Dysfunction

Canada after Keystone XL

Dennis McConaghy

• Publisher: Dundurn Press
• Year: 2017
• ISBN:
  9781459738218
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

#1 Calgary Herald Bestseller
An investigation of the history and demise of the most controversial North American energy infrastructure project. In 2015, President Barack Obama denied approval for TransCanada's Keystone XL pipeline, which would have carried crude oil from the Canadian oil sands to the U.S. Gulf Coast, providing great economic benefit to Canada. Over seven years of regulatory process, environmental activism, and media attention, the project had become infamous, a cause célèbre for North America's ENGO movement and a test of Obama's bona fides in the face of global climate change risk. As one of TransCanada's senior executive group, Dennis McConaghy provides an insider's perspective of Keystone XL's history and demise. How did this routine infrastructure acquire iconic status? Why couldn't government and industry find some accommodation to salvage the project? And most importantly, what must Canada learn from Keystone XL's demise? Can the country find common ground between economic value and credible carbon policy?

PART ONE

MORE SINNED AGAINST THAN SINNING

—King Lear – Act 3, Scene 2

CHAPTER ONE

GETTING TO KEYSTONE XL

Beginnings

I believe myself to be the typical Albertan. I was born in Edmonton, Alberta, Canada, in 1952. My life has roughly spanned the same sixty-five years as Alberta’s modern hydrocarbon industry. My parents were both working class, yet I never believed it beyond my reach to transcend the economic limits of my parents, or to do so relatively simply. Still, I did not have the luxury to pursue an impractical education, and so, with an aptitude for mathematics, I went to engineering school. In the late 1960s, my family could afford my university education largely because it was substantially subsidized by the revenues available from Alberta’s hydrocarbon endowment, all sanctioned by the profoundly conservative provincial governments of the 1950s and 1960s. I studied chemical engineering, completed graduate school in 1975, and began a career in the hydrocarbon industry.

Before the famous oil strike at Leduc, however, Alberta was an entirely different place from the prosperous province I have known for virtually all of my life. I learned about that former Alberta from my parents, both raised in rural areas of the province in the 1920s and 1930s. My father was born outside Edmonton near the turn of the century, and my mother was born in Poland before her family immigrated to Alberta in the 1930s. Neither had any significant formal education, and they both knew humble lives in an Alberta reliant primarily on agriculture and forestry. Like many Albertans, my parents both left rural life for the city in the late 1940s, and they met in Edmonton. My father served in the Canadian Armed Forces in the Second World War, returning from Holland and Italy in 1945; two years later, in 1947, the oil discovery at Leduc validated Alberta as significant hydrocarbon production location.[1]

By the mid-1950s, the province was developing and constructing the first pipelines to move Alberta’s oil across the continent. Then, as now, the provincial government owned the resources and extracted significant revenues from the industry via royalties, lease payments, and other taxes.[2] Alberta’s affluence gave rise to a long-standing conservative political culture, not unlike that found in oil-producing American states such as Texas and Oklahoma — a basic symbiosis between the hydrocarbon industry and the body politic. Until the 2015 election of a left-leaning New Democratic Party (NDP) government, Alberta elected right-of-centre political leadership for roughly eighty years: first the Social Credit Party from 1935 to 1971, and then the arguably more moderate Progressive Conservative (PC) Party from 1971 until 2015. Albertans have always understood what the hydrocarbon industry means: affluence, relative to Canada’s other provinces, that manifests itself in abundant public services and infrastructure, traditionally lower taxes, including no provincial sales tax, and, of course, enduring employment and investment opportunities. When I was growing up, even Albertans who didn’t directly participate in the industry knew the option was there for their children. That same affluence created a distinct and often tense relationship between Alberta and central Canada, quintessentially represented by the federal Liberal party.

In the early 1970s, world oil prices rose to over $10/bbl (U.S. dollars per barrel) — the world’s first “oil-price shock” — caused by the collective action of the oil cartel known as the Organization of Petroleum Exporting Countries (OPEC).[3] Throughout the 1960s and early 1970s, the price of oil had remained in the range of $2 or $3/bbl, in nominal dollars. Then OPEC, dominated by the Middle Eastern oil producers, made production cuts that caused supply and demand to rebalance at higher price levels, thereby creating a significant transfer of wealth from the world’s oil consumers to producers. The price shock also created a period of perceived energy crisis that led to various initiatives for energy independence, especially in the United States. But for Canada, which had no issue with energy self-sufficiency, the price shock led to a protracted period of acrimonious struggle between Alberta’s Conservative government and Canada’s Liberal government over how to raise the domestic price of oil to world levels, and over what jurisdiction owned the majority of the associated economic rent (returns in excess of what would justify investment).[4] This dynamic was exacerbated by the second oil-price shock in the late 1970s, which sent world oil prices to even higher levels.[5]

Such was the political and economic environment in May 1980, when I received an offer to join Alberta Gas Trunkline. That Calgary-based natural gas pipeline company would be renamed Nova before merging with TransCanada Pipelines in the late 1990s. Just as I was settling into Calgary in 1980, Prime Minister Pierre Elliott Trudeau was, surprisingly, re-elected, defeating a brief Conservative government that had been more aligned with Alberta and industry positions on hydrocarbon pricing and export access. Trudeau imposed the National Energy Program (NEP) — infamous in Alberta still as memories of Leduc No. 1 are fondly recollected — a complicated set of initiatives designed to reallocate a higher portion of hydrocarbon revenues to the federal treasury, maintain some price subsidization within Canada, and increase Canadian ownership in the resource sector.[6] The second OPEC price shock had tripled prices to levels approaching $40/bbl. Trudeau wanted to moderate that price shock for the rest of Canada, a policy that would result in Alberta receiving less than the world price for its hydrocarbon resources. The NEP also sought to appropriate a greater share for the federal government of the economic rents from hydrocarbon production in Canada. Hydrocarbon pricing had not yet been fully deregulated, and governments controlled pricing; the evolution to market pricing across North America would take the rest of the decade. The NEP not only reallocated economic rent between Ottawa and Alberta but also increased the fiscal burden on the industry. The resulting animosity between Alberta and rest of the country arguably colours, perhaps even dominates, the province’s politics up to the present. Alberta’s ethos has traditionally been distinguished by comparative affluence and opportunity but also by conflict and grievance with the rest of the country.

However, through the rest of the 1980s, hydrocarbon prices were deregulated across North America. A transparent commodity market for hydrocarbons subsequently emerged. Within Canada, material constraints on hydrocarbon exports were gradually removed. And most importantly for Alberta, the advent of a federal Conservative government in 1984 resulted in an end to the acrimonious and arduous negotiations with the federal government that had stretched out over almost fifteen years. A settlement was finally reached, which culminated in an acceptable accommodation on the sharing of the economic rents from Alberta’s hydrocarbon resources. Alberta reaffirmed ownership rights, and it would control resource development and derive most of the economic value from that development, with the federal government relying on federal income and corporate taxes, interprovincial transfers, and monetary policy as its principal mechanisms to deal with macroeconomic impacts of hydrocarbon commodity prices within Canada. Ottawa cancelled the various special taxes it had formulated under the National Energy Board (NEB) that tried to replicate the Alberta royalty. Importantly for the future, Alberta would control how those resources were developed within its own borders. That would become profoundly important for oil sands development.[7]

During the 1970s and 1980s, policy debates about hydrocarbons had little if anything to do with climate change. The key issues were whether or not industry could unearth enough hydrocarbons (the very essence of the “energy crisis”) and how they would be priced — relying on free markets rather than regulation. Hydrocarbons were fundamental to the world’s geopolitics and macroeconomic conditions, reflecting the inherent economic value hydrocarbons provided modern nation states. Adjusting to higher prices proved a difficult economic transition, but it never occurred to anyone that social acceptance of hydrocarbon use could become an issue. For the first decade of my professional career in the hydrocarbon industry, the issue of climate change was simply non-existent for me, and for the various executives, engineers, lawyers, and other professionals I worked with every day.

I clearly remember the first time carbon emissions and the risk of climate effects were raised in a business meeting. It was in 1990. That meeting took place in a boardroom on the thirty-sixth floor of then Nova building in downtown Calgary, now known as the Nexen building, named after a subsidiary of the Chinese National Offshore Oil Corporation (CNOOC). We sat right on the western edge of downtown, with the most amazing view of the mountains and city, a typically bright blue sky, snow-capped mountains on the horizon, with the west side of Calgary in the foreground blending into the southern Alberta foothills. The Canadian and Alberta governments had requested from Nova an estimate of the potential greenhouse gas emissions from our facilities, in order to measure the scale and source of Canadian carbon emissions. In gas pipelines, compressors move the product through the pipe, and we power those compressors by burning gas. That process creates the emissions we were to measure — a first sign that the federal government was responding to climate-change risk.[8]

NASA scientist James Hansen had already delivered his now historic testimony before the U.S. Congress, in which he warned about the dangers of global warming.[9] At roughly the same time in the late 1980s, the World Meteorological Organization (WMO) and the United Nations Environment Program (UNEP) established the Intergovernmental Panel on Climate Change (IPCC), the pre-eminent scientific organization to provide assessments as the scientific underpinning of future international climate negotiations. By the early 1990s, the United Nations had established its process to deal with the risk — the United Nations Framework Convention on Climate Change (UNFCCC), to which Canada was to be a signatory.[10]

But those of us assembled that morning in 1990, in the NOVA boardroom, seemingly had no sense that dealing with this climate-change risk could become antithetical to the economic interests of the hydrocarbon industry. In any event, the Canadian industry began to measure its emissions. But the world’s attempts to deal with that risk continued to exert little, if any, apparent impact on hydrocarbon related investment decisions through the 1990s.

The Kyoto Protocol on climate change emerged out of the UNFCCC process,[11] and in late 1997 Liberal Prime Minister Jean Chrétien committed Canada to Kyoto’s targets, leaving subsequent governments to figure out how to actually achieve the specific emission reductions implicit in such targets.[12] As I will discuss at length in chapter three, the Kyoto Protocol was intended to materially contain the risk of the Earth’s temperature increasing more than 2 °C above the average throughout pre-industrial human history. Developed countries generally had to reduce their GHG emissions by about 5 percent compared with 1990 levels between 2008 and 2012. For Canada, achieving the targets imposed by the protocol would prove very difficult, if not entirely implausible. As the Liberal federal government tried between 2000 and 2006 to find commitments from key economic sectors to comply with Kyoto, industry consistently made the case that it could not or should not contract its scale or structure to comply: we either “keep the lights on or we don’t,” they declared, adding, “we extract value or others will.” Few, if any, economic compliance mechanisms existed. Moreover, the United States rejected participating in the protocol after the election of President George W. Bush, despite having been a key driving force in Kyoto’s development.

By the late 1990s, I personally began to consider how global concern over carbon emissions might affect the pipeline industry and, more broadly, the hydrocarbon industry. Were governments serious about containing the risk, and what would that mean for hydrocarbons, the demand for which was only increasing on a global basis?[13] How much short-run cost would the world be willing to assume to contain a risk that was still uncertain and contentious in terms of its impact and timing? Those concerns felt very abstract to us in our executive offices, and to most Albertans and Canadians.

Although hydrocarbon prices were modest throughout most of the 1990s, Alberta remained one of Canada’s most affluent provinces. World demand for hydrocarbons continued to grow steadily into the new millennium, particularly due to demand from various emerging economies, notably China. With that came a real prospect of substantially higher prices that would improve the economic viability of Alberta’s oil sands resource and natural gas potential. As TransCanada merged with NOVA in 1998, becoming one of the continent’s largest pipeline companies in terms of assets and geography, those of us working for the company were not fundamentally concerned with how the U.N. process to deal with the climate-change risk could materially impact our company’s, Alberta’s, or Canada’s economic prospects. Nevertheless, Canada’s commitment to Kyoto created the same basic dilemma between climate commitments and economic potential that continues today.

Inside TransCanada: A Pipeline Company

Alberta Gas Trunkline, renamed NOVA in the early 1980s, merged with TransCanada in 1998. NOVA’s primary role had been to gather gas from producers in western Canada, while TransCanada transported gas long haul to consumption markets across North America. Together they formed a single company that would substantially consolidate Canada’s major gathering and long-distance infrastructure for transporting natural gas. I stayed with the merged entity and was fortunate to find myself in an exciting new phase of my career. TransCanada employs many talented and dedicated professionals, mostly engineers but also regulatory and financial specialists. I ascended to the senior leadership ranks of the company by 2001, moving into an office on the newly constructed TransCanada tower’s third floor, with its gleaming maple-panelled executive offices and boardrooms. Over the years, I held various senior executive positions, primarily related to the business development of new pipeline infrastructure, corporate strategy, and business unit commercial operations. My career applied the actual engineering I had studied at university indirectly, as I typically led interdisciplinary teams to advance specific projects and business results. The focus of my work has been the planning and commercial realization of major pipeline projects.

Since Alberta has no access to tidewater, transporting its hydrocarbon production via pipelines across the continent is an integral determinant in realizing Alberta’s economic potential. Pipelines offer economically efficient and environmentally responsible transport for hydrocarbons over long distances at high volumes, even across various challenging topographies such as water crossings and mountainous terrain.[14] The scale of North American hydrocarbon infrastructure is a testament to that. The basic pipelining technology of hydrocarbons has been well established for well over a century, and its efficacy is not fundamentally disputed by any knowledgeable and fair-minded analyst of transportation alternatives,[15] notwithstanding the occasional occurrence of spills and ruptures.

TransCanada’s “mainline” linked western Canadian gas producers to markets in eastern Canada and the northeastern United States. Other infrastructure provided access for Canadian gas to northern California and Chicago. By 2010, my colleagues and I had established TransCanada as a major North American natural gas transmission company, with various acquisitions of transmissions systems in the United States, in addition to the significant position created from the 1998 merger of Canadian transmission assets. The company operated infrastructure in the U.S. Gulf Coast, mid-continent, and Mexico, in addition to its historic geographies. One of the core “blue-chip” holdings in the Canadian equity market, TransCanada, nevertheless, had no unique public profile among the general public within Canada, let alone the United States. Of course, that would change as the decade unfolded, with the advent of KXL.[16]

Just as my life’s trajectory forms a typical Albertan narrative, reflecting typical Alberta political attitudes, I feel confident saying the same for most of my colleagues within TransCanada’s senior management ranks. Most were raised and educated and began their careers in Alberta, where for six decades hydrocarbon resource development has ...