Private Gain or Public Interest?

Canadians should benefit fairly from oil and gas they own
February 1, 2010

Canada’s oil and gas industry can and should be converted to a public-interest industry whose mandate would be to serve the broader public interest, not just the private interests of owners and shareholders.

At present, the private corporations that dominate the oil and gas industry in Canada are inflicting serious environmental harm and causing major social and economic problems. The environmental impacts of oil and gas extraction, especially from Alberta’s tar sands, are staggering. The toxic lakes created by the tar sands are just one example. Gas wells degrade local air quality; coal-bed methane development contaminates groundwater; and pipelines blight habitat, sometimes causing as much forest loss as industrial logging.

The oil and gas corporations strenuously resist paying adequate royalties to the public owners of these resources, resulting in a loss of government revenue to support public services, infrastructure, and long-term savings.

The industry also tends to drive a boom-bust style of development. During the booms, spending is high, inflation is driven up, and temporary foreign workers are brought in. During the busts, like the one now devastating our economy, unemployment soars and provincial revenues decline.


The underlying problem

All these serious issues are symptoms of a common underlying problem: the nature of the current oil and gas industry itself.

Simply put, large, for-profit business corporations – like those that dominate the oil and gas sector – are programmed to maximize share value. That means maximizing profits, which in turn means increasing revenues or reducing costs, or both.

For the oil and gas industry, raising revenues means raising consumption. And an effective means of reducing costs is to create and maintain “externalities” – the imposition of costs (such as pollution) on the general public.

While some of the harm arising from oil and gas consumption results from the nature of the product itself, some does not. The industry works hard to increase consumption and externalize costs. If, instead, it just met normal market demand, the social and environmental harm would be reduced. But the oil and gas corporations can’t do that, because it would mean reducing their share value and profits.

The share value maximization imperative is backed up by corporate law, which holds that directors of a corporation can be sued if they fail to maximize profits and dividends for shareholders. For example, in the early 1900s, when Henry Ford decided to lower the price of his cars so that working people could afford to buy them, he was sued by two minority shareholders, John and Horace Dodge. The court upheld their suit and found Ford guilty of violating a basic corporate law. The Dodge brothers used their winnings to set up a new car company.

The modern corporation, then, is a machine that is legally programmed to do one thing only: maximize the value of its shares. It has no conscience. Granted, some of a corporation’s officials and shareholders might wish that their profits were more equitably shared, that oil consumption and its resulting emissions were reduced, or even that the industry were more effectively regulated. But they are powerless as individuals to make their corporation more socially responsible. Indeed, if they fail to do all they can to serve the corporate mandate of maximizing share value, they can be fired – and even sued.

So the social and environmental harms caused by higher oil and gas consumption and by the industry’s cost externalization are simply trumped by the profit imperative. And as long as the oil and gas sector is dominated by for-profit corporations, these problems are bound to continue, and intensify.

Fortunately, it doesn’t need to be this way.


Public-interest alternative

Canada’s private-interest industry is distinctly out of step with the rest of the world. The great majority of oil reserves elsewhere are controlled by publicly-owned companies. The private-interest industry controls only about 10% of global proved reserves. (Ironically, there are plenty of public companies participating in Alberta’s oil patch, but all of them are foreign-owned.)

A public-interest industry could be set up to supply all of the oil and gas that customers want, but without the efforts to boost consumption and externalize costs. It would no longer be engaged in lobbying, litigation, and PR campaigns to prevent and undermine effective conservation and emissions-reduction efforts. And, needless to say, it would be a Canadian industry, not a foreign-owned one.

Furthermore, a public-interest company could be mandated to help in:

• boosting job-producing, value-added, clean downstream industry development in Canada;

• instituting demand reduction through carbon pricing;

• making oil patch development more orderly and less inflationary;

• boosting security of energy supply for Canadians;

• enabling full capture of rents; and

• developing job-creating renewable energy.


How would this transformation be carried out?

As with any corporate acquisition, the cost of buying out the industry would be paid for out of its future profits. In other words, the net cost to Canadian taxpayers would be zero, or close to it.

The up-front payment would be approximately $330 billion(Cdn) to purchase the firms producing a majority of Canada’s oil and natural gas output, based on current market capitalization.

This figure is not so daunting when compared to the $490 billion of Canadian military spending announced in June 2008 or Norway’s Pension Fund (built with oil revenues) of more than $450 billion, or even the size of federal surpluses and deficits (tens of billions per year) and recent federal corporate tax cuts ($15 billion per year).

If the current industry is made to play by the same rules that the public-interest industry would play by when it is established, the price would be lower.

Governments in Canada have the legal authority to acquire corporations and create new businesses with public interest mandates programmed into their governing documents. Both senior levels of government have owned energy corporations in the past: for example, the Alberta Energy Company and Petro-Canada. Neither Canada’s constitution nor trade agreements impose barriers to converting the industry to a public-interest mandate.

Of course, this wouldn’t stop corporations from litigating; strategic litigation doesn’t require a winnable case in order to be pursued. However, providing fair value compensation would take the wind out of the sails of any litigation. And amending or withdrawing from NAFTA, if that were necessary, could be accomplished in a matter of months.

Nationalizing the oil companies is supported by at least half of Canadians, according to recent polls, and may be the preferred choice; but public ownership is not the only way to enable a public-interest mandate. Other models are available, such as social enterprises run by charities and non-profits. Social enterprises have organizational structures that are similar to those of corporations, and control large diversified industries in Canada and globally.

Another model, the cooperative, is common throughout the world, with the Canadian cooperative sector alone employing 160,000 people and controlling $167 billion in assets. Canada’s Federated Cooperatives Ltd. Even runs an oil and gas business.

Yet another model, the Community Interest Company, has recently been developed in the United Kingdom.

The existence and success of such business models demonstrate that a public-interest energy corporation can be created with public, private, or mixed ownership. The ownership decision would turn on a number of factors, including democratic control, stability, service of Aboriginal interests, public acceptability, and federal/provincial relations.

* * *

The Canadian people own the vast majority of oil and gas in Canada, and are entitled to the rents (excess profits) from their development. However, the private-interest oil and gas corporations capture an enormous share of those rents – a remarkable transfer of wealth from the public to corporate shareholders. Royalties and taxation are one way to capture those rents. Another way is through public-interest ownership, which enables both an accurate determination of the size of those rents, and their full capture.

Which regions of Canada would be entitled to those rents? Currently, both producing and consuming regions benefit from rent capture via royalties and taxation. With a public-interest industry, both could benefit even more. In practice, however, the level(s) of government that captured the rent could depend largely on which government(s) established the new public-interest industry. It is possible that, if a producing province like Alberta or Newfoundland and Labrador acted first, it could retain the additional rents and not need to share them.

In any event, the rents shouldn’t be seen as a bonanza for current generations. They result from the extraction of natural capital, and instead of being liquidated to finance regular spending, they should be gradually converted to investments in infrastructure or education that will provide benefits in future years when natural capital is depleted.

The vast majority of workers currently employed by the industry would still be doing their jobs after it was converted to a public-interest mandate. The directors would consist of people knowledgeable about the business and the full range of issues within the public-interest mandate of the industry. The members/shareholders would represent the equity owners and the broader public, being chosen from across occupations, regions, and cultural and other groups.

The new mandate of the public-interest industry would include working for improvements in job-rich, value-added processing, energy conservation, energy security, renewable energy development, improved employment conditions, and environmental protection. Performance indicators would enable directors and managers to be evaluated and compensated on the basis of the outcomes produced in each of these areas.

The benefits of this public-interest transformation of the existing for-profit oil and gas industry would be tremendous: no more consumption boosting, no more cost externalizing; no more lobbying, litigating, and waging of PR wars against public-interest regulation. And with those changes would come reductions in fossil fuel consumption, increases in employment, the development of renewable energy, a cleaner environment, and healthier people.

With oil prices currently at around one-half their previous levels, this, as Stephen Harper famously said, could be a “buying opportunity.”


(David Thompson is an independent public policy consultant and a Parkland Institute research associate. He has post-graduate degrees in law and economics. Keith Newman is Director of Research for the Communications, Energy and Paperworkers’ Union of Canada. This article was adapted from their longer paper – Private Gain or Public Interest: Reforming Canada’s Oil and Gas industry – a joint publication of the Parkland Institute and the CCPA. The full text can be accessed on the CCPA website.)