The Northern Gateway Brief: Unhappy Political Options & Geo-Political Assessment

I spent much of last week in Alberta which, as anyone who has traveled across Canada knows, is a very different place from BC. While there, it became increasingly clear that talking about the oil sands in general, and the northern gateway pipeline in particular, was verboten. I spent my week in a Fawlty Towers episode: whatever I did… I couldn’t mention the war pipeline.

It was interesting contrast since, in British Columbia, it is virtually accepted that the Northern Gateway pipeline is not going to be built (and there is equally great opposition to the Kinder Morgan pipeline). Meanwhile, in Alberta, it seems an article of faith that the pipeline is going to be built. At some point these two realities are going to clash.

This post is not designed to be a definitive piece on the subject, but rather an outline of a sort of intelligence brief for those curious about where things may be headed. Based on conversations I’ve had with people in the natural resource sector, government, environmental groups and first nations this is an effort to explore what I think are the likely scenarios and choices for our government, as well as what it may mean for foreign governments with an interest in the outcome.

Some Assumptions

If, as you begin to read this piece you are saying – err… what does David mean by the pipeline, I suggest a brief scan of the Enbridge Northern Gateway Pipeline, which will run across Northern British Columbia and allow oil from Alberta’s oil sands to be exported from the west coast port of Kitimat. While I won’t talk about them as much, a reader will benefit from being aware of the proposed Kinder Morgan Pipeline expansion and Keystone Pipeline. However, knowing about them is not a strict requirement.

In case anyone takes the time to read what I suspect will be a lengthy post… yes, I, like a large and growing number of BC residents, have deep reservations about the pipeline. My interest here however is less about whether the pipeline will happen – although I dive into that – and more about what I think that means for the choices of various players, which I think is quite interesting.

The New National Energy Policy: Why the Pipeline (Probably) Won’t Happen

I confess, sitting in British Columbia, it is very hard to imagine the pipeline being built. The fact is, most British Columbians – 60% – are opposed to the project, and that number has been growing, not shrinking, with time. Each day, the project becomes more tarnished and unpopular.

At this point, it is hard not to imagine a potentially massive negative backlash against any political party set on ramming the project through British Columbia. It is hard to imagine the current government could have handled the communications around this project in a more inept manner. Environmental Minister Joe Oliver’s rant statement effectively labeling anyone opposed or concerned as a radical did more damage than any environmentalist campaign could have imagined. Those concerned about, but open to discussing the pipeline, felt attacked and grew suspicious that they would have no voice. As the polls reveal – they have turned sharply against the project.

The National Energy Program of 1980 – when a Liberal federal government forced Alberta to sell oil to central Canada at below market prices – is political lore in Alberta. It turned the province forever against the Liberals and become a major source of “western” grievance. Of course, British Columbians feel like they now are about to become the victims of a new National Energy policy, one that sees the export of Alberta’s oil subsidized by British Columbia, which will have to assume billions of dollars in environmental and economic risk while seeing relatively little economic benefit.

Given BC is about to acquire six new seats in the House of Commons, holding on to, and acquiring more of those seats is critical to Conservative’s efforts to maintain a majority. The concerns of British Columbians will not be taken lightly – one can imagine the discomfort of the BC caucus in the party. Indeed this August 2012 Abacus poll showed that “In BC… 41% of 2011 Conservative Party voters oppose the pipeline with 21% strongly opposed.”

Terrible Choices

This leaves the Federal Government in an exceedingly sticky position on multiple fronts. The government has, of course, been pushing Canadian oil across the Pacific, which has helped spur significant Asian investment in the oil sands; witness the $15.1-billion acquisition of Calgary-based Nexen Inc. by China National Offshore Oil Corporation (CNOOC) and $5.2-billion acquisition of Calgary-based Progress Energy Resources by Malaysia’s Petronas.

If the pipeline were now not to be built, the promises of access to Alberta oil across the Pacific would be greatly damaged; so too, I suspect, would be the access to foreign capital needed to develop the capital-intensive oil sands.

On the other hand, if the pipeline were to be built, the Conservatives would be significantly exposed to suffering major, and possible majority-ending losses, in British Columbia.

This means that all the current scenarios are not great for the government.

The first scenario assumes that the National Energy Board (NEB) – which is conducting a review of the pipeline (including an environmental review) – approves the project and that it gets built. This is a disaster. The risks of a new “National Energy Program” this time directed against British Columbia by Conservatives could wipe the party off the political map in BC much as it did the Liberals in Alberta after the 80s.

The second assumes the NEB approves it – however, the pipeline is bogged down for at least 10 years in litigation from First Nations and environmental groups (if not much, much longer). What makes this so friendly is that it may allow the government to appear to support the pipeline while nothing actually happens. It may thus be able to preserve its political base in BC since the facts on the ground don’t change much and can continue to cast its favourite enemies – environmentalists and, less publicly spoken, First Nations – as the enemies of progress. Ranting against the former could serve as a useful rallying cry for fundraising – much like the gun registry – for many years.

That said, foreign investment would probably suffer – how much I don’t know – but it is hard to imagine much Asian money flowing into the oil sands at this point.

Of course, if the NEB doesn’t approve the project, things get worse. Much worse. Now the only way for things to move forward is for the cabinet to overrule or find a workaround of the NEB’s decision (assuming this is possible).

If the Government doesn’t overrule the NEB, it is essentially telling Asia that its promises and commitments to exporting oil are empty. Do not expect a “Team Canada” trade mission to be welcome in the capitals of Malaysia or Beijing any time soon. Worse, expect Alberta – particularly Conservatives in Alberta – to be livid. The implications for the party’s internal dynamics could be significant.

However, if the government does find a way to overrule the NEB, this would constitute a direct attack on the interests of British Columbia. Conservatives would become even less electable than in scenario one. It would be a disaster. It is no wonder that even Joe Oliver – the aforementioned minister with the rant that killed the project – is softly using language that backs away from such an outcome.

The Escape Hatch

This leaves a final – and what I believe to be most probable – scenario. I expect that under intense pressure from the Conservative government, Enbridge will withdraw its proposal before the NEB rules on it.

Why?

Because this would save the government from having to make any of the damning political choices above – choices that would either damage the Conservative base in BC, damage the government’s credibility with foreign investors, or both. Yes, this would be a crushing blow to Enbridge, and significantly embarrassing for the government, but the alternatives are likely much worse, especially if the NEB does not approve the project. Of course, I’ve no idea if Enbridge would go along with such a plan, but I suspect that opposing a sitting government – one stacked with allies – is probably not appealing either.

I’m open to the possibility of being wrong about this; it is, of course, impossible to know the future, but my sense is that the interests and pressures facing the various parties involved leave this as a highly appealing option.

Out of the Frying Pan…

Of course, all of this has even more interesting implications south of the border.

There, President Obama still has to decide whether or not he wishes to approve the Keystone Pipeline, which would connect the oil sands with refineries in the United States. Approval for this pipeline was denied prior to the US election – in part, I believe, so as to not to alienate environmentalists. However, many – including myself – assumed that it would be approved after the election. I assumed in part this was to make the already controversial Gateway project less necessary (I suspect people in BC will be even less interested in Gateway if Keystone is approved) and thereby hurt China’s access to oil while securing more for the US.

However, because of the mismanagement of the Gateway project, the risks of it getting built have vastly diminished. Add on the prediction that the US will likely become self-sufficient in oil within two decades, and the calculus has changed. Now the president could further boost his environmental credentials, not worry about energy and not worry about enhancing China’s involvement in the North America energy market. Whereas I previously thought Keystone was a slam dunk decision, now… I’m not so sure.

If Keystone is not approved, this would be an unmitigated disaster for the government. The Gateway and Kinder Morgan pipelines – along with the political quagmire surrounding them – would become even more significant. Needless to say, if all three failed to materialize it would be hard to imagine much more development in the oil sands, if only because there would be no capacity to get the oil to any market.

You Do It To Yourself

Again, I’m sure there are flaws in the above assessment. What is most unclear to me is if cabinet can “overrule” the NEB or not. Having read some on this, it remains a mystery to me. I’ve assumed it can, but if it cannot, that would change the scenarios or, at least, eliminate some.

What I think is most interesting about all of this is that these wounds were virtually all self-inflicted. By alienating anyone with concerns about the pipeline, the government made enemies out of much of the BC public it needed for support. Of course, Enbridge has been the entity that has had to bear the majority of this negative public opinion. This has been a master stroke, since while Enbridge has been largely incompetent in its communications, it has not been malicious. It is the government, not Enbridge, that has employed an aggressive stance with environmental groups and others.

Either way, supporters of the pipeline will have a hard time blaming others for its likely failure to materialize. The project was always going to be a tough sell in a province that – while big on developing natural resources – has been home to some of the world’s largest environmental protests. But I really couldn’t imagine a worse bungled communications strategy – one that might end up having big implications for Canada’s domestic political scene, but also for its relations in Asia, and south of the border.

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