In 1926 HBC became involved in the petroleum industry. But the roots of this new line of business go back to 1909 when Donald Smith, Governor of HBC and Canadian High Commissioner in London (since 1896), became Chairman of the brand new Anglo-Persian Oil Company, a subsidiary of Burmah Oil.
By the 1890s oil was being produced on an ever increasing scale and the smart money realized it would be the fuel of the future. John Arbuthnot (Jacky) Fisher, "the god-father of oil," rose to the top of the Royal Navy in 1904. He pushed both the Royal Navy and the British government toward the adoption of oil-powered vessels. But between them America and Russia controlled 94% of the world’s supplies. Outside of the small operation in Burma, the only possible place for Britain to try and secure a reliable supply was from Persia, modern-day Iran.
Donald Smith and Anglo-Persian
Sir Donald A. Smith, by Adolphus Muller-Ury, 1903, HBC Corporate Collection
Englishman William Knox d’Arcy had obtained a drilling concession in Persia in 1901. Battling difficult terrain, an uncertain political situation and rising costs, d’Arcy, like so many others, hadn’t the financial resources to exploit it. Partnering with Burmah Oil in 1905 he finally struck oil in 1908. Admiral Fisher asked Donald Smith to become the head of a combined consortium that would operate both the Burmese and Persian concessions. Smith agreed, eventually investing at least £1.5 million of his own money in the business. In 1909 Anglo-Persian was incorporated. The Chairman of both companies was none other than Donald Smith.
In 1912 at the urging of then First Lord of the Admiralty, Winston Churchill, the British government decided to invest £2.2 million in Anglo-Persian, acquiring in turn 51 percent of the stock. The government also signed a 25-year agreement for the delivery of fuel at a fixed price. Anglo-Persian received an injection of capital and the British government obtained a guaranteed flow of oil. By the summer of 1914, the British Navy was fully committed to oil. For the first time, oil had become an instrument of national policy – a strategic commodity. Anglo-Persian became Anglo-Iranian in 1935 and, in 1951, was nationalized as British Petroleum.
Always a visionary when it came to possibilities for profit, as early as 1906 Smith, HBC’s first Land Commissioner from 1874-1879, had presided over a significant change in the Company’s land sales policy, whereby it now retained mineral rights over its huge portfolio of western real estate – some 4.5 million acres in Manitoba, Saskatchewan and Alberta. This prescience would pay off in 1926.
Although HBC had done very well out of the First World War thanks to its lucrative French shipping contract, the post war period was proving difficult. The fur trade had pretty much been on hold during the hostilities and was only starting to recover. Meanwhile the ambitious department store building program across the west had been expensive and shareholders were less than enthusiastic about the returns.
Hudson’s Bay Marland Oil
HBOG truck, ca. late 1920s - early 1930s, HBOG 1976 Annual Report
Enter American oilman Ernest Whitworth Marland, the pride of Ponca City, Oklahoma. A lawyer and student of geology whose early businesses in Pennsylvania and West Virginia had met with modest success, Marland was attracted by oil drilling activity near Ponca City. He obtained leases and in a few years his company’s operations dominated the fast-growing oil scene in the northern part of the state. Marland was the first to use geology as a tool to help discover oil and his methods proved to be effective. His geology department launched an innovative drilling experiment – core drilling – which became a major operation. This and his introduction of the seismograph from Germany gave him a two-year jump on the industry in the use of this geophysical method to locate favorable deposits.
An Anglophile who favoured kilts, knickerbockers and spats, and lived in a pseudo-English country house, Marland was a frequent visitor to London, where, in the spring of 1926, he paid a call on HBC Governor Charles Vincent Sale. Marland had a proposition: he would provide the technical expertise, cover all exploration expenses, and pay out a royalty on any oil or gas produced in return for a-25 year option to lease any parcel of land over which HBC held mineral rights for drilling purposes. Eager to diversify HBC’s business Sale and the Committee agreed and Hudson’s Bay Marland Oil was born. When Marland’s extravagant lifestyle caught up with him in 1929, he was forced to sell out to Continental Oil. Continental, in its turn, formed Hudson’s Bay Oil & Gas (HBOG) as a joint partnership with HBC, which retained a 25% stake. Marland himself carried on an extraordinary career, serving as a Congressman from 1933 to 1935 and Oklahoma’s 10th Governor from 1935-1939.
Hudson’s Bay Oil & Gas
HBOG Propane tank car at a Company operated loading terminal, ca. 1970, HBOG 1971 Annual Report
The depression was tough on Hudson’s Bay Oil & Gas, so much so that HBC’s new General Manager for Canada, Philip Chester, tried unsuccessfully to sell off the Company’s stake. Instead, in 1931 HBC simply suspended further investment in HBOG. In 1934 HBOG entered into an agreement with Imperial Oil subsidiary Northwest to permit Northwest to explore the Company’s holdings in exchange for a 50% share of any findings. This was subsequently renewed until 1951. In the early 1940s HBC’s investment in HBOG was reactivated and by the spring of 1943 the firm owned a dozen wells in Alberta’s Turner Valley, over 10% of the field’s production. Over the next decade HBC would invest over $8 million in exploration and HBOG would hold over 4.3 million acres of known gas reserves, and over 80 producing wells. By the late 1960s HBOG was Canada’s 3rd largest oil and gas producer, with 1,606 wells ad 11.2 millions acres under licence. Earnings were twice those of HBC and equity worth four times as much.
In 1973 HBC acquired a stake in Siebens Oil & Gas, a company with a large exploration activity in the North Sea, financed by a swap of HBC’s mineral rights income in return for 3.2 million Siebens shares – or 35% of the company. Siebens got much needed cash and HBC got a stake in the potentially lucrative North Sea. In 1979 HBC sold its stake on to Dome Petroleum for $123 million of preferred shares. The following year HBC acquired its last petroleum investment, Roxy Petroleum.
Exiting the Business
Hudson’s Bay Oil and Gas 1975 Annual Report Cover
By the early 1980s it was clear that HBC was over-extended and heavily in debt. A decision to consolidate and focus on core business led HBC to dispose of non-retail assets. The HBOG share was finally sold to Dome Petroleum in 1981. Dome had acquired 53% of HBOG from Conoco, as Continental was now known. But its debt load was so large that it needed to capture all the minority shareholders, of which HBC’s 10.1% stake was the largest, in order to gain access to the company’s cash flow. The sale was a complicated deal whereby HBC received 7.7 million shares of preferred stock valued at a fixed price of $57.50 per share, redeemable any time up to Dec. 31, 1984. HBC exercised its option in 1983, realizing $455 million in much-needed cash. Dome never recovered from its massive debt load and was finally sold to Amoco in 1989. Today it is a wholly-owned subsidiary of Amoco Canada Petroleum Company, itself a wholly-owned subsidiary of Amoco Corporation.
And what of Roxy? The sale of Roxy Petroleum to Westcoast Transmission in 1987 for $82 million marked the end of HBC’s foray into the oil business, after sixty-one years on the boom and bust oil & gas roller coaster.