the natural resources development debate in canada

Groforum. Vol. 12. No 3. ,,p. 227-236, 1981. Prmted m Great Britain

*11~7185/81/030227-lOSOZ.M/U 0,9”, Pergamon Press Ltd.

The Natural Resources Development Debate in Canada

BRUCE MITCHELL*, Waterloo, Canada

Abstract: The current debate concerning natural resources developed in Canada- is examined against the background of population distribution, electoral distribution, variations in regional economies, foreign investment, federal versus provincial jurisdiction over resources, and the demands for constitutional reform. These have resulted in an essential division between the resource producing regions of the west and, to a lesser extent the extreme east, and the resource consuming region in the centre. After establishing the context for resource development, the paper goes on to assess the debate as it has evolved with respect to offshore fishery resources on the Atlantic Coast, potash in Saskatchewan and petroleum and natural gas in the western provinces.

Introduction

The recent and extended debate over natural resources development in Canada can be related to several themes or issues: (1) the redistribution of income, wealth and power associated with resource development, (2) the accommodation or reconcilia- tion of diverging national and regional interests, (3) the balancing of concerns with economic efficiency and social equity during resource development, and (4) the necessity for trade-offs and compromises in satisfying conflicting societal values and objectives. These four themes or issues are considered first by identifying and reviewing a variety of aspects which establish the context for resource development, and second by assessing the resource development debate as it has evolved for offshore and fishery resources on the Atlantic coast, potash in Saskatchewan, and petroleum and natural gas in the Western provinces.

Context for Resource Development in Canada

A number of aspects combine to set the context for resource development. Each one in isolation is less significant than when they are considered collec-

*Professor, Dept. of Geography, University of Waterloo, Waterloo, Ontario, Canada N2L 3Gl. This paper represents the text of a lecture delivered at Canada House, London, on February 10, 1981, while the author was visiting Professor in the School of Geography, University of Leeds, Leeds, U.K.

tively. The aspects considered here are population distribution, electoral distribution, regional economies, foreign investment, shared jurisdiction for resources, and constitutional reform.

Population distribution

As of October 1, 1980, STATISTICS CANADA estimated the total population of Canada to be just over 24 million. The majority of the population is concentrated in Ontario and Quebec (Table 1). Al- though the most rapidly growing provinces are Alberta and British Columbia, it is clear that the majority of Canadians live in Central Canada. This situation is unlikely to change significantly during the 1980s and 1990s.

Table 1. Canadian Population Distribution (as estimated on October 1, 1980)

Total 24,009,600

Ontario 8,587,300 36% Quebec 6,310,800 26% British Columbia 2,662,OLXl 11% Alberta 2,113,300 9% Manitoba Saskatchewan

1,028,000 8% 973,000 1

Nova Scotia 855,000 New Brunswick 705,700 Newfoundland 582,800

1

10%

Prince Edward Island 124,000 Northwest Territories 43,cOO Yukon Territories 21,600

Source: STATISTICS CANADA, 1980.

228 Geoforum/VoIume lZ/Number 3/1981

Several implications arise concerning the resource development debate. Central Canada, with its large population, may be viewed as the major resource ~on~~~~n~ region within Canada. As such, residents of Central Canada are likely to place high priority upon maintaining relatively low prices for energy and similar resource-related commodities since these goods often must be imported into the region. Con- versely, when it is recognized that some 85% of domestic petroleum and natural gas production is in Alberta, with the balance in British Columbia and Saskatchewan, the Western provinces become a resource producing region, at feast for energy. Resi- dents in the Western provinces naturally desire a price for energy products which approaches world price levels. Such a situation has resulted in disagreements between Western and Central Canada regarding how the wealth, income and power from resource development should be shared.

Electoral distribution

The distribution of seats in the parliament of Canada follows the population distribution with the majority of seats being in Central Canada (Table 2). When the distribution of seats by political party is considered, it is clear that there is a sharp polarization. The Liberals, the majority party, have eIected only two members west of Ontario, and none west of Mani- toba. The Conservatives, the official opposition party, have much of their strength in the West but have onfy one member from Quebec. In contrast, the Liberals took all but one seat in Quebec. Thus, there is no national political party which has a mandate from all of the regions in Canada.

A further consideration is the possibility of substantial petroleum discoveries in the Beaufort Sea and the islands and adjacent waters of the High Arctic. Given the relatively small population in the Arctic. and the concentration of consumers in Southern

This situation has created further tension when it is realized that the Liberals were able to gain a majority during the last election from support in Central and Atlantic Canada. Thus, with the time difference (5% hours) across the country, when the polls closed in British Columbia and Alberta, voting had been over for two to three hours in Ontario. The first thing British Columbians and Albertans heard when they turned on their radios and televisions at 8 pm on

Table 2. Canadian Election Results (February 18, 1980)

New Progressive Democratic

Liberals Conservaties Party Totals

Atlantic Provinces 19 13 0 32 Newfoundland 5 2 0 7 Nova Scotia 5 6 0 I1 Prince Edward Island 2 2 0 4 New Brunswick 7 3 0 10

Quebec 74 1 0 75 Ontario 52 38 5 95 Prairie Provinces 2 33 14 49

Manitoba 2 5 7 14 Saskatchewan 0 7 7 14 Alberta 0 21 0 21

British Columbia 0 16 12 28 The North 0 2 I 3

Yukon Territories 0 1 0 I Northwest Territories 0 f 1 1

Totals 147 103 32 282

Source: KEESING’S CONTEMPORARY ARCHIVES June 6. 1980, p. 30290.

Canada, it is likely that resource development decisions will favour the resource-consuming regions of the country. However, the major environmental and social impacts will be borne by the residents of Northern Canada. In this situation, a need arises to balance concern with economic efficiency and social equity.

election night was that a majority Liberal Govern- ment had been elected. In other words, the western votes had no impact on which party formed the government. This created considerable bitterness in the Western provinces since one of the main election issues had been the price for petroleum. Many ‘Westerners’ believed that voters in Central and

Geoforum/Volume 12/Number 3/1981

Atlantic Canada voted for the party which best served their regional interests, and, even though the Liberals were almost totally rejected in the west, the voters in the four Western provinces could not in- fluence the outcome of the election, due to the manner in which electoral seats are distributed. This fact, and other considerations, has led to frustration and bitterness in Western Canada, to the extent that by late 1980 there was growing support for those who advocated that the Western provinces should sepa- rate from the rest of Canada.

Regional economies

The economic historian, Harold Innis, offered the staple theory to account for the pattern of Canadian economic development. He argued that Canada’s development was based on successive exploitation of five different resources - cod, fur, timber, wheat and minerals. In this sense, Canada became a “hewer of wood and drawer of water”, trading unprocessed natural resources for manufactured goods made in other countries.

A Canadian manufacturing sector has developed, however, especially in Central Canada along the axis from Windsor to Montreal. This development was started at the time of Confederation in 1867, when Canada was comprised only of Ontario, Quebec, New Brunswick and Nova Scotia (Table 3). A major concern at that time was to ensure the survival of the new country which had a powerful and rapidly expanding neighbour to the south.

Table 3. Dates when Provinces Entered Confederation

1867

1870

1871

1873

190.5

1949

Ontario Quebec New Brunswick Nova Scotia

Manitoba

British Columbia

Prince Edward Island

Alberta Saskatchewan

Newfoundland

Three policies were pursued to ensure the viability of the new nation. A settlement policy was developed through encouraging immigration to the West. A transportation policy aimed at establishing an east- west link led to the building of the transcontinental railway. A manufacturing policy was pursued which sought to protect the small and vulnerable economy through protective tariffs. Since at that time most manufacturing was located in Ontario and Quebec,

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the hinterland regions (the West, the Maritimes) had to purchase goods at higher prices than would have been the case if no tariff were in place and the goods were purchased from adjacent American states.

The presence of tariffs, and the perceived advantage given to manufacturers in Central Canada, has been a source of frustration to people Jiving in the resource-producing regions, especially the West. ‘Westerners’ believe that Central Canadians want all the advantages, and are obtaining them through their large number of voters. On the one hand, ‘Westerners’ feel that manufacturing in Central Canada receives the benefits from protective tariffs, at the expense of ‘Westerners’ who must absorb higher prices for manufactured goods. On the other hand, Central Canada wants energy at lower than world prices, and gets it by electing to government the party that promised lower prices, even though the resulting loss of revenue is to the energy producing provinces in the west. Regional priorities are obviously in conflict.

Foreign investment

While tariffs were established to foster an indepen- dent Canadian economy, the long-term result has been somewhat different. The existence of tariffs provided an incentive for foreign entrepreneurs, especially Americans, to invest in Canada. Through such investment, they gained access to markets in Canada as well as in other Commonwealth countries. The consequence has been considerable loss of control over the economy to foreigners, especially multinational corporations.

The resource sector is one area which has attracted substantial foreign investment. For example, the Canadian petroleum industry is dominated by foreign interests (Table 4). Further evidence emerged from a study, published in 1980, by the Institute for Research in Public Policy in Montreal. Entitled The Men with the Yen, the report concluded that Japan intends to become the world’s economic super power by the year 2000, and that Canada is viewed as a source of badly needed resources as well

Table 4. Foreign Control and Ownership of the Canadian Petroleum Industry

‘% of Revenue under ‘% of Revenue under Foreign Control Foreign Ownership

1971 94 80 1978 87 74 1979 82 72

Source: DEPARTMENT OF ENERGY MINES AND RESOURCES, 1980.

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as a stable market for manufactured goods. The Institute warned that the Japanese can be expected to invest heavily in Canadian uranium, mineral, forestry and fishery industries.

The issue of foreign ownership and control has been recognized since the Report of the Royal Commis- sion on Canada’s Economic Prospects in 1958. Sub- sequent studies and inquiries explored the nature of the issue and possible responses. Several initiatives were taken during the 1970s. The Canada Develop- ment Corporation was established to encourage domestic entrepreneurial skills. The Foreign In- vestment Review Agency was created to screen proposed takeovers by foreign firms. Petrocan was introduced to increase Canadian participation in petroleum exploration, processing, distributing and marketing.

During the budget speech in October 1980, the Liberal Government announced the objective of bringing the petroleum industry under 50% Canadian ownership by the year 1990. This has created conflict with oil-producing provinces which are concerned that such a policy objective will dampen interest in the petroleum industry. In addition, the provinces have questioned whether the federal Government has the constitutional authority for the proposed taxation scheme on the petroleum industry which is intended to generate the revenue required to fund the 50% Canadian ownership programme. This disagreement leads into another aspect influencing the natural resource development debate-shared jurisdiction over natural resources.

Divided jurisdiction over resources

Jurisdictional control over natural resources is divided between the federal and provincial governments under the British North America Act, 1867. A dis- tinction usually is made between proprietary rights and legislative authority (Table 5). Under Section 109 of the Act, proprietary or property rights for natural resources were given to the provinces. At the federal level, proprietary rights are held only for the Canadian North (Yukon and Northwest Territories) under section 91-l.

Legislative authority is more mixed, and has been a source of considerable tension. The federal jurisdiction over trade and commerce gives it substantial control over both interprovincial and export trading of resource products (91-2). This has frustrated provinces such as Alberta, British Columbia and Saskatchewan over sales of oil and natural gas. Their governments have viewed the setting of prices and selection of buyers for such resources as being related to their legislative authority over property


Table 5. Jurisdictional Responsibility for Resource Management

FEDERAL GOVERNMENT BNA ACT, SECTION 91

(PREAMBLE). for the peace, order and good government of Canada, in relation to all matters not coming directly within the classes of subjects by this Act assigned exclusively to the legislatures of the Provinces.

(2) The regulation of Trade and Commerce.

(3) The raising of money by any mode or system of taxation.

(12) Sea Coast and Inland Fisheries.

(24) Indians and lands reserved for Indians.

PROVINCIAL GOVERNMENTS BNA ACT. SECTION 92

(2)

(5)

(loa)

(13)

(16)

SECTION 109

Direct Taxation within the Province in order to the raising of a Revenue for Pro- vincial purposes.

The management and sale of the Public Lands belonging to the Province, and of the timber and wood thereon.

Local works and undertakings other than such as (those, connecting the Province with any other or others of the Provinces, or extending beyond the limits of the Province.

Property and Civil Rights in the Province.

Generally all matters, of merely local or private nature in the Province.

All lands, mines, minerals and royalties belonging to the several provinces of Canada.

and civil rights (92-13) and matters of local interest (91-16), and have resented the actions of the federal authority in regulating such prices and in the negotiation of sales.

The Federal Government has the right to impose indirect as well as direct taxes (91-3), whereas the provinces are confined to direct’taxes (92-2). With a direct tax, the producer cannot pass the tax on to the consumer, whereas with an indirect tax the producer theoretically can pass the tax on to the consumer. This situation has created debate between the resource-producing provinces, especially regarding royalties for oil (Alberta, Saskatchewan) and natural gas (British Columbia), and the Federal Govem- ment. The debate focuses upon when royalties are a direct or an indirect tax.

Fisheries were placed under federal jurisdiction by the BNA Act (91-12). Over time, the Federal Government has agreed to the provinces being res- ponsible for the administration of the freshwater or inland fisheries while retaining responsibility for the


saltwater or marine fishery. During the late 1970s several coastal provinces, led by Newfoundland, have been seeking a greater provincial role in the marine fisheries.

The constitution is vague with regard to such offshore resources as oil and natural gas or minerals. Clearly, the issue of offshore resources was not anti- cipated when the RNA Act was passed in 1867. This vagueness is a source of conflict between the Federal Government and coastal provinces, particularly with the prospect of major oil reserves off the east coast. A Supreme Court case in 1967, regarding British Columbia offshore resources, found in favour of ownership by Ottawa. However, this single precedent has not clearly established federal control over all offshore resources.

Legislative control over natural resources is con- fused, vague and often conflicting. The major issues to be resolved include regulation of interprovincial and export trade, pricing, taxation, and responsibility for offshore resources. Each of these debates touches on the way in which revenue from resource development will be divided.

Constitutional refbn

Canada does not have its own constitution, but rather has one passed by the British Parliament in 1867. Any time that Canada wishes to amend the constitution, it must obtain the approval of Britain. Many Canadians find this arrangement unaccep- table, and want the constitution “brought home”. However, before they will agree to its repatriation, various political leaders have insisted upon changes to reflect the needs and conditions of today rather than those that were perceived in the 1860s.

Twelve issues have been placed on the constitutional

agenda, and have been debated intensely (Table 6). Ownership of natural resources and powers over the economy bring the strongest constitutional desires of the federal and provincial governments in conflict. The provinces own the resources within their boundaries and are suspicious and resentful of federal efforts to interfere with that control through its power to control interprovincial and international trade. Ottawa has suggested that there be concurrent jurisdiction over interprovincial trade with the condition that federal laws would prevail if a conflict arose. This proposal has not been acceptable to the provinces, especially Alberta. Ottawa has agreed that the provinces should be able to levy indirect taxes on resources, but has refused to cede jurisdiction over offshore resources to coastal provinces and has refused to share jurisdiction over the marine fisheries.

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Table 6. Canadian Constitutional Reform: Issues for Federal-Provincial Negotiation

A. GENERAL PRINCIPLES AND PATRIATION

1. Principles 2. Patriation of Constitution and Amending

Formula

B. RIGHTS

1. Charter of Rights

C. INSTITUTIONS

1. Senate 2. Supreme Court

D. POWERS, REVENUES AND BENEFITS

1. Powers Affecting the Economy 2. Dedication to Sharing and Equalization 3. Ownership of Resources 4. Offshore Resources 5. Fisheries 6. Family Law 7. Communications

As a result of these conflicting views, agreement on constitutional reform has been difficult to reach. No one can agree on priority items. Most want a package proposal, but the trade-offs and compromises have become too numerous and complex. Thus, Ottawa would not accept a package without patriation and a charter of rights, and has been insistent that it must have the power to govern for the general welfare of the entire country. Newfoundland would not accept a package without provincial control over offshore resources. Alberta and Saskatchewan have been adamant on provincial control over resources, an attitude which required Ottawa to weaken its position on interprovincial trade. In brief, underlying these disagreements have been different views as to how the revenues from resources should be shared and how conflicting regional and national interests should be resolved. As OZIEWICZ (1980) has noted:

“ .control of natural resources and the massive revenues flowing from them promise to be an enduring test of any renewed federalism.

No one, not even the Federal Government or Ontario, disputes the producing provinces’ right to resource ownership. The question really comes down to who shares the wealth and what limits there are on the provinces’ right to own the resources and on Ottawa’s power in such energy-related matters as trade and commerce. The issue also focuses on when, how and by whom the natural resources will be husbanded.”

In the following section, the conflicting priorities between the two levels of government are examined with respect to offshore and fishery resources, minerals, and oil and natural gas.

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The Natural Resources Debate

Offshore and fishery resources

Control over offshore resources has been a source of controversy between the Federal and Newfoundland governments for over 30 years. Newfoundlanders have argued that they were given control over offshore resources when they joined the confederation in 1949. The Federal Government has disagreed, and put a test case to the Supreme Court during 1965, with reference to the offshore resources of British Columbia. The Supreme Court decision, in 1967, stated that such control belonged at the federal level.

The prospect of major oil and natural gas deposits in Atlantic offshore waters has led Newfoundland to continue to press for provincial control. This interest was sparked by the discovery of oil at the Hibernia site, 190 miles south east of St. John’s in the middle of the Grand Banks, with a well having a potential of 20,000 barrels of oil per day. With the current high rates of unemployment and over 50% of the provincial budget based on equalization and other federal payments, Newfoundland believes that revenue for offshore oil could transform it from a “have not” to a “have” province.

Various arrangements have been made to share the revenue from offshore resources. During 1977, the Liberal Government of Pierre Trudeau offered the Atlantic Provinces 75% of offshore revenues and Ottawa 25%, with Ottawa retaining ownership of the resource. However, Newfoundland never agreed to this arrangement, and the other Atlantic provinces subsequently rejected it. After the election of a Conservative Government in May 1979, Prime Minister Clark offered Newfoundland total control over its offshore oil and mineral resources. Similar offers were made to Nova Scotia and British Columbia. Before details could be worked out and a formal agreement signed, the Conservative Government was defeated in December 1979. With the subsequent election of a Liberal majority in February 1980, the Conservative offer was shelved.

In Juiy 1981, Prime Minister Trudeau contacted the Premiers of Newfoundland, Nova Scotia and British Columbia, to suggest that officials from Ottawa and the provinces should meet in September with a view to reaching an agreement by February 1982. The provinces agreed to reconvene discussions. However, a new element has appeared between Ottawa and British Columbia. In June 1981 that province claimed jurisdiction over offshore resources east of a line skirting the western edges of the Queen Charlotte Islands and Vancouver Island. That claim could lead to a case in the Supreme Court of Canada.

Geoforum/VoIume 12fNumber 3/1981

During the constitutional negotiations, the Liberal Government has been opposed to provincial demands that offshore resources should be treated identically to those onshore, which are owned by the provinces. The Federal Government has offered to share revenues from the offshore resources with coastal provinces to the extent of agreeing that coastal provinces should receive 100% of the royalties as long as they continue to remain as “have not” provinces. It also has agreed to establish a joint management board for offshore resources on the condition that the Federal Gove~ment should be able to overrule any joint board decision on issues deemed to be of major national interest. These conflicting interests have been a stumbling block in constitutional negotiations. Newfoundland has been unwilling to accept any package which does not include provincial ownership of offshore resources while the Federal Government has maintained that such resources belong to all Canadians and should be managed for the national good.

Although responsibility for fisheries belongs to the Federal Government under the BNA Act, several provinces have been calling for a greater provincial roie. Premier Brian Peckford of Newfoundland has argued that despite glowing prospects of petroleum on the east coast, petroleum is a nonrenewable resource. He has maintained that the fishery, as a renewable resource, will be the longterm mainstay of the Newfoundland economy and that the province should, therefore, have a greater voice in managing this resource.

The state of the northern cod stock along the northeastern coast of Newfoundland and off Labrador, triggered the Newfoundland claims for more authority. Premier Peckford has argued that vessels from Nova Scotia were harvesting these fish and then taking them to Nova Scotia for processing. This activity was perceived as creating a loss of jobs for Newfound~anders. Peckford, initjal~y demanded provincial control over the offshore fishery, but later modified this claim to one for joint control. Nova Scotia initially supported the claim for greater provincial control, but later altered its position to favour federal responsibility, perhaps after realizing that Newfoundland intended to exclude Nova Scotia vessels from the “provincial” coastal zone.

The Federal Government has indicated willingness to transfer control of inland fisheries to the provinces, but not the marine fishery. However, for the marine fishery it has agreed to enshrine into the constitution the right of consultation over fishery management decisions. In its view, provincial control of, or shared responsibility for, the Atlantic fishery raises the spectre of five provinces (New-


foundland, Nova Scotia, New Brunswick, Prince Edward Island and Quebec) squabbling over migratory stocks and fishing rights as well as creating problems when negotiating with other countries over delineating fishing grounds or establishing quotas. Fishermen along the east coast also have expressed concern about the problems inherent in increased provincial control, so it appears as if this resource will be one in which there will be little substantial future change in the pattern of responsibility. On the other hand, responsibility for offshore petroleum and mineral resources will continue to be a conten- tious issue.

Mineral resources: potash

Potash is a basic ingredient in fertilizer, and Saskatchewan and the Soviet Union are the major exporters of this resource-based product. Potash was discovered in Saskatchewan during exploration for oil in the late 1940s but due to problems with extrac- tion, the first commercial mine did not open until the early 1960s. Viewing potash as a means to diversify an economy based on grain, the provincial Liberal Government in the early 1960s established attractive incentives to encourage development of the resource. By the end of that decade, some ten mines were in operation, nearly all of which were foreign controlled. A combination of a surge in production resulting from the establishment of these new mines, a temporary slump in world demand, and competi- tion from United States producers, raised concern that not all of the Saskatchewan mines would survive. Consequently, during 1969 the Saskatche- wan Provincial Government passed a law that set production limits for each mine as well as minimum prices for potash. The intention was to ensure the survival of the mines with their associated jobs.

Central Canada Potash Ltd, an American-controlled firm, had a contract to supply potash to a Chicago- based agricultural cooperative. With prorationing, Central Canada Potash Ltd. could not produce the amount stipulated in its contract, so it challenged potash prorationing in the courts. Supported by the Federal Government, the firm argued that prorationing and the establishment of minimum prices infringed upon regulation of interprovincial and international trade (a federal responsibility), through controlling supply and price. Noting that the product was almost entirely exported from Saskatchewan, the Supreme Court declared the law to be unconstitutional in October 1978.

This decision upset the resource-producing provinces which viewed the decision as an alarming precedent. Alberta worried that if such a decision could be made with respect to potash then a similar

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one could be made for petroleum. The Saskatche- wan Government feared that if they could not regulate potash then they would not be able to regulate uranium, and the province anticipates billions of dollars of income from uranium by the end of the century. As Premier Blakeney commented

“ . .the Supreme Court decision denies the province the right to determine the price and production rate on potash and other resources moved out of Saskatche- wan. The decision means that when a mineral is mined and shipped out of the province, Saskatchewan cannot have control over the price it is sold at and puts in doubt whether the province could limit the rate at which the resource is produced.” (EFU3,1978.)

The Premier also noted that Alberta had been told what it could charge for oil and British Columbia what it could charge for natural gas, but Ontario was not told what it could charge for nickel nor Quebec what it could charge for the electricity exported out of that province. This situation has underlain the Western provinces’ insistence that any constitutional changes must guarantee greater provincial control over natural resources.

Petroleum and naturalgas

The debate over control of oil and natural gas has been the most visible resource issue between the federal and provincial governments. The debate has pitted the energy-producing provinces (British Columbia, Alberta, Saskatchewan) against Ottawa and the energy-consuming provinces, especially Ontario. The debate has focused upon taxation and pricing.

Saskatchewan and Ottawa went to court over the province’s imposition of a system of taxes and royalties on oil and natural gas. Unlike in Alberta, where the province owns the mineral rights in most of the producing areas and obtains its revenue primarily through royalties which are considered to be direct taxes, in Saskatchewan production is mainly on free-hold lands. This is where the dispute arose.

A royalty normally is levied by an owner of a resource and can be considered as a rent which the producer pays to the owner of the resource. In legal terms, a tax is deemed to be “direct” if it is demanded from a company with the intention that the firm bear the burden. With an “indirect” tax, it is expected that the firm will pass the burden along to its customers. Since petroleum production in Sas- katchewan usually was on free-hold land, Canadian Industrial Gas and Oil Ltd. challenged Saskatche- wan’s royalty on crude oil. Supported by the Federal Government, the company claimed that the levy was actually an indirect tax on oil users. The firm also

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suggested that as Saskatchewan exported its oil, such an indirect tax infringed upon inter-provincial trade and commerce. In November 1977, the Supreme Court declared the royalty and taxation system to be unconstitutional. If the same principle were applied to all oil companies in the province, the government had collected over $500 million in illegal taxes which would have to be paid back with interest.

As with the potash dispute, the Saskatchewan Pro- vincial Government viewed this decision as an intrusion by the Federal Government into provincial rights. Premier Blakeney stated that the Supreme Court decision appeared to

L‘ indicate a deliberate strategy to expand federal jurisdiction at the expense of provincial powers to manage and tax natural resources. In my view, the federal determination to further centralize power at the expense of the provinces is imposing very serious strains on our federal system.” (Globe and Mail, 1980.)

The right to taxation also has generated a dispute between British Columbia and Ottawa. During its budget introduced on October 28, 1980, the Federal Government forecast a deficit of $13.7 billion for

198 1. To increase federal revenues, Finance Minister MacEachen imposed a new tax on natural gas and gas liquids sold in Canada or exported from Canada. While British Columbia does not produce significant amounts of oil, it does market natural gas through two provincial agencies, B.C. Hydro and the B.C. Petroleum Corporation. These agencies would collect the taxes and forward them to Ottawa. However, the British Columbia Cabinet ordered the two agencies to collect but to withhold payment of the federal tax until its legality was tested. British Columbia intended to take the tax before the courts under Section 12.5 of the BNA Act which forbids the taxation of governments or their agencies. While Alberta cannot join British Columbia in this action, since Alberta’s natural gas utilities are privately rather than provincially owned, it has supported the action by British Columbia.

Oil pricing has probably been the most widely debated issue between Ottawa and the producing provinces. The National Oil Policy, introduced during 1961, divided Canada into two regions. The area to the west of the Ottawa Valley was to be supplied by domestic oil production from Western Canada, primarily Alberta, while the area east of the Ottawa Valley was to be supplied by imported oil from other countries. This action resulted in the eastern region receiving lower cost petroleum than the western region throughout the 1960s and early 1970s. Indeed, proposals to extend the Canadian pipeline system into the eastern regions were resisted by the eastern provinces because they had the advantage of cheaper foreign oil.


The Arab-Israeli war in 1973 and the subsequent oil price increases by OPEC altered this pattern. Foreign oil quickly became more expensive than domestic oil. The producing provinces began to press for their prices to rise so as to match world prices, or at least to be pegged to increases in world prices. The consuming provinces, especially Ontario, on the other hand, argued for lower than world prices for domestic oil so as to give Canadian manufacturers a competitive advantage. Not surprisingly, the bulk of Canadian manufacturing activity is concentrated in Ontario and Quebec.

The Federal Liberal Government has rejected any direct link to world prices, arguing that they are the artificial creation of an oil exporter’s cartel. Instead, the Federal Government has developed a “blended price system” under which imported oil to the eastern region is paid for at world prices, with domestically produced oil priced lower but still theoretically reflecting the costs of production and the cash needs of industry and government. The prices for various types of oil are blended, or melded, to result in a uniform price for refineries across Canada. Thus, with the exception of differences in transportation costs, quality, and provincial taxes, consumers across the country pay comparable prices, even though at the end of 1980 the world price was $37.75 a barrel and the domestic price for Canadian producers was $16.75 a barrel. By August 1981, the world price was $43.00 per barrel and the domestic price was $17.75. The Federal Government $17.75 pays the difference, which for 1980-1981 was estimated to require a subsidy to the eastern region of $3.95 billion assuming unchanged world prices and a stable Canadian dollar. As the Canadian dollar decreased in vaue over the summer of 1981, this subsidy became larger.

The producing provinces have argued that they are being forced to subsidize Ontario and the other eastern provinces with low cost dil, while at the same time being expected to pay relatively high prices for manufactured goods from Central Canada which are protected by tariffs. Indeed, Alberta claims that by not charging world prices between 1975 and 1980, it lost $15 billion in extra revenue. Under the Federal Progressive Conservative Government in 1979, Ottawa and Alberta tentatively agreed that domestic prices should increase to 85% of world prices by 1984. The Liberal Government elected in February 1980 rejected this arrangement, and also rejected a later Alberta offer to have the domestic price raised to 75% of the world price by 1984. Alternatively, it has argued that prices should rise to 75% of the world price, but over an unspecified period of time, so as to soften the impact on domestic regional economies.


When Ottawa rejected the proposal of 75% by 1984, Alberta announced in November 1980 that it would reduce oil shipments to Ontario by 15% over three stages. The reduction would total 180,000 barrels a day staged through cuts of 60,000 barrels a day on March 1st June 1st and September 1st 1981. These cuts were implemented on schedule. To import 180,000 barrels of oil to make up for the Alberta reductions, Ottawa would have to spend about $3.6 million extra a day in subsidy payments to equalize the price of oil in all parts of the country. This action effectively would nullify any advantage to the national economy of a lower priced domestic oil.

Alberta also indicated that until an acceptable pricing arrangement was reached it would not provide its portion of the funding for new oil-sands plants in northeastern Alberta, whose production could help to make Canada less reliant on foreign suppliers and thereby reduce the federal funds required to subsidize the eastern region. Alberta was hoping that Ottawa would need these projects to meet its national energy programme goal of Canadian self sufficiency in oil by 1990. However, despite an earlier f40 million federal loan to keep the Cold Lake, Alberta oil sands project alive until June 1981, Ottawa did not intervene when Imperial Oil Ltd. announced during July that it was suspending the Cold Lake project. This $12 billion project was to be completed by the end of the decade with a daily capacity of 140,OOO barrels of synthetic crude. Imperial Oil explained that it was suspending the project until the two governments reached an acceptable pricing agreement. Without such an agreement, the rate of return on the project could not be forecast with enough certainty.

Ministers from the Federal and Alberta governments started negotiations on energy pricing and energy sharing in early 1980. Lack of apparent progress from numerous meetings during 1980 and the first half of 1981, and the emergence of a protracted and bitter standoff, was viewed by many observers as seriously harming the Canadian economy. The lack of an energy agreement was seen as contributing to relentless downward pressure on the Canadian dollar, a sag in investment, and a delay in oil-related development such as the oil sands.

However, after a marathon six-day bargaining session in late August by Federal Energy Minister Lalonde and his Alberta counterpart Leitch, the two governments signed an energy agreement on 1 September 1981. The agreement reflected com- promise on both sides.

Alberta retreated from an insistence on domestic prices rising to world levels. Instead, a two-tiered

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system was established. Conventionally produced oil from existing fields will rise to 75% of world levels by 1986. Production from new fields, oil sands plants and frontier oil will rise to 100% of world levels by 1986. With the agreement signed, Alberta agreed to resume oil production which had been cut by 180,000 barrels a day after the three cutbacks during 1981.

The Federal Government made a key concession by withdrawing its export tax on natural gas. This tax was viewed by Alberta as an infringement on provincial rights. However the Federal Government will receive increased revenues as a result of an altered sharing of income among the two levels of govem- ment and industry. Compared to the proposal in October 1980, Ottawa’s share rises from 24% to 29%, Alberta’s increases from 33% to 34%, and industry’s drops from 43% to 37%. Nevertheless, because of the increased prices, industry’s profits should rise overall by 25%. For consumers, over the five year period to 1986, oil prices will more than triple and natural gas prices will more than double.

Implications

The dispute over how resources should be developed has become symbolic of different interpretations of national and regional interests. At stake is the possible redistribution of power and wealth in the country. From the federal perspective, Prime Minister Trudeau has insisted that Ottawa needs a larger slice of revenues from resource development. In his words

‘L . There must be a more reasonable sharing of revenue between governments. This means that the provinces must give up some of their share in favour of the Government of Canada.” (SIMPSON, 1980)

This position reflects the changing fiscal balance between Ottawa and the provinces throughout the 1970s. Ottawa’s share of total government spending grew less rapidly than that of the provinces and muni- cipalities. In addition, the Federal Government has experienced huge deficits while the provinces had either budgetary surpluses or less substantial deficits.

AS resource-rich provinces accumulate more revenue, the per capita income in other provinces falls even further behind. This situation increases the cost to Ottawa for equalisation payments. The Federal Government does not want to see a massive redistribution of wealth to a few resource-producing provinces, and sees its role as ensuring that all Cana- dians benefit. Simultaneously, the Government wishes to check a drift toward decentralization of power within the country.

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In contrast, the provinces and other critics of the Federal Government argue that its fiscal problems are self-imposed. Charges of reckless spending, a reluctance to curb expenditures, and unwillingness to increase domestic oil prices are all viewed as contributing factors for federal fiscal difficulties. The Saskatchewan Mineral Resources Minister Elwood Cowley stated the provincial view regarding oil pricing in these words:

“The federal Government has abandoned its responsibility to ensure energy security for the country. The National Energy Program serves no other purpose than to divert revenue to Ottawa and attack the right to control resources that the provinces have under the

BNA Act.” (HUMPHRIES, 1980.)


The overriding need is for the federal and provincial Governments to identify possible trade-offs and compromises.

References

ERB, M. (1978) NDP resource plank assumes new dimen- sions. Saskatoon Star-Phoenir, October 5, p. 22.

ERB, M. (1980) ‘The uranium thing’ hanging over Alberta’s head in oil battle. Globe and Mail, September 5, p. 10.

HUMPHRIES, D. (1980) West unified to fight Ottawa on energy. Globe and Mail, December 19, p. 9.

OZIEWICZ, S. (1980) Over a barrel: oil haunts BNA bargainers. Globe and Mail, September 5, p. 1.

SIMPSON, J. (1980) Trudeau won’t yield, wants more talks. Globe and Mail, November 1, p. 1.

the natural resources development debate in canada

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