By David Yager, September 8, 2016
Entrepreneur. Consultant. Journalist. Political Activist.
How Did Alberta’s Oil Future End Up With Pipeline Companies?
How did the value of your house and your future employment opportunities end up in the hands of owner/operators of buried steel tubes and a single federal regulator? Why does the fate of Canada’s largest and most valuable resource industry – and the millions of Canadians who depend upon it – rest with commercial pipeline companies and the National Energy Board (NEB)?
What about all the other stakeholders? Why are the governments which own these resources on behalf of the people and all the elected politicians not more actively involved? What about the voters? Who’s representing the consumers who need the product to survive in this large cold country and the Canadians whose jobs depend on oil and gas development? When will we hear from the companies that actually find and produce oil?
Welcome to Canadian pipeline paralysis 2016. Incredibly, three private pipeline companies – TransCanada Corporation, Enbridge Inc. and Kinder Morgan Canada, guided by and the vacillating and increasingly impossible mandate of the NEB – are now in charge of Canadian oil policy. Kinder Morgan isn’t even Canadian. Give your head a shake.
These companies clearly drew the short straw when in the pursuit of commercial self-interest they ended up in expensive, high profile and inconclusive public hearings debating aboriginal land claims and the future of planet Earth. Pipeliners are just plumbing companies which connect buyers and sellers for money. Who put them in charge? The logical people to weigh in on such matters of domestic and global importance – our elected politicians – are nowhere to be found. Unless of course they object at which point you can’t keep them quiet.
The NEB’s Energy East hearing in Montreal was shut down August 29 for reasons of decorum and safety thanks to three highly-motivated professional disrupters. Finally, more people are asking the question nobody wants to answer; how did the future of Canada’s oil industry end up being decided at pipeline hearings?
Politicians Love Regulators
Because politicians love regulators. They hide behind them. Regulators are government institutions which study, analyse and adjudicate on major projects somebody believes are in the public interest. They need regulatory approval because they impact people, often called voters. Highways. Power lines. Pipelines. Railroads. Mass transit. All shared public works and utility infrastructure modern society cannot live without.
And people love pipelines. They just don’t know it. Every residential and commercial building is supported by multiple pipelines carrying fresh water and natural gas in and sewage out. Pipeline conduits protect electricity, telephone and cable TV lines. Every community in the country is riddled with pipelines. “Look before you dig”. The 2016 oil pipeline stalemate is about the contents not the tube.
A great example of why politicians love regulators is sour gas or hydrogen sulphide development in Alberta. The WCSB is cursed with some of the highest concentrations of poisonous H2S in the world. Following the tragic 1982 Lodgepole blowout the province’s energy regulator concluded future exploitation of reservoirs with a certain combination of H2S and potential flow rate should be subjected to what became the Critical Well public consultation process. The regulator was the Energy Resources Conservation Board (ERCB), a name which has changed a couple of times.
It took some getting used to. A resource developer would have to post a public notice and within a certain distance go door-to-door saying, “We’d like to drill a poison gas well upwind of the school your kids attend. What do you think of that?” The reaction was universally negative. However, through long and expensive public hearings the ERCB would listen to and review everything – including the drilling plan and accidental release mitigation measures – and decide if it could be done safely and in the public interest. Most wells were eventually approved but a few were denied. An entire industry of emergency response planning, community consultation, security and downwind air quality monitoring emerged. There seemed to be enough money around to keep this increasingly expensive business going.
The genius of the Critical Well regulatory process was no elected politician had to tell their flock, “Drilling poison wells in your back yard is good for the economy. Shut up and take one for the team”. That was left to regulators frequently described as the fairest and finest in the world. Today’s gas prices are so low and H2S processing costs so high nobody can afford to develop sour gas, so this issue has gone away.
But even the decision of the world’s most enlightened adjudicators was not always accepted. Recall late last century when Weibo Ludwig took the law into his own hands and was arrested for bombing gas wells and facilities in northwest Alberta.
The mandate of the NEB has not been materially different from the ERCB. Faced with a pipeline application and approval process, the regulator was charged with seeking industry and public input then determining if the design was safe, the setbacks adequate, environmental protection considered, and finally if the project was in the national interest. The historic bias has been towards economically advantageous because until recently resource development in Canada been never been regarded as anything else. It has worked well for decades. Canada didn’t become the 5th largest hydrocarbon jurisdiction (oil, gas, natural gas liquids) in the world without building and burying a whack of pipe.
However, in the past five years the subject changed from the existence of the pipe to the contents. Suddenly formerly boring NEB hearings were dealing with increasing numbers of intervenors talking about the terrible effects of mankind consuming oil such as global warming, climate change and rising oceans. For Enbridge, TransCanada and Kinder Morgan, this was simply not their business. They are transportation companies. All they did with oil was move it around. It was like railways being questioned because they might transport genetically modified wheat or the merits of highways based on the fuel consumption ratings of the cars on trucks that might use it.
The Anti-Carbon, Anti-Harper Crowd Takes Control
The success the climate change/anti-carbon crowd has enjoyed vilifying oil is well documented. Carbon-based fuels are changing the climate and will ultimately destroy the environment. This must stop now. There is no worse source than Alberta’s oil sands. This is not true (think lignite coal) but in this racket perception is reality. It is counter-intuitive everyone can burn oil and depend upon oil-based products to live their lives while simultaneously learning to hate the commodity. But that’s what happened.
It’s a big deal. It is no longer politically advantageous for anybody running for public office to say, “Oil is the miracle fuel that powers modern civilization so shut up and take one for the team”. More politicians are learning there is more to be gained from trashing oil than defending it. And what else could possibly matter more than winning the next election?
An unabashed supporter of oil was former Prime Minister Stephen Harper who, early in his mandate, called Canada “an energy superpower”. But as oil became branded as toxic it had a similar impact on politics. With fewer public officials brave enough to wade into the fray the NEB process into new pipe like Northern Gateway became the battleground for oil development versus anti-carbon fuel forces. Former NEB chair Gaeten Caron has said many times since retiring the scope of NEB hearings has exploded far beyond the regulator’s original mandate. Harper’s determination to support the industry became a liability, one of many reasons his party lost the 2015 federal election.
Harper was PM for almost ten years. It became fashionable to claim his administration completely bungled the pipeline file. Both Prime Minister Justin Trudeau and Alberta Premier Rachel Notley routinely blame Harper’s government for polarizing the pipeline debate by ignoring the anti-carbon movement, interfering in the NEB process and running roughshod over the interests of First Nations and others affected by development.
Even people who should know better have lost their senses. In an exchange with this writer former Alberta Liberal MLA and broadcaster Dave Taylor declared on Twitter, “I called out Harper’s failure to get a single mile of pipeline to export all that oil.”
Utterly false. Under Harper, in 2010 Enbridge completed the Alberta Clipper line to U.S. and two years later TransCanada completed phase one of Keystone pipeline. Today these lines carry 1.7 million b/d of oil to the U.S., over 40% of Canadian crude production. One of the first acts of the Obama administration in 2008 was to ratify the cross-border permit for Clipper, the same approval the White House withheld to kill the Keystone XL shortcut to Cushing in 2015. There were thousands of kilometers of export lines and regional connectors buried while Harper was PM.
Reviewing history objectively and recognizing how much pipe did get approved before oil became uber-politicized, critics should be more sympathetic to the former federal and provincial governments and industry for wondering where the anti-oil tsunami came from and how it grew so strong so quickly. How could the U.S. approve Clipper and Keystone but not KXL?
Purchasing The Elusive “Social License”
In Edmonton and Ottawa new governments claim to have the answer.
Alberta’s NDP solution is carbon taxes and oil sands emission caps as proof to opponents Alberta truly cares about the environment. The clearly contradictory message is the NDP supports the oil industry but for our collective good it must be heavily taxed and regulated, even if the process renders it uneconomic. It’s a great day at the office when a “progressive” government can raise taxes and save mankind at the same time.
The NDP’s 2015’s Climate Change Leadership Plan concluded there existed a positive cost/benefit analysis whereby large and comprehensive carbon taxes would earn a so-called “social license” from opponents thus permitting continued oil development. We’ll suffer by imposing huge financial penalties on carbon but prosper by gaining permission (defined as reduced opposition) from environmentalists. The NDP thesis, at least publicly if not intellectually supported by several large oil sands producers, was no action, no pipe. The $3 billion a year carbon tax will come into effective January 1, 2017.
Federally the Liberals concluded fine-tuning the NEB’s mandate and an expanded consultation process with opponents would mollify resistance. Simply re-regulate the regulator and rebuild “trust”, the key element that was said to be lacking. As a related issue, how Ottawa will ever permit Northern Gateway to proceed after the Prime Minister has publicly-declared an oil tanker ban on the north Pacific Coast is impossible to comprehend.
But after the Montreal NEB hearing disruptions it became obvious neither Alberta nor Ottawa’s schemes to make new friends meant anything to anti-oil crusaders. Trudeau was half a world away in China talking about other things. Alberta’s energy minister Marg McCuaig-Boyd’s public reaction sounded like the famous line from the classic movie Cool Hand Luke. Just before he was shot in the head in the last scene star Paul Newman said, “What we’ve got here is a failure to communicate”. CBC News wrote, “The protests, said McCuaig-Boyd, are an indication that Alberta needs to work harder to ‘allay the concerns’.”
There’s a pattern emerging here.
Seek Forgiveness, Not Permission
Both Northern Gateway and Trans Mountain have received conditional NEB approval. The problem is the NEB’s decision was not “no”. Legal challenges promised before the Northern Gateway hearings were concluded resulted in the courts overturning federal approval because Ottawa failed to adequately consult aboriginals. This had nothing to do with the NEB. The solution? More consultation. The Trudeau administration is staring at the multi-conditional Trans Mountain NEB approval with a federal decision due by year-end. Maybe.
Anybody objectively studying the pipeline approval process can only conclude the NEB pipeline application, review and decision process no longer works. Opponents are well organized and well-funded and won’t accept “yes” or even “maybe” for an answer. The simple reversal of Enbridge Line 9 from Sarnia to Montreal was fought vigorously followed by civil disobedience once it was operating. Built during the world oil crisis of the 1970s, Line 9 was a pipeline that originally flowed west to east and was reversed twice. It was built for no other purpose but to carry oil. The latest Energy East stalling tactics involve deep research on NEB panelists hunting for alleged conflicts of interest. And if that doesn’t work opponents will just storm the hearings and physically shut down proceeding.
When the anti-crude crowd figured out how the NEB regulatory process worked they must have jumped for joy. Anybody can attend and say anything. The mandate is to hear from everyone, no matter how bizarre or arcane the presentation. If denied a voice intervenors could allege massive injustice. The media would transmit their every utterance for free. How else could so few people with so little money hijack the future of the Canadian oil business?
Canadian regulatory bodies work more on the principles of British common law than American-style constitutional law. If the process is open and all voices heard, the final decision will be accepted by the public in the interest of fair play. The problem is opponents of oil and pipelines are so convinced of the purity of their cause they no longer accept any need to play fair.
When Will Pipeline Companies Give Up?
Those who care about the future of Canada’s oilpatch should question how long pipeline companies will continue this application/hearing/disruption/approval/denial process before they do something that actually makes money. Between KXL, Northern Gateway, Trans Mountain and Energy East these companies have invested billions. If approved these costs can be rolled into the rate base and generate a return. But when rejected the costs are restated as losses. Billions out the door either way. At some point pipeline executives proposing and promoting pipelines that never get approved will realize they are not making career-enhancing decisions.
And they’ve already figured that out. TransCanada and Enbridge have been busy doing what they are supposed to do which is make money for shareholders. In July TransCanada closed the $US13 billion acquisition of Columbia Pipeline Group Inc., a large gas distributor in the northeast U.S. On September 6 Enbridge announced a $US37 billion merger with Spectra Energy Corp. which operates oil and gas pipelines in Canada and the U.S.
If they can’t build pipe then buy it. Nothing wrong with that. TransCanada and Enbridge are great Canadian companies. But this strategy is much more successful for their shareholders than for tens of thousands of unemployed oil workers wondering if and when they will be able to return to work.
Imagine if Canada woke up one morning to learn TransCanada had simply given up on Energy East and withdrawn its application because the process was unworkable and political support non-existent. This is pure conjecture of course as their customers will likely persuade and/or pay them to keep pushing. But this can’t and won’t go on forever. Ordinary Canadians must realize the wrong people have been put in charge of the future of oil in Canada and the NEB-mandated pipeline approval process no longer works.
No regulator can thrive or even survive when its political masters conclude it is the problem, not the solution, and decline to provide clear and definitive support. Unfortunately, this is the Trudeau government’s current strategy for success.
Political Leadership Please
There is an alternative. That is for Canada’s elected political class to put the interests of the economy ahead of their own and state the obvious; “We’re putting an oil pipeline through your neighborhood. Shut up and take one for the team”. Governments have the power of legislation and legal enforcement. All it takes is the political will and courage to use it. If the country is to gain control of its economic future the only solution is to challenge the organized, well-funded, vocal and surprisingly small anti-oil crowd. Don’t hide behind regulators which will be confronted and assailed so long as they don’t say “no”. And most importantly, don’t dump the issue on private-sector common carriers of commodities the world still requires and consumers will not live without.
For Alberta, if we can’t get pipe, then cancel the carbon tax. The massive tax increases and development restrictions for the oil business to purchase a “social license” will be economically damaging. The desired response, which is petroleum opponents standing down so Alberta can get more pipe to tidewater and stay in the oil business, is clearly not working. If one of the world’s largest oil producing regions can’t gain low-cost market access could Edmonton at least allow the people who live here to keep their jobs and homes? Must Albertans be taxed to the point of financial ruin during a massive recession to win a battle that cannot be won?
Time for Plan B.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
David Yager can be reached at Ph: 403.850.6088 Email: [email protected]