As the planet becomes increasingly inhospitable for humans, we face both a crisis and an opportunity. Canada is a large country with a small population, and we rely on international trade to fund our well-being. Exports represent almost a third of our national economy, and nearly 25% of all exported goods, representing $538 billion, come from the energy sector. One in five Canadian jobs stems from goods-producing industries, including manufacturing, resources and agriculture. It’s critical that building a more sustainable nation include lowering emissions while protecting the livelihoods of seven and a half million Canadians. This represents not just an opportunity for Canada to lead but an opportunity to prosper.

There are three big levers we can pull to get there.

The first and most obvious is to lower Canada’s industrial emissions. We already have a national strategy, the Pan-Canadian Framework on Clean Growth and Climate Change (adopted in late 2016), including a Canada-wide carbon price. However, Canada is on track to fall short of its 2030 Paris Agreement targets by about a third. While the Trudeau government continues to tease its detailed plan to reach net-zero emissions by 2050, Canada (like many other countries) has a track record of missing its ambitious climate targets.

That leads to the second lever: helping other nations reduce emissions while reaping the economic rewards. One way to do this is to focus on growing Canada’s innovative low-carbon exports, an area in which we have some existing advantages.

The Canadian labour force can rightly claim deep expertise in engineering, research, design, business and financial services from our long history as a resource-heavy economy. We also enjoy a vast and accessible market for exports to our southern neighbour (Canada exported approximately US$337 billion of goods in 2019 to the U.S.), which is predicted to improve as Biden moves into office and enforces his Build Back Better economic recovery plan.

As governments and multinational corporations continue to announce net-zero commitments, the market pull for low-carbon innovation is white-hot. Canada can take advantage of this trend by doubling down on support for innovation at home while exporting technologies that reduce our economy’s greenhouse gas intensity. For example, Canada is home to the Quest carbon capture and storage facility, which has captured five million tonnes of C02 for an Alberta oil refinery in the last five years, equal to the annual emissions from 1.25 million cars. Exporting the technological innovation that allows projects like Quest to succeed will support other nations in meeting their climate targets using low-carbon Canadian innovations.

Another example of low-carbon export opportunities is in C02-based materials and products. “Carbontech” is an emerging sector in which materials typically manufactured using fossil fuels are instead made by recycling existing C02 emissions. A vast array of materials can be manufactured using this method, including concrete, jet fuel, paints, plastics, fertilizer, carbon fibre, even synthetic protein and food. Making these materials from recycled C02 emissions could reduce seven billion tonnes of C02 by 2030, representing roughly 15% of annual global C02 emissions, according to estimates by the Global C02 Initiative at the University of Michigan.

Though this innovative sector is still in its infancy, it’s not hard to map a pathway to a future in which Canada is a leader in emerging technology. In fact, 40% of the teams participating in the NRG COSIA Carbon XPRIZE, a $20 million prize for the development of new and emerging C02 conversion technologies, are Canadian technologies. British Columbia’s Carbon Engineering is already pulling C02 from the air and turning it into fuel, and Calgary’s Carbon Upcycling Technologies’ materials are used to manufacture everything from consumer goods to C02-based plastics. The estimated total addressable market for C02-based materials already exceeds $8 trillion.

The third lever is also perhaps the most controversial. It involves Canada exporting products where most reduction occurs through use. One hotly debated route is exporting natural gas as a replacement for coal-fuelled power. According to studies by MIT and Johns Hopkins University, natural gas, if done right, can reduce comparative coal emissions by half. Natural gas is not, however, a climate panacea. As the American National Academies of Science, Engineering, and Medicine has pointed out, uncontrolled methane leaks from natural gas can undo all the positive effects of lowering the carbon footprint.

Using carbon-based fuels, like natural gas, as a bridge to a green transition is a complex topic; the details of execution matter. We owe it to current and future generations to lean in to this topic’s nuances, challenges and opportunities as we plan for the future.

The global conversation around fighting the climate crisis and decarbonizing our global economies is starting to move beyond hope and into practical policies and business plans. Getting this right is not automatic and will take work, capital and planning, but the opportunity for Canada is there, so let’s seize it.

Marcius Extavour leads climate, energy and environment work at XPRIZE. His work includes the $20 million NRG COSIA Carbon XPRIZE, a global competition to recycle C02 into valuable products as a way to decarbonize our economy and avoid dangerous climate change.

Dan Zilnik is the president of AFARA. His firm works on the math, science and economics of sustainability, focusing on energy systems and the economics of the circular economy.

The post Canada can punch above its weight by helping other nations lower emissions appeared first on Corporate Knights.

(On Thursday, we looked at why environmentalists’ opposition to the oil sands became a symbolic, four-front battle targeted at Keystone XL. Today, in the final installment of our three-part series, we ask if the death of Keystone XL would be considered a true victory if nothing fundamental in the oil sands changes.)

With Keystone XL on the ropes, activists claim to be winning the fight – even if the final punch has yet to be thrown.

What is clear is that the oil sands are in a crisis. Every week of 2015 seems to bring another announcement of a delayed or cancelled oil sands project, layoffs or industry consolidation. Environmental groups often follow such news with triumphant statements about the imminent extinction of the oil sands. The Natural Resources Defense Council has even suggested that advocacy groups and their supporters take a celebratory bow. “By delaying the proposed Keystone XL pipeline, which would ship tar sands oil across the Midwest to refineries on the U.S. Gulf Coast, [you] have helped make digging up Alberta’s boreal forest an increasingly bad investment,” it said.

The reality, however, is not so simple. The oil sands’ current lull is driven by a combination of factors, including spiraling projects costs and the fact oil prices are half of what they were a year ago. Continued pipeline opposition has added to the industry’s troubles, but whether untapped bitumen reserves remain permanently in the ground depends mostly on the demand for fossil fuels. A drop in oil prices ultimately incents people to use more oil, precisely the opposite of environmentalists’ goal of having the world purchase battery-powered Teslas, step onto public transit or ride their bicycles. Delaying or stopping Keystone does nothing directly to affect the demand side of the equation.

And if oil prices swing back around, as they are likely to do, the survivors of today’s industry malaise will have found new techniques and technologies to bring these projects back into contention for investment.  Some projects may even come back into play thanks to the recent fall in land, labour and supply costs in Northern Alberta.

For projects already or nearly operating, it’s also important to remember that producers will not simply turn off the taps. Production of bitumen at the end of 2015 will almost certainly be higher than it is today, despite the low oil price, and by 2020 higher still. This rise in production will continue until the backlog of projects partway through construction get ‘worked through’. Surprisingly, existing projects are far cheaper to keep in production than to shut in. The steel, concrete, and giant yellow diesel toys have been paid off. With comparatively little investment, these projects can be kept operating for generations. Indeed, it is possible that companies will never shut down some of these projects, since the ever-escalating cost of full reclamation would land like a bomb on their balance sheets.

Which brings us back to Keystone. A cap on pipelines, if a Keystone XL rejection inspires more such rejections, is in reality only a cap on the pace of extraction, not on emissions or production. The total amount of oil sands ultimately produced, and thus emissions, is likely to be around the same. It will simply take a lot longer to reach those levels. Projects will source bitumen from further afield and with different recovery enhancements, to keep the existing pipelines and refineries fully supplied. So long as willing buyers of the product can be found, the current roster of mines and thermal plants will continue to chug along with the economics of the business shifting from growth to boring utility-like returns. Outside of the pace of production, nothing fundamentally will change – that is, no assets will be stranded unless the framework governing both production and consumption is transformed.

In other words, today’s low oil prices are far from a final nail in the oil sands coffin. As Mark Twain once remarked, “reports of my death are greatly exaggerated.” The environmental community may win the Keystone XL battle and celebrate a symbolic victory, one which adds fuel to the oil divestment campaign and strikes fear in the hearts of pipeline developers everywhere. But this victory is in reality at best a pause. Whether it can be translated into a lasting change that keeps carbon out of the atmosphere will depend on whether a wider resolution of the tensions between fossil fuel dependence and climate limits can start to emerge. It also depends on what role Alberta chooses to play in reaching that resolution.

Shifting sands

As the Keystone XL debate enters its final chapter, it is clear that Ralph Klein’s advocacy as Alberta premier nearly a decade ago helped propel talk of oil sands growth from Alberta onto the U.S. stage, where it gained national significance.

It also transformed the climate campaign tactics of environmental groups, transmuting the pipeline into a headline-grabbing proxy war over climate policy and a rallying cry for grassroots protest. This has slowed the momentum of the industry – but it hasn’t stopped it. Oil sands production will still grow to 2.3 million barrels a day by the end of 2015, and many of the bottlenecks to market access that inspired the Keystone XL proposal have since been largely resolved.

Not that Keystone XL no longer matters. This large pipeline would make access to tidal waters cheaper than trucks and barges, and possibly less risky than rail. If built, it would certainly improve the economics of existing projects, and potentially bring some suspended projects back to life.

While what ultimately happens with Keystone XL remains uncertain, there’s no question that this debate has moved onto shifting sands – starting in Alberta, which is feeling the pain of collapsing oil prices and declining resource revenues. A spring 2015 election put a left-leaning, climate-friendly NDP government in charge, bringing an unexpected end to the Conservative Party’s 40-year monopoly on power and resource policy.

Similar changes could come at the federal levels, with both Americans and Canadians heading to the polls over the next 18 months to elect their national leaders. At the same time, momentum is building toward the Paris climate conference at the end of 2015.

One consequence of political change in Alberta is that its leaders will no longer reflexively support new oil sands infrastructure and production. Another is that they are getting more serious about reducing carbon emissions.

In 2007, the Alberta government imposed a carbon price of $15 per tonne on 12 per cent of the greenhouse gases from its large emitters, becoming the first jurisdiction in North America to do so. Criticized for being too weak, Alberta’s Specified Gas Emitters Regulation (SGER) has endured while other more ambitious policy efforts have withered on the vine. Among its first acts, the new government in Alberta has increased the stringency of its GHG reduction target to 20 per cent and doubled the cost of compliance to $30 per tonne.

The amount collected so far for emissions has been put into an investment fund which has contributed over $1 billion to innovative carbon reduction projects and technologies. Through Alberta’s ‘Grand Challenges’ approach, funds are also being used to incent a global competition to crack one of the greatest challenges impeding progress on carbon-emission reductions – that is, the pathway to transform CO2 from a waste product into an economically valuable commodity. The idea is that Alberta will host groundbreaking early deployments, and the recently strengthened regulations bring added punch to such efforts.

Oil sands developers, meanwhile, are responding to the unprecedented pressure and uncertainty plaguing them. Haltingly and unevenly, they are developing a new approach to innovation, and potentially, establishing a new and better template for resource development.

Even before today’s challenges, in 2007 a small group of leading oil sands developers established the Oil Sands Leadership Initiative (OSLI) with the aim of achieving “tangible improvements in environmental, social and economic performance through collaboration and technological innovation.” Their insight was that environment was a collective problem that requires collaboration and not competition; there was no incentive to “win” environment. That these companies chose to collaborate rather than compete is rare in any bottom line-focused industry. OSLI became the springboard in 2010 for the launch of Canada’s Oil Sands Innovation Alliance (COSIA), a novel collaboration encompassing virtually all of the major project developers to accelerate deployment of new environmental technology.

At its core, COSIA works to reduce barriers to the sharing of experience and research between all producers, as well as to accelerate deployment and wider diffusion of successful environmental actions or technologies across the sector. Working closely with the innovation arm of the Alberta government, COSIA has reached out within its members and more widely for the best ideas, and is working frantically to bring those ideas to a commercial scale. But whether a larger group means greater heft, or lowest common denominator, remains to be seen.

At the same time, and backed by substantial federal and provincial subsidies, Alberta has become a world-leading jurisdiction for development and deployment of carbon capture and storage (CCS). In 2015, Shell will officially turn on the $1.35 billion “Quest” CCS project at its oil sands refinery and upgrader complex. It has several additional initiatives in the works, including a pipeline to collect CO2 from capture sites and a range of technology pilots. In tandem, it has worked through a notably consultative process to develop regulations that govern CCS deployment. These regulations are reportedly being closely studied by other jurisdictions.

Good intentions aside, the focus on environmental technology innovation in Alberta highlights the limitations of these efforts. It is the production process itself, not the carbon, land, tailings or water management techniques that happen during production, which offers the greatest opportunity for environmental improvement. Yet collaborating on production is a third rail due to anti-trust concerns. Also, the historically low price of natural gas is expected to be far more significant in preventing the implementation of more efficient production technology than anything reasonably contemplated under a carbon price.

Even with the right incentives, industry-wide use of new technology in the oil and gas sector historically has taken decades to emerge. COSIA is likely to make it possible for companies to partner in the piloting of novel technology more rapidly than if they went it alone, but commercial-scale deployment would still be decades away due to the slow cycle of new capital investment, stalled by today’s low oil and natural gas prices. Just look at AOSTRA’s track record. Despite its successes and foresight, it invested less than 1 per cent of its funds over its 18-year existence on environmental research. There is clearly a gap in public investment too great to fill with carbon policy on its own, so more innovative approaches are needed.

Also important to consider is that new technologies can carry additional costs, and pose new and potentially unforeseen risks to the public and the environment. Providing operators with the necessary rewards for deploying unproven technologies, and giving regulators the discretion they need to temporarily exempt those technologies from performance standards required by permit or law, calls for an overhaul of both fiscal and regulatory approval structures.

In their search for new innovation models, Alberta’s political leaders have looked outward to like-minded governments in countries such as Norway, the United Kingdom and the Netherlands, as well as to First Nations, the environmental community and other non-government stakeholders.

One model that needs little government action is gaining traction in Latin America. Inspired by the success of fair trade, sustainable forest products and coffee certifications, at least one oil certification scheme has started to emerge. Equitable Origin’s market-driven approach aims to reward progressive oil companies for their greater investments in environmental and social performance by charging willing consumers a premium and passing a portion back to the company and its host communities.

Some suggest Alberta should shift its focus to new energy sources, leveraging its unusually high quotient of engineers and megaproject financiers, as well as synergies between renewables, oil and gas. With vast untapped potential for hydro, geothermal and solar energy development, and having wind power that is arguably already at cost-parity with coal, Alberta could become a clean power leader, they argue.

Would any of these initiatives be sufficient to buy a thumbs-up for Keystone XL from a new U.S. president? In a letter sent to President Obama back in 2013, Prime Minister Harper suggested their two countries collaborate on oil and gas GHG emissions as a quid pro quo for market access. Two years on, as far as the public knows, this letter remains unanswered.

While fair to give credit to Alberta’s regulators, industry and new government for their efforts to date, the facts cannot be ignored. Environmental impacts from the production and consumption of hydrocarbons have never been higher and thirst for all fossil fuels in transportation continues its steady climb. The path we are on locks the oil sands into a slow burn; it is unlikely they will be the financial magnet they once were. But the oil sands will be produced and burned, to the detriment of the climate, until something fundamentally changes on the demand side.

In a world that sets limits on global emissions, some carbon reserves will stay in the ground. This coming hammer, if it falls, does not threaten all fossil fuels, oil producing regions, or individual projects in a region, equally. Like a game of musical chairs, the question will be who is most likely to be left standing when the music stops. For Alberta and for the companies invested in the oil sands, the challenge is to position some portion of their reserves to be consistent with a carbon constrained world, either by being first to find a seat, or by being faster – lower-carbon – than the competition.

Finding a path that delivers climate benefits and space for the oil sands to prosper will require collaboration and innovation across sectors and at a scale that may be tough given the entrenched and adversarial positions of many of the key players. If such a path can be found, it offers the opportunity to pivot Alberta towards a leadership role in the emerging green economy, and to set a global high water mark for extractive sector development. But it calls for nothing less than making the oil sands into a laboratory in which fossil fuel development and carbon constraints can be reconciled.

As one oil sands insider put it, “downside risk is all in Alberta, but upside potential is in Alberta and across the globe.”

About the authors: Dan Zilnik (dzilnik@ogsustainability.com) is president of Oil & Gas Sustainability Ltd., a Calgary-based consultancy. Jason Switzer has been on an extended leave of absence since January 2015, prior to which he was co-director of the Pembina Institute’s consulting team.

The post Does a decision on Keystone XL matter? appeared first on Corporate Knights.

(Yesterday, we looked at how the oil sands evolved from a money-losing proposition to a lure for international investment and a reason to expand the Keystone pipeline. Today, we look at how that success sparked an unprecedented amount of well-organized environmental opposition.)

In a way, Alberta Premier Ralph Klein was blindsided.

There was no doubt that Klein’s salesmanship was pivotal to igniting the imagination of the global investment community. What he didn’t expect was how it would capture the attention of environmental non-governmental organizations (eNGOs) around the world.f

These environmental advocates saw the oil sands as “Canada’s single largest contribution to global warming.” Seeing the mine truck parked so close to the White House during the 2006 Smithsonian Folklife Festival in D.C. set off alarm bells. For these advocates, it was a clear indication that both the U.S. and Canada were doubling down on what they viewed as among the dirtiest types of oil.

Oil sands are megaprojects in a democracy. Their footprint and financials can be viewed by anyone with access to the Internet. Their enormous size, and the geographic proximity of one project to the next, makes them uniquely un-photogenic. And when it comes to public trust, oil companies rank low survey after survey.

Initially – and understandably – environmentalists focused their protest campaigns on well-know oil companies and their iconic megaprojects. They did this by drawing attention to the scale of development in the oil sands and its potential impact on local First Nations communities and global climate change. The aim here was to raise legitimate concerns about the pace and scale of development and how it affected host communities, with the objective of closing gaps in regulation that were demonstrably subsidizing oil sands development. They also wanted to call out the increasingly blatant inconsistency between Canada’s international carbon reduction commitments and the rapid growth in emissions from this one sector.

Tactics included tallying up carbon emissions, benchmarking the dirtiness of crudes from around the globe against those from Northern Alberta, and forecasting the total expected footprint of oil sands on globally significant watersheds and migratory birds. Environmental groups began drawing attention to the ever-growing risks posed by seepage from or the complete failure of tailings ponds, which are held in place by some of the largest earthworks dams in the world.

These groups intervened in regulatory review processes on a project-by-project basis. As part of these interventions, they would try to widen the set of environmental aspects under consideration and force assessment of the cumulative effects of development. They would also work to ratchet up environmental performance obligations in the operating permits sought by companies. This led to costly delays for project proponents.

Other groups targeted national and global public opinion. They engaged in street-level protests, including media-friendly direct actions like street theatre and costumed sit-ins. Some conducted commando-like raids into the oil sands projects themselves, where activists scaled oilsands infrastructure to unfurl massive banners for aerial photographers.

These efforts kept the environmental risks posed by oil sands projects in the public spotlight, but offered only modest returns. Public reviews, for example, did not result in a single project being denied permission to proceed. Groups continued to engage diligently with the scientific community, forecasting that cumulative environmental impacts would surpass regional statutory limits and accelerate the decline of ‘at-risk’ species. But these findings were insufficient to drive rejection of individual projects. Yes, intervenors could delay projects, dent economics, and ratchet up regulations over time, but they were unable to curb the appetite for new oil sands projects as crude prices continued to climb.

The coming tide of bitumen meant that a vast network of oil sands export pipelines, including Keystone XL, and a significant retooling of the U.S. refinery fleet would be needed. This set off alarms. The price tag for this enabling infrastructure was estimated to be a staggering $379 billion (U.S.). Environmental groups and their advisors became increasingly concerned that, once built, this huge capital outlay would lock North America into a high-carbon trajectory for generations to come.

This is when activists began to innovate: Rather than target the heart, go after the veins and arteries that keep it pumping.

Increasingly, environmental groups began to target the various paths the oil sands relied on to access markets and capital. An example was opposition to BP’s planned retooling of the Whiting Refinery in Illinois. Due in part to sustained campaign pressure, the project was caught up in three years of regulatory reviews and incurred a reported $1 billion (U.S.) in additional costs. Advocacy groups also supported a set of legislative measures in the U.S. and EU aimed at establishing lifecycle-based fuel standards. The standards would penalize crude imports with a disproportionate upstream carbon footprint, making lower-emission alternatives more favoured in the marketplace.

On the financial side, environmental groups began to publicly link banks and other investors directly to the oil sands and their associated environmental and social impacts. The goal was to increase the cost of capital for oil sands and related pipeline projects, by elevating the reputational risks to the banks, and by forcing these financial supporters to scrutinize risks with more vigour. In one famous example, activists unfurled a two-storey banner in front of RBC Financial Group’s head office and urged the wife of RBC’s chief executive to talk to her husband about the bank’s oil sands investments.

In 2010, the U.S. Senate killed the national carbon cap-and-trade bill, which had been the focus of the U.S. environmental community. With cap-and-trade all but dead in the U.S., environmentalists started looking for a winnable fight. Emerging analysis suggested that it would be necessary to keep 80 per cent of the known reserves of oil, gas and coal in the ground to stop dangerous climate change. It was this “terrifying new math,” as described by journalist and activist Bill McKibbin in the pages of Rolling Stone magazine, that motivated him to convene what has since become the largest series of popular environmental protests to date, starting with a mass rally and arrest in DC targeting the State Department’s Keystone XL review in 2011.

Pinpointing pipelines

When it comes to pipelines, there are many distinct entry points for determined monkey wrenchers. Because pipelines impact many landowners, each with potentially diverging concerns regarding safety, environment and commercial arrangements, a pipeline like Keystone XL offers multiple avenues for opposition.

The specific battle over the Keystone XL pipeline would be fought in at least four distinct domains:

A first battleground was over risks to the safety and local environment of those landowners and communities that would have a pipeline put in their backyard. By 2011, a plague of well-publicized pipeline spills and leaks had undermined U.S. public trust in pipelines, and in particular in Canadian pipeline companies trafficking in oil sands. TransCanada’s peer, Enbridge, was the owner of the pipeline which in 2010 released bitumen into the Kalamazoo River, becoming infamous for the most expensive onshore spill in U.S. history and what an independent review labelled a “Keystone Kops” response. While it is perfectly true that pipeline safety and integrity is a high priority for oil transporters, and that 99.9995 per cent of liquid hydrocarbons transported by pipeline have been delivered safely over the last decade, no landowner or community on the route wants to be one of the .0005 per cent.

As a consequence, TransCanada found itself stymied by an unlikely alliance of conservative libertarians, local and national environmental activists in Nebraska. Together, they gummed up TransCanada’s efforts to secure a right of way through Nebraska’s Sand Hills region and over the sensitive Ogallala aquifer.

A second battleground was over the extent and allocation of economic benefits from the pipeline. Most oil projects, pipelines included, take massive manpower to build and little labour to actually to run. Keystone XL is forecast to create 1,950 construction jobs. Once complete, only 35 permanent American jobs will exist, according to TransCanada. Jobs not only factor into the economic wellbeing of a country, but they figure strongly in a time when economic disparities are the subject of elections.

As for the wider economic dividends, the oil transported to the Gulf Coast would be refined there. Much would be consumed in the U.S., which could lower the U.S. consumer prices at the pumps – somewhat. Outside of property tax paid by TransCanada, the economic activity, taxes and jobs associated with the operation of the pipeline would be localized to refineries on the Gulf Coast. But the lion’s share of the benefits would arguably go to the oil sands producers back in Alberta.

As President Obama would say in late 2014: “I think there has been this tendency to really hype this thing as some magic formula to what ails the U.S. economy and it is hard to see on paper where they are getting that information from. It’s very good for Canadian oil companies, and it’s good for the Canadian oil industry but … it’s not even going to be a nominal benefit to U.S. consumers.”

A third battleground is politics. For Republicans, Keystone is a ‘wedge’ issue that pits organized labour against environmentalists, thus weakening the Democrats.  The Republican position is that the pipeline as an engine of economic growth (tweeting about the #KeystoneXLJobs bill, for example) and, by opposing it, the Obama Administration is opposing job creation at a time of high unemployment. On the other side, Democrats use the threat of approval of the pipeline by Republicans to mobilize pro-climate voters.

The final battleground is environmental. Keystone’s direct environmental impacts, assuming no spills or leaks, are pretty similar to that of the thousands of kilometres of other large pipelines running throughout North America. So when advocates against Keystone talk about the environment they are actually drawing attention to the full lifecycle of a barrel of oil, from the decline of Caribou in Alberta’s boreal forests to the greenhouse gases associated with driving a car.

This position has been criticized loudly and repeatedly. Win or lose, Keystone XL proponents argue, the pipeline won’t in itself materially change global carbon emissions. On this front they paint protesters as being misguided. Yet this criticism may betray a misunderstanding of the catalyzing power of the oil sands and its relationship to this pipeline. As a senior journalist from Time magazine put it, questioning activists in their choice of Keystone XL as a target is like telling Rosa Parks that it was wrong to go after the Montgomery, Alabama, bus system in the larger fight against racial segregation .

It’s a position Bill McKibben also holds. “This pipeline,” McKibben has said, “won’t by itself kill the climate.” Rather, the goal is to send a clear message that it’s time to stop exploitation of unconventional fossil fuels. “This is the clearest place to make the fight,” he said.

(Click here for part three.  In the final story of this three-part series, we ask whether reports of Keystone XL’s death have been greatly exaggerated, and consider the potential of Alberta’s oil sands to become a laboratory for transformational change, in Canada and around the globe.)

About the authors: Dan Zilnik (dzilnik[@]ogsustainability.com) is president of Oil & Gas Sustainability Ltd., a Calgary-based consultancy. Jason Switzer has been on an extended leave of absence since January 2015, prior to which he was co-director of the Pembina Institute’s consulting team.

The post Deconstructing Keystone XL appeared first on Corporate Knights.

(The talk around Washington, D.C., these days is that U.S. President Barack Obama will soon issue his final rejection of the controversial Keystone XL pipeline project, possibly as early as this month. For environmentalists, the seven-year battle over the Keystone expansion has been a proxy for their larger war against the oil sands, which has become a symbol of climate destruction. For Alberta, it is considered an enabler of oil sands growth – a way to get more of its product to market. How did Keystone XL come to be such a lightning rod? Below is the first of a three-part series on the rapid rise and fall of Keystone XL, and what it means for the future of Canada’s oil sands sector and the global fight against climate change.)

Onlookers must have been astonished when the world’s largest mining truck took up residence on the Washington Mall, a stone’s throw from the U.S. Congress. Half the height of the White House, the truck could comfortably fit an entire mid-sized car inside each wheel.

This mine truck, parked in downtown Washington in the summer of 2006, was a triumph of political salesmanship by Ralph Klein, a populist pro-business politician who was then premier of Alberta.

Klein had watched trucks exactly like this one many times before, usually in the company of foreign dignitaries and magnates as they toured oil deposits near Fort McMurray. The premier was used to the size, scale and shape of the trucks. He had seen dozens of them in tandem motion, as, one at a time, they would accept staggering shovel loads of sticky black bitumen mixed with sand, and drive their 300 to 400 tonne payloads out of man-made canyons to dump the bitumen into a gigantic centrifuge.

In his time as premier, Klein had seen the enormous tailings pools in the north of his province fill with a mixture of water, sand, oils and clay. He had witnessed the high-temperature alchemy that transformed the tarry bitumen into some of the world’s lightest and sweetest crude, along with the denser mixes of “dilbit,” “synbit” and a host of other products broadly called oil sands. More than anyone, he knew the royalty potential of the oil sands, the jobs and the opportunities they meant for Canada, the U.S., and especially Alberta. If only more investors would come. If only the markets could be secured.

The truck was part of a larger plan.

The Smithsonian Institute, a custodian of American cultural history and treasures, hosts an annual Folklife Festival that brings attention to various domestic and international topics. The Klein government had secured a spotlight for Alberta within this cultural festival. It was an avenue for sharing the province’s diverse cultural traditions, First Nations and spectacular landscapes.

The festival was also a forum for simultaneously putting Alberta’s oil sands in front of the captains of American government and industry. Back then, the potential of the oil sands may have been known to energy insiders, but for the general U.S. public it was completely off the map. Klein planned to change that.

It was the height of the Iraq War and D.C. was dominated by Texans. Klein’s goal was to get the message out that Alberta and its oil sands were ‘open for business’. He called upon U.S. business leaders and politicians to look to their friendly neighbour to the north for energy security. He presented the oil sands as a symbol of the special relationship between Canada and the United States. He pointed to the massive mine truck as an embodiment both of the scale of the potential resource in play and the innovation needed to unlock it.

What Klein did not expect is that this same heavy hauler would spark a call to arms for what has become the most significant battle between environmental groups and the fossil-fuel industry this decade: the battle over the Keystone XL pipeline.

Nearly a decade later, in February 2015, U.S. President Barack Obama would personally veto a bilateral bill to approve the Keystone XL pipeline. That a sitting U.S. president would directly engage in an infrastructure decision is surprising. That he would come out against it in opposition to some members of his own party – not to mention the personal appeals of Canada’s prime minister – is astonishing.

Some activists are already declaring victory. After the veto, Greenpeace U.S. executive director Annie Leonard noted that all President Obama needs to do now is instruct the State Department to “put the final nail in the coffin of Keystone XL.” With oil worth half what it was a year ago, Keystone’s importance to the growth in the Canadian oil sands industry has grown even as the case for it has been eroded by a glut of U.S. shale oil.

A shadow of fear can now be felt in Alberta: could the oil sands’ moment have come and gone? Is there any way to reconcile the imperative for curbing global greenhouse gas emissions with continued development of Canada’s oil sands?

Pundits speak in knowing terms of how the Keystone XL pipeline decision will profoundly change both the oil sands and the environmental community. The reality is that it already has.

From “no dice” to “no brainer”

Near the close of the 20th century the oil sands were known in the industry as a sure place to find oil, and to lose money.

This began to change when “supermajor” Shell announced in 1999 that it would move forward on the first new oil sands mine in 20 years. At the time, two mines and one steam injection project collectively produced about 700,000 barrels a day of crude oil, dwarfed by conventional production from the rest of Canada. Regardless of the vast scale of the resource, no one was beating a path to Northern Alberta.

Shell itself had twice sent its project back to the drawing board. Concerns included the big upfront investment with uncertain returns, and the potential negative reaction from environmentalists over the project’s greenhouse gas emissions. In context these concerns make sense. At the time, oil prices were at about $10 per barrel in today’s dollars, and some thought it could fall to as little as half of that.  Natural gas, which is the main input for separating oil from the sands, was about twice as expensive as today. At the time, the world appeared poised to make firm commitments on carbon, with the European governments set to launch an international emissions trading system in 2005. Shell’s play was high risk, and everyone on the project team knew it.

What motivated Shell to take the risk was a contrarian insight: the oil sands’ business case is the opposite to the oil production business case in almost every other part of the world.

Most of the world’s remaining recoverable oil lies in inhospitable environments (e.g. deep under the ice and waters of the Arctic) where drilling an accurate hole into a known reservoir is next to impossible. Or the oil is in countries where major publicly traded petro-companies are unwelcome. Big international oil companies bring technical expertise and financing, but also potentially unwelcome transparency to regions where oil production is expected to benefit the monarchy first, not the shareholder. In the few situations where independent oil companies are allowed to operate, they usually only get a “postage stamp” fee of a few dollars a barrel for delivering oil from the ground to a local refinery or port. Reducing costs, in other words, does not mean making more money, and technology investment is a low priority. On top of this, investments are subject to the whims of national and family politics.

In contrast, Alberta’s oil sands are a vast and well-delineated resource with virtually no ‘dry holes’. With its stable democratic government, independent judiciary, and transparent tax regime, Alberta has little of the political uncertainty that marks many other possible opportunities. This makes oil sands a sure bet to balance riskier plays in a portfolio.

What distinguishes the best oil sands projects from the worst is the quality of the sands acquired for development, and the execution of the project to extract the bitumen, with its combination of financing, technology, management and refining strategy. This favours deep-pocketed, sophisticated companies over small debt-leveraged entrepreneurs, or lumbering politically motivated state behemoths. And the technology upside in the oil sands is tremendous. If you can figure out a way of getting oil out of the oil sands more cheaply, you keep every dollar of that cost difference.

Despite these attractions, a series of technological and financial innovations were needed before Shell and others would come to the table with the necessary megascale investments. This is where the Alberta government showed more foresight and gumption than its international peers.

In 1974, the province established an arm’s-length organization called the Alberta Oilsands Technology and Research Authority (AOSTRA) to develop technology for getting oil sands out of the ground and transforming them into valuable products.  AOSTRA has become the stuff of legends. It is often, and rightly, applauded for being a model of industry-government collaboration. The keys to its success included its political support, its independence and its single-minded focus on advancing the oil sands.

Unlike the large oil companies who spread their research dollars across many opportunities, AOSTRA had the single goal of making the oil sands viable, with the aim of generating jobs and royalties in Alberta. As a consequence, AOSTRA could go it alone and invest when companies would not. This marriage of industry, politicians and academics allowed the organization to toil for well over 10 years spending the equivalent of over $1 billion in today’s money from the public purse, considerably more if contributions-in-kind from industry are tallied up.

AOSTRA developed many of today’s dominant oil sands production technologies, including the in-situ thermal process for recovering resources too deep to mine. AOSTRA also had a direct voice in all policy discussions: it was required to have one board member as a sitting member of the Alberta legislature, while the other directors had extensive industry and academic experience.

Catching a fever

Advancing the technology was necessary but not sufficient. To make the oil sands economically attractive, a new fiscal regime would be required to balance the interests of Albertans with the need to overcome the cost barrier and uncertainty associated with deploying these novel technologies.

In 1993, the Alberta Chamber of Resources convened the industry- and government-represented National Oilsands Task Force to draft such a framework. Its 1995 report set out a 25-year game plan for growing the sector to a then-ambitious 1.2 million barrels per day of production by 2020. This would be done through a generous royalty regime and favourable federal and provincial tax breaks, which were adopted in 1997. While the original SAGD (steam-assisted gravity drainage) patent was awarded in 1969, the implementation of these incentives were likely helpful in enabling its first commercial deployment 27 years later.

Even with this technological and fiscal support, many thought Shell’s oil sands mine would be a bomb.

But by 2002 oil prices began a steep climb, led by China’s dizzying growth, while a couple years later natural gas prices began to fall. By the time Shell’s project got over its initial hiccups, Shell and its partners were well in the money, and oil companies from around the world started piling in.

Under pressure from Alberta’s leadership, the U.S. Energy Information Administration and the influential Oil and Gas Journal reclassified the quantity of economically recoverable bitumen in 2003. With a stroke of a pen Canada’s oil sands became the second-largest single reserve in the world next to Saudi Arabia.

The result is that Premier Klein’s oil sands message started gaining significant traction in the investment community. Between 2006 and 2008, global markets and world oil prices continued their dizzying rise, and each week brought new dollars to Canadian oil-sands projects. Production from the oil sands was forecast to grow from roughly 1.2 million barrels per day to about three million by 2015. Some suggested that on the back of the oil sands, Canada could eventually meet 40 per cent of U.S. oil import demand.

From about 2000 through to the financial crisis of 2008, oil sands fever was a reality.

A roster of blue chip projects waited in line to produce from the oil sands. With that in mind, TransCanada was being sensible when in 2008 it proposed a dramatic expansion of its existing Keystone pipeline to the Gulf Coast. Its refiners increasingly needed to buy Canadian bitumen, and the Midwest was becoming oversupplied.

It’s important to note that refineries are designed to operate on a narrow diet – a specific mix of inputs with limited variance, which are converted into a slate of products: mostly gasoline, diesel and jet fuel. Many of the refineries in North America are built for heavy oil such as the oil produced in Canada’s oil sands, in Venezuela, or in Mexico. But a combination of political intervention and state sponsored mismanagement meant that production in both of the Latin American countries was becoming increasingly unreliable. The refineries were willing to pay a significantly better price for Canadian heavy oil, if they could get it. The only bottleneck was limited pipeline capacity. At the same time, light oil production from the U.S. was growing quickly, and infrastructure to move this was simply unavailable. By expanding Keystone to carry both light and heavy oil, a lot of backs would get scratched.

It was no wonder then that in 2011, hailing Canada’s rise as an emerging “energy superpower,” Prime Minister Steven Harper called the approval of Keystone XL by the U.S. State Department a “no-brainer”.

But the decision over the Keystone XL pipeline would become the victim of the oil sands’ unanticipated success. Through an unmatched advocacy effort, Klein had successfully elevated Alberta’s bitumen deposits to international significance. At the same time, this escalation had brought with it an equal and opposite reaction from environmentalists.

Instead of being viewed as the answer to U.S. dependence on Middle East oil, the oil sands would increasingly be framed in the public debate as a looming environmental tragedy. Keystone XL was characterized as its enabler, resulting in unprecedented opposition against its construction.

(Click here for Part 2: the story of that opposition, and how environmentalists transformed a routine infrastructure decision between the two most-closely integrated economies in the world into a referendum on climate change.)

About the authors: Dan Zilnik (dzilnik[@]ogsustainability.com) is president of Oil & Gas Sustainability Ltd., a Calgary-based consultancy. Jason Switzer is on an extended leave of absence since January 2015, prior to which he was co-director of the Pembina Institute’s consulting team.

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