Requiem for Keystone

Posted by on November 10, 2015
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We knew it was doomed. Long ago. And while some may dream of phoenixes rising from the ashes sometime after the next US election, its time has passed. The surge in production of light, tight crude due to fracking, and the behavior of OPEC in keeping production up to depress prices has cut the attractiveness of Canada’s tar sands bitumen. Exploration activity has fallen off a cliff and while producing wells continue to produce, they do not generate the huge profits hoped for, and the producer corporations are looking elsewhere for the next multiplier of shareholder wealth. How long the price of oil will remain down is anybody’s guess, but there is little sign of life in that sector at present. Without rapid growth in output in Alberta, Keystone is simply no longer needed.
Obama kills KXL susan walsh AP

President Obama announces that he is not approving the Keystone XL pipeline.
Photo © Susan Walsh/AP

The low oil prices may be around for a good time longer than many people expect. A growing awareness that the world must act on climate change is likely in the next few months and years to increase the costs of extracting oil. New tougher environmental regulations, new taxes (perhaps called fees) on fossil fuels, new energy efficiencies, and new political decisions to move away from fossil fuels even if energy costs slightly more when obtained in other ways will all play a role. Alberta’s tar sands are not the world’s dirtiest source of oil, but they are among the worst in the sense that extraction and refining are energy-intensive and therefore costly. In addition, they are a long way away from any markets, and the unrefined product is very difficult to push through a pipeline or pump into a rail tanker car.

Corporations in the business of producing oil usually have multiple places at their disposal from which they source their product, and Alberta’s tar sands are among the more expensive sources. With more oil available than is really needed, it’s the expensive sources that will get used the least. And given that the fracking revolution has hardly exhausted its potential for growth, if the demand for oil begins to catch up with supply, or if Saudi Arabia decides to cut its own loss of profit and curtails production so that supply is reduced and comes into line with demand, the expansion of fracking to liberate more tight, light crude will mean that expensive oil like that from Alberta’s tar sands, or Alaska’s north slope for that matter, will remain expensive and under-used.

In short, Canada should not expect a quick resurgence in activity in the Alberta tar sands, and without a new boom there, Keystone would be a waste of money. Which brings me to two questions: How did Canada get into this mess? What can we do about it now?

How did we get into this mess?

Canada got into this mess a long time ago, when successive governments were so hungry for investment by corporations interested in extracting this bitumen that they did not drive hard bargains when oil executives came calling. While the Alberta tar sands were seen as raw resources capable of sustaining a long-term stream of royalty income and some extraction-related jobs, they might better have been seen as raw resources capable of sustaining a major expansion of the Alberta economy in the chemical industry. Governments taking the latter view might have demanded that refinery capacity be built in Alberta, and then worked to secure the further investments that could have built a significant chemical industry there. After all, the scale of the deposits is certainly sufficient to sustain a long-term, industrial development that would have resulted in Canada exporting a broad range of high value-added products derived from the bitumen. These would doubtless have included gasoline, diesel and other fuels as well as a wide range of chemical products including the plastics now becoming increasingly important to the 3D printing industry.
oil cartoon scienceblogs-com

I’m of the opinion that the dead end for use of fossil fuels is going to come sooner than most people expect, and come suddenly. Current events which have brought an unexpected slow-down in the Alberta tar sands could be a useful ‘pivot point’ moving Canada away from bitumen as exported fuel to bitumen as a base for a new chemical industry with high-value jobs, sustained activity, and reduced carbon emissions. A bold new plan for a bright new day?

Governments that saw the opportunity to build a long-term industrial capacity centered in Alberta would also have been interested in ensuring that the rate of development of the tar sands be commensurate with capacity to process the product, and commensurate with the capacity to prevent or mitigate environmental pollution caused by the extraction process. Why create Mordor when you are trying to build a modern, high-value chemical industrial sector?

Unfortunately, our governments did not think this way, and they permitted the oil corporations to minimize any investments not absolutely needed to get the bitumen out of the ground, minimally upgraded, and sold to whomever would buy it. I can imagine the arguments of the corporate executives as they visited sundry government spokespersons:

“No need for new refining capability, we have access to refineries in Texas. Or we can sell the raw product to Asia where they have their own refining capabilities.”

“No need to go slow and prudent in developing this resource, we need to maximize our ability to extract and get it to market. Time is money.”

“Yes, the extraction process results in a lot of highly contaminated water. We can simply store this water in large ponds while we work out ways of cleaning it. Or maybe the ponds will allow settlement of pollutants so that a thick lens of clean, productive water will exist on top of the pollution, yielding functional lakes so long as you don’t go stirring up the mud on the bottom. All will be fine, just let us dig.”

“Yes, the anticipated rate of production of bitumen product will tax existing pipelines, so just help us build lots of new pipelines to any place on the coast so we can ship the product overseas. Perhaps you could ease some of the regulations underlying the approvals process for new pipelines so that we can get them approved and built quickly? Maybe hide the legislative changes in a great big omnibus budget bill so nobody notices?”

“After all, the quicker we extract, the more workers we employ, and the more taxes and royalties you receive – this is clearly a win-win-win. Help us to help you grow Canada’s wealth.”

Certainly, the Harper government spent the past decade acting as a shill for the oil industry, while gutting Canada’s environmental regulations governing development approvals. They also adopted a hands-off policy towards policing of the corporations’ behavior with respect to pollution, or requiring some semblance of progress towards restoration of grievously altered landscapes and contaminated waters. Now we have large areas of Alberta despoiled and polluted, bearing scars visible from space, negligible progress in solving the environmental issues, and an industry that has cut its losses aggressively in the downturn (all those good jobs that vanished overnight the moment oil prices tanked).  I’ve been commenting on this since at least 2012. I wonder what happens to the environmental messes that have been made, when the corporations slowly tiptoe away to hunt for profits elsewhere?

You’d think Canada would have learned its lesson by now. We’ve been encouraging foreign entrepreneurs to bring in their capital and extract our natural resources since long before we were a country. It began with the cod trade, even before we had settlements that might become a country. Then there was the fur trade, timber and minerals. Far too often we have failed to extract a fair share of the profits from such businesses, and we have failed to require that the entrepreneurs invest appropriately in building the Canadian economy. We’ve been too willing to accept a few temporary jobs, some royalties and taxes, while the entrepreneurs take our raw resources elsewhere to further process them for the benefit of others. These are Canadian resources, and our governments have been giving them away for some short-term financial benefit. As businessmen we have been little if any more effective than some of our predecessors on this land, who were tempted into giving much of it away for a few glass beads and an axe.
Champlain trading with the indians  MIKAN 2837451c103059k

Canadians have a long history of trading away their wealth.
Champlain trading with the Indians’ © Library and Archives Canada

One of the clearest demonstrations of just how ineffective we have been in managing the exploitation of our natural resources is the comparison between Alberta’s success in exploiting its tar sands, and Norway’s success in exploiting its offshore oil. I reported on this in 2012, citing an article from the Canadian Centre for Policy Alternatives. In both cases, trust funds were set up to receive the government income that exploitation would generate. Alberta used its fund to cover routine governmental expenses that should have been covered by taxes; Norway grew its fund until it was generating far more income from its sovereign investments than from the oil revenue. When the oil ceases to flow for Norway, as it will, it will be a wealthy country. Alberta, not so much. The failure to use the tar sands to grow a vibrant economy that would endure beyond the oil boom is a failure we will simply have to bear. The failure to prevent massive despoliation of the environment has created problems for us that will only become apparent over time as extraction projects slow, collapse, and close. It’s difficult to get a corporation, stripped of all its assets as foreign partners flee, to fulfill obligations to ameliorate environmental damage that it caused when it was a vibrant, active extractor of tar sands bitumen.

Understanding how we got to here does not guarantee that it will not happen again, when we see an opportunity to entertain a new set of multinational corporations bringing promises of great wealth if we will only give them access to some other part of Canada’s natural patrimony. Maybe our governments need to understand that they have a responsibility to the future inhabitants of this country, indeed, a responsibility to this country itself, to not enter into agreements that do not sufficiently protect our interests. They are not supposed to be real estate agents selling off bits and pieces of our national wealth to whomever comes along waving a few dollar bills around. They are supposed to be stewards of our nation, working to build our strength and creating wealth for our shared future. Maybe we need oversight mechanisms that ensure agreements reached with large, almost always multinational, corporations are carefully scrutinized to ensure Canada, rather than the government of the day, is getting fair value for whatever is being sold. It may be difficult to have the public weigh in on major business ventures by government with corporate investors, but relying on governments to look after our interests has not been very successful so far.

Where do we go from here?

The far more interesting question is ‘where do we go from here’. An early step for the Trudeau government must be to restore the weakened procedures for granting approvals for major development projects. The gutting of environmental oversight by the Harper government has left us with approvals processes in which the public has no faith. We need development that is environmentally and socially appropriate, but until the procedures are repaired good projects will find the path to approval just as difficult as will bad projects. There is some urgency here, because we do need to address the shipping of oil from Alberta. Putting highly flammable oil onto tank cars and shuttling them across the country on aged rail beds is not a satisfactory way of moving that product to market. An east-west pipeline that could deliver oil to refineries or markets in the east, or even to eastern ports, makes considerable sense, but Energy-East or something comparable will have great difficulty gaining approval given the present state of affairs. Getting oil off trains and into safe pipelines should be a part of our infrastructure renewal, not to encourage expansion of the tar sands venture, but to mitigate untenable environmental and health risks that presently exist because of it.

Another early step should be to introduce new requirements that will get the tar sands operators to make some real progress in cleaning up the environmental mess that has been allowed to grow during the past decade. Cleaned water, restored land, and measurably reduced emissions due to tar sands extraction and upgrading should all be required, with firm targets and due dates. Done properly, these actions can be funded by the corporations, and will contribute to our efforts to reduce greenhouse gas emissions. New developments should not be permitted without clear and effective environmental safeguards in place, and existing ones should be closed down if progress in this regard is not made. The tolerance of environmental irresponsibility that has characterized the past decade cannot continue.

A third step should be to explore the possibility of developing a technologically advanced chemical research and development industry using bitumen from the tar sands as a primary resource and generating products other than fuels. This might begin by moving from upgrading to refining, but should be expected to go well beyond that. This might take decades to achieve, but it would mean that we were developing our tar sands resources in a way that maximizes the benefit to Canada. The alternative is to shut them down as quickly as possible, conserving the resource for possible future use and cutting the greenhouse gas emissions their exploitation is currently causing.

Finally, there is the broader issue of climate change and what Canada will do. The Globe & Mail reported enthusiastically in late October that Trudeau has an excellent opportunity to forge a powerful agreement on carbon with the provinces and territories. In their view, the stars seem to be aligning well. As I wrote the day after our election, Canada’s INDC submitted to the UN by the Harper government contains several weaknesses that can be repaired to yield a far stronger policy that is more in keeping with what Canada should undertake to do. There is now a possibility of really making progress.
catherine-mckenna-and-justin-trudeau-at-swearing-in Chris Wattie Reuters

PM Justin Trudeau and Environment & Climate Change Minister Cahterine McKenna at her swearing in. She is already in Paris participating in pre-COP21 talks. What will they be able to build as Canada’s contribution to solving climate change? Photo © Chris Wattie/Reuters.

By taking Keystone off the table, President Obama has given Prime Minister Trudeau a free pass on one of many thorny issues, and the down-turn in the oil market has provided breathing space. Trudeau has the opportunity to push harder on climate change mitigation than might have been possible otherwise, including by putting in place a firm and growing cost on carbon that everyone, including tar sands corporations, will have to comply with. Perhaps it will be possible, as the dust settles, to reflect upon the errors made in the exploitation of the tar sands up till now, and to put in place policies that will guide future resource development more effectively.

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