By JEFF LEWIS, KELLY CRYDERMAN, SHAWN MCCARTHY
Saturday, April 14, 2018
CALGARY, OTTAWA -- It was supposed to be the sure bet.
As investment poured into Northern Alberta's oil sands during the past two decades, a race began to build a pipeline that could get large amounts of crude to the refineries that turn it into usable fuel.
One by one, many of the projects foundered because of politics, economics or environmental opposition. TransCanada Corp.'s southbound Keystone XL ran into an adversary named Barack Obama, and the company's Energy East project was scrapped. Enbridge Inc.'s Northern Gateway, which would have cut across Northern British Columbia to the town of Kitimat, B.C., hit legal and political trouble.
Eventually, Kinder Morgan Inc. emerged as the clear front-runner to build significant new pipeline capacity for Canada's oil industry.
Desperate to secure new export routes, some of the world's largest energy companies threw their support behind the Texas firm's contentious plan to thread a new pipeline alongside an existing one that had ferried Alberta crude across the Rocky Mountains since the Korean War.
While tanker traffic would increase in Vancouver Harbour, many wagered the Trans Mountain expansion stood a more realistic shot at getting built than the others.
Demand for Trans Mountain was so great that Kinder Morgan upsized the plan in 2013 to 890,000 barrels a day.
Ottawa gave its blessing to the project in November, 2016, and drove a stake through Northern Gateway on the same day. Investors bought in, snapping up $1.75-billion worth of shares in an initial public offering last year of Kinder Morgan's Canadian unit.
But the oil industry's sure bet suddenly looks like a massive gamble.
This week, Kinder Morgan put the $7.4-billion oil pipeline on life support, warning it would scrap the already-delayed expansion without assurances by May 31 that it can actually start construction this summer without facing a political battle in British Columbia that could stop the project months from now and cost its shareholders dearly.
The company's threat has reverberated across Canada.
In Ottawa, the surprise ultimatum has triggered a political and national-unity crisis unlike any faced so far by Prime Minister Justin Trudeau, who this week said he would interrupt a scheduled 10-day trip to Peru, France and Britain to meet with the warring premiers of Alberta and B.C.
Oil-industry executives and the heads of major Canadian banks have issued dire warnings. With the U.S. sharply cutting taxes and regulations, they say, Canada already seems a less attractive place to invest. The failure to build Trans Mountain - even after it won approval from the federal government - would amplify the risks to the country's economy. It would cost the oil industry billions of dollars, with knock-on effects for the rest of the country.
Faced with the prospect of cancellation, Alberta Premier Rachel Notley has made the extraordinary threat to choke off fuel deliveries to B.C.'s Lower Mainland and has vowed to buy the expansion project outright, if necessary, to ensure its survival. Meanwhile, Ottawa has said it would consider loan guarantees and other mechanisms to prop it up.
Kinder Morgan's demand has galvanized environmentalists who say Trans Mountain threatens the coast and undermines Canada's commitment to help slow climate change. First Nations who oppose the project maintain it will never be built, pointing to unresolved challenges before the Federal Court of Appeal.
For his part, B.C. Premier John Horgan has not blinked, arguing his province has a right to defend its coasts, economy and interests.
His government raised the temperature further this week, saying that whether the expansion is built or not, B.C. intends to pursue authority to restrict the diluted bitumen from moving across the province by rail.
Hanging in the balance is a national consensus on fighting climate change, including measures imposed by Ms. Notley to limit the growth of planet-warming greenhouse gases from the oil sands.
In Calgary's office towers, frustration has turned to bewilderment. Trans Mountain could yet be built, but many in the downtrodden oil industry are asking the same questions: What happens if it fails?
"This is the simplest, most straightforward, least-invasive project that we have," said Jim Davidson, deputy chairman of investment bank GMP FirstEnergy, a boutique dealer that specializes in energy.
Although Mr. Davidson still believes the expansion will go ahead, the project has become a litmus test for Canada's ability to attract global capital - for its ability to get something done to develop its resources.
"If we can't get this built - if we can't get this project complete - why would international investors even take a look at us?"
Oil sands producers had only started to emerge from a bruising price slump that prompted waves of cuts to staffing and spending levels and permanently dented investor confidence in the sector.
But while much of the global oil business is reaping benefits as prices recover, Alberta's dominant industry is once again grappling with bouts of steep discounts. The extra-heavy crude trades at a discount to the main North American price because it must be shipped over long distances to refineries and because it takes extra energy to convert into gasoline, diesel and jet fuel.
Tight export capacity means the price is especially sensitive to even slight changes in demand or supply. The gap between the extra-heavy oil and the U.S. benchmark price, West Texas intermediate, mushroomed late last year to more than US$30 owing to restrictions on major pipelines.
Some pressure has eased as producers curtail output, but analysts say the relief is temporary.
Backers say Trans Mountain offers a more lasting solution, giving Alberta's hard-hit oil producers what they have long sought: wider access to global markets, a boost in prices and a sharp break from near-total dependence on the United States.
The federally approved project involves threading almost 1,000 kilometres of new pipe from Edmonton to a marine terminal at Burnaby, B.C. Much of it would follow the same route as the existing, 300,000-barrel-per-day line and other utility corridors, but the project requires a major expansion of storage capacity in Vancouver's suburbs.
"This is the opportunity for us to move into those new and growing markets in Asia, which everyone sees as where the future is going to be," energy consultant Greg Stringham said. "It ties us to that, so this is really important."
Kinder Morgan's ultimatum has been widely praised in the oil patch, where opposition to the plan has sparked fears the company and its oil-shipper customers are about to lose another construction season.
That would push the project's start date even further into the next decade, an alarming prospect for an industry that is losing out as more barrels compete for space on pipelines that are effectively full. Big price discounts sap corporate revenue and have made even the largest companies reluctant to invest in new growth, triggering concern in Alberta, a province that relies heavily on energy royalties to fund health care and education.
"Until some major pipe capacity comes on, we're going to continue to lose $10- or $15-billion a year, just through discounted oil, as barrels are competing to get into the pipeline rather than competing at the market hubs at the other end," said Hal Kvisle, the one-time head of TransCanada and a board nominee for oilsands producer Cenovus Energy Inc.
"That's what is really a horrific challenge for Alberta today."
The project's demise would ratchet up pressure to get TransCanada's Keystone XL or Enbridge's Line 3 done, while also forcing producers to pay more to ship growing volumes by train.
Although they each face resistance, both Line 3 and Keystone XL would enable more crude to flow south to the United States, where big refineries on the Gulf Coast are already consuming more than 800,000 barrels per day of heavy oil sands crude, according to estimates by consultancy IHS Markit.
While history is rich with examples of Canadian governments pushing contentious energy infrastructure across the finish line, it is far from clear that public investment in Trans Mountain will mollify opponents in Vancouver Harbour.
Mr. Kvisle bluntly called the region an "unbuildable endpoint" for the project and said the expansion plan is at risk of withering on the vine.
"I'm not optimistic at all." POLITICS The economic magnitude of the multibillion-dollar project, along with the accompanying increased tax revenue and royalties, always meant that politicians at all levels of government would pay close attention.
However, the project has also become emblematic of Mr. Trudeau's pledge that he can both make Canada a world leader in environmental protection and promote the country's economic growth. His credibility came into sharp focus the moment Kinder Morgan said it would give Canada only a matter of weeks to prove that it can remove the roadblocks to the pipeline expansion.
At risk is the understanding between Mr. Trudeau and Ms. Notley that Alberta, Canada's largest greenhouse gas emitter, will support the federal Liberals' carbon price and place a cap on its oil sands emissions in exchange for pipeline access to Asian and other global markets.
The political stakes are high for all leaders. Mr. Horgan is presiding over a minority government in partnership with the Green Party and could see that deal collapse if he caves on Trans Mountain.
Alberta's NDP Premier, who has become an increasingly hawkish advocate for pipelines over her three years in power, risks losing a provincial election early next year to the United Conservative Party.
But for Mr. Trudeau, the pipeline crisis has exposed political weaknesses in his government that few foresaw just a few months ago. Hot off the heels of a poorly received trip to India, the fight over the pipeline is Mr. Trudeau's first real national unity test.
He and his staff have long insisted that those who doubt his government's resolution to get the project done will be proven wrong. If Kinder Morgan backs away from the project, it will be a severe blow to his credibility, even as his poll numbers already show signs of weakness.
In Vancouver, former federal Liberal cabinet minister and former B.C. premier Ujjal Dosanjh said something even greater is in question.
"Where we are as a federation is in a dangerous spot," he said.
Mr. Dosanjh says that if the pipeline expansion is built, many in B.C. will still be angry about the spill risks but will eventually reconcile themselves. If it's not built, the political alienation of Alberta, and even separatist sentiment, will spike. "You haven't seen the likes of what might happen in Alberta if it's not built," he said.
"There has to be some understanding that you can't have landlocked provinces at the whim and mercy of coastal provinces," Mr. Dosanjh said.
"Perhaps I am too critical in my old age, but the longer whatever decision is going to be made by the federal government is delayed, the worse it is," he said.
"The federal government has known that this was coming, and if they still want the thing built, they should have acted sooner."
Ted Morton, a former Alberta PC cabinet minister who now runs a consultancy focused on political and policy risks in Canada's energy sector, said whatever path Mr. Trudeau's government takes, it will have to walk a fine line - particularly in relation to vote-rich Quebec, where the Liberals hold 40 seats.
Facing tough new rules on greenhouse gas emissions, TransCanada killed off its controversial Energy East pipeline six months ago. But Quebeckers are still not particularly fond of new heavy oil pipelines - or alpha-dog displays of federal authority. The federal Liberals may have to reconcile themselves to losing seats in the Lower Mainland of B.C. out of the pipeline fracas (and Alberta was already a wasteland for Liberal votes), but now Mr. Trudeau must make sure that any decision does not come back to haunt him in Quebec.
"It might hurt Trudeau more than it would help him," Dr. Morton said.
THE CLIMATE FALLOUT While Mr. Horgan invokes the threat of an oil spill to justify his anti-pipeline stand, the national climate change debate is never far from the surface.
Federal Environment Minister Catherine McKenna argues the demise of the Trans Mountain expansion would threaten the fragile national consensus cobbled together in December, 2016, in an agreement called the Pan-Canadian Framework on Clean Growth and Climate Change.
Ms. Notley only agreed to the climate-change plan - and to increase carbon prices to $50 a tonne by 2022 - in exchange for federal approval on the Trans Mountain project, which came just weeks before Mr. Trudeau sealed the deal at a first ministers' meeting in Ottawa.
In reviewing the Trans Mountain expansion proposal, the federal government assessed the impacts on greenhouse gas emissions from the oil sands and declared that, while GHGs were likely to rise, the increase fit within the federal-provincial climate plan.
The pipeline project needs to be seen in the broader context of all the actions Ottawa and the provinces are taking to cut GHGs, including Alberta's climate plan, as part of a long-term transition to a low-carbon economy, Ms.
McKenna said in an interview on Friday.
"Alberta has taken extremely serious measures to tackle climate change," she said. That action is threatened by "politicians who want no climate action at all," she added, a clear reference to United Conservative Party Leader Jason Kenney, who opposes the province's carbon price and is urging Ms. Notley to scrap it if the pipeline fails.
Pipeline opponents insist it is foolhardy to pin the success of a GHG reduction strategy on a pipeline that will increase emissions in the oil sands, which have been the fastest-growing source of GHGs in the country since 2000.
B.C. environmentalist Tzeporah Berman said it would be a good thing for the country if the expansion did not go ahead. "It would show the world that Canada is going to lead on building a new, cleaner economy - that we're moving forward, not backwards," she said.
The Alberta government's climate plan includes an economywide carbon tax and a cap on emissions from the oil sands set at 100 megatonnes. That cap would still allow oil sands emissions to increase by 47.5 per cent above 2014 levels - and that does not include the exemptions for new upgrading facilities or cogeneration plants that use steam for both electricity and extracting bitumen.
Construction of the Trans Mountain pipeline would facilitate more investment in the oil sands and more GHG emissions, especially if accompanied by the completion of either Line 3 or Keystone XL through the United States.
Simon Fraser energy economist Mark Jaccard states it bluntly: The expansion of oil sands emissions is inconsistent with Canada's target - pledged under the 2015 Paris climate agreement - to reduce GHGs by 30 per cent from 2005 levels by 2030. And it is inconsistent with the global goal of limiting the increase in average temperatures to less than two degrees above preindustrial levels, as the Paris accord sets out.
Regardless of the fate of the Notley government, Ottawa has the power to impose a carbon price and regulations on the oil industry that would ensure that Alberta's emissions fall over the next 12 years, he argues.
Ms. McKenna rejected the view that Alberta's plan is inadequate, though she did not directly address the question of how the Paris target can be met if GHG emissions in the oil sands rise to hit the Alberta cap.
"This is a multigenerational transition ... There's so much focus on one pipeline - stopping this pipeline is not going to stop climate change," Ms. McKenna said. "We need to change behaviour."
FIRST NATIONS While much will be lost in terms of industry, the economy and some political careers if the project fails, much will be gained from the perspective of several First Nations in the Lower Mainland. They are prepared to fight federal approval to the Supreme Court of Canada to enforce their argument that they must give consent to a project that poses so much risk to their land and homes.
Somewhat lost amid the political spectacle of one NDP premier confronting another, and the federal government putting its credibility on the line, is the impact the pipeline issue is having on the government's reconciliation effort with First Nations.
The situation on the ground around Kinder Morgan's terminal in Burnaby is becoming increasingly tense.
Indigenous and environmental activists are pursuing a strategy of civil disobedience to block activity around the terminal and to provoke police into making dozens of arrests each day.
In an opinion piece on The Globe and Mail website on Thursday, two prominent First Nations leaders warned that the government is risking a violent standoff as a result of its failure to obtain consent for the pipeline project.
"If the federal government tries to ram through this pipeline, it could mean going back to one of the darkest times in modern Canadian history: the Oka standoff with the Mohawk Nation," wrote Chief Stewart Phillip, president of the Union of B.C. Indian Chiefs, and Serge Simon, Grand Chief of the Mohawk Council of Kanesatake.
While they mount direct action along the pipeline route, several First Nations have challenged in court the National Energy Board review process and the federal approval of the project. The Tsleil Waututh Nation, the Musqueam Indian Band and the Coldwater Indian Band have argued that the government failed to meet its obligations to consult and accommodate their concerns over the project.
A federal court decision is pending - expected this spring, though perhaps not before Kinder Morgan's May 31 deadline.
Natural Resources Minister Jim Carr is confident that Ottawa met its constitutional obligations, which he maintains were clearly spelled out in previous court rulings.
In a conference call this week, Kinder Morgan chief executive Steve Kean said anything less than a clear federal victory would jeopardize his company's willingness to proceed. Still, even a clear victory in federal court will not end the legal fight, as the TsleilWaututh vow to fight it to the Supreme Court if necessary. The "People of the Inlet" are determined to protect the coast from what they believe would be an inevitable oil spill from the increased pipeline volume and tanker traffic.
"We've been here for thousands of years. We'll never leave," said Rueben George, manager of the community's Sacred Trust, which was set up to stop the pipeline project.
"We need the money [the project would bring], but we don't need it enough to sell out the things we love and are spiritually connected to - and that's our land, our water, our people. We do that because we love it and we'll never stop."
Still, Kinder Morgan and the federal government do have some allies among B.C. Indigenous communities.
Ernie Crey is the elected chief of the Cheam First Nation near Chilliwack and chair of the TMX Indigenous advisory and monitoring committee, which was established by Ottawa to monitor the company's compliance with its licensing conditions.
He notes that 43 First Nations have signed benefit agreements with Kinder Morgan - 30 of them in B.C. They will receive revenue, employment opportunities and business contracts.
"If this project doesn't go through, it'll hurt our people," Chief Crey said in an interview. "It will provide a major leg up out of poverty."
Workers set poles for a new fence under construction at a Kinder Morgan facility in preparation for the expansion of the Trans Mountain Pipeline in Burnaby, B.C., on April 9. B.C. Premier John Horgan has argued that his province has a right to restrict diluted bitumen's movement across British Columbia, putting him at odds with Alberta.
DARRYL DYCK/THE CANADIAN PRESS
Indigenous leaders and environmentalists march in protest against Kinder Morgan's Trans Mountain pipeline expansion in Burnaby, B.C., in March.