Private Gain or Public Interest

Industry problems, and their cause

Currently, the oil and gas industry creates a number of serious environmental, social, economic, and political problems. The environmental impacts of oil and gas extraction activities, such as Alberta's tar sands, are profound. Oil and gas corporations pay low royalties to the public resource owners and stridently resist any increases, even in times of record profitability.

Climate change, however, is the biggest problem. A catastrophe in the making, human-induced climate change is projected to cost trillions of dollars in economic harm, and mass extinctions within a generation. Yet an industry of climate change deniers exists, with funding from the energy sector, strategic assistance from public relations (PR) firms, and close ties to current governments. Their efforts in lobbying, PR, and litigation have been successful in heading off serious government action on climate change, as well as in other areas.

These issues are symptoms of a deeper underlying problem: the nature of the oil and gas industry itself. Simply put, the structure of the large, for-profit business corporation— like those that dominate the oil and gas sector— generates problems. It is programmed to maximize share value, and it causes serious social and environmental problems because of this mandate.

In the long run, maximizing share value 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 on others (e.g., pollution).

While some of the harm arising from oil and gas 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 market demand, the social and environmental harm would be reduced. Can oil and gas corporations do so?

Can they simply decide to work toward demand reduction and cost internalization, even if it means reducing share value and profits?

In a word, no. 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 value for shareholders.

Will corporate social responsibility (CSR) provide an answer? By treating workers and communities fairly, a corporation can boost its reputation, and thus sales and profits.

However, corporations can't serve environmental or community interests to the extent that it would reduce profits.

Corporations often conduct cost-benefit analyses (CBA) to determine whether to risk harming others or risk harming the bottom line. The Ford Pinto and Chevy Malibu cases show that corporations will choose to save money by scrimping on safety features, even when doing so could result in hundreds of deaths. While CSR takes corporate reputation into account in CBAs, it can't undo the basic rules of corporate law.

In large, for-profit corporations, the profit imperative simply outweighs considerations of social, economic, and environmental harm.

As long as the oil and gas sector is dominated by for-profit corporations, these problems will continue.

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

A public-interest alternative

The oil and gas industry can be converted to an industry with a mandate aimed at serving the broader public interest, not just private interests.

Indeed, 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, cleaner 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 the 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 would be zero, or close to it.

The up-front payment would be on the order of $330 billion(Cdn) to purchase the firms producing a majority of Canada's oil and natural gas output, based on market capitalization in mid- November 2009. Changes in circumstances could alter the up-front price in the future.

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 about $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 bythe 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 pubic 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 the 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— as proposed in this paper— 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.

Several interesting design issues would arise in the transformation.

Public, private or mixed ownership?

Public ownership is one way to enable a public-interest mandate. Although nationalizing oil companies is supported by at least half of Canadians, public ownership in general has become an ideological bogeyman for political leaders across the mainstream spectrum. However, with the recent degree of public involvement in the financial and automotive sector bailouts, this ideology no longer determines practice.

In any event, 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 co-operative, is common throughout the world, the Canadian co-operative sector alone employing 160,000 people and controlling $167 billion in assets.

Canada's Federated Co-operatives Limited 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.

Would the new replacement industry be comprised of one entity, or many? If many, would they be competitive, subsidiaries, or joint ventures? Would some be for-profit?

These are all questions open for discussion, and would need to be considered in light of the larger goals of the transformation.

Rent entitlement, and producing and consuming regions

The public owns the vast majority of oil and gas in Canada, and is 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 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.

Stakeholder involvement

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. Only those few engaged in undermining public policy would be redirected or dismissed. 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.

A new mandate

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.

Preparing for the transformation

The transformation would require significant preparation, including stakeholder negotiations, advanced implementation of the policy framework (the rules that the public-interest industry would play by), and public education and outreach to inform the public about the change and counteract any disinformation circulated by the current industry.

Conclusions

The private-interest, for-profit oil and gas industry creates significant social, environmental and political harm, much of which is a result of its profit-maximization mandate.

However, the industry can be transformed to have a public-interest mandate. Doing so would result in business as usual for the vast majority of the sector's workers. But vital changes would take place: an end to consumption boosting, cost externalizing, and 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, development of renewable energy, a cleaner environment, and healthier people.

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