Economic analysis

One hurdle cleared, many to go for Northern Gateway

Expect a Supreme Court challenge before the sod is ever turned on this pipeline

Darryl Dyck/CP

As most observers expected, the joint National Energy Board and Canadian Environmental Assessment Act review panel approved Enbridge’s Northern Gateway project, subject to 209 conditions. Enbridge Northern Gateway President John Carruthers called these conditions tough on a conference call late this afternoon, but reminded listeners that many reflect, “recommendations and proposals made by and committed to by Northern Gateway during the Joint Review Panel process.” He tentatively stated that he did not see any which would be insurmountable.  Enbridge CEO Al Monaco stated that Enbridge was happy, but not celebrating.

The Northern Gateway project consists of two pipelines (one to ship oil west, the other to import lighter oil products used to dilute oil sands bitumen) and a marine terminal.  The project, if built, would ship 525,000 barrels per day of oil to the Port of Kitimat for export, and would allow the return of 193,000 barrels per day of diluent.

Today’s ruling does not represent a green light for the project, as UBC’s George Hoberg points out in a great blog post on the process ahead. The next step in the process is the approval of the federal cabinet, which must come within 6 months.  As Hoberg points out, the cabinet does not have the power to amend the conditions attached to the approval, although they may ask the review panel to reconsider certain aspects.

A parallel process to cabinet approval will be the ongoing consultation with First Nations in BC and Alberta.  Enbridge has been able to negotiate equity agreements with some First Nations along the route, but it’s not yet clear how many.  The duty to consult with First Nations resides with the Federal government – as Chief Justice McLachlin wrote in the 2004 Haida Nation v. British Columbia [2004] decision of the Supreme Court, “the ultimate legal responsibility for consultation and accommodation rests with the Crown.”  The degree to which this project has appropriately consulted with and accommodated  the interests of First Nations will almost certainly be the subject of a Supreme Court challenge before the first sod is ever turned on this pipeline.

Another hurdle for Enbridge is the development of firm shipping arrangements (basically subscriptions for shipping services) with equity partners and shippers. One of the Panel’s conditions is that Enbridge must have firm take-or-pay style agreements sufficient to cover 60% of the pipeline’s capacity before construction may begin.  Given the projected growth in the oil sands, this might seem like a sure thing but it’s not.  Firms will not want to sign firm shipping agreements unless they feel there is a reasonable possibility the project will be completed on time and on budget.

Also on the table are BC Premier Christy Clark’s 5 conditions, the first of which will be satisfied once the project is issued its final permit by the National Energy Board.  The most contentious of these is the fifth; that BC receive a fair share of the economic benefits of the pipeline. Despite signing a truce last month, Alberta and BC have agreed that any additional economic benefits to be provided to BC would have to be provided by the shippers or by Enbridge, not by Alberta directly.  Given that the economic benefits of the pipelines are, for the most part, due to an induced increase in the price of oil, the lion’s share of these accrue to the Alberta government and to firms operating in Alberta.  Whether this condition can be satisfied, or whether the federal cabinet will be willing to push for a pipeline over the wishes of the government of BC remains to be seen.  Watch for developments on this front with respect to David Black’s Kitimat Clean Refinery, which may be well positioned to offer BC what it wants, while allowing Alberta to not appear to be directly compensating BC for oil transit.

Some of the conditions imposed by the Panel are very interesting.  At first glance, the one most likely to generate controversy relates to oil spill liability. The panel, “requires the company to maintain insurance and other financial resources totaling $950 million.”  The panel based this recommendation on the projected costs to clean up a 31,500 barrel spill.  This number seems low given Enbridge’s recent experience spending over $1 billion to clean up a 20,000 barrel spill in Michigan. This is important in the context of Northern Gateway, which is not an Enbridge asset but rather an equity partnership.  The degree to which partners would or could be held liable for spill damages beyond this cap will certainly be a topic of discussion in the days and weeks to come.

The potential impacts of a spill remain in dispute in the report. One of the key issues is whether diluted bitumen sinks.  The EPA found that, of the 20,000 barrels spilled in Michigan, approximately 4000 barrels of oil remain trapped in river sediment, so clearly it can sink. The Joint Review Panel was not as definitiive – it found that, “further scientific research would be needed for definitive answers,” and has required the Northern Gateway to complete that work.

The Panel found that, “the likelihood of significant adverse environmental effects resulting from project malfunctions or accidents is very low,”  but they did allow that a spill would involve significant adverse environmental effects. However, in what will be a controversial statement, they found that, “a large oil spill would not cause permanent, widespread damage to the environment.”  They did allow that such a spill would bring, “adverse effects on lands, waters, or resources used by residents, communities, and Aboriginal groups.”

What will also be an issue, potentially for legal appeal, is what the Joint Review Panel didn’t consider: the impacts of oil sands development.  The Panel excluded any discussion of the environmental impacts of oil sands development, although they did allow the consideration of increased oil prices generated by the pipeline on the taxes and royalties associated with forecast future oil sands production. This asymmetry was the subject of a challenge during the panel process, and may be the subject of future challenges to the legitimacy of the panel’s findings.

Today’s decision, while not a surprise by any means, still leaves Northern Gateway a long way from shipping oil.

Disclosure: The author holds the Enbridge Professorship at the Alberta School of Business at the University of Alberta and is also an Enbridge shareholder. You can get more details on both here.

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