David Yager – Yager Management Ltd.
Oilfield Service Management Consulting – Oil & Gas Writer – Energy Policy Analyst
March 30, 2017
The Keystone XL (KXL) pipeline is back in the news after U.S. President Donald Trump signed the presidential permit former President Barack Obama denied the project in November of 2015, eight years and $2.9 billion after TransCanada Corporation (TC) conceived the idea. KXL is surely the world’s best-known non-existent pipeline. After a $2.9 billion write-down in 2016, TC sued the U.S. government for damages. Incredibly, due a change in the White House it might actually be resurrected and completed.
Engineers shouldn’t be allowed to write books because telling long stories is not usually a core skill of the profession. But Dennis McConaghy, chemical engineer and retired TC executive, released a highly readable, detailed and engaging version of the KXL story in January titled, “Dysfunction – Canada After Keystone XL”. Dysfunction is actually two books, one the KXL saga and another about carbon taxes and Canadian energy policy. This review is dedicated to the pipeline.
McConaghy played a key role in TC’s new pipeline projects. The original “base Keystone” line, as McConaghy calls it, was named after a hockey rink in Brandon, Manitoba. Conceived in 2005, it repurposed an underutilized natural gas line to Manitoba then built a new leg south to Steele City, Nebraska. It was routinely approved by the NEB while Stephen Harper was Prime Minister. Permission to cross the U.S. border was applied for and received in 2008 from the George Bush administration. It was shipping crude in 2010 and currently transports about 600,000 b/d. This was TC’s first major oil pipeline.
McConaghy quotes Robert McNally, then Bush’s senior energy advisor, as saying approving pipelines is, “the most routine, boring thing in the world”. In hindsight, this off-the-cuff remark would be a curse for KXL.
By 2007 TC was examining rising oil sands production and the plumbing between Hardisty, Alberta’s main pipeline hub, and the Gulf of Mexico. With shipper demand strong, TC conceived KXL as totally new pipe in almost a straight line to Steele City, Nebraska.
As TC would learn the hard way, conceiving KXL would be the only truly enjoyable event. Unknown to the company and its clients, KXL would ultimately be not be managed by regulators or markets but Murphy’s Law which states, “Whatever can go wrong, will go wrong”.
By mid-2009, consultations to secure right-of-way access had been completed. TC’s annual report said KXL could be carrying crude by 2012. The direct path to Steele City went through an area called the Nebraska Sandhills which sits on top of something most had never heard of, the Ogallala Aquifer. The sand dunes are environmentally sensitive and the aquifer a major source of drinking water.
TC’s troubles began when a single activist named Jane Kleeb began rallying the state’s environmentalists to the potential damage of KXL on the Sandhills and the aquifer. A year later she had launched Bold Nebraska, a special purpose Environmental Non-Government Organization (ENGO) to protest KXL. It was the first of many. TC had an alternate plan to circumvent this region but believed brand new pipe was very safe and regulators would agree.
Oops. Nebraska still haunts KXL to this day even after Trump’s strong support.
Later that year, two events occurred the company could not have anticipated. On April 10th, BP’s Macondo well blew out in the Gulf of Mexico destroying the rig, killing 11 workers and creating the worst offshore oil spill in U.S. history. On July 26th, Enbridge’s Line 6B in Michigan burst spilling some 25,000 barrels of dilbit (bitumen and diluent) into the Kalamazoo River. McConaghy claims this was the largest pipeline oil spill in U.S. history. McConaghy writes, “…the Enbridge spill in particular contributed to greater public concern about any pipeline transporting Canadian dilbit within the United States”. These disasters indelibly changed the American political landscape for oil and pipe.
TC received the necessary environmental permits from U.S. regulators on April 16, 2010. This validated TC’s original route for KXL and would, under normal circumstances, be seen a positive major step. TC was on track and for the most part on budget.
But at the same time, U.S. and Canadian Environmental Non-Government Organizations, or ENGOs began communicating about KXL. The Natural Resources Defense Council (NRDC) said, “The meetings with the Canadian groups really made a difference…it was a very important session for elevating our attention to this issue in the U.S.”. And elevate they did. By June of 2010, 50 left-leaning Democrats in Congress wrote to Secretary of State Hillary Clinton stating, “…building this pipeline has the potential to undermine America’s clean energy future and international leadership of climate change”. Things were changing fast.
The approvals received in April were gone by June when TC was asked to produce a supplemental environmental review. This would set the project back 12 to 14 months in what the author called “The first delay”.
Meanwhile in Washington, in 2010 an attempt to introduce carbon taxes had failed. This followed the 2009 Copenhagen climate conference where attendees agreed the world must hold any future rise in the earth’s average temperature to 2oC. This would require substantially reduced carbon emissions. Carbon taxes were gaining credence as a solution. However, the U.S. was unable to introduce carbon pricing legislation in Washington. This left the ENGO movement searching for something else to do.
By 2011, there was growing pressure on the Obama administration not to approve KXL. Undoubtedly responding to the Kalamazoo mess, in the spring the government presented TC with 57 new special conditions never before imposed on a pipeline. All were technical such as steel quality, shut off valves, circumventing water where possible and ultrasonic weld inspections. TC complied.
In June, the Environmental Protection Agency requested TC review its route through Nebraska. It also questioned whether TC had factored in incremental carbon emissions caused by the contents of the pipeline. This was the first time this had even been raised in a U.S. pipeline review. This was TC’s second major regulatory setback.
Public criticism grew in the U.S. media. James Hanson, a climate change activist who worked at NASA, wrote an article in the New York Times calling oil sands “the tar sands monster” and “game over” for the world’s climate. After the failure to introduce carbon pricing post-Copenhagen, U.S. ENGOs required a new crusade to save mankind. Enter Bill McKibben of 350.org who, in July 2011, started promoting widespread public opposition to KXL. His pitch read, “Twenty years of patiently explaining the climate crisis to our leaders hasn’t worked.” He called KXL a horror, a “fifteen hundred mile fuse to the biggest carbon bomb on the continent, a way to make it easier and faster to trigger the final overheating of our planet”.
McKibben wrote, “…what we are planning is civil disobedience, the broadest in the history of climate activism.” McConaghy writes that McKibben, “appreciated more than most the need for a tangible cause that could reinvigorate the entire environmental movement.” KXL was perfect because the pipeline’s future lay with one signature, that of President Obama. McKibben would later admit, “If it had been Congress in charge of it, I don’t know that we would have invested the hope and the passion, because what’s the odds of Congress doing anything. It was a decision that the President was going to make, which gave us the glimmer of a chance of winning”. Soon movie stars were getting themselves arrested outside the White House
After all, when Obama won his first presidential campaign in 2008 he said future generations would look upon is presidency as, “the moment when the rise of the oceans began to slow and the planet began to heal”. The ENGOs would never let him forget. By August 2011 McConaghy wrote all the major U.S. ENGOs came together to urge Obama to reject KXL; “They stated that the ‘green base’ would obstruct KXL even if that required civil disobedience.
By late 2011 the entire U.S. political landscape had changed. The next election was only a year away. The ENGOs continued to pressure Obama to stop KXL, saying, “We expect nothing less.” KXL was, “perhaps the biggest climate test you will face between now and the (2012) election.” McKibben promised opposing KXL would trigger a “surge of enthusiasm from the green base that supported you so strongly in the last election”. Obviously, Obama was listening, having positioned himself as a pro-environment leader. The entire U.S. ENGO movement was going to withdraw support unless he complied.
As 2011 wound down the pressure was clearly working. TC was advised all previously issued regulatory approvals had been withdrawn until TC developed a route avoiding the Nebraska Sandhills. McConaghy describes this as a maneuver to suspend the project without saying no. TC later received permission to build the link from Cushing, Oklahoma to the Gulf of Mexico, the Gulf Coast Pipeline, which it did. But it was interpreted as a signal all was not lost with the American approval process.
Things were getting ugly. 350.org organized a phone campaign to TC’s head office in Calgary to convey broad opposition, even though TC’s polling indicated 60% approval among the American public. The message was KXL was “immoral”. TC CEO Russ Girling became the subject of personal attack ads funded by Thomas Steyer, a successful hedge fund investor with pro-environment leanings. TC expanded its PR team and tried to provide a positive spin on XKL. The company stuck to the facts thinking the economic imperative, continued public support and the fact no other pipeline had ever become such a political flashpoint would carry the day.
With the ENGOs on side, in the 2012 U.S. election Obama won a second term. In early 2013 the Nebraska governor approved TC`s reroute and Washington`s review indicated the pipeline itself would cause no increase in carbon emissions because the oil would get to market somehow including rail. TC believed a positive outcome was still possible.
However, in June 2013 Obama gave a speech that said in part, “allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation`s interest. And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution. The net effects on the pipeline`s impact on our climate will be absolutely critical to determining whether this project is allowed to go forward”.
McConaghy writes nobody really knew what that meant. However, TC was becoming acutely aware how much the world had changed since KXL was conceived. Over $2 billion had been invested to this point.
In early 2014 the reroute in Nebraska was approved and the regulatory bodies had found no grounds on which to outright dismiss KXL. But only a month later a Nebraska judge ruled the new routing was illegally approved. Washington withdrew the prior approval after only three months because of Nebraska. About this time the author admits to having his first clear doubts KXL would ever be built.
McConaghy retired from TC in August of that year. But to that point he had a seat and voice at every major management meeting about KXL and what to do next. Fascinating.
On January 9, 2015 Nebraska announced KXL was good to go with the new route. As everyone wondered what to do next, Obama decided the Canadian election set for the fall of 2015 was yet another good reason to postpone a decision. Three weeks after Justin Trudeau became Prime Minister in October and before the Paris climate change conference in late November, Obama killed KXL stating, “America is now a global leader when it comes to taking serious action to fight climate change…frankly, approving this project would have undercut that leadership”.
McConaghy is circumspect on what could have been done differently. What if TC had rerouted the Nebraska section at the first signs of opposition? Then Obama could not have implemented the 2011 and 2014 delays. Should TC have done the deal in the first place? It looked promising in 2007 and besides base Keystone, Enbridge’s Alberta Clipper line was also under construction. Could TC have done a better job at communications? This was uncharted territory for pipelines in 2007 although nowadays it comes with the territory. Should TC have given up earlier and saved money? There had never been a pipeline cancelled in North American history primarily because organized ENGOs influenced a president who promised an environmental legacy when he left office.
And of course, third-party events which would ultimately shape KXL’s fate such as Copenhagen, Macondo and Kalamazoo were impossible to predict in 2007.
McConaghy writes at length in the various parts of the book how things might have been different if Prime Minister Harper had embraced carbon taxes instead of calling KXL a “no brainer”. He believes this would have made it more difficult for the ENGOs to build their case and Obama to say no. The second half of his book is dedicated to this issue and the “dysfunction” of Canadian infrastructure regulatory policy and processes. This is a good read for energy policy wonks.
However, McConaghy argues both sides saying Canadian carbon taxes could have been the difference yet they might not have been enough to derail the big ENGO machine once it got rolling. That’s how complicated this issue had become.
But the KXL story is a fascinating insider chronology of the risks companies take in financing and constructing major capital projects in the face of a dynamic and fast-changing regulatory and political environment. The brass at TC can and has been forgiven for not being able to anticipate in 2007 how a confluence of multiple events, including the disasters of other industry players, could turn the KXL “no brainer” into a $2.9 billion black hole.
McConaghy’s book – at least the KXL part – should be required reading for any executive team undertaking a multi-year capital project involving multiple jurisdictions and regulatory approvals. Business profs should use it as a reference tool.
“Dysfunction – Canada After Keystone XL”, is available at local bookstores in Calgary or on line at Amazon or Kobo books.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principal 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.