Wascana Energy Inc.
Address:
1777 Victoria Avenue
P.O. Box 1550
Regina, Saskatchewan S4P 3C4
Canada
Telephone: (306) 781-8200
Fax: (306) 781-8364
Statistics:
Public Company
Incorporated: 1973 as Saskatchewan Oil and Gas Corporation
Employees: 650
Sales: C$437.6 million
Stock Exchanges: Montreal Toronto
SICs: 1311 Crude Petroleum & Natural Gas; 1381 Drilling Oil & Gas Wells
Company History:
Wascana Energy Inc. is involved in the exploration, development, and marketing of crude oil and natural gas in northwestern Canada. Originally called the Saskatchewan Oil and Gas Corporation, it was created as part of an initiative to establish state-owned enterprises, which would take advantage of Saskatchewan's natural resources to diversify the province's predominantly agricultural economic base. A major petroleum concern in Saskatchewan, Wascana has also broadened its mission by expanding operations geographically to other provinces and abroad to South America, Africa, Asia, and Europe.
Saskatchewan became a Canadian province in 1905. As a remote plain region, its almost complete dependence on agriculture exposed the province to severe economic fluctuations. In the 1970s, the province made efforts to stabilize its economy by diversifying its agricultural base and developing an industrial and manufacturing sector. A new opportunity emerged in the growing world market for mineral resources such as potash, oil, and uranium. The region proved rich in minerals and the provincial government established a number of Crown Corporations to develop this natural resource base; among them was the Saskatchewan Oil and Gas Corporation.
Volatility in the world petroleum industry, subsequent price increases, and questions about the dependability of foreign oil supplies made the new company's formation timely. Foreign dominance of Canadian oil production became a government policy issue of major concern that would continue into the 1990s. Because of the agriculture's increasing reliance on mechanized, gasoline fueled equipment, an additional boon was seen for the Province of Saskatchewan in developing its own source of petroleum.
March 1975 marked the end of the first full year of operation for Saskatchewan Oil and Gas. All of the activities necessary to establish a major capital-intensive business were begun. The company grew from one to 22 employees, as senior management positions were filled, support staff hired, and permanent office space found. The company began land acquisition, geological appraisal, exploratory drilling, field production, and property acquisition, as well as the development of administrative and accounting systems. By fiscal year end, the corporation had spent C$2.8 million on 949,599 acres of land in Saskatchewan and C$0.8 million on 63,680 acres in neighboring Alberta. Management began a program to acquire reserves and spent C$8.6 million to purchase proven producing properties from outside operators.
The first crude sales began in May 1974. Sales reached as much as 1,590 barrels per day, and the average price per barrel was C$6.07 gross and C$3.21 net. By fiscal year end, a capacity of 2,240 barrels a day was achieved. Revenue for the first full fiscal year was C$356,631, with a net loss of C$236,577.
The corporation grew significantly over the next year. By 1976 fiscal year end, the company had doubled its exploratory acreage, drilled over three times the number of wells from the year before, tripled the funds spent on the acquisition of reserves, and increased oil production almost nine-fold. The number of employees grew from 22 to 44. Net income for the year was positive for the first time, with a total of C$360,201. Gross revenue was almost ten times that of the year before at C$3.4 million.
One major and five smaller acquisitions increased the company's reserves by nearly 22 million barrels during this time. The purchase of Atlantic Richfield Canada Limited's Saskatchewan interests for C$23.3 million provided the bulk of the expansion. Another C$1.3 million in smaller purchases accounted for a little more than a million barrels of the new reserves. Production averaged more than 2,500 barrels per day over the year and capacity more than quadrupled to 11,000 barrels per day by fiscal year end. To handle the increasing responsibilities, a formal production department with ten employees was established in July 1975. Also in 1975, Kywan Petroleum Ltd., a wholly owned subsidiary, was incorporated to perform oil and gas exploration and development outside of Saskatchewan.
In 1976 and 1977, the corporation continued to expand steadily. The number of wells drilled almost doubled and production more than tripled to 3.3 million barrels. Revenue more than tripled to C$14.3 million. Price per barrel increased to C$8.05, almost two dollars more than the previous year's price. Export restrictions, however, were reducing demand for the company's medium gravity crude and the corporation made a strategic decision to begin investing in heavy oil extraction. The province was rich in heavy oil, but these reserves were not as developed as lighter crude reserves because heavy oil was more difficult to produce and refine than medium and light crudes. Heavy oil was normally found in thin, unconsolidated sand formations and was extremely viscous, making development and refining more difficult than for lighter crudes. The corporation decided to explore new technologies that would make development of this resource viable.
The fourth full year of operation for Saskoil, as the corporation now referred to itself, was a significant one in terms of profitability and new investments. Net revenue income increased to C$5.7 million, almost 26 percent of gross revenues, compared to eight percent the year before. Saskoil attributed this success to unprecedented production volumes, which accounted for 60 percent of the revenue increase, and a C$1.57 increase in wellhead price per barrel. C$8 million in capital investments was financed through re-investment of cash flow from operations.
Saskoil was not alone in its success during this period. The late 1970s were boom years for the upstream industry. Increased revenues from OPEC crude oil price hikes engendered high profits that allowed greatly expanded exploration programs. The expansion was further fueled by fear of middle eastern dominance in the petroleum industry and a desire to garner as much control of the outstanding resources as possible. Heavy investment in capital-intensive projects set the scene for the problems that many in the industry faced as a result of declining oil prices and the global economic recession of the early 1980s.
In keeping with its strategy to invest in heavy oil extraction, Saskoil undertook a major experimental project with two other investors in June 1977. Saskoil, Texasgulf Inc., and Total Petroleum Ltd. each took a one-third working interest at a cost of C$1.4 million in the leasehold, wells, and steam-generating equipment of the pilot North Battlefield Heavy Oil Project. The project was formed to explore techniques to reduce the viscosity of heavy crude so that it could be extracted by conventional pumping techniques. Already in operation seasonally since 1974, the facility was slated for expansion by the new investors, making it operational year-round.
By 1979, Saskoil was the third largest owner of oil produced in Saskatchewan, drilled the second largest number of wells and largest number of exploratory wildcat wells. Saskoil, along with Gulf Canada Resources Inc. and Petro Canada Exploration Inc. as one-third investors, began an eight-year project to identify and develop heavy oil reserves in a largely unexplored area of west central Saskatchewan. The Province of Saskatchewan was also an investor in the C$100 million project. The investment was made as a hedge against the declining reserves of light and medium crude oil. The high costs associated with the production of heavy oil and technological research to reduce costs were justified as a necessary part of a forward-looking strategy to ensure crude supply in a volatile and foreign-dominated oil market.
In 1980, business was still booming. The company reported capital expenditures equal to 2.5 times cash flow. Investments had been doubling every one or two years as the company pursued its goal of becoming a major presence in the oil and gas industry in Saskatchewan. While production of light and medium crude declined due to reserve depletion, heavy oil production had increased 75 percent over the previous year. The Saskatchewan Heavy Oil Project was successfully on balance and continued to grow. Net revenues were up 20 percent over 1979. A formal research and development division was formed in anticipation of increasing importance of enhanced oil recovery technology.
In the early 1980s, recession, severe price restrictions, and higher taxes from Canada's National Energy Program (NEP) cut into the profitability of the North American petroleum industry. While foreign crude sold for $C41.30 per barrel in 1981, Saskatchewan crude was limited to C$21.30 per barrel by the NEP. Moreover, the federal Import Compensation Program made foreign crude cheaper than Canadian crude for Canadian refineries. Fifty percent of Saskatchewan production suitable for Canadian refineries was stopped in response to the NEP restrictions. In 1981, Saskoil had a loss in net income of C$6.2 million, down from C$5.7 million profit the year before. The bulk of the loss was due to the 12 percent Petroleum and Gas Revenue Tax. The tax cost Saskoil C$3.7 million in 1981, wiping out its C$2.9 million net earnings before the tax. The tax was estimated to have cost oil companies operating in Canada a collective C$2.5 billion a year from 1980 to 1985.
At C$2.9 million before the Petroleum and Gas Revenue Tax, Saskoil's earnings were still down by almost half from the previous year. Saskoil production fell 40 percent below expected levels and 20 percent below the production level of the year before. An additional problem for producers in Saskatchewan was the cut back in production by the Province of Alberta in reaction to the NEP measures. The high sulfur content of crude from Saskatchewan required blending with the sweeter crude from Alberta to be suitable for Canadian refineries. Lack of availability of Alberta crude reduced the volume of marketable Saskatchewan crude. There was much negotiation between producers, the provincial government, and federal government concerning the NEP. Hoping for a favorable outcome from negotiations, Saskoil decided to maintain its exploration pace. The North Battlefield Heavy Oil Project doubled. Saskoil also joined a group of companies planning to construct a heavy oil upgrading facility to make it suitable for refining.
In 1982, a change in provincial government created a "significant change in purpose and direction, characterized by a shift in focus away from its previous 'invest to grow' mandate to one emphasizing profit and return on investment," according to Saskoil's 1982 annual report. Prices declined as a result of a world oil glut, an economic recession, and declining demand. The company shifted emphasis from exploration to production and continued to focus on heavy oil. Production was up by 18 percent over 1981 and the company realized a modest profit of C$1.6 million. Relief from taxes through the May 1982 NEP Update and a government price supplement added C$4.9 million to cash flow, a million dollars less than the previous year's loss. Soft demand and declining prices put the Enhanced Oil Recovery and heavy oil upgrading projects under scrutiny as demand for secondary products in the future was unstable.
The following year, Saskoil had a record after-tax income of C$30.9 million. Demand for Saskoil's heavier crude was boosted by a major road repaving project in the United States requiring large amounts of asphalt. An amendment to the NEP, giving the world price to oil discovered after March 1974, applied to about 60 percent of Saskoil's production and further boosted revenues.
In late 1985, world oil prices decreased precipitously to under US$20 a barrel due to increased OPEC production. Most of the provisions of the Canadian NEP were dismantled in 1985 by the Progressive-Conservative government. OPEC countries had indicated that they would continue producing at that level until non-OPEC countries dropped their production levels to what OPEC considered a fair proportion of the world supply. An expected change in the royalty rates in Saskatchewan added to the uncertainty of the future outlook for the company.
In the same year, Saskoil made its first public offering and was privatized under the Oil and Gas Corporation Act of 1985. The initial public offering was considered a success and the C$110 million in shares were subscribed within several days. The Province of Saskatchewan retained a 7.35 percent stake in Saskoil.
In 1986, crude prices dropped significantly and continued to be volatile into the 1990s. Natural gas prices dropped as well. The deregulation of the United States petroleum industry and the Free Trade Agreement between the United States and Canada further increased competition. The downward pressure on prices and profitability was evident in the bankruptcies, cost-cutting, and mergers that characterized the industry. Saskoil began an expansion through acquisition that continued into the 1990s. In 1987, Saskoil bought all issued and outstanding shares of Thomson-Jenson Petroleum Limited and Thomson-Jenson Energy Limited from the Thomson Organization PLC for C$65.8 million. In 1988, the company began an international exploration program as larger reserve investment opportunities declined in western Canada. In 1989, Saskoil increased its medium gravity crude reserves by C$7.3 million and bought ICG Resources Ltd. for C$105 million to expand the percentage of its production operated by Saskoil. The company continued its commitment to heavy oil investment by acquiring heavy crude production properties in Northwest Saskatchewan from Gulf Canada Resources Limited for C$34 million in 1990 and Moose Jaw Asphalt Limited for C$10.9 million in 1991. Also in 1991, Saskoil acquired light crude oil assets in Southeast Saskatchewan from Esso Resources Canada Limited for C$75.8 million. In 1992, Saskoil acquired Broad Street Oil & Gas of Columbus, Ohio, to expand marketing opportunities in the Midwest and California.
In 1993, Saskoil changed its name to Wascana Energy Inc. The change was intended to reflect the company's diversified business and growing role outside Saskatchewan. Wascana's activities by then had grown to include crude oil and natural gas exploration and development in Canada and abroad, a full range of crude and natural gas marketing activities, transportation and an interest in cogeneration. Since 1990, however, the company had been reporting a net loss in earnings.
A net gain of C$49 million was welcome news in 1994, especially after a net loss the previous year of C$34 million. C$37 million of the gain was due to the sale of non-core properties. Wascana's 1994 annual report was entitled "Back to the Basics" and detailed a renewed focus on "economically replacing reserves and efficiently producing and marketing crude oil and natural gas." Wascana sold Broad Street Oil & Gas, exited from the cogeneration project, reduced exploration in foreign countries to two principal areas, and consolidated the London office into Canadian operations. Dramatic improvement in profitability in 1994 and the introduction of significant measures to stabilize Wascana's performance put the company in a good position for the immediate future. Still, sustained competition, rationalization in the industry and the threat of takeover, even for a company of Wascana's size, continued to present significant challenges.
Principal Subsidiaries: Wascana Energy Marketing Inc.; Moose Jaw Asphalt Inc.
Further Reading:
Boras, Alan, "Huge Oil Find: Grad & Walker Field Contains 135 Million Barrels," Calgary Herald, February 14, 1995, p. 1.
"Free at Last," The Economist, April 6, 1985, p. 67.
Jeffrey, Tim, "Wascana Energy Announces Year End 1994 Results," Business Wire, February 20, 1995.
Yergin, Daniel, The Prize, New York: Simon & Schuster, 1992.
Source: International Directory of Company Histories, Vol. 13. St. James Press, 1996.
