About the Author

Dennis McConaghy

Dennis McConaghy is a Canadian energy executive with nearly forty years of industry experience in infrastructure development. He has engaged in the evolution of Canadian energy and climate policy over thirty years, from the National Energy Program of 1980 to the Paris Climate Conference of 2015. As one of the senior executives of TransCanada Pipelines, he was directly involved in conceiving and executing the Keystone XL pipeline project. He lives in Calgary.

Books by this Author
Breakdown

Breakdown

The Pipeline Debate and the Threat to Canada's Future
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Introduction

AT THE BEGINNING OF 2019, two impassioned Canadian protests took to the streets. For the United We Roll convoy, those streets began in Red Deer, Alberta, merged with the Trans-Canada Highway, and ended on Wellington Street in Ottawa, beneath Parliament Hill. Hundreds of workers arrived in their trucks to protest the threat to their livelihoods in the oil and gas industry — the threat caused by a decade of frustrated hydrocarbon infrastructure development and ineffectual political response.

Weeks earlier, other Canadians had demonstrated just as fervently; in that case, they were protesting against the construction of any such infrastructure. The RCMP had arrested fourteen people blocking the access of pipeline workers onto land in north-central British Columbia, access required to carry out pre-construction for a legally approved project. That pipeline, Coastal GasLink, would carry natural gas to Kitimat, B.C., where it would be converted to liquefied natural gas (LNG) and exported to Asia. The Canadian prime minister and the B.C. premier had endorsed the project heartily and publicly just a few months earlier. The protestors came out in solidarity with the specific subset of the local Indigenous community that had adamantly resisted this project for over four years, and with those who opposed any further hydrocarbon development in Canada on the grounds that such development increased the risk of global climate change.

These protests exemplify Canada’s political extremes — one imbued with a sense of absolute moral certitude regarding both its climate and Indigenous-rights demands, and the other “populist,” not typified by dogmatic conservatism or corporate elitism, but rather motivated by the heartfelt reaction of workers trying to protect their livelihood. These respective protests perfectly demonstrate the division that has developed within Canada over the last ten years on the fundamental questions that are subject of this book: Should the country commit itself to hydrocarbon development as an indispensable contribution to its economy? Or should Canada eschew that opportunity as incompatible with contributing reasonably to containing the risk of global climate change? Just as significant in this discussion are issues of the appropriate limits of due process, what constitutes justifiable infringement of Indigenous rights, and to what degree these matters should be subordinated to the national economic interest.

Since the early 1950s, Alberta has thrived economically relative to much of the rest of Canada, overwhelmingly due to the development of its hydrocarbon resources. I must state at the outset that I spent roughly forty years professionally engaged in the development of hydrocarbon infrastructure and upgrading in Alberta, achieving considerable professional recognition and enjoying significant financial reward. In my experience, there was, prior to 2008, no substantive public policy debate that questioned such developments as inconsistent with the national interest or as representing some fundamental moral quandary.

Clearly, however, the recognition of the risk of global climate change caused by the rise in atmospheric concentrations of greenhouse gases, especially carbon dioxide (CO2), beyond historic levels — attributable primarily to continuing human consumption of hydrocarbons — has put in question whether the world can continue to burn hydrocarbons such as oil and gas for fuel. The nature of the climate change risk requires global collective and coordinated action; in my view, catastrophic impacts are possible without appropriate mitigation and adaptation policy responses. But specific action to deal with the risk remains problematic, and global demand for hydrocarbons has not yet materially been reduced from historic levels. Indeed, that demand may in aggregate continue to grow for much of this century.

Reducing the risk of global climate change while sustaining levels of economic growth that rely on growing hydrocarbon consumption may prove an insuperable challenge globally, and the dilemma has become especially problematic for Canada. How will the country find an optimal mix of policy instruments to reasonably contribute to containing the risk?

Canada has participated in the UN process to deal with the climate change risk since that process’s inception in the early 1990s. The country has dutifully imposed on itself national emissions reduction targets arising from various treaties and accords, from the one produced in Kyoto to the one developed in Paris, regardless of how much achieving such targets would cost Canada relative to the costs its major trading partners were prepared to impose on themselves. Canada has not yet achieved any of those targets. Since 1992 Canadian emissions have continued to grow. Unless Canada is prepared to impose massive intervention in its fundamental energy systems and contain or even contract its hydrocarbon production industries, it will come nowhere close to meeting its reduction targets arising from the 2015 Paris Climate Accord.

The threat, or moral imperative, of containing if not outright contracting the Canadian hydrocarbon industry lies at the core of those angry protests seen at the beginning of 2019. Indeed, it has had a material impact on the process of developing hydrocarbon pipeline infrastructure — over the past ten years, no new pipelines have been constructed.

How much is Canada prepared to go on sacrificing? How fair would that sacrifice be? To date, Canada has found no national consensus.

I retired in 2014 from my position as executive vice-president of one of Canada’s pre-eminent hydrocarbon pipeline companies, TransCanada Pipelines. Since then, I have tried to be a constructive commentator on the subject of this fundamental challenge for Canada: Should hydrocarbon development be part of that future or not? As mentioned, I bring some forty years of experience both as energy executive and strategist; I believe that, as an engaged Canadian citizen, I can also contribute usefully to the debate.

In Breakdown, I argue that, despite the polarization that has emerged within the country, Canada can, and must, find a consensus that balances credible and proportionate climate policy — by which I mean policy instruments that contribute to reducing the risk of global climate change — with realizing the economic benefit of continued development of our hydrocarbon resources, specifically natural gas, primarily in Alberta and British Columbia, and the Alberta oil sands.

This book was completed in early 2019. The ultimate resolution of certain outstanding issues that are foreshadowed here, which may occur later than that, do not detract from the credibility of the analysis or the recommendations offered. They remain robust.

My first book, Dysfunction: Canada After Keystone XL, details KXL’s journey from conception to rejection, and explores the consequences for Canada of the project’s apparent demise. I was compelled to write Dysfunction because I wanted Canadians to understand how unfairly the country had been treated by both the Obama administration and the North American environmental movement. The failure to enact comprehensive carbon policy breakthroughs led to the nullifying of specific hydrocarbon infrastructure projects and the demonizing of specific resources, including the Canadian oil sands. Barack Obama ultimately rejected KXL to preserve his “climate credibility” before the late November 2015 UN climate meeting in Paris — his words. This rendered irrelevant the prior seven years of regulatory process for the approval of KXL, which had been substantively affirmative; multiple assessments conducted by the Obama administration’s own Department of State had deemed KXL’s incremental impact on global carbon emissions immaterial.

Also distasteful and unfair for Canadians was the fact that, despite Obama’s fundamental antipathy to hydrocarbons, his administration had abided a substantial increase in domestic crude oil and natural gas production over its tenure. Admittedly, breakthroughs in extraction technology had made that increase possible; still, Obama hypocritically allowed the United States to gain this economic benefit while unfairly depriving Canada of KXL. All of this took place even as Canadian carbon policy constraints became arguably more aggressive than what was unfolding in the United States over the same time frame — for example, this period saw the advent of carbon pricing in both Alberta and British Columbia.

I wanted Canadians to understand the costs Obama’s decision had imposed on them, all in the name of “climate credibility.” That lost additional pipeline capacity for future oil sands production meant that Canada would rely on more expensive rail transport in the interim, and over time that would result in lost production, costing billions of dollars in additional annual cash flow back to Canada.

Dysfunction was a book about how Canada was treated unfairly by elements within the United States. Breakdown is about what Canada has done to itself: about its failure to seize economic opportunity in its hydrocarbon potential, as evidenced by the building of no new pipelines, even while not developing a genuinely credible and proportionate contribution to dealing with the risk of global climate change.

But Canada — as the KXL experience reminds us so clearly — does not exist in a vacuum. American policy always provides a constraint on Canada’s actions, limiting how the country may reasonably proceed, especially in respect of energy and carbon policy. The 2016 American election fundamentally changed the context for how such events in Canada would unfold.

Most Canadians, like most Americans, expected that Hillary Clinton would be elected president in 2016. I took no special pleasure in that prospect. In late 2010, in a moment of candour, then secretary of state Clinton had stated that she was inclined to approve Keystone XL, but that position was short-lived. She deferred to Obama after the project’s denial became a litmus test for his “credibility” on climate change. Aligning with that position had, by then, become an absolute requirement of any politician wishing to remain a contender in the Democratic Party primaries, and Clinton subordinated whatever centrist impulses she may have had to that reality. As a presidential nominee in 2016, she duly announced that she opposed the KXL pipeline. Make no mistake: denying KXL meant denying incremental Canadian oil sands production, full stop. With Clinton as U.S. president, I anticipated greater negative consequences for Canadian hydrocarbon development, beyond continued resistance to KXL, than most Canadians seemed capable of acknowledging.

But of course the actual results of the 2016 election reversed those expectations. The message of an aging, crude, self-indulgent autocrat, moulded by the New York real estate industry and U.S. media celebrity, brimming with a lifetime of resentment and frustration with his country’s evolution, had, incredibly, resonated with enough of the U.S. electorate to enable Donald Trump to be elected president. His election would give KXL a second chance, and would therefore allow for accelerated Canadian oil sands development. That was the new reality.

Trump’s presidency would clearly be typified by an unshakable alignment with the interests of capital, seen as providing the only credible means for economic growth: lower taxes, fewer regulations, less redistribution of wealth. Regardless of what the Trump presidency would portend for America and the world, it was immediately evident that he was utterly indifferent to climate change risk and would fundamentally reverse how the United States approached the issue. The Trump administration would have no moral qualms about unfettering hydrocarbon production and consumption, since it was disinclined to consider climate change risk or other matters related to environmental sustainability as important. A Trump presidency would therefore provide a unique window of opportunity for the hydrocarbon industry, at least within the United States, to expand production and install infrastructure. There would be fewer federal regulatory constraints than could have possibly been imagined, given the evolution in regulatory oversight under the past administration. The energy policy of the United States would align fully with increased hydrocarbon production, and would be accompanied by a virtually nonexistent climate policy.

Would Canada seize these circumstances, recognizing them as opportunities to advance its economic interests? Canada did still have to question if Trump’s impacts on carbon and energy policy would be sustainable. Did his presidency represent only a four-year hiatus from the international consensus to deal with the risk of climate change established at Paris in late 2015, or did Trump’s election signal that there would be a genuine reset in how the world would deal with the climate risk?

On January 24, 2017, ironically the same day I launched Dysfunction, Trump announced that he would reverse Obama’s decision and provide the necessary permit to cross the Canada-U.S. border that had so long eluded KXL. After another three months of process with the Department of State, Trump formally issued that permit to TransCanada CEO Russ Girling in person, in a brief Oval Office ceremony. Amity and alignment abounded; KXL was formally back under development. But as Girling observed to Trump as he accepted the permit, TransCanada still faced regulatory and legal challenges within the state of Nebraska. Nothing would come easy. The project’s opponents would regroup and find new ways to obstruct KXL, resorting to the courts and state regulatory forums instead of the White House.

For Canadians, KXL’s history should have led to one obvious question: Shouldn’t we build the required infrastructure to realize market access for Canadian hydrocarbons, efficiently and responsibly, within our own jurisdiction, rather than rely on U.S. politics, regulatory structures, and judicial interventions? The building of various projects had been proposed within Canada over the ten years preceding Trump’s decision, but to date none have succeeded in being built. And so we must ask ourselves other, more fundamental questions: Can Canada find a national consensus to exploit its hydrocarbon potential and capture the attendant economic value? Do Canadians appreciate the scale of that economic contribution, and appreciate just what would be involved in replacing it? Or is Canada so fundamentally conflicted on carbon policy and hydrocarbon development that all it is able to achieve is protracted and unresolved approval processes that result in inevitable terminations?

Canada’s political leadership has vacillated between support for hydrocarbon exploitation along with recognition of the country’s economic dependence on hydrocarbons, and a fundamentally equivocal position typified by the aspirations of decarbonization and reinventing Canada around some ill-defined “green” economy. Although a modest majority of Canadians support hydrocarbon development, Canada’s basic political, regulatory, and judicial processes may be too broken to realize that potential, at least based on the record of the last ten years during which various projects have failed. So we have to ask ourselves: Will Canada permit economic contraction while the forces of obstruction and environmental extremism prevail in the long term? Is too much of the country simply indifferent to the consequences of losing the economic contribution of its hydrocarbon resources? Can Canada realize its hydrocarbon potential with a credible and proportionate national climate policy that is recognized as such internationally?

This book is not an academic treatise on Canadian energy and carbon policy, nor is it an investigative report into the confidential decision-making processes of the NDP government in Alberta and the Liberal government in Ottawa with respect to market access for hydrocarbons and carbon policy. Instead, this book is an essential history of how Alberta’s legitimate demands for market access for its hydrocarbon resources have been frustrated over the last ten years. It also lays out the principles of fundamental policy change that would better enable Canada to capture economic value not only from hydrocarbons but also from all forms of major infrastructure development, while maintaining sufficient credibility in respect of carbon policy. Finally, Breakdown confronts forthrightly the choices available to Canadian political leadership on hydrocarbon development, and the consequences of those choices.

Part One of Breakdown discusses in detail events that occurred primarily within Canada from late 2015 to the end of 2018 — a period typified by continued frustration for those seeking market access for Alberta’s hydrocarbons, incoherent national climate policy, and the continued failure of national institutions — political, judicial, and regulatory — to provide a functional approval process for major hydrocarbon infrastructure. It is important for Canadians to understand this history, not only in the context of hydrocarbons and climate change, but also in the broadest context of major development projects of all kinds. The question is whether the country retains the capacity to act in an economically rational manner, or whether the forces of obstruction have made a de facto breakthrough — a breakthrough to which too many Canadians may be entirely oblivious.

In Part Two, I suggest specific fundamental changes to Canadian regulatory processes as well as a national climate policy to redress the failures of the last ten years — years of lost opportunities. I propose fundamental clarifications of Canadian law that are inescapable if major developments are ever to occur with reasonable risk.

Canada may still realize the final available market access options, despite all the obstructions still in play. But we may lose those options. If we do, what fundamental political reaction will that evoke in Canada, and in Alberta especially? We will see more polarization and alienation, to be sure, but we may possibly see other, more extreme results — a breakdown not only of Alberta’s economy but also a breakdown of the country — economically and politically.

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Dysfunction

Dysfunction

Canada after Keystone XL
edition:Paperback
also available: eBook
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Excerpt

I
The story of Keystone XL began back in the early part of 2007. At that time, my colleagues at TransCanada and I believed that the company would be able to simply apply to the appropriate regulatory entities for necessary permits, and then, within a reasonable time frame, proceed with constructing KXL. Operations would likely begin, we believed, as soon as late 2012.
In our estimation, KXL had no fundamentally special elements differentiating it from comparable pipelines that traversed most of North America. It was merely a logical extension of the base Keystone system, for which the company would soon receive the necessary permits from the same regulatory entities that would next adjudicate KXL. Construction of base Keystone would commence while we prepared and submitted the regulatory applications for KXL. Base Keystone was to connect the Alberta oil sands to the United States mid-continent, and KXL would extend that reach to the U.S. Gulf Coast. That market access and the overall scale of the project were enormously significant for the Alberta oil sands industry’s long-term economic prospects. At TransCanada, we were genuinely excited about the project, as a private economic opportunity and also as essential infrastructure for Canada.7
TransCanada applied for permission to build KXL in September 2008,8 and even in mid-2009, no one seriously imagined that this pipeline project might be rejected. Yet when I retired in mid-2014, the approval still remained unresolved, despite over five years of review. The project needed a presidential permit from Barack Obama to cross the Canadian border into the United States — a permit that was supposed to be predicated on an environmental impact assessment and a National Interest Determination (NID) process led by the U.S. Department of State (DoS). The U.S. government’s vesting of the final decision with the president himself was meant to expedite the approval process, but in this case leaving the decision with the president had had the opposite effect. When I retired in late 2014, I had come to the view that the Obama administration would likely reject the project, despite the DoS’s two separate, extensive environmental assessments, in 2011 and 2014, that consistently found the project environmentally acceptable, albeit with certain special operating conditions, to which TransCanada had agreed.9 Environmentalist resistance to the project and the president’s response to that resistance had, incredibly, proved decisive. It was a triumph of symbolism over substance and reasonable expectation of due process.
So, when the project I had so enthusiastically contributed to conceiving and planning, the project that had once seemed so valuable for the continent, and especially to Canada, my company, and, yes, me personally, was formally rejected, I asked myself the questions I had pondered so many times: How and why did this happen? Why did TransCanada persist so intensely? Why did we meet ultimate failure and unprecedented notoriety? These questions deserve substantial analysis and rationalization. The first part of this book sets out to provide that, directly and fairly.

II
A specific confluence of events precipitated KXL’s demise — Nebraska’s resistance to the company’s route through the state, the breakdown of the Kyoto Treaty and subsequent failure of the 2009 Copenhagen conference to find a viable alternative, U.S. Congress’s 2010 failure to enact an economy-wide cap-and-trade bill to deal with carbon emissions, a few highly publicized oil spills, the basic reality of the higher carbon intensity of oil sands–derived crude oil, a regulatory process vesting ultimately with President Obama, and failure in both countries to find an accommodation to rationalize its approval. Was this pipeline’s rejection an anomalous experience or a harbinger of things to come? Has social acceptance of the oil sands resource been lost?
The Alberta oil sands resource offers Canada a great economic opportunity; more than $200 billion of investment in production and related facilities over the last twenty years is a testament to that.10 In 2016, notwithstanding current low commodity prices, production has continued at over two million bbl/d.11 Without KXL, is Canada prepared to go forward with alternatives such as the Northern Gateway, Energy East, and TransMountain pipeline projects? Although those projects may not represent the same value to Canada as KXL could have, the economic potential of the oil sands resource cannot be realized without them.
Of course, if Canada fully exploits this potential, Canadian carbon emissions will grow; that is an inescapable reality in the short and medium term.12 We need to rationalize that growth to a world committed to dealing with the risk of climate change. Producing and consuming hydrocarbons cause increasing risk of climate change. Yet, those hydrocarbons still provide great economic value. Whether the world can significantly decrease its demand for hydrocarbons, especially crude oil and natural gas, over the remainder of this century is an open question.
As well, it must be conceded that the oils sands resource emits more carbon on a unit basis than most other crudes in its production processes. This carbon intensity is perhaps the fundamental reason for the unique hostility directed at this Canadian resource, culminating, even within Canada, in an implacable resistance to its exploitation.
However, Canadians should be able to support hydrocarbon development, provided the country adopts a credible and proportionate carbon policy. Unfortunately, this is not the case at present. The hydrocarbon industry and several successive governments have failed to show Canadians adequately that resource development not only serves their economic self-interest but can be managed within an acceptable climate-policy framework, comparable and proportionate to those embraced by other relevant countries, especially the United States. Canadians remain largely misinformed about oil sands carbon emissions and the economic consequences of extreme carbon policy. Sadly, much of the animosity over the oil sands is now aimed at obstructing the regulatory processes related to hydrocarbon infrastructure, with opposition to KXL serving as the template for that larger struggle. National, non-partisan regulators adjudicate the costs and benefits of hydrocarbon infrastructure projects, but their authority is increasingly diminished if not entirely undermined by legal obstruction, outright civil disobedience, and a lack of political will. Dysfunction has become the default. How much economic opportunity is Canada prepared to lose?
The demise of KXL should force Canada to come to terms with the difficult issues created by the loss of that project. The second part of this book is dedicated to confronting those issues. What has the pipeline’s demise cost Canada? What can, and must, Canada learn from the experience? Do Canadians agree with the reasons President Obama gave when he rejected KXL? Where do we stand on our other pipeline projects, such as the Northern Gateway pipeline through British Columbia and Energy East to New Brunswick, in the wake KXL’s demise? Even more fundamentally, where does Canada stand on hydrocarbon development at all?

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