B.C.’s latest move against the Kinder Morgan pipeline

When it comes to stopping unsustainable fossil fuel development, anything that creates investor uncertainty can be useful. By that metric, the British Columbia government’s announcement of a diluted bitumen shipment expansion moratorium while it studies how a diluted bitumen spill would unfold is a small contribution to shifting Canada to an acceptable development pathway.

Still, I wish governments would look squarely at the real problem: the fundamental contradiction between continued fossil fuel exploitation and the climatic stability objectives that states including Canada asserted in the United Nations Framework Convention on Climate Change, the Paris Agreement, and in their own climate announcements. Making it all about local issues may be politics as usual, but it misses the main ethical issues at play.

A new MacBook Pro or a nice digital SLR

Reporting on the Credit Suisse Research Institute’s global wealth report, The Economist explains:

If the world’s wealth were divided equally, each household would have $56,540. Instead, the top 1% own more than half of all global wealth. The median wealth per household is just $3,582; if you own more than that, you are in the richest 50% of the world’s population.

Even for those who believe that it’s ethical for your wealth to be determined by the amount of economic value you create for others, the evidence that high wages are deserved is weak (especially for top executives).

New big dams in Canada

Some earlier comments discussed the Site C dam project in B.C. Today, B.C.’s NDP government committed to finishing the $10.7 billion project.

Like the Muskrat Falls project in Labrador, this is a multi-billion dollar project facing extensive criticism from environmentalists and Indigenous people.

On the one hand, it is desirable to get as much low carbon generation as possible. On the other, these projects seem to represent continued Indigenous exploitation by Canadian governments (ignoring the standard of free, prior, and informed consent from UNDRIP), and it’s not clear there aren’t lower cost options which are equally desirable from a climate perspective. Loss of glaciers and summer snowpack might also have a catastrophic effect on hydro production.

Stranded assets and regulatory risk

One of the most important economic and political points arising from climate change is uncertainty about how seriously future governments will respond to the problem. If some kind of political change makes governments serious about hitting the 1.5 – 2.0 ËšC temperature targets from the Paris Agreement, it will mean doing everything possible to rapidly reduce emissions, from imposing high carbon prices to mandating the abandonment of especially harmful technologies and practices like burning coal and using exceptionally filthy fuel for international maritime shipping. This is termed “regulatory risk”. Whenever a potential investment project has finances that rely on governments continuing to talk big but do little about climate change, the project risks becoming non-viable after all the costs of development are spent if the government subsequently starts to take climate change seriously.

When it comes to actual fossil fuel reserves, there is a related issue of “stranded assets” – fossil fuel reserves that would be economically viable to extract if they could be sold, but where the climate change and energy policies of governments either directly prohibit their extraction or add other costs like carbon taxes which make the extraction unprofitable. In such a scenario, firms that depended on the value of these reserves to justify their own market value could be in trouble, along with everyone who has invested in them.

A recent article in The Globe and Mail describes how firms are aware of these risks:

[Caisse de dépôt et placement du Québec] The Quebec-based pension fund is part of a growing tide of institutional investors – which includes giants such as Vanguard and BlackRock Inc. – pressing companies for more information on how they will manage the transition to a low-carbon economy. Companies in carbon-heavy industries such as energy and mining face the highest pressure, as investors fear being stuck holding stranded assets: companies who fail to plan for the future and whose valuations will likely plummet as a result.

“It’s a risk that we could be left holding the bag in a Minsky Moment and it could be quite costly,” says Toby Heaps, chief executive and co-founder of Corporate Knights Inc., a Toronto-based organization focused on corporate social responsibility. “I wouldn’t say we need to sound the fire alarm, but certainly it’s time to pause and take a serious look at how we can accelerate our transition to a low-carbon economy.”

The pressure has catapulted climate risk to the top of the agenda in many of Canada’s boardrooms as companies grapple with how to measure, mitigate and disclose potential liabilities. Last year, the board at Suncor Energy Inc. recommended that shareholders approve a proposal put forward by NEI Investments to enhance the company’s climate-related disclosures. Shareholders voted overwhelmingly in favour of the resolution.

There is every reason for advocates of stronger climate change mitigation policies to pressure firms to consider these risks before investing. There are ample examples of how – once a project is built and operating – it becomes politically impossible to shut down, regardless of how much harm it is causing. A classic example is coal-fired power plants in the United States that were built before the Clean Air Act and are thus exempt from the obligation to install scrubbers. Arguably, the entire bitumen sands is a massive example of a terrible idea that has become impossible to discontinue because too much has been invested, too many jobs are now at stake, and governments have become too dependent on royalties and other related revenue.

Targeting pipelines

By the time of the 2015 World Heavy Oil Congress, midstream companies like Kinder Morgan, Enbridge and TransMountain PipeLines had grown used to the calamity that accompanied their pipeline applications. TransCanada’s Keystone XL project had ignited the battle, drawing ferocious protests from ranchers and Indigenous people in Nebraska. This in turn had attracted opposition from regional and then national and global environmental groups, which had long searched in vain for a catalyst to intensify and expand climate change activism. Keystone XL turned oil sands pipelines into an international political issue and a proxy of the first resort for the much broader debate about climate and energy policy. In the process, the pipeline — eventually any pipeline intended to move bitumen to tidewater — became the symbol of the entire fight. It was the line in the sand, the first full and direct conflict between progress in the age of fossil fuel — defined by expanding energy use and industrial megaprojects — and progress in the age of climate change, which sought to balance economic growth and industrial development with sound environmental stewardship and reductions in greenhouse gas emissions.

Turner, Chris. The Patch: The People, Pipelines and Politics of the Oil Sands. Simon & Schuster, 2017. p. 119 (emphasis in original)

Boom psychology

Perhaps every boom is expected to last forever. Every boom contains within it some skewed logic in which the impossible growth and rapidly amassed wealth undergo a transition from fantastically fluid to some simulacrum of a solid state. The careening boom logic becomes the norm. Luck becomes a strain of genius, and opportunism starts to resemble a chess master’s grand strategy. The boom was built on stuff as solid and true as glass and steel, crafted from the technological brilliance and entrepreneurial daring of a generation of the smartest engineers the nation has ever known, its credibility renewed daily at a rate of 2.4 million barrels. With such lofty heights near enough in the Patch’s collective memory, even the deepest troughs can seem like mere hiccups on a journey headed ever upward.

Turner, Chris. The Patch: The People, Pipelines and Politics of the Oil Sands. Simon & Schuster, 2017. p. 107–8

Scale of bitumen sands investment

Midway through the boom’s first wave, in 2006, a Statistics Canada study reported that Alberta was in the midst of “the strongest period of economic growth ever recorded by any Canadian province.” Annual provincial gross domestic product (GDP) and population growth both cleared 10 percent.

When the oil industry’s champions first pitched the federal and provincial governments on more favourable tax and royalty regimes in the mid-1990s, they promised $25 billion in capital expenditure on oil sands projects within 25 years. They hit that mark inside of five years and kept on charging. More than $200 billion was invested in the oil sands from 1999 to 2013. In 2014, the peak year for investment, $34 billion more in capital poured into the Patch. Alberta collected $5.2 billion in royalties from oil sands production the same year.

Turner, Chris. The Patch: The People, Pipelines and Politics of the Oil Sands. Simon & Schuster, 2017. p. 96

The bitumen sands and global decarbonization

Still, even if it was not recognized in many boardrooms in Calgary or anywhere else in the industry, oil’s dominance could no longer be taken for granted. Climate change was not readily managed like the sludge in a single tailings pond or contained like the mess from a single pipeline spill. This was a more profound challenge to the industry’s story of progress — perhaps an existential one. In the years after Shell unveiled its two scenarios, environmental activists began to stand in opposition to one new fossil fuel project after another, and bankers and investors started to ask industry executives tough questions about whether their reserves represented future profits or “stranded assets.” And starting with the proposed Keystone XL project, a major new pipeline that intended to carry Alberta’s bitumen from a storage terminal on the prairie south of Fort McMurray to the Gulf of Mexico, the oil sands became the front line in a larger conflict. In the story of progress being told with climate change at its centre, the world had no choice but to move as quickly as possible toward an economy free of greenhouse gas emissions. For a variety of reasons connected only tangentially to the daily operations of an oil sands site — American political considerations and universal symbolic impact, in particular — the elimination of the Patch’s daily ration of the world’s oil supply came to be seen as the essential first step in this decarbonization process.

Turner, Chris. The Patch: The People, Pipelines and Politics of the Oil Sands. Simon & Schuster, 2017. p. 15–6

Fort McMurray in 2007

The city existed in a perpetual state of growth and agitation. Numbers were murky at the peak of the boom — no one could get a clear count of the “shadow population” living in work camps and other short-term arrangements — but safe to say there were many hundreds like Raheel Joseph arriving each month. Hundreds and hundreds of young people, young men especially, who’d come from somewhere far away because here was a place where the full scale of opportunity a person could grasp all at once was still an open question. And so there were too many people and there was too much money and there was not enough of anything else in Fort McMurray in 2007. A little snow or a single stalled truck, and traffic on Highway 63 was pure gridlocked chaos. You went to Walmart, and no one was stocking shelves — they couldn’t afford the wages to pay someone to do it, and there was no time. They just put the groceries or housewares or work clothes or whatever new stuff made it to the boomtown that week out on pallets, and the pallets would be empty within hours. This was really how things went, day in and day out. Any warm body could find a job, but try to get a table at a restaurant, try to get a coffee at Tim Hortons in less than half an hour, try to find a bed to sleep in.

Turner, Chris. The Patch: The People, Pipelines and Politics of the Oil Sands. Simon & Schuster, 2017. p. 5

Related: Boomtowns and bitumen