary. Aquitaine could hardly o b t a i n loans i n Canada fo r they were not known and the reserves were not proven, so they could not get an i n t e r e s t i n g f i n a n c i n g without p a r a l y s i n g guarantees, e.g., not g i v i n g dividends, no pay back to the parent company, etc. They could hardly i s s u e shares because since they did not know the reserves, they dJd-not know the value of the company nor the value of the share. Therefore the parent company financed the investments of Aquitaine up to 1966; the loans obtained from S.N.P.A. amountedto $25 m i l l i o n . During the summer of 1966, Aquitaine obtained a contract of loan with French banks which opened c r e d i t s up to F.F. 225 m i l l i o n (about $ 5 0 , 0 0 0 , 0 0 0 ) . La Societe' Generale i s the leader of the group with a t h i r d of the commitment, La Banque Nationale de P a r i s , Le C r e d i t Lyonnais, and La Banque de P a r i s et des Pay-Bas hold 2/9 each. The r a t e was 6 i % on the part of the loan u t i l i z e d plus 1% on the t o t a l of the c o n t r a c t . These loans were rather expensive because they 57 could not be rediscounted to the C r e d i t N a t i o n a l which d i d not finance the investments abroad, but a law of 1967 allowed the C r e d i t N a t i o n a l to rediscount loans for f o r e i g n i n v e s t -ments, and F.F. 170 m i l l i o n of the previous loan were changed i n t o a cheaper loan which was rediscounted to the Cr e d i t N a t i o n a l . The rat e on the amount drawn i s only 5-5%. This loan i s repayable i n f i v e years. The bank ra t e i s indexed on the rat e of the C r e d i t N a t i o n a l . This loan has been u t i l i z e d as f o l l o w s : F.F. 100 m i l l i o n i n 1967 (to 1972) and F.F. 70 m i l l i o n i n 1968 (to 1973). This loan i s guaranteed by S.N.P.A. In 1966 Aquitaine also obtained a $10 m i l l i o n production loan from the Royal Bank of Canada. The r a t e i s 6%. The loan i s repayable i n f i v e years and i t i s guaranteed by the production of the Rainbow f i e l d . This $50 m i l l i o n has to be financed i n the long run. The company has two p o s s i b i l i t i e s : — l o n g - t e r m debts, but t h i s i s expensive, 8% to 8£%, repayable i n twenty years. The company wants to avoid them except i n the case of new d i s c o v e r i e s . — i n c r e a s e of c a p i t a l . In October 1968 Aquitaine increased i t s c a p i t a l by |15 m i l l i o n . This was l i m i t e d because i t was d i f f i c u l t to p r i c e the share and i t was the f i r s t o peration of t h i s type. Therefore' the company has s t i l l to f i n d $35 m i l l i o n i n the next two years.. The increase of c a p i t a l has been made to pay back the parent company. 58 Aquitaine also obtained a $750,000 long-term loan from the N a t i o n a l Housing Act Fund to b u i l d f o r t y - e i g h t houses at Rainbow"^. Accounting p o l i c y A q uitaine changed i t s accounting p o l i c y i n 1967. Aquitaine l i k e every o i l company has some very important investments. With i t s previous accounting p o l i c y the cnmpany took a l l the expenses i n t o account, but only a part of the p r o f i t s which were expected from these investments. The f u l l cost method of accounting was adopted i n 1967. In t h i s method, a l l the expenses r e l a t i v e to the e x p l o r a t i o n f o r and development of o i l and gas are c a p i t a l i z e d . They are then amortized by the u n i t of production method based on t o t a l 15 estimated recoverable reserves of..;oil and gas . Ik Mr. R a p a c c i o l i , Treasurer, Aquitaine Co. of Canada L t d . 15 I d . 59 VII The Prospects of the Company Without any new discovery the production w i l l i n c r e a s e from k m i l l i o n b a r r e l s i n 1968 to 7.7 m i l l i o n b a r r e l s i n 1974« - Then, because of the p r o r a t i o n scheme, as the reserves w i l l not be as s u b s t a n t i a l as at the present time, the production allowed w i l l decrease. Without any new discovery the production can s t i l l continue f o r another t h i r t y - f i v e years. But i t i s not the p o l i c y of an o i l company to l e t i t s reserves decrease, f o r the-reserves are the a c t u a l value of the company. The investments i n e x p l o r a t i o n which soared i n 1968 to $12 m i l l i o n w i l l decrease to $10 m i l l i o n i n 1969 and then remain at t h i s l e v e l . Hopefully these $10 m i l l i o n w i l l i n c r e a s e the reserves by new d i s c o v e r i e s . The Hudson Bay and the A r c t i c are the areas where the e x p l o r a t i o n w i l l be i n t e n s i f i e d . I t i s expected by Aquitaine that these investments w i l l b r i n g t h i r t y m i l l i o n b a r r e l s per year. Since the y e a r l y production of Aquitaine i s 7 m i l l i o n b a r r e l s , the reserves should increase by 22 m i l l i o n b a r r e l s per year. The a c t u a l reserves amount to 220 m i l l i o n b a r r e l s " ^ . l b Mr. P r a d a l , Executive V i c e - P r e s i d e n t . 60 V I I I A n a l y s i s of the Investment We w i l l analyze the management of t h i s investment and i t s r e s u l t s , and see how the two are r e l a t e d . The r e s u l t s w i l l show whether the second hypothesis i s v e r i f i e d f o r S.N.P.A. 1. The management of t h i s investment The purpose of t h i s s e c t i o n i s to f i n d the strengths and the weaknesses of t h i s investment, and we w i l l see i n the next s e c t i o n how they can be r e l a t e d to the r e s u l t s of A q u i t a i n e . We can see two important strengths i n t h i s investment; they are the a c q u i s i t i o n off Banff O i l Co., and the f l e x i b i l i t y i n the r e l a t i o n s betweeen Aquitaine and Banff O i l , and between Aquitaine and S.N.P.A. I t s main weakness seems to be the l a c k of Canadians at the top l e v e l of the cmmpany, but we w i l l see that i n t h i s case i t i s l e s s important because of the a c q u i s i t i o n of Banff O i l . There i s s u f f i c i e n t independence from the parent company, even though the general p o l i c y i s decided by S.N.P.A. Aquitaine has enough freedom to make i t s own decisions without r e f e r r i n g to i t s parent company. This allows Aquitaine to respond q u i c k l y to the o p p o r t u n i t i e s and the problems i t faces. This i s very important i n any type of i n d u s t r y , but p a r t i c u l a r l y i n the o i l i n d u s t r y where '." success depends on immediate response to o p p o r t u n i t i e s . The u n i t y of management i s maintained by the fact that the 61 president of Aquitaine i s i n France. Many t r i p s of the managers between P a r i s and Calgary help to maintain good understanding between S.N.P.A. and i t s s u b s i d i a r y . The weakness i s that the Canadians do not hold enough top p o s i t i o n s . This has c e r t a i n disadvantages: — F o r p s y c h o l o g i c a l and economic reasons, a country l i k e s to see i t s own c i t i z e n s h o l d i n g key p o s i t i o n s i n the s u b s i d i a r i e s of f o r e i g n companies. — A company with f o r e i g n managers does not always have the connections necessary with the p u b l i c a u t h o r i t i e s , the banks, e t c . , and does not always have the knowledge 17 necessary about the.industry i n the country . However, these disadvantages, p a r t i c u l a r l y the second one, are minimized by two f a c t s : — The French personnel of Aquitaine was chosen with much care. Most of them had p r e v i o u s l y l i v e d i n Anglo-Saxon c o u n t r i e s , p a r t i c u l a r l y i n North America, and they could very e a s i l y become accustomed to the environment. --Aquitaine acquired Banff O i l Co. I t seems that S.N.P.A. chose the best way of i n v e s t i n g i n Canada and chose the r i g h t company. Through Banff, Aquitaine can be considered as a Canadian company with a l l the-advantages that i t could not have acquired so soon by i t s e l f : the knowledge of the '...Canadian o i l i n d u s t r y and the connections i n Canada. I t s knowledge of the country and of the i n d u s t r y allows Aquitahe 17 Paul de Bruyne, op. c i t . , p. 377 and Bernard Bonin, op. c i t . , p. 1 9 8 . 62 to make the best use of the human, f i n a n c i a l and n a t u r a l resources of the country. I t s connections give Aquitaine 18 the support i t needs .The choice of Banff O i l was c e r t a i n l y good, because Banff had a good management and good s t r u c t u r e but suffered from a l a c k of money. The f i n a n c i a l help of Aquitaine provided Banff with greater o p p o r t u n i t i e s . This a c q u i s i t i o n a l s o permitted Aquitaine to have a small s t a f f of i t s own, and t h i s l i m i t s i t s expenses and management problems. Moreover, the r e l a t i o n s between the two companies are very f l e x i b l e ; Aquitaine can deal with other companies f o r any p r o j e c t i f t h i s appears to be to i t s advantage. The f a c t that S.N.P.A. owns 93-4% of Aquitaine's shares gives i t the c o n t r o l of the company, therefore i t w i l l r e c e i v e most of the dividends when there are some. However, the government of a country i n which an. investment i s made by a f o r e i g n company does not l i k e the f o r e i g n s u b s i d i a r y to be owned completely by the parent company. For t h i s reason Aquitaine launched some shares on the Canadian market i n 1968. The iss u e was rather l i m i t e d but could not be greater because Aquitaine i s s t i l l a young company and i t s exact value i s not known. I t i s the desi r e of the management to launch some more shares on the market i n the fu t u r e . This w i l l not give any pr e c i s e benefit to Aquitaine but i t w i l l give i t the good r e l a t i o n s with the T3 Paul de Bruyne, op. c i t . , p. 379-63 19 p u b l i c a u t h o r i t i e s that a f o r e i g n company always needs . This i s also one of the reasons why Aquitaine acquired a r e l a t i v e l y small part of Banff's shares. The soundness of the management of t h i s investment appears i n the r e s u l t s of Aquitaine as shown i n the next s e c t i o n . 2. The r e s u l t s I s hypothesis 2 v e r i f i e d f o r S.N.P.A.? The value of the assets of Aquitaine i s $38,183,412. This represents 14% of the t o t a l assets of S.N.P.A., but the production of Aquitaine represents one t h i r d of the t o t a l production of S.N.P.A.20. Moreover the r a t e of r e t u r n on investment of 21 A q u i t a i n e i s 6.09% , while the average r a t e of retu r n i n 22 the Canadian o i l i n d u s t r y i s 4-30% These e x c e l l e n t r e s u l t s are c e r t a i n l y due i n part to the luck of the company. Hazard plays an important r o l e i n the success of an o i l company, but these r e s u l t s are also due to a great extent to the q u a l i t y of the management, as explained i n the f i r s t s e c t i o n . T§ I d . , see also Friedman, W.G. and Kalmanoff, G., eds., J o i n t i n t e r n a t i o n a l business ventures, Columbia U n i v e r s i t y Press, New York, 1961. 20 1967 21 I d . 22 See I n t r o d u c t i o n , hypothesis 2. 64 CHAPTER I I I ELF OIL EXPLORATION AND PRODUCTION  CANADA LTD I . The parent-company:ERAP E l f O i l E x p l o r a t i o n and Production Canada L t d i s a s u b s i d i a r y of ERAP(Entreprise de Recherche et d ' A c t i v i t e P e t r o l i e r e s ) which was mentionned i n the previous chapter because Aquitaine i s a s u b s i d i a r y of SNPA which i n turn i s a s u b s i d i a r y of ERAP.51% of the c a p i t a l of SNPA i s owned by ERAP, but SNPA i s an almost completlely independent s u b s i d i a r y which j u s t i f i e d a separate studji. ERAP i s a state-owned corporation and i t i s a c t i v e i n a l l branches 'of the petroleum i n d u s t r y , from e x p l o r a t i o n to marketing through i t s n a t i o n a l or f o r e i g h s u b s i d i a r i e s . 1 The o r g a n i z a t i o n of ERAP i s described i n the f o l l o w i n g chart: 1 ERAP,Brochure 65 Table XXVII Organization chart of ERAP E l f Canada E l f R.E-. E x p l o r a t i o n Production Expl..- Prod, SOGERAP SNIP Financing ERAP Petrochemicals S..N.P.A. \ Refining-Petrochemicals Marketing ELF UNION Source;Elf,Rapport de gestion,1967 A* A c t i v i t y of ERAP 1. E x p l o r a t i o n On January 1 s t 1968 the s i t u a t i o n of ERAP (SNPA excluded) was as f o l l o w s : 66 Table XXVIII  Land ho l d i n g of ERAP ( 1 - 1 - 1 9 6 8 ) Km2 Gross Net permits leases permits leases France 3 9 , 3 2 6 341 3 3 , 3 3 2 291 Europe 8 9 , 4 2 0 65 2 6 , 9 6 9 28 North A f r i c a 215 ,313 12,567 108,711 6,796 L i b y a 4 , 0 0 ? 561 Somali 6 1 , 4 8 0 3 6 , 8 8 8 Former French E q u a t o r i a l A f r i c a and Madagascar Middie-East 2 3 9 , 8 2 4 7 3 , 3 5 9 3 , 3 4 2 2 2 6 , 4 6 6 7 2 , 2 0 7 3 , 3 2 7 North-America 3 4 9 , 9 2 8 126,569 Central,South America 137 ,804 7 4 , 6 5 0 T o t a l . 1 , '210,461 16,313 7 0 6 , 3 5 3 1 0 , 4 4 2 Source:Elf,Rapport de gestion , 1 9 6 7 I t can be seen i n t h i s tableau that the e x p l o r a t i o n dJs« now concentrated i n A f r i c a and North-America,and A f r i c a i s not s a f e r than the Middle-East where the i n t e r e s t s of ERAP are r e l a t i v e l y smaller than the ones of CFP and SNPA. 2 . Production The production of ERAP p r i n c i p a l l y comes from A l g e r i a as shown i n ths f o l l o w i n g t a b l e : 67 Table XXIX- -Production of ERAP (tons) i n 1967 &SNPA excluded) France 318,527 A l g e r i a 14,077,587 Gabon and Congo 2,463,473 N i g e r i a 1,056,260 Source:Elf,Rapport de gestion,1967 This t a b l e shows how the production of ERAP i s concentrated i n areas which are not safe from a p o l i t i c a l p o i n t of view and why i t needs to i n v e s t i n safer c o u n t r i e s l i k e Canada. 3- N a t u r a l gas The major part of the gas production comes from Lacq which i s operated by SNPA. 4. R e f i n i n g The r e f i n i n g a c t i v i t i e s s t a r t e d i n 1966.They are c a r r i e d on i n France,Belgium,West-Germany,Africa and Cambodia. There i s no r e f i n i n g a c t i v i t y i n North-America. In France,the r e f i n i n g capacity of ERAP was 8.3 m i l l i o n tons i n 1967,in other European coun t r i e s i t was 5.65 m i l l i o n tons,elsewhere i n the world i t was .86 m i l l i o n tons. Therefore the t o t a l r e f i n i n g capacity of the group was 14.8O m i l l i o n t o n s , t h i s was about one quarter of the r e f i n i n g capacity of Canada. 68 5. P f i t r - n c h e m i c a l s This a c t i v i t y i s c a r r i e d out by SNPA and El f - U n i o n . SNPA ranks as the t h i r d s u l f u r producer i n the world,the production p r i n c i p a l l y comes from Lacq.Elf-Union i s i n v o l v e d i n the petrochemical i n d u s t r y through i t s s u b s i d i a r y Rhone-Alp es. ERAP, p r i m a r i l y through SNPA,ranks as the f i r s t producer of s u l p h u r , r i l s a n and ethylene i n France.It also ranks as the second l a r g e s t French producer of p l a s t i c s . 6. D i s t r i b u t i o n ERAP has been i n v o l v e d i n d i s t r i b u t i o n since 1960. The d i s t r i b u t i o n business i s c a r r i e d on by E l f - U n i o n , E l f -D i s t r i b u t i o n , i t s French subsidiary,and by i t s f o r e i g n s u b s i d i a r i e s . In France,ERAP took over Caltex,La Mure and Av i a . The laame E l f - D i s t r i b u t i o n was adopted on A p r i l 28,1967,after an e x c e l l e n t a d v e r t i s i n g campaign.The value of the campaign i s shown by the increase i n s a l e s : i n 1967 the sales of ERAP increas e d by 19-7% while the n a t i o n a l sales increased by only 14.1%. E l f - D i s t r i b u t i o n i s also present i n the other c o u n t r i e s of the Common Market. B. Presence of ERAP i n the world When ERAP decided to i n v e s t i n safer c o u n t r i e s Canada was one of the most i n t e r e s t i n g countries f o r the 69 reasons given' i n the f i r s t chapter,but ERAP was used to f o r e i g n investments. Before 1962 ERAP was working i n the Franc Zone, mainly i n A l g e r i a and the former French c o l o n i e s i n C e n t r a l A f r i c a . I t s t a r t e d e x p l o r i n g i n other coun t r i e s a f t e r the agreements of Evian between France and the A l g e r i a n F.L.N. ERAP now has two s u b s i d i a r i e s i n A l g e r i a : L a Compagnie de Recherche et d'Etude P e t o l i e r e s ( 5 8 % to ERAP) and l a Societe Nationale de Recherche et d 1 E x p l o i t a t i o n Petrdliere,: en A l g e r i e ( 5 0 % to ERAP). ERAP i s now ex p l o r i n g i n many countr i e s outside the Franc Zone:Europe U.S.A.,Saudi Arabia,Iran,Iraq,Somali Turkey,Costa-Rica,Surinam,Venezuela,Australia,New Zealand, New-Guinea and Malaysia.In the countr i e s of A u s t r a l a s i a , ERAP i s present through SNPA only. I I . A r r i v a l of ERAP i n Canada ERAP in v e s t e d i n Canada i n 1963>the same year as SNPA.Nevertheless the investment was made i n a completely d i f f e r e n t way.Early i n 1963 t e c h n i c i a n s and economists v i s i t e d C a n a d a , p a r t i c u l a r l y Alberta,and ERAP also used the s e r v i c e s a Montreal lawyer.At the end of 1963 Betropar Canada L t d was created and i t i s only a f t e r the s e t t i n g up of t h i s company that p r o p e r t i e s were acquired.There was no a c q u i s i t i o n of a Canadian O i l Company. 70 The d i f f e r e n c e i n the a r r i v a l of the two companies r e s u l t s from a d i f f e r e n c e i n t h e i r policies.SNPA was i n t e r e s t e d i n short term prospects and long term prospects at the same time,i.e., i t wanted to i n v e s t i n t h e long run i n r i s k y areas but i t also wanted to have a cash-flow as soon as p o s s i b l e and the a c q u i s i t i o n of Banff O i l was c e r t a i n l y way to acheive that.ERAP was p r i m a r i l y i n t e r e s t e d i n long term prospects and d i d not have to take over a l o c a l f i r m . I I I . A c t i v i t y of ELF E.P. CANADA As a r e s u l t of i t s long-term p o l i c y , t h e a c t i v i t y of E l f has been p r i m a r i l y e x p l o r a t i o n since 1 9 6 3 . E l f has an i n t e r e s t i n only one producing f i e l d , i n Zama,in the North-West of Alberta,where the French Petroleum Co i s the operator,but the i n t e r e s t i s only 1 2 . 3 % and the cash-flow $ 1 5 , 0 0 0 per year. The f i r s t p a r t i c i p a t i o n taken was i n the A r c t i c , on the Domex group permits (Dominion Explorers l i , then many permits and leases were acquired i n the A r c t i c , t h e Northwest T e r r i t o r i e s , t h e offshore of the East Coast and Hudson Bay. In 1967 the company decided to i n v e s t i n B r i t i s h Columbia, Saskatchewan and A l b e r t a to obtain a cashflow i n the short r u n . E l f was one of the f i r s t companies to i n v e s t i n the Canadian A r c t i c , b u t since the discovery of Prudhoe Bay, A l a s k a , i n August 1 9 6 8 ,there has been:.a rush of o i l companies and the value of E l f p r o p e r t i e s has increased t e n f o l d . 71 A. The NWT and the A r c t i c E l f i s second i n the A r c t i c regions from an acreage holding viewpoint.The company has an i n t e r e s t of 100% on 10 m i l l i o n a c r e s . I t has not d r i l l e d to-date but the g e o l o g i c a l and geophysical s t u d i e s show that the area i s promising.Elf holds f i v e m i l l i o n acres i n the NWT where i t has almost always an i n t e r e s t of 100%,the lowest i n t e r e s t i s 40% on land h e l d together with Aquitaine,the French Petroleum and G u l f - C a n a d a . D r i l l i n g operations should s t a r t i n the autumn of'1969. B. Offshore of the East Coast E l f holds s e v e r a l permits around Newfoundland.lt has a 100% i n t e r e s t on a 1,800,000 acres permit' south of the i s l a n d ; t h i s f i e l d seems very p r o m i s i n g . l t also has a 100% i n t e r e s t on a 4,300,'o00 acres permit,East of Newfoundland, t h i s permit i s known as the Avalon permit.In the north E l f has a 50% i n t e r e s t on a permit held with Gulf.The company also holds various i n t e r e s t s offshore of St. P i e r r e and Miquelon,they have been granted by the French government, but as some permits have been granted i n the same area to Gulf by the Canadian Author!ties,no operation can be c a r r i e d out. Only a few companies are c a r r y i n g a c t i v i t i e s on the East Coast:Shell,Pan-Am,Imperial O i l and Mob i l O i l . Only Pan Am has d r i l l e d to-date and t h i s d r i l l i n g consisted 72 only of two holes i n 1 9 6 6 . S h e l l i s the only company holding a n . i n t e r e s t on the offshore of the West C o a s t , i t has been d r i l l i n g f o r two years but without success. C. Hudson Bay The company has had an i n t e r e s t of 7-5% on the permits h e l d by Aquitaine i n both operations since 1967. D. Others. In 1967 E l f decided to acquire p r o p e r t i e s i n Saskatchewan,British Columbia and Alberta.The i n t e r e s t s rank from 12.5% to 25% and the permits are u s u a l l y f a i r l y s mall.This i s not a major change i n the p o l i c y of the company,it i s only a des i r e to acquire a cash-flow i n the-short term. IV. F i n a n c i a l Aspects The t o t a l assets of E l f are worth % 9 , 1 6 8 , 4 1 2 2 " The production i s very small and the cash-flow derived from Zama i s only $ 15 ,000 per year,therefore E l f r e l i e s on i t s parent-company f o r i t s f i n a n c i n g . The budget i s prepared by the company and approved by ERAP a f t e r negotiations.The parent--company owns the shares of E l f but the l a t t e r w i l l i s s u e some shares on the Canadian market when i t deems i t advisable.The budget granted by ERAP represents about 4% of i t s own budget.The company also 2 Elf,Balance-sheet, 1 9 6 7 73 has a mortgage debt which amounted to $93,000 at the end of 1967. The c a p i t a l i s r e l a t i v e l y small ($50,000) and therefore the advances from the parent company represent the l a r g e s t part of the l i a b i l i t i e s of E l f . Permits and leases represent the l a r g e s t part of the assets; they amounted to $7,500,000 i n 1967 and to $13,500,000 i n 1968. I f the company was s o l d , a p r o f i t would be made; i t s value can be estimated at $25 m i l l i o n thanks to the l o c a t i o n of i t s permits and leases i n the north of the country. The company hopes to have a cash-flow from the e x p l o i t a t i o n i n the north i n 1972 and from the East Coast i n 1973. V. Organization and R e l a t i o n s h i p  with the Parent Company A. R e l a t i o n s h i p with the parent company  1. • H i e r a r c h i c a l r e l a t i o n s h i p The president of E l f E x p l o r a t i o n and Production Canada L t d . i s the head of the American d i v i s i o n of E l f R.E. i n P a r i s , and two of the f i v e d i r e c t o r s of the company l i v e i n France. Adding to t h i s the f a c t that E l f R.E. owns the whole c a p i t a l of Elf-Canada, we can see that Elf-Canada i s h i e r a r c h a l l y and f u n c t i o n a l l y dependent on i t s parent company. Nevertheless there i s enough f l e x i b i l i t y i n t h i r r e l a t i o n s , 7k so that the company i s able to work-on i t s own and to do what i t deems advisable without always r e f e r r i n g to i t s parent--company. Table XXX  Organization chart of E l f R.E. General management Explo. and prod. Managing d i r e c t o r Geographic d i v i s i o n Ameri d i v i can sion E l f Canada Source:Mr Saubestre,Executive.Vice-President,Elf-Canada 2. Technical r e l a t i o n s h i p The company o f t e n h i r e s people from France but i t also h i r e s the s e r v i c e s of Canadian contractors i f they are competitive or t e c h n i c a l l y more advanced. People often come from Elf-France i n the summer fo r g e o l o g i c a l work. The r e s u l t s of the geophysical s t d i e s are examined e i t h e r by t h e i r g e o p h y s i c i s t s i n Calgary or by the la b o r a t o r y of ERAP i n P a r i s . F u n c t i o n a l d i v i s i o n 75 B. Organization Canadian. The s t a f f of E l f c o n s i s t s of 13 persons,French and Table XXXI Organization chart of Elf-Canada President E x p l o r a t i o n manager Vice-President E x p l o i t a t i o n Secretary Treasurer Geophysicists G e o l o g i s t s Accountant i — A s s i s t a n t - s e c r e t a r y Draftsman Source:Mr Saubestre,Executive Vice-President. The management i s mostly French,while the t e c h n i c a l personnel i s Canadian. VI Prospects of the company The prospects are e x c e l l e n t . F o l l o w i n g i t s long-term p o l i c y , t h e company i s present i n the most promising areas of Canada.The A r c t i c regions seem to be p a r t i c u l a r l y i n t e r e s t i n g i f we r e f e r to the recent d i s c o v e r i e s made i n Alaska. 76 The management of the company thinks that the United States w i l l not f i n d enough oil:'.in i t s s u b - s o i l and that Canadian crude w i l l become of prime importance for i t s economy. But i f the Alaskan o i l can be transported to the West Coast or even to the East Coast v i a the Panama Canal and be competitive there, the exports of Canadian o i l to the U.S. are going to decrease i n s t e a d of i n c r e a s i n g . The managment of the company also hopes that the A r c t i c o i l w i l l be exported to Europe . They know that the areas where they have inv e s t e d are t e c h n i c a l l y promising but i t i s not p o s s i b l e to know whether the e x p l o i t a t i o n w i l l be economically p r o f i t a b l e . The company hopes to d r i l l i n the North as soon as p o s s i b l e ; the d r i l l i n g i s not as c o s t l y there as i t i s on the East Coast. Nevertheless they hope to s t a r t d r i l l i n g i n t h i s area by 1972. The company hopes to obtain a cash-flow from i t s f i e l d s i n B r i t i s h Columbia, Saskatchewan and A l b e r t a soon to finance i t s a c t i v i t i e s i n the North and i n the East. The most important problem f o r E l f i s the p r o f i t -a b i l i t y of the e x p l o i t a t i o n i n the North; i f t h i s e x p l o i t a t i o n i s p o s s i b l e , the r e s u l t s of the company w i l l be very s i g n i f i c a n t ^ . _ g e e chapter I . 4 The in f o r m a t i o n given i n t h i s chapter was obtained from the management of Elf-Canada, p a r t i c u l a r l y from Mr. Saubestre, Executive V i c e - P r e s i d e n t . . 77 V I I . A n a l y s i s of the Investment The previous paragraphs showed how the investment of E.R.A.P. i s d i f f e r e n t from the investment of S.N.P.A. E.R.A.P. and S.N.P.A. inv e s t e d i n Canada at the same time but i n completely d i f f e r e n t ways. A f t e r analyzing Aquitaine i t i s i n t e r e s t i n g to analyze E l f to compare the two investments. A. Management of the investment The great strength of E l f i s that i t i s f o l l o w i n g e x a c t l y the p o l i c y which was decided by E.R.A.P. E.R.A.P. di d not i n v e s t i n Canada to s t a r t a production immediately, but to acquire p r o p e r t i e s which should, be very p r o f i t a b l e i n the long run and E l f i s f o l l o w i n g t h i s p o l i c y : the p r o p e r t i e s are chosen very c a r e f u l l y and they are l o c a t e d i n the most promising areas of Canada, p a r t i c u l a r l y i n the A r c t i c ^ . E.R.A.P. di d not have to acquire a Canadian company. I t could get the connections and the knowledge necessary to i t s e x p l o r a t i o n by s e t t i n g up a small company with Canadian s p e c i a l i s t s . But i t seems that the main weakness of E l f i s the l a c k of Canadian s p e c i a l i s t s . Since no Canadian company was acquired and since there i s no development of a f i e l d f o r production, E.R.A.P. did not need as l a r g e an investment as S.N.P.A. As the investments were made i n such d i f f e r e n t ways, i t w i l l be i n t e r e s t i n g to compare the r e s u l t s of Aquitaine and E l f when the l a t t e r enters a production phase. 6" See Chapter I I I , I I I A. 78 B. The r e s u l t s This comparison i s not p o s s i b l e at the present time since E l f has no production. Nevertheless the comparison w i l l be extremely i n t e r e s t i n g i n ten to f i f t e e n years; i t w i l l then be p o s s i b l e to compare the two p o l i c i e s on the b a s i s of t h e i r r e s u l t s . However i t i s p o s s i b l e to appreciate what has been done u n t i l now by E l f by i n d i c a t i n g two p o i n t s : • 1. The p r o p e r t i e s which have been acquired are l o c a t e d i n the most promising areas of Canada, p a r t i c u l a r l y i n the A r c t i c . I f the company were to be s o l d now, i t would be o s o l d with a p r o f i t . Moreover, " g e o l o g i s t s t h i n k that as many as 30 b i l l i o n b a r r e l s of o i l may l i e under the surface Q of Canada's A r c t i c e i c e " y ; t h i s confirms the hopes of the management of E l f . 2 . The p o l a r route has a good chance of being opened to n a v i g a t i o n i n the near future, or a p i p e - l i n e w i l l be constructed from the A r c t i c to Edmonton. No study could prove that the e x p l o i t a t i o n would be p r o f i t a b l e , but the 200 b i l l i o n b a r r e l s of o i l i n Alaska and the 30 b i l l i o n b a r r e l s of o i l i n the Canadian A r c t i c w i l l c e r t a i n l y not remain undiscovered and eventually the e x p l o i t a t i o n w i l l be pro f i t a b l e " ^ . I f i t i s not p o s s i b l e to say that E l f has a t t a i n e d i t s goals, i t i s p o s s i b l e to say that i t i s making progress towards that end. 8 See F i n a n c i a l Aspects. 9 Time, J u l y 1 8 , 1969, p. 13-10 I d . 79 CHAPTER IV  FRENCH PETROLEUM CO. OF CANADA LTD. I . . The parent.company: Compagnie  Franqaise des P e t r o l e s The Compagnie Francaise des P e t r o l e s was created i n 1924 by the French government when France obtained the r i g h t s over the o i l bearing f i e l d s of Mesopotamia, which had p r e v i o u s l y belonged to Germany. France obtained these r i g h t s at the t r e a t y of San Remo"*". The growth of the Compagnie Franchise des P e t r o l e s has been steady and the company managed to enter the club of the b i g o i l producers. The company i s i n v o l v e d i n a l l the branches of the petroleum i n d u s t r y and i s present a l l over the world. A. E x p l o r a t i o n and Production Table XXXII Production of o i l of C.F.P. ( b a r r e l s per day) 1966 1967 Ir a n 2,112,000 2,384,207 I r a q 1,331,000 1,220,673 Quatar 289,000 294,036 Abu-Dhabi 363,000 383,013 Oman 58,412 A l g e r i a 387,207 454,011 Source: C.F.P., r e p o r t s . 1 Daniel Durand, op. c i t . , pp~ 97^ 98 and 99. 80 La Compagnie Francaise des P e t r o l e s i s also e x p l o r i n g i n other c o u n t r i e s , p a r t i c u l a r l y i n Senegal, Madagascar, South A f r i c a and A u s t r a l i a . B. Transport C.F.P. had. eighteen ve s s e l s representing a t o t a l of 692,000 cwt. i n 1967. This tonnage i s expected to double i n the next few years. C.F.P. holds some i n t e r e s t s i n the Societe du Pipe-Line Mediterranee-Rhone, i n the Sapro Co. (Switzerland) and i n p i p e - l i n e companies i n C e n t r a l Europe and A l g e r i a . C. R e f i n i n g The r e f i n i n g i n d u s t r y i s c a r r i e d on i n France, Germany, Gabon and South A f r i c a . In 1967, 19,077 , % k - tons of crude o i l were r e f i n e d i n France by the Compagnie Francaise de Raffinage, a s u b s i d i a r y of C.F.P. In the other c o u n t r i e s mentioned the r e f i n e r i e s have been f u n c t i o n i n g since 1967 only. D. Marketing C.F.P. i s i n v o l v e d i n marketing under the trade name of T o t a l . This name i s present throughout Europe and i n other coun t r i e s where the production of the company i s s u b s t a n t i a l . In 1967 the sales of r e f i n e d petroleum through d i s t r i b u t o r s using the trademark T o t a l amounted to 321,930 b a r r e l s per day. The increase over 1966 was 15%. Abroad the sales amounted to 273,060 b a r r e l s per day. A i r T o t a l , a s u b s i d i a r y of C.F.P., operates at 70 a i r p o r t s . 81 E. Petrochemical i n d u s t r y The group i s i n v o l v e d i n the petrochemical f i e l d through - i t s s u b s i d i a r y , t h e Compagnie Frangaise de B a f f i n a g e . ^ I I A r r i v a l i n Canada The Compagnie Franchise des P e t r o l e s i s t h e . f i r s t French O i l Company which was i n t e r e s t e d i n i n v e s t i n g i n Canada.This may be due to the f a c t that the company had been created to handle the i n t e r e s t s of the French government abroad.As e a r l y as 1953 >Mr. Henri de Cizancourt was sent to Canada by CFP with the task of studying the c o n d i t i o n s of the e x p l o i t a t i o n of o i l i n Canada. The way CFP entered the Canadian market i s completely d i f f e r e n t ffom the way SNPA d i d and was c l o s e r to the way ERAP d i d . Mr de Cizancourt created a branch of CFP i n Calgary i n December 1963-He acquired permits and l e a s e s . I n September 1956 the French Petroleum Company of Canada was incorporated as a p r i v a t e company and i t was converted i n t o a p u b l i c company i n June 1957-It acquired a l l the assets that CFP owned i n Saskatchewan,British Columbia and above a l l i n Alaska.CFP was p a i d with the shares of the new company. 3 Mr/Laing, Treasurer. 82 I I I A c t i v i t y of the French  Petroleum Co- of Canada A. A c q u i s i t i o n of permits and leases Table XXXIII Acreage h e l d by the French Petroleum Co. of Canada Gross acreage Net acreage 1954 808,865 154,608 1955 1,463,288 573,451 1956 2,547,136 1,522,337 1957 2,926,291 1,643,872 1958 2,229,412 1,244,553 1959 5,248,768 1,653,802 1960 5,272,013 1,533,641 1961 4,584,975 1,556,110 1962 5,439,535 2,312,815 1963 5,860,210 3,104,070 1964 6,334,685 4,165,070 1965 3,915,662 2,491,711 1966 5,524,324 2,340,990 1967 8,957,427 2,956,728 Source:Annual repo r t s The diminution of 1965 was due to the non-renewal of exploratory permits i n the Northwest T e r r i t o r i e s , and the surrender of exploratory permits i n Saskatchewan.Except for that the acreage holding of the company has been i n c r e a s i n g since 1954-83 Table XXXIV Location of the p r o p e r t i e s  Of the French Petroleum Co. A l b e r t a 2,125,033 1 , 0 7 7 , 7 3 4 Saskatchewan 26,925 9,533 B r i t i s h Columbia 631,607 377,253 Northwest T e r r i t o r i e s 623,653 405,594 Manitoba(Hudson Bay,onshore) 449,624 449,624 Ontario(Hudson Bay,onshore) 1,538,162 192,270 Federal(Hudson Bay,offshore) 986,560 123,320 T o t a l 8,957,427 2,956,728 Source:French Petroleum Co,Report,1967 Except f o r the Hudson Bay,where the company i s i n v o l v e d with Aquitaine and Elf,most p r o p e r t i e s are s i t u a t e d i n A l b e r t a . B. Reserves The reserves kept pace with the i n c r e a s i n g land holding as i t i s shown i n the f o l l o w i n g t a b l e : 84 Table XXXV O i l reserves of the French Petroleum Co Proven(bbls) Probable(bbls) 1954 275,000 150,000 1955 403,000 210,000 1956 7,107,000 2,918,000 1957 7,750,000 3,340,000 1958 12,500,000 6,100,000 1960 16,000,000 6,400,000 1963 23,100,000 11,800,000 1966 33,100,000 10,400,000 1967 34,094,411 10,555,000 French Petroleum Co ,reports C Production The production of the company i s r e l a t i v e l y small.The company d i d not make any b i g d i s c o v e r y . I t s f i r s t s i g n i f i c a n t discovery was made at Blonnie Glenn i n the e a r l y years of the exploration,but the w e l l was not deep enough and the p r o r a t i o n scheme of A l b e r t a reduced the production of the f i e l d . The tv/o other f i e l d s where the company has a s u b s t a n t i a l production are Swann H i l l s and Zama i n A l b e r t a . 4 Mr Laing,Treasurer 85 Table XXXVI O i l Production of the French Petroleum Co Year o bbls/year 1954 11,681 1955 96,040 1956 124,507 1957 278,462 1958 272,885 1959 469,571 1960 565,418 1961 722,583 1962 875,955 1963 1,046,494 1964 999,736 1965 988,907 1966 1,00.8,652 1967 1,114,339 Source:French Petroleum,reports The decreases of production i n 1964 and 1965 were due to a d e c l i n i n g p r o d u c t i v i t y i n s e v e r a l f i e l d s . IV F i n a n c i a l aspects The assets of the company amounted to $33,834,213 i n December 1967. 5 French Petroleum,annual report,1967 86 As the production of the French Petroleum Co. i s s m a l l , i t i s dependent on i t s parent-company f o r i t s financing.Every year the budget i s voted by C.F.P. a f t e r n e g o t i a t i o n s with the French Petroleum Co. The company bought the assets of C.F.P. by granting shares to i t and almost every year the funds a l l o c a t e d by the parent-company are paid back by an increase of c a p i t a l . In 1965,the c a p i t a l was reo r g a n i z e d . P r i o r to t h i s , the i s s u e d c a p i t a l c o n s isted of 2,580,000 p a r t i c i p a t i n g p r e f e r r e d shares of $10 each,carrying one vote each,and 11,603,882 ordi n a r y shares of $1 each.By r e s o l u t i o n approved on June 29,1965,the authorized c a p i t a l was changed to 6,500,000 common shares without nominal value.In 1967, the company i s s u e d shares f o r a t o t a l amount of $9 m i l l i o n , these shares were launched on the Canadian market. The d e f i c i t of the company i s due to the low p r o d u c t i v i t y of the f i e l d s , b u t i t i s also due to the account t i n g policy.When the company was created i n 1957,the d e f i c i t amounted to $ 26,013,411,it d i d not stop i n c r e a s i n g u n t i l 1965 when the company adopted the s o - c a l l e d f u l l cost method of accounting.The company has been making a p r o f i t every year since that and t h i s c o n t r i b u t e s to decrease i t s d e f i c i t . 87 V. R e l a t i o n s h i p with the Parent  Company and Organization A. R e l a t i o n s h i p with C.F.P. As the company i s f i n a n c i a l l y dependent on C.F.P., the r e l a t i o n s h i p between the two i s very close. Moreover, C.F.P. owns 59.02% of the c a p i t a l of the French Petroleum Co. This company i s the only French o i l company with a Canadian president. Mr. Hamilton succeeded Mr. de Cizancourt as president on 1966. On the other hand, the vi c e - p r e s i d e n t of the company i s French. Three out of seven d i r e c t o r s l i v e i n France. There i s also a t e c h n i c a l r e l a t i o n s h i p between the two companies. The g e o l o g i c a l l a b o r a t o r y of C.F.P. i n P a r i s i s o ften u t i l i z e d and people can be sent from France f o r seasonal work. B. Organization The company has a s t a f f of s i x t y - t h r e e people, the m a j o r i t y of whom are Canadian. This la r g e s t a f f enables the company to do more by i t s e l f than Aquitaine and E l f . VI. Prospects The prospects of the company are very good; t h i s i s the reason why the Compagnie Franchise des P e t r o l e s s t i l l i n v e s t s i n Canada despite the moderate r e s u l t s of the French Petroleum Co. The budget a l l o c a t e d by C.F.P. has doubled i n the l a s t two years. The company has some i n t e r e s t s i n two promising areas: 88 - i n Hudson B a y : i t has an i n t e r e s t of 12.5% on 20,500,000 acres. - i n the Northwest T e r r i t o r i e s and Yukonrit holds 1,250,000 net acres.This property was revalued by the d i s c o v e r i e s made i n Alaska.The permits of L i v e r p o o l Bay and B r i t i s h Mountain are p a r t i c u l a r l y i n t e r e s t i n g . T h e company plans to d r i l l there i n the e a r l y Eameteen seventies. VII A n a l y s i s of the investment The study of t h i s investment showed how C.F.P. in v e s t e d i n Canada i n the same way as ERAP and how the French Petroleum Co then had a p o l i c y s i m i l a r to the p o l i c y of A q u i t a i n e . 1 . C.F.P. i n v e s t e d i n Canada the same way ERAP d i d , i . e . i t d i d not acquire any Canadian company,rather i t acquired p r o p e r t i e s by i t s e l f and then created the French Petroleum Co of Canada L t d which took over the assets of C.F.P. i n Canada. Nevertheless C.F.P. decided to f i l l top p o s i t i o n s 7 with Canadians ,and t h i s appears to be the great strength of the French Petroleum Co.Mr Hamilton,who was working f o r I m p e r i a l Oil,became v i c e - p r e s i d e n t of the French Petroleum Co and i s now the president of the company.This gave the company the connections and the knowledge that Aquitaine obtained p r i m a r i l y through Banff o i l . 2. The French PetroleumCo then had a p o l i c y s i m i l a r to the p o l i c y of A q u i t a i n e , i . e . most of the p r o p e r t i e s which the company acquired are i n Alberta,which i s the most proven zone of Canada,and therefore proved i t s e l f to be more 7 ^ee chap IV,paragraph V : • 89 i n t e r e s t e d i n the short term than i n the long term.Nevertheless the -results of the French Petroleum Co are not as good as the r e s u l t s of Aq u i t a i n e . The value of the assets of the French Petroleum Co i s $33,834,213,this represents Lf/0 of the t o t a l assets of C.F.P. but the production i n Canada represents only .3% of the t o t a l production of the group,and the r a t e of r e t u r n on investment i s 1.90%. How can we e x p l a i n these r e s u l t s ? T h i s i s the great problem of the management of the company.The r o l e played by hazard i n the o i l i n d u s t r y i s very high and t h i s i s c e r t a i n l y the answer to the question.Nevertheless C.F.P. decided to continue these investments i n Canada,and the p r o p e r t i e s that the French Petroleum acquired i n the North of the country should give the company a l a r g e r r a t e of r e t u r n on investment. 90 CHAPTER V ANALYSIS AND CONCLUSIONS The purpose of t h i s l a s t chapter i s : — t o v e r i f y the hypotheses set f o r t h i n the i n t r o d u c t i o n --to make recommendations and draw conclusions. I . V e r i f i c a t i o n of the hypotheses 1. The f i r s t hypothesis was concerned with the p o l i t i c a l and economic s a f e t y of the French o i l investments i n Canada. The hypothesis of p o l i t i c a l safety as a .motivation f o r investment has been supported. The investments are not and were not endangered by p o l i t i c a l i n s t a b i l i t y i n Canada. There was no n a t i o n a l i z a t i o n and there i s no danger that another p o l i t i c a l party coming i n t o power would n a t i o n a l i z e the o i l i n d u s t r y . This danger which e x i s t s i n the Middle East and i n A f r i c a does not e x i s t i n Canada. Moreover there i s no r i s k of r e v o l u t i o n or p o l i t i c a l t rouble as there i s i n developing c o u n t r i e s . The aspect of economic safety i n Canada r e q u i r e s more a t t e n t i o n than the aspect of p o l i t i c a l s a f e t y . The Compagnie Franchise des P e t r o l e s i n v e s t e d i n Canada i n 1953 and thus was the only one of these companies to s u f f e r the 7-5% devaluation of the Canadian d o l l a r i n 1 9 6 2 . This had two major consequences: — T h e r e was a decrease of the value of the assets, --but on the other hand the future investments of C.F.P. 91 became cheaper, because f o r the same number of d o l l a r s needed, the amount of fo r e i g n currency necessary decreased. As S.N.P.A. and E.R.A.P. inv e s t e d i n Canada i n 1963, they d i d not s u f f e r the devaluation. I t i s n o t i c e a b l e that the c a p i t a l of E l f i s only $50,000; t h i s may be a consequence of the 1962 devaluation. The loans given i n f o r e i g n currency do not s u f f e r a devaluation l i k e advances i n c a p i t a l ; on the other hand, a devaluation of the French Franc would be more damaging to a company which grants loans to i t s s u b s i d i a r y . The r a t e of i n f l a t i o n has been lower i n Canada than i n other c o u n t r i e s where the French o i l companies could have i n v e s t e d , except i n France, where the rate i s almost the same as i n Canada, as shown i n the f o l l o w i n g t a b l e . TABLE XXXVII Increases i n P r i c e s i n Canada,  France, I r a q , S y r i a , Venezuela 1963 1964 1965 1966 1967 Canada 100 100 102 106 108 France 100 102 103 105 105 I r a q 100 105 101 106 114 S y r i a 100 102 101 111 116 Venezuela 100 104 108 109 111 Source: United Nations, S t a t i s t i c a l year book, 1 9 6 3 . The other safety c r i t e r i a have been f u l f i l l e d as expected, there was no i n c o n v e r t i b i l i t y , no surtax or any other burden on f o r e i g n investments. Canada i s a country which needs and welcomes fo r e i g n investments. 9 2 We can say that the hypothesis of p o l i t i c a l and economic sa f e t y as a motivation fo'r French o i l investments i n Canada has been supported, and t h i s was the main reason f o r these investments^. But i t i s necessary to v e r i f y the second hypothesis to see whether the r e s u l t s of these companies are s u b s t a n t i a l , 1. e., to see whether the French o i l companies do not pay too much f o r the s a f e t y they have i n Canada. 2. The second hypothesis was concerned with the p r o f i t a b i l i t y o f these investments. We chose two r a t i o s when formulating t h i s hypothesis: the production of the s u b s i d i a r y as a percentage of the production of the group _^ the assets of the s u b s i d i a r y as a percentage of the t o t a l assets of the group the r a t e of r e t u r n of investment of a company the r a t e of r e t u r n of the Canadian o i l i n d u s t r y These r a t i o s were chosen because they show the p r o f i t a b i l i t y of the s u b s i d i a r i e s as compared to the p r o f i t a b i l i t y of the parent companies and to the p r o f i t a b i l i t y of the o i l companies i n Canada. The r a t e of r e t u r n was obtained by comparing the net 2 p r o f i t to the t o t a l assets . The f o l l o w i n g t a ble i s dreived from Chapters 2, 3 and L\ and from the 1967 annual r e p o r t s of the French o i l companies i n Canada. I t compares t h e i r investment and t h e i r r e s u l t s . 1 See I n t r o d u c t i o n , hypothesis 1. 2 See I n t r o d u c t i o n , hypothesis 2. 93 TABLE XXXVIII A Comparison of the Three French  O i l Companies i n Canada Aquitaine E l f French Petroleum Investments (|) 58,183,412 9,168,412 33,834,213 Return on Investment 6.09% n i l 1.90% Assets (% of the group) 14.00% 1.20% 4.00% Production (% of the group) 33.00% n i l .30% Production (•barrels) 3,961,337 n i l 1,114,339 P r o p e r t i e s (net- acres) 5,111,409 3,849,842 2,952,728 a) Aquitaine Aquitaine produces 33% of the output of S.N.P.A. with only lif.% of i t s assets. This i s c e r t a i n l y an e x c e l l e n t r e s u l t and we should remember that t h i s i s only four years a f t e r i t s a r r i v a l i n Canada. This success i s due to the discovery made i n Rainbow j u s t a f t e r the a r r i v a l of the company i n Canada, and i t i s the a c q u i s i t i o n of a Canadian Company, Banff O i l Co., which made t h i s discovery p o s s i b l e so soon a f t e r t h e i r a r r i v a l i n Canada. This shows that the p r o f i t made from a f o r e i g n investment w i l l be bigger and w i l l occur sooner with the knowledge,. ..the experience and the connections of a l o c a l 3 company . The rat e of r e t u r n on investment of Aquitaine was 6.09% i n 1967, which i s almost two po i n t s above the rat e of 3 See Chapter I I , Section V I I . 94 r e t u r n of the o i l i n d u s t r y i n Canada. Therefore we can say that t h i s investment i s a success and that S.N.P.A. has at t a i n e d i t s two goals. b) E l f E l f has not as yet gone i n t o production, therefore i n order to appraise i t s r e s u l t s we have to compare i t s goals to what has been done to date. We should remember that E.R.A.P. had a long-term p o l i c y and was not i n t e r e s t e d i n immediate p r o f i t s but i n long-term prospects. The p r o p e r t i e s were acquired very c a r e f u l l y and E l f now appears to be lo c a t e d i n the most promising areas of Canada, p a r t i c u l a r l y i n the A r c t i c regions, the Yukon and the Northwest T e r r i t o r i e s . The p r o p e r t i e s of E l f were revalued by the discovery made i n Prudhoe Bay, Alaska, i n 1968, and as i t has been s a i d ^ , i f the company had to be s o l d now, i t would be s o l d with a p r o f i t , because of the l o c a t i o n of the p r o p e r t i e s . c) The French Petroleum Co. The iD roduct ion of the French Petroleum Co. represents only .3% of the production of C.F.P., while the t o t a l assets represent 4% o f the t o t a l assets of C.F.P. The rate of r e t u r n i s only 1.90%, therefore we cannot say that these investments are very p r o f i t a b l e for the parent company. Nevertheless C.F.P. continues to i n v e s t i n Canada; t h i s i s due to the p o s s i b i l i t i e s of o i l discovery that C.F.P. sees i n 4 See Chapters I I I and IV. 95 Canada, and i t i s encouraged to continue these investments 5 by the success of Aquitaine . 3- The t h i r d hypothesis was concerned with the good i n f l u e n c e of these investments on the Canadian economy. This was not a motivation f o r the i n v e s t o r s , but i t i s a normal consequence of a f o r e i g n investment, and i t i s necessary to see what i s the impact of the French o i l investments :bn the Canadian economy, i f we want t h i s study to toe complete. But i t i s c e r t a i n l y the most d i f f i c u l t hypothesis to v e r i f y because t h i s i n f l u e n c e i s u s u a l l y not measurable and can only be estimated. The production of the French o i l companies i n Canada was 5 j 0 7 5 5 6 7 6 b a r r e l s i n 1967; during the same year the t o t a l o i l production i n Canada was 3 4 9 , 9 1 4 , 9 7 1 b a r r e l s . Since the output of these French o i l companies represents only 1.4% of the Canadian o i l production, the a d d i t i o n to the gross n a t i o n a l product i s very small. Nevertheless we can analyze the i n f l u e n c e s that these investments have on the Canadian economy. The French O i l companies can have an i n f l u e n c e on t h e i r environment. A f o r e i g n company has to order m a t e r i a l and equipment. Does i t order them from i t s parent company or from l o c a l companies? Does the f o r e i g n company engage l o c a l people or does i t work with people sent by i t s parent company? Does i t s a c t i v i t y o r i g i n a t e any a c t i v i t y f o r l o c a l 5 See Chapters IV and V I I . 6 Canadian Petroleum A s s o c i a t i o n , S t a t i s t i c a l year book, 1967 . 96 firms? The answers to these questions w i l l show us whether the French s u b s i d i a r i e s are only French co l o n i e s i n Canada or whether they are r e a l l y i n v o l v e d i n the Candian economic l i f e . As f a r i s personnel i s 'concerned, the French Petroleum Co. i s c e r t a i n l y the most Canadian of the French s u b s i d i a r i e s . The president of the company i s Canadian, as are most of the managers and employees. Aquitaine and E l f engage more and more Canadians because these companies have understood the b e n e f i t which r e s u l t s from such employment 7 p r a c t i c e s . As i t was s a i d i n the t h i r d chapter, tne l o c a l people have the knowledge and connections necessary to the success of a f o r e i g n investment. Moreover, t h i s has a p s y c h o l o g i c a l i n f l u e n c e on the p u b l i c a u t h o r i t i e s which w i l l be more favourable to f o r e i g n companies which engage c i t i z e n s and i n v i t e them to develop t h e i r country i n s t e a d of merely t a k i n g the n a t i o n a l resources out of the country. The French o i l companies often h i r e the s e r v i c e s of Canadian companies i f they are competitive, but they also work with personnel sent from France for seasonal operations. Aquitaine often h i r e s the s e r v i c e s of Canadian companies through Banff O i l Co., which u s u a l l y i s i t s operator. I t g e n e r a l l y works with S.N.P.A. i n the areas Where Banff O i l i s not the operator, p a r t i c u l a r l y i n the Hudson Bay. 7 See Chapters I I and V I I . 97 The s e r v i c e s of S.N.P.A. are u s u a l l y h i r e d for deep d r i l l i n g because i t s technology i n t h i s f i e l d i s very advanced. As f a r as E l f and the French Petroleum Co. are concerned, they o f t e n h i r e people from t h e i r parent companies f o r seasonal work but they u s u a l l y h i r e the s e r v i c e s of o Canadian firms when these are competitive . The parent companies i n P a r i s want to decide the general p o l i c y of t h e i r s u b s i d i a r i e s i n Canada, but they also want them to be i n v o l v e d i n the Canadian l i f e as much as p o s s i b l e for the reasons 9 p r e v i o u s l y explained . As most of the m a t e r i a l and equipment used i n e x p l o r a t i o n and production belongs to the co n t r a c t o r s , the companies do not req u i r e t h e i r own such equipment"^. Nevertheless o f f i c e f u r n i t u r e and equipment i s purchased i n Canada and we should also mention the constru c t i o n s occasioned by these companies and p a r t i c u l a r l y Aquitaine's $8,000,000 o f f i c e b u i l d i n g i n Calgary and i t s f o r t y - e i g h t houses at Rainbow. I t appears from t h i s study that although the economic i n f l u e n c e of the French o i l companies Js-;not and cannot be very s u b s t a n t i a l , the management of these companies have a strong d e s i r e f o r a s s i m i l a t i o n i n t o the Canadian economy. 15 See Chapters I I I and IV 9 See Chapters I I and V I I I 10 The assets of o i l companies c o n s i s t p r i n c i p a l l y of p r o p e r t i e s . The f i e l d equipment i s not very s i g n i f i c a n t : — A q u i t a i n e - $3,022,033 French Petroleum - 02,683,320 — E l f - $173,957 (Purchase cost) Source: 1967 r e p o r t s . 9 8 We should now analyze the f i n a n c i a l consequences of these investments, p a r t i c u l a r l y t h e i r i n f l u e n c e on the balance of payments. This i n f l u e n c e appears to be p o s i t i v e : the c a p i t a l comes from France, but no money leaves Canada except the payment of the s e r v i c e s of the parent companies when they are h i r e d and the repayment of loans. Aquitaine i s the: only company to pay an i n t e r e s t and to repay loans because i t i s the only company which has obtained loans from French banks. E l f and the French Petroleum r e c e i v e advances from t h e i r parent companies and these are u s u a l l y r epaid by increase of c a p i t a l and a l l o c a t i o n of shares to the parent company. As.these companies do not pay dividends, the f a c t that the d a p i t a l belongs to the parent companies has no i n f l u e n c e on the balance of payments of Canada. I t i s important that a s i g n i f i c a n t part of the c a p i t a l belongs to Canadians when these companies s t a r t paying dividends. I f not, there would be a continuous e x i t of d o l l a r s from Canada. A f o r e i g n country i s much concerned with that; the advances by c a p i t a l have the advantage that there are no dividends i f there i s no p r o f i t , but the dividends are paid as long as the company makes a p r o f i t , while loans which have to be r e p a i d without any c o n s i d e r a t i o n of p r o f i t have a l i m i t i n time, and once the loans have been reimbursed, the p r o f i t s can be r e i n v e s t e d i n the country"*""*". As these companies want to launch shares on the Canadian market, part of the 11- Bernard Bonin, op. c i t . , pp. 324-331. 99 p r o f i t s w i l l stay i n Canada and there w i l l be no negative i n f l u e n c e on the balance of payments of Canada. The balance of trade i s also i n f l u e n c e d by these investments. As i t was explained i n the f i r s t chapter, Eastern Canada imports o i l while Western Canada exports o i l . The export of t h i s o i l to the United States brings American currency to Canada and thus has a p o s i t i v e e f f e c t on the balance of payments, and counterbalances the purchase of o i l abroad f o r the Montreal market. The most important b e n e f i t of these investments f o r Canada i s complementary to the b e n e f i t of the companies; i t i s v a r i e t y and d i v e r s i f i c a t i o n . We have seen the desi r e of the French o i l companies to d i v e r s i f y t h e i r investments to e q u i l i b r a t e the r i s k s . Canada i s c e r t a i n l y glad to d i v e r s i f y the source of f o r e i g n investments, p a r t i c u l a r l y i n the o i l 12 i n d u s t r y Moreover, French i n v e s t o r s are more f l e x i b l e than many American i n v e s t o r s : some of the U.S. s u b s i d i a r i e s cannot buy Canadian equipment without the approval of t h e i r parent company J?. 12 See Chapter I . See a l s o : Canadian Balance of I n t e r n a t i o n a l payments,  1961-1962, p^ 61 and Quarterly Estimates of the Canadian  Balance of I n t e r n a t i o n a l payments", 19667 p. 16, Dominion Bureau of S t a t i s t i c s . 13 Bernard Bonin, ,op. c i t . , p. 221. 1 0 0 I I Recommendations We can draw some recommendations from t h i s study. 1 . P r o f i t maximization i s not and should not always be the f i r s t goal of f o r e i g n i n v e s t o r s . Even i f i t i s an important c r i t e r i o n , i t i s not n e c e s s a r i l y the most important one as was proven i n t h i s study. This i s an example of the " p r o f i t s a t i s f i c i n g " theory which was developed by Herbert Simon"*"^. Some f a c t o r s can be more important than p r o f i t maximization, such as s e c u r i t y and o r g a n i z a t i o n goals. 2. I t i s important to have l o c a l connections. These connections can be obtained by the a c q u i s i t i o n of or a s s o c i a t i o n with a l o c a l company or by the employment of l o c a l people at a high l e v e l . The r a p i d success of A q u i t a i n e i s a good example of t h i s . The l o c a l people or l o c a l firms also have the knowledge and experience that the f o r e i g n i n v e s t o r does not have. 3. The s u b s i d i a r y should have s u f f i c i e n t freedom. I f i t i s normal f o r the parent company to decide the general p o l i c y of i t s s u b s i d i a r y according to i t s own general p o l i c y , i t i s of prime importance that the s u b s i d i a r y can make the d e c i s i o n s necessary to solve the problems which i t faces on a day-to-day b a s i s . k- I t i s very important not to appear as a c o l o n i a l i s t . This can be done by: 1 4 Aharoni, op. c i t . , p. 2~o3~. 101 — e n g a g i n g l o c a l people, — l a u n c h i n g shares on the l o c a l market so that the l o c a l people can p a r t i c i p a t e i n the p r o f i t s r e s u l t i n g from the development of t h e i r n a t i o n a l resources, ;—behaving l i k e a n a t i o n a l f i r m , i . e . , purchasing m a t e r i a l and equipment on the spot, o b t a i n i n g loans from l o c a l banks when t h i s i s p o s s i b l e , to avoid a negative e f f e c t on the balance of payments r e s u l t i n g from the payment of i n t e r e s t , etc. I t i s important to send the r i g h t men to a f o r e i g n country. These people have to be able to adapt themselves to t h e i r new environments. 102 GENERAL CONCLUSION France and Canada find..a mutual i n t e r e s t i n the investments of the French o i l companies i n Canada: The French companies wanted to make a safe investment, an investment i n a country where the p o l i t i c a l and economic r i s k s would be much smaller than i n countries where they had in v e s t e d before. This c r i t e r i o n of safety i s f u l f i l l e d and the r e s u l t s of these companies are good, or t h e i r prospects are good. Canada welcomes i n v e s t o r s who do not .merely want to take the Canadian n a t i o n a l resources out of the country but also want to share the p r o f i t s they make from the e x p l o i t a t i o n of these n a t i o n a l resources. The investments of the French o i l companies are only one example among many of the economic r e l a t i o n s h i p between France and Canada. Economic r e l a t i o n s help to provide a bet t e r understanding between c o u n t r i e s , and i t i s hoped that these r e l a t i o n s w i l l become more and. more s i g n i f i c a n t for the b e n e f i t of both Canada and France. 103 BIBLIOGRAPHY I. BOOKS Aharon!, Y a i r , The Foreign Investment Decision Process, D i v i s i o n of Research, Graduate School of Business A d m i n i s t r a t i o n , Harvard U n i v e r s i t y , 1966. Bonin, Bernard, L'Investissement Etranger a Long Terrne au  Canada, l e s Presses de L'Ecole de Hautes Etudes Commerciales de Montreal, 196?. de Bruyne, P a u l , E n t r e p r i s e s et Marches d'Outre-Mer, Dunod E d i t e u r , P a r i s , 1966. C e n t r a l O f f i c e of Information, London, U.K., World O i l , a  Short Survey, 1966. Durand, Danie1, La P o l i t i q u e P e t r o l i e r e I n t e r n a t i o n a l e , Presses U n i v e r s i t a i r e s de France, 1962. Hansom, E r i c , Dynamic Decade, McClelland and Stewart L t d . , London, 1938. Issaw i , Charles, The Economics of Middle Eastern O i l , F r e d e r i c k A. Praeger, New York, 1962. Longrigg, S. H., O i l i n the Middle East, Oxford U n i v e r s i t y Press, 1968. Martyn, Howe, I n t e r n a t i o n a l Business, the Tree Press of Glencoe, C o l l i e r - M a c M i l l a n L t d . , London, 1963• Mikdashi, Zuhayr, A F i n a n c i a l A n a l y s i s of Middle Eastern  O i l Concessions: 1901 - 1965, F r e d e r i c k A. Praeger, New York, 1966. Nash, G. D., United States O i l P o l i c y , U n i v e r s i t y of P i t t s b u r g h Press, 19c"5\ O d e l l , P. R., An Economic Geography of O i l , G. B e l l and Sons L t d . , London, 1963• ' O.E.C.D., Energy P o l i c y , Problems and Obje c t i v e s , O.E.C.D., P a r i s, 1966. P l o t n i c k , A. R., Petroleum: Canadian Markets and United States Foreign P o l i c y , U n i v e r s i t y of Washington Press, lOZf I I . PUBLICATIONS Aqu i t a i n e Co. of Canada L t d . , Annual Reports, 196k - 1 9 6 7 . Banff O i l Co., The Appropriate Income Tax Treatment of the  Canadian O i l and Gas Industry, 19€E~. Banff O i l Co., Annual Reports, 1965 - 1967. Banff O i l Co., Etudes de Reservoir et Conservation des  Girements dans l e Cadre du Systeme de P r o r a t i o n en  A l b e r t a , June 1 9 6 8 . Bank of Montreal, O i l and Gas Department, P u b l i c a t i o n s on the o i l i n d u s t r y i n Canada. Canadian Petroleum A s s o c i a t i o n , Monthly S t a t i s t i c a l B u l l e t i n , August 1 9 6 8 . Canadian Petroleum A s s o c i a t i o n , S t a t i s t i c a l Year Book, 1 9 6 ? . La Documentation Francaise, Notes et Etudes Documentaires, no. 3 4 6 2 . E l f , Rapport de Gestion, 196?. French Petroleum Co. of Canada L t d . , Annual Reports, 1957 -1 9 6 7 . I m p e r i a l Bank of Commerce, O i l and Gas Department, P u b l i c a t i o n s on the o i l i n d u s t r y i n Canada. Imp e r i a l O i l C o l , Facts and Figures about O i l i n Canada, June 1 9 6 8 . Independent Petroleum A s s o c i a t i o n , P u b l i c a t i o n s of the o i l i n d u s t r y i n Canada. Independent Petroleum A s s o c i a t i o n , State of Industry: Address  to the Federal Cabinet, November 1 9 6 8 . Royal Bank of Canada, O i l and Gas Department, P u b l i c a t i o n s on the o i l i n d u s t r y i n Canada. S.N.P.A., Annual Reports, 1965 - 1967 . I I I . UNPUBLISHED PAPER Aquitaine Company of Canada L t d . , Rapport Pomared. 

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