Petro Politics and Trudeau’s Sordid Pipeline Deal

“Petroleum is unique among the world’s resources; it is more likely to be associated with conflict than any other commodity.” — Terry Lynn Karl

The debate about the Federal Court of Appeal decision that killed the approval for the Trans Mountain $7.4-billion pipeline expansion speaks volumes about the oily state of Canadian politics.

The leaders of Canada’s die-hard petro republics, Alberta’s Rachel Notley and Saskatchewan’s Scott Moe, predictably chaffed and frothed.

They complained that they had been let down, billions of dollars are being lost and Parliament must address “this crisis.”

Business types lamented that the courts had dealt another blow to Canada’s mining republic reputation by slowing down another noble megaproject promising jobs and prosperity — for China no less.

The power of oil to construct narratives that bear little or no relation to the truth is a global phenomenon and, in Canada, a new boreal specialty. You can’t find a more entitled political player than a petroleum exporter.

All in all, the media and Canadian politicians reduced the court decision to a dubious concession to pesky First Nations and environmentalists and another damned hurdle for “the national interest” and the pursuit of jobs.

But that’s not the truth or the reality.

Here are some of the important issues that concerned citizens should now be contemplating in the wake of the historic decision.

The eagle feather triumphed. Canadian governments and industries still tend to treat First Nations with colonial contempt and the Federal Court of Appeal tried to address this ongoing travesty. The seven nations that raised legitimate concerns about the pipeline expansion on their lands merely exercised their democratic rights. They raised concerns about property rights, human rights, aboriginal title, marine safety, sacred burial sites, the survival of orcas and the protection of aquifers. If a country’s regulatory regime can’t address such basic issues with fairness and honesty, then its energy regulatory system is badly flawed — just as the court concluded.

Canada remains another unaccountable petro state when it comes to reducing emissions from fossil fuels. Canada won’t be able to meet any of its climate targets because of rising emissions from the oilsands and, for that matter, from proposed LNG production. When Notley, Alberta’s petulant petro leader, pulled out of the nation’s carbon pricing plan over the court decision, she merely abandoned an already doomed strategy designed by cynics to serve the status quo.

The economist Jeff Rubin recently stated the obvious.

“For the publicly climate-change-conscious Trudeau government, which seeks to eradicate widespread international perceptions of Canada as a climate change laggard, the country’s recent emission performance is no better than during the previous Harper government, which was ignominiously awarded a ‘Lifetime Unachievement’ Fossil award at the UN climate change conference in Warsaw in 2013.”

Mark Jaccard has also called a spade a spade.

“National studies by independent researchers (including my university-based group) consistently show that Mr. Trudeau’s 2015 Paris promise of a 30-per-cent reduction by 2030 is unachievable with oilsands expansion. His staff know this, so he knows it, too.”

Kinder Morgan won the lottery and Canadian taxpayers lost their shirts. The highly indebted Texas firm, the bastard child of Enron, couldn’t find enough investors because bitumen economics are volatile and risky. It tried to sell the project to former Alberta premier Alison Redford, but she said no thanks to what was then a $5-billion boondoggle. The price tag then grew to $7.4 billion but Kinder Morgan could only raise $5 billion in the market place. Earlier this year, it faced the prospect of walking away from the project and eating losses of nearly a billion.

After Trudeau declared the project a matter of national interest, Kinder Morgan saw an easy way out. It promptly delivered a ransom note to Trudeau: bail us out or say goodbye to your “national interest.” Without so much as a basic cost-benefit analysis, taxpayers paid $4.5 billion for 67-year-old infrastructure not worth much more than $1 billion, according to Kinder Morgan’s financial statements.

With the court decision the federal government lost a construction approval certificate worth about $1 billion. Meanwhile, the cost for the expansion has grown by $1.9 billion to $9.3 billion. Delays caused by the court decision should raise the cost to more than $10 billion.

Not surprisingly, Kinder Morgan’s savvy negotiators got bonuses and shareholders company ratified the deal in three minutes.

Why aren’t the nation’s business journalists asking the government to produce an independent and credible cost-benefit analysis on the expansion? And why aren’t taxpayers cringing?

The real law-breaker in this sorry narrative remains the federal government. Trudeau and company have frequently attacked the B.C. government’s opposition to the pipeline expansion, arguing that “the federal government will not allow any province to infringe on federal jurisdiction over making decisions about resource development in the national interest.” But the Federal Court of Appeal found that it was the federal government that actually broke the law.

It didn’t engage with First Nations in a rigorous or honest way and it failed to assess the impact of increased tanker traffic on B.C.’s wildlife and coastal economy. As such the court decision vindicates the 220 people who have been arrested at Kinder Morgan’s Burnaby facility for protesting the pipeline expansion.

Before approving the pipeline, Trudeau had promised to fix the flawed National Energy Board process for reviewing such projects, but he didn’t. He emerges from this drama as a consistent law-breaker and promise-breaker — a weak and feckless leader with no moral code.

Pipelines don’t put lots of people to work. They never have, and never will. The Alberta government and federal Liberals still gush about Trans Mountain as though it is the only job opportunity left in the country. At one point Kinder Morgan falsely claimed that the project would put 15,000 people to work for two years. But the economist Robyn Allan discovered the real figure was closer to 2,500.

TransCanada practised the same kind of job inflation in promoting its Keystone XL pipeline. It promised 28,000 jobs. The U.S. State Department concluded the real number would be closer to 3,900 people. Pipelines, like most oilsands infrastructure, are highly capital intensive. They provide some jobs during construction, but little more than a handful once the project is completed. Propaganda about pipeline jobs, or “green jobs” for that matter, is just that — propaganda. People taking a new job are really leaving an old one and most economists don’t support energy policy based on job creation goals.

Severin Borenstein, an economist at the University of California’s Energy Institute, advises governments to “pursue energy policy to maximize the economic value energy creates (including the value consumers get from more affordable energy prices), while minimizing environmental impact and energy security risks. Not to ‘create jobs.’”

Canada has failed Borenstein’s economics class.

Meanwhile Canada’s oil and gas industry is now busy shedding workers. It is either automating or employing digerati to reduce overall employment so that it can produce bitumen more cheaply. The industry even boasts that it takes 10,000 fewer workers to produce 10,000 barrels of oil in 2016 than it did in 2010.

The oil and gas industry and supportive politicians claim oilsands producers are losing money because of lower prices for heavy oil, and that would change if they could reach Asian markets. But bitumen has always been priced lower than light crude because it costs more to process (it has a high sulfur content). Industry also can’t move the heavy stuff through a pipeline without diluting it with pricey condensate. The discount has always been highly volatile.

To date the discount primarily affects a small group of oilsand producers. Some in situ producers — which pump steam underground to melt the bitumen and then pump it to the surface — may be losing millions, but certainly not billions.

And many producers can hedge prices or store the stuff until the price gap narrows, find new markets or upgrade the crude to higher value products.

Meg Energy, for example, tells shareholders that the firm is making money because it’s able to diversify markets without the pipeline.

Suncor, one of the largest oilsand miners, also makes a mockery of the billion-dollar losses claim. “Approximately 80 per cent of bitumen production is upgraded to higher-priced light oil or refined,” the company’s annual reportsays. “Our highly efficient integrated model limits Suncor’s exposure to heavy oil crude differentials.” This explains why Suncor has increased dividends to its shareholders 15 years in a row.

Imperial Oil, which refines nearly 400,000 barrels a day, also isn’t losing any money. In its 2017 report it cheerfully told shareholders that bitumen returns in 2017 were $39.31 a barrel, up $12.61 from a year earlier.

Most of the oilsands industry upgrades or hedges around the volatile discount for heavy sour crude because nobody likes to lose money. The fictional billions that Notley, Alberta opposition leader Jason Kenney and Moe claim the industry has lost due to the stalled construction of the Trans Mountain pipeline remain the biggest lie now eroding Canadian politics and democracy.

Bitumen will soon be subject to more discounts that have nothing to do with pipelines or global markets. The International Maritime Organization plans to reduce the amount of sulfur in fuel used by ships from 3.5 per cent to 0.5 per cent by 2020. The change has major ramifications for the global refinery business and Canada, one of the world’s largest producers of high sulfur heavy crude. The Canadian Energy Research Institute even predicts that “the price discount on Western Canada Select (WCS) crude… will expand significantly due to the IMO regulation.”

Other analysts agree the news will not be good for many heavy oil producers. “The 0.5-per-cent global sulfur cap will likely result in a lowering of the forward value of heavy sour hydrocarbons,” wrote Ned Molloy, managing editor of Europe Fuel Oil.

At least 500,000 barrels of bitumen primarily produced by Alberta’s high carbon steam plants will be hit with lower prices for their unrefined heavy sour crude. Expect Kenney and Notley to blame environmentalists, and the Trudeau government to blame B.C.

Alberta has a big problem and it’s called overproduction. Low royalties and a rubber stamp approval process have poured too much bitumen into the marketplace because the government doesn’t understand the volatility of oil prices. (An opium addict doesn’t understand the volatility of addiction either.)

The more raw bitumen that Alberta digs or steams out of the ground, the more pipelines it needs. That’s because the junk crude can’t move anywhere unless it is diluted with 30 per cent high-cost condensate.

Partial upgrading of bitumen could solve this problem while improving quality and adding value. Such ventures are expensive, and would also be heavy carbon emitters. But they could free up 30 per cent more pipeline capacity. If Trudeau was interested in a political compromise and a deal good for the national interest, he would kill the Trans Mountain expansion and invest in partial upgrading in Alberta.

In one blow he would remove an egregious pipeline that threatens B.C.’s coastal economy and put Albertans back to work by producing a higher value product for the marketplace. It wouldn’t be good for climate change but petro states don’t give a damn about the future or their children anyway. They live for oil, and only oil.

Despite all the media hype about the importance of getting Canada’s junk crude to other global markets, Asian refiners are not pining for the carbon-heavy crude. A recent report done for the Alberta government notes that “None of the Asian countries are as well positioned to process Alberta heavy crude oil” as U.S. Gulf Coast refineries.

The same report cast doubts on potential markets in Korea, Japan, India and China.

These basic facts explain why Kinder Morgan couldn’t raise the money it needed to build the Trans Mountain pipeline on its own, and why the Canadian people have been taken to the cleaners and now own an uneconomic pipeline.

In the end the Trans Mountain pipeline remains a peculiarly Canadian fiscal calamity. Trudeau has outdone Harper, and now suffers from a pronounced case of “petromania.”

But nationalizing an uneconomic pipeline can’t make it economic. Nor can a nationalized pipeline do anything more than contribute to the destabilization of the globe’s climate.

The U.S. political scientist Terry Lynn Karl would not be surprised by the illogic of Canada’s bitumen debate.

As she noted years ago,

“Petro states rely on an unsustainable resource trajectory fuelled by an exhaustible resource — and the very rents produced by this resource form an implacable barrier to change.”