Talisman Energy

views updated

Talisman Energy

Suite 2400
855 2nd Street S.W.
Calgary, Alberta
Canada T2P 4J9
(403) 237-1123
Fax: (403) 237-1027

Public Company
Incorporated: 1925 as Supertest Petroleum Corporation
Employees: 1,450
Sales: $195.7 million
Stock Exchanges: Toronto Montreal Vancouver

Talisman Energy is a natural resource company engaged in exploration and drilling for crude oil, natural gas, and sulfur in western Canada. It also has oil and gas exploration and marketing interests in the country’s eastern half. The company in 1992 took over the operations of the former BP Canada operation after its parent, the British Petroleum Company, sold its 57 percent interest in the Canadian concern.

Talisman’s roots can be found in the Supertest Petroleum Corporation, established on December 17, 1925, with the opening of a corner gas station in London, Ontario. The company immediately began building a network of gas stations, and in 1926 it bought the gas and oil interests of Ensign Oil Company, based in Montreal. Growth for Supertest was slow during the economic depression of the 1930s, when unemployment and persistent economic downturns affected the ability of Canadians to buy and drive cars.

In 1953, the rival BP company made its first large foray into the Canadian market. BP, headquartered in London, England, had its earliest roots in the Middle East, where extensive gas and oil interests were found and exploited, in Iran and Saudi Arabia in particular. As early as 1926, the company considered expanding outside of the Middle East. Specifically, Arnold Wilson, who succeeded F. G. Watson as managing director of D’Arcy Exploration Company, a division of BP, told company directors that disappointment with drilling in Asia and Africa led him to consider drilling opportunities in Canada or South America. As it happened, BP did much to explore new opportunities before it entered the Canadian market in a substantial way. Between 1927 and 1930, company geologists showed considerable interests in possible fields in British Columbia, New Brunswick, and Alberta. However, the geologists could not agree on whether potential gas and oil reserves in the Canadian hinterland warranted further investment towards drilling.

In 1953, BP bought a minority stake in Triad Oil Company, a small exploration company based in Calgary with large exploration holdings in western Canada. Four years later, BP entered the Quebec market. By 1960, when the company’s first refinery opened for business in Montreal, BP had over 800 service stations in the French-speaking province. Now operating as rivals, both companies expanded during the 1950s and 1960s. Earlier, in 1959, Supertest merged into its own operations those of Reliance Petroleum Ltd., also based in Calgary. In 1964, BP bought the eastern Canadian interests of Cities Service, comprising 750 retail gas stations and a refinery at Oakville, Ontario. This acquisition brought to just under 1800 the number of retail gas stations that BP had in Ontario and Quebec and added to its sales and service teams for home heating and the agricultural, commercial, marine, and aviation industries.

In 1969, BP’s holding company in Canada was renamed BP Canada, and the principal marketing company was renamed BP Oil Ltd. Put another way, BP’s Canadian operations now had two arms, an upstream—that is, oil and gas exploration and production—arm, and a downstream—refining and marketing—arm. A year later, all BP’s marketing and refining interests in western Canada were put under the corporate umbrella of BP Oil and Gas Ltd., including the interests of the former Triad Oil Company.

The discovery in August 1969 of giallt oil reserves at Prudhoe Bay, Alaska, convinced BP headquarters in London that it had a significant future in northern Canada. In August 1971 BP Canadian Holdings Ltd., then BP Canadian Ltd., and a division of BP in Britain offered to buy a controlling interest in Supertest. The British parent exchanged for shares all of its petroleum marketing, refining, and exploration interests in Canada. These entailed all the outstanding stock of BP Oil Ltd.—an associate company mainly engaged in marketing and refining in eastern Canada—and a 65.9 percent interest in BP Oil and Gas Ltd. The BP offer was accepted by Corlon Investments Ltd., which then held an 83.7 percent stake in Supertest. It sold its entire stake for $10 a share. By November of that year, BP had bought 97.8 percent of Supertest, having paid $16.50 per share for that holding.

Immediately upon buying Supertest, the new company, BP Canada Ltd., set about securing new oil and gas acreage holdings in the Arctic Islands region of Canada. The idea was to explore for possible oil and gas reserves in the regions adjoining the 1969 Alaskan oil and gas discoveries. Once located, substantial oil and gas reserves would be extracted from the earth via drilling rigs, and then refined downstream before being sold to consumers through a network of gas stations. Other oil companies tended to be specific about identifying and taking aim at specific oil targets. BP Canada, on the other hand, had a “shotgun”, as opposed to a “rifle”, approach. It explored in many places in search of leads and eventual discoveries.

Total acreage in 1970 for BP Canada amounted to 26.7 million gross acres, up from 19.3 million gross acres held a year earlier. Of particular interest was a 1.2 million permit acre tract of property purchased for exploration on Vanier, Emerak, and Prince Patrick Islands where actual drilling was to commence in 1971. BP Canada’s net production of crude oil and natural gas in 1970 amounted to 18,582 barrels daily, up 17 percent on production a year earlier. Sales of natural gas had jumped 24 percent to an average of 62.4 million cubic feet per day, compared with production in 1969. In 1971, the company drilled its first Arctic well on Vanier Island, and labeled it “BP et al Panarctic Hotspur J-20”. It then added two more, one on Prince Patrick Island (“BP et al Panarctic Satellite F-68”) and the other on Graham Island (“BP et al Graham C-52”). BP Canada also purchased considerable acreage holdings in northern Alberta and British Columbia for possible exploration and drilling in those regions.

A year later, the former offices of Supertest Investments and Petroleum in Calgary had been closed as management of the new company was moved to the Montreal-based headquarters of BP Oil and Gas Ltd. Production for the company jumped substantially in 1972. Sales of petroleum products averaged 94,400 barrels daily, whereas production of crude oil and natural gas was posted at an average 22,132 barrels daily. To accommodate this increased production, the company announced plans in 1972 to add a further 40,000 barrels per day of refining capacity at its Trafalgar Refinery facility in Oakville, Ontario. Products produced there would be marketed under the BP and Supertest brand names.

In April 1972, just months after the Supertest merger, company president Derek Mitchell, who had initially come to the position in 1966, outlined his business strategy to shareholders in the company’s 1971 annual report: “Your company is now firmly established as a major marketer and refiner of petroleum products in Ontario and Quebec, is well placed as a producer of oil and gas in Western Canada, and has an important stake in the exploration activity rapidly gaining momentum in Canada’s frontier areas.” BP Canada was establishing up-stream exploration and production facilities in western Canada to serve key downstream markets in Ontario and Quebec, where oil and gas products could be sold directly to consumers.

By late 1972, the company was beginning to feel the effects of higher world prices for a barrel of oil, caused by the efforts of the Organization of Petroleum Exporting Countries (OPEC) cartel. Essentially, a higher price paid for imported crude oil forced BP Canada to pay more for the energy reserves it required to replace petroleum products sold earlier downstream in the marketplace.

This trend worried Mitchell, who said in March 1973 in the company’s 1972 annual report: “The comparative stability of the 1960s is giving way to a decade likely to be characterized by rising prices for petroleum and growing government interest in the industry’s affairs, both at the political and at the technical levels.” Mitchell’s words were to prove prophetic. Throughout 1973, OPEC instigated production cutbacks and embargoes among its customers, which played havoc with the global oil industry. The price of oil on the global market went up, and the world supply seemed to be shrinking.

Turmoil and confusion gripped the oil industry. Responding, BP Canada began moving crude oil from western Canada to Montreal through the St. Lawrence Seaway, and later through the Panama Canal during the winter freeze-up. A thorn in the company’s side was the growing involvement in the domestic oil industry by the Canadian government in Ottawa. Specifically, the government was calling on the industry to hold down anticipated price rises for Canadian oil products, which would grow costlier as they were affected by the rising world oil prices charged by OPEC member countries. Such restraint was meant to allow the government to develop a Canadian pricing policy to cushion the impact on consumers from rising world oil prices and provide an incentive for the domestic oil industry to develop new energy sources.

As a measure of the growing spread between domestic and world oil prices, a barrel of Canadian crude oil rose by 85 cents to around $4.50 in Toronto in the 12 months leading up to January 1, 1974. During that same period, the cost of imported crude oil rose by some $8 to over $11 a barrel in Montreal. BP Canada was making increased profits from selling petroleum products to consumers at higher prices, but it had to restore energy reserves it had sold off by buying imported crude oil at around twice the December 1973 level. According to the company, it was under-recovering its cost of crude oil by some $300,000 a day in the second half of 1973.

BP Canada might have been trading in crisis-ridden conditions in 1974, but it still managed to see profits rise 82 percent to $39.5 million that year. Even so, the company still found grounds to complain in its 1975 annual report about growing royalties and income taxes owed to Canada’s provincial and federal governments. What is more, by the end of 1974, world oil prices had risen to five times the mid-1973 level. The unprecedented price hikes had led to increased production, and ultimately a glut in the world oil market. The net result: lower margins for BP Canada products in an ever more competitive market.

In 1975, the company began exploring for oil off Newfoundland, on Canada’s easternmost seaboard. Also that year, the expansion of the Trafalgar Refinery was completed, but only after delays and cost overruns. A year later, BP Canada bought the remaining 65 percent stake in British Columbia Oil Sands Ltd. to take full control of the company. Paying $20 per share in the transaction, the company gained ownership of oil and gas acreage in the Yoyo, Kotcho, Cabin, and Louise gas fields of northeastern British Columbia. Cost-cutting measures that year included reducing the number of retail outlets selling BP petroleum brand products in Ontario and Quebec from just over 3000 to around 1800. The company also introduced BP No-Lead gasoline at its remaining retail outlets.

Early in 1977, BP Canada signed an agreement with the Alberta Oil Sands Technology and Research Authority that would see the government body contribute half the $18 million cost of testing a sequential steam heating system to extract heavy crude oil (thick sludge used as highway asphalt) in the Wolf Lake area of Alberta. These tar-like deposits are filled with impurities but can be upgraded to light, valuable crude oil; the process is worthwhile if there is a $3 to $5 spread between the light and heavy crude oil variants. At the time, the price of oil on the world market was rising at too fast a rate compared with the price for domestically produced oil to fully justify the development of heavy oil upgraders. The Wolf Lake project was noteworthy for its incentives to develop new sources of oil and gas in Canada. Companies like BP Canada often had to extract heavier crude oil reserves at greater than average expense and longer than usual lead times before it could deliver a refined product to consumer markets in a light crude form.

BP Canada in the 1970s continued its thrust into the rugged terrain of the Monkman area in northeastern British Columbia. It now held interests from 25 to 64 percent in 204,000 acres and 100 percent of 94,000 acres in the region, which was thought to hold vast natural gas reserves. The British Columbia Petroleum Corporation announced plans to build a pipeline and plant facilities to bring the Monkman area natural gas to market in 1980.

In 1978, BP Canadian saw its profits rise over the $40 million mark for the first time. However, this record was reached at a time when the industry as a whole was experiencing a market glut due to excess refining capacity and reduced consumer demand for petroleum products due to the unexpected success of conservation measures. The Iranian revolution in 1979 caused yet another jump in the price of oil on the world market. BP Canada saw its off-shore supply drop substantially due to embargoes. To replace the shortfall, the company arranged to send Canadian crude oil from western Canada to northern-tier U.S. refiners, who in turn would divert their imported oil to the Montreal refinery.

At this time, BP Canada also faced a glut in the natural gas market, then a key earner for the company. Production in 1979 was 109.5 million cubic feet per day, down from 122.7 million cubic feet per day a year earlier. Purchasers had essentially been unable to take all the gas they had contracted to buy. Sales of natural gas continued slowly in 1980, but the company did manage to post profits of $63.1 million for fiscal 1979, up 93 percent from the year before. A jump like that had company chairman and CEO Mitchell defending the company’s performance, given its persistent calls for less government control over the oil industry. Suspicions abounded in the 1970s that the oil industry as a whole was manipulating the OPEC crisis for their own profitable ends.

Speaking to shareholders, Mitchell repeated his company’s call for regulatory restraint in the company’s 1980 annual report: “Their is no doubt that given appropriate policies—higher crude oil prices, a fair and stable tax and royalty system which will allow adequate netbacks to the industry, a commitment to allow companies to reap the fruits of their endeavors, and the encouragement of fuels substitution and energy conservation— Canada can again become self-sufficient in oil.” If Mitchell sought government restraint, he ended up with greater intervention still. The Conservative government, entering the 1980 federal election, had proposed an 18-cent-a-gallon gasoline tax, whose revenues were to subsidize more expensive oil imports. That proposed excise tax in part led to the Conservative government’s downfall at the polls. The incoming Liberal government introduced the National Energy Program in October 1980. It painted foreign oil companies as profit-hungry conglomerates and gave support to Canadian-owned companies like Petro-Canada.

Company chairman Mitchell complained in March 1981 in the company’s 1980 annual report: ‘The government is now hellbent on putting on a circus for the benefit of the media and the public.... The principal purpose will, doubtless, be to try to justify by propaganda and by ‘trial’ in the media the federal government’s already well-demonstrated xenophobic prejudices against one of Canada’s vital and most successful industries.”

Although the Liberal government became a foul word in the BP Canada boardroom, the company’s fortunes did not suffer. For the first time in 1980, gas from the Sukunka-Bullmoose area of northeastern British Columbia reached the market after many years of exploration. It was also announced that year that BP Canada’s headquarters would move from Montreal to Toronto. The move served two purposes: it would remove the company from the separatist tensions then developing in Quebec and would place the headquarters in Ontario, where 70 percent of the company’s assets were.

Profits for 1980 were posted at $104.3 million, a 56 percent jump on 1979. The rate of return on investment was 17.3 percent, a company record. Despite the government’s aim to restrain foreign oil companies in Canada and support the domestic sector, the multinationals were doing better than ever.

Company chairman Mitchell died suddenly on October 29, 1981, and was replaced by R. Hanbidge as president and CEO. A year later, BP Canada shelved plans to proceed with developing the Sukunka coal mine in northeastern British Columbia. Low coal prices on the world market accounted for the strategic move. The company in 1984 completed work on its Wolf Lake project, which came on stream five months ahead of schedule and with a price tag of $110 million. Full production of 1,100 cubic meters of fuel per day was achieved in September 1985, and expanded production at Wolf Lake was forecast at 5,600 cubic meters per day by the end of the decade.

The falling price of oil on the world market hit BP Canada’s earnings in 1985. Cash flow fell by 17 percent, and net profits fell by 55 percent to $20 million, compared with results for the year earlier. Continuing success at energy conservation during the 1980s also cut into production at BP Canada. In 1985, sales of light and medium oil were down by 10 percent on sales a year earlier, and 15 percent of production was lost during the first quarter of 1987. Also that year, production at the Wolf Lake project stood at 1,140 cubic meters per day, not far above production figures when the project came on stream in 1984.

For these reasons, the company attempted to curb its operating costs to maintain profitability. M. A. Kirkby, president of BP Canada told shareholders in the 1987 annual report: “While we cannot control the worldwide prices of oil, gas and metals, we are constantly working to reduce our costs and to improve our netbacks within the market.” Cost-cutting measures helped boost BP Canada’s net profits to $44.6 million in 1987, an all-time high. But the very next year, net profits were down to $10.3 million. The main reason: world oil prices fell by 27 percent in 1988.

In 1989, David Claydon replaced M. A. Kirkby as president of BP Canada. That year, he ordered environmental audits of all BP Canadian operations in response to growing concerns about possible environmental damage from oil exploration and refining. The company also announced plans to boost its natural gas exploration and reserves, recognizing that natural gas was a clean-burning fuel considered more environmentally sound by consumers than oil or coal.

In 1991, mounting debt and losses prompted a management shuffle and a worldwide review of operations by the head office of British Petroleum in London. By mid-1992, BP announced it would sell off its 57 percent stake in BP Canada through a secondary offering of shares. The Financial Times of Canada reported that Canadian employees responded with a burst of applause on hearing the news. To sell its stake in a highly profitable company with prospects that greatly encouraged Canadian and American investors, BP in London clearly had priorities elsewhere.

Upon being sold in June 1992, Talisman’s share price stood at C$13.00. At the end of July 1993, the share price had climbed to C$26.50. The company now had Jim Buckee at its helm as president and CEO. The British-born businessman, Oxford-educated and with a PhD in astrophysics, transformed Talisman into a smaller, more focused company in the 1990s. For example, the company sold its Wolf Lake oil sands assets to Amoco Canada Petroleum Company in April 1992. Talisman then bought Encor Inc., which held the oil and gas assets that once belonged to TransCanada PipeLines Ltd. The purchase price comprised C$239 million worth of treasury shares.

Talisman achieved impressive growth in the early 1990s. The company saw promising signs of the world oil price creeping upwards, perhaps a go-ahead for continued exploration and drilling in Canada’s north. Talisman suggested it would explore gas plays in Alberta and British Columbia and even announced in 1992 that it had entered into two joint ventures with companies involved in exploration in Cuba. Given the company’s record of innovation and business savvy, it is likely that Talisman will remain among Canada’s best performing oil companies.