A Winding Path for Pipelines
Pipelines are essential to the oil and gas industry, and thus a quarter of Canada’s economy, but continued societal concerns demand a nuanced approach from project proponents.
ALTHOUGH A SPATE OF OPINION POLLS conducted in 2016 found that a majority of Canadians support the country’s major pipeline projects — Forum Research, as one example, reported numbers varying from 51- to 55-per-cent approval, depending on the pipeline — the results also revealed a significant level of concern among a large portion of the population. An EKOS poll on energy and the environment, commissioned by the CBC, perhaps best summed up the mood in the country: “Canadians appear torn between a rising environmental ethic and deep anxieties about the economy.”
Pipeline projects tend to polarize public opinion, eliciting fear in some stakeholders that they have the potential to cause catastrophic environmental damage if a significant leak or other breakdown occurs. Although he understands that response, Gordon Nettleton, the co-head of the national environmental, regulatory & Aboriginal group in the Calgary office of McCarthy Tétrault LLP, says it’s borne out of a misunderstanding of the importance of pipelines to the economy and their safety record.
“Pipelines are a necessary part of Canada’s energy infrastructure,” says Nettleton. “The energy sector is the second largest in Canada’s economy, next to auto manufacturing. When people talk about doing away with them, they are effectively saying Canada should not have an oil and gas sector, and that means taking about 20 to 30 per cent of our GDP out of the equation.”
They are also much safer than many opponents believe, says David Bursey, a regulatory, environmental and Aboriginal law partner at Bennett Jones LLP in Vancouver. “There is no doubt the evidence demonstrates that pipelines are a very safe mode of transportation, especially compared to trains or tanker trucks,” he says. Fred Erickson, a partner in the Calgary office of Stikeman Elliott LLP, who has considerable experience in the oil and gas and natural gas liquids industries, concurs: “Considering the thousands of pipelines, there are very few ruptures.”
Nonetheless, the challenges investors and developers face in getting pipeline projects approved — “It’s a field of landmines in terms of the various traps pipeline developers have to negotiate their way through to get projects off the ground,” says Erickson — has created an upsurge in the use of rail to transport oil.
“I know a number of producers who are shipping [oil] by rail from various terminals around Edmonton to the Chicago area,” he says. “There they load it on barges and have it transported down the Mississippi River to the gulf coast. All it takes is one barge running into a rock or a drunk captain and you could ruin such an important and historical waterway for decades.”
The most significant landmine that developers face, says Heather Treacy, QC, managing partner in the Calgary office of DLA Piper LLP, “is the uncertainty as to whether final approval of the project will be granted. The current process means that significant upfront investment costs have to be incurred. These projects are very, very expensive to develop and can be in the billions of dollars.” The second greatest challenge, she says, “is managing and dealing with a very large and varied group of different stakeholders.”
A key initiative for companies considering applying for a pipeline project, says Alan Ross, managing partner of Borden Ladner Gervais LLP’s Calgary Office, is consultation.
“Building a pipeline in Canada today and getting it approved is not for the faint of heart. A number of factors come into play that didn’t exist 20 years ago, such as social licence, for example, and the notion of many competing interests, such as the role of provincial governments.”
Ross says he emphasizes to clients the importance of entering a consultation process with the various stakeholders, especially First Nations, as early as possible. “It needs to be comprehensive and it needs to be sensitive to their concerns.”
Developers need to think of First Nations “as another level of government,” says Bursey, who has worked on behalf of First Nations’ clients in pipeline projects. He agrees that consulting First Nations and other stakeholders early on is critical to success. “This is an important strategy and should be one of your first-priority items when planning a project.”
Understanding how to navigate the regulatory process is obviously extremely important. “It’s complicated and it usually takes much longer than expected,” says Bursey. “It’s a bit like trying to hold a handful of corks under water: you never know what’s going to pop up. For a lawyer working in this area, there’s no substitute for world-class research.”
Part of that research is advising clients on how to prepare “a thorough and complete application” to the National Energy Board, says Ross. Dealing with the NEB is soon likely to change, following recommendations made by an expert panel to the federal government in May 2017 (see “Transforming the NEB,” p. 4). “Modernizing the National Energy Board is a priority of the government of Canada to help ensure we develop our resources responsibly, said Minister of Natural Resources Jim Carr upon receiving the report.
“The report recommends that there would be a two-stage process [for pipeline approval],” says Treacy. “In the first stage, major projects would undergo a one-year review by the federal cabinet to ensure the project was of national interest. If the answer was yes, then there would be an additional two-year environmental and more technical review after that. So, essentially, there’s a recognition that because these are such huge investments in these projects, there should be a more upfront loaded process.”
While regulatory delays, stakeholder challenges and national, federal and international governments (i.e., those in the US) can make it difficult to get a pipeline project approved, the bottom-line issue for developers to consider, says Nettleton, is economics. “When crude was $100 a barrel, the price was so high it was sensible to develop more [pipelines],” he says. “But the question now is, in a $40- to $50-a-barrel oil market, do the economics justify the type of expansion when crude was $100? I think the short answer to that is no. Today, [the industry] is more like a manufacturing operation than a conventional oil and gas system. The incredible investments required in oil sands developments means the only opportunity to even earn back marginal costs means you still must produce, and produce at a subpar or price-challenged level.”
The need for pipelines, however, has not, and likely will not, decrease. “Canada will need more pipelines built through to 2030 to transport an additional 1.3 million barrels per day (b/d) of oil sands production to markets across North America and around the world,” the Canadian Association of Petroleum Producers announced in its 2017 Crude Oil Forecast, Markets and Transportation report. “Overall, Canadian oil production will grow to 5.1 million b/d in 2030, up from 3.85 million b/d in 2016. This 1.3-million-b/d growth will be driven by a 53 per cent increase in forecasted oil sands production of up to 3.7 million b/d in 2030 from 2.4 million b/d in 2016.”
Ross believes there still is an economic need to get natural resource products to markets outside of the North American continent. There still is a price difference from what it can fetch in North America and in the European or Asian markets.”
Nevertheless, if Erickson was asked by a client if it should get into the pipeline business, his answer, he says, would be blunt: “Don’t.” Instead, he might steer them towards acquiring an existing pipeline. “You see more in the midstream industry companies looking to grow by acquisition. In today’s world, it’s easier to grow by buying as opposed to developing. You see that in spades. Two very large domestic companies have done very significant acquisitions over the past year.”
Erickson has also seen a reduction “of new foreign money coming in for developing [pipeline] projects in Canada.” Although Canada remains an attractive country for foreign investment in large pipeline projects, primarily because of its stable economy and stable political environment, the often overwhelming challenges that must be overcome to get a project approved can turn some investors away. “Certain delays that have taken place may be a concern for international investors for whom capital is very fluid and for whom regulatory frameworks and timeframes may differ substantially in different parts of the world,” says Ross.
A possible sign of what might lie ahead was seen in July when Petronas, a Malaysian oil and gas company, cancelled its Pacific Northwest LNG (liquefied natural gas) project in BC, comprising about half of a proposed $36-billion investment. A weakened economic market and ongoing opposition concerning greenhouse gas emissions were cited as the reasons.
While companies entering the pipeline business should do “as much upfront work in developing a clear strategy at the outset” to increase their chances of success, says Treacy, she also believes all stakeholders need to work to reduce the adversarial environment in which projects tend to become ensnared.
“What we really need is strong leadership in this area from all fronts,” she says. “Especially when it comes to explaining the projects and why they are beneficial. ... Uncertainty in this area is not in the interest of anyone. I’m very hopeful, however, that there can be a better regulatory process developed that can approve projects in a highly efficient manner.”