Oil & Gas

Safety and environmental concerns put pipeline operators in the crosshairs

Rising oilsands production, combined with a need to develop new markets for natural gas, is leading to a new wave of proposed pipeline construction in Canada and the United States.

A spate of pipeline leaks and fierce opposition to the export infrastructure from environmentalists and First Nations, however, are making it difficult to move forward on any of the projects.

Oilsands production in northeastern Alberta is expected to reach three million barrels per day by 2020, according to the latest Canadian Association of Petroleum Producers forecast. Total Canadian crude oil production is predicted to reach 4.2 million barrels per day.

That is, if the country can find markets for the growing production. As it stands, Canadian oil and growing production from the Bakken play in North Dakota and Montana is creating a massive bottleneck at Cushing, Okla. In mid-July, that bottleneck resulted in West Texas Intermediate crude trading at a $22-per-barrel discount compared to world prices. With Canada currently producing 2.5 million barrels per day, this discount is costing $55 million per day.

The natural gas industry is also facing issues in finding markets for production. The shale gas revolution in the United States has severely limited demand south of the border, just at the time when the revolution has taken hold here in Canada. New export markets are needed for the industry to grow.

Keystone concerns

There are a number of proposed pipeline megaprojects to move growing oilsands production to market. The furthest ahead is TransCanada's Keystone XL project. The 2,673-kilometre, 36-inch crude oil pipeline would begin at Hardisty, Alta., and extend southeast through Saskatchewan, Montana, South Dakota and Nebraska, incorporating a portion of the existing Keystone pipeline through Nebraska and Kansas before continuing to Texas. It would allow for 500,000 barrels per day to be shipped to markets on the Gulf Coast.

The U.S. government has been dragging its feet on making a decision on whether it should go forward. Initial opposition to the line came from environmentalists and landowners worried about the environmental impacts of the oilsands and concerns about the effects a leak would have on the Ogallala Aquifer, a massive shallow underground reservoir that provides water for much of the U.S. breadbasket. But with Enbridge's major oil leak from a pipeline in Minnesota last year, and a rash of smaller leaks on the existing Keystone line, the debate has now shifted to focus on whether bitumen from the oilsands carries greater risk for pipeline safety.

In July, U.S. congressman Henry Waxman asked regulators to examine whether oilsands crude is more corrosive to pipelines than traditional sources, making them more likely to spring leaks. Speaking to the Energy and Commerce committee, Waxman said he was concerned pipeline safety regulations didn't reflect the changing composition of crude imports.

"I'm concerned that the industry is changing, but the safety regulations are not keeping up with the changes," he said. "That could be a recipe for disaster down the road."

Anthony Swift of the Natural Resources Defense Council echoed Waxman's comments.

"It is in the public's best interest for our pipeline safety for regulators to evaluate the risks that high volumes of heavy, corrosive and abrasive crude, such as diluted bitumen, will have on the U.S. pipeline," Swift said at the committee meeting.

Gateway blocked

Enbridge is also meeting stiff opposition for its Northern Gateway project. The proposed $5.5-billion project would deliver 525,000 barrels per day of oilsands production to the port of Kitimat, B.C., where it would be loaded into large crude tankers bound for Asian markets. A parallel pipeline would deliver imported condensate to Alberta for use in the oilsands.

Enbridge president and chief executive officer Pat Daniel said at a recent speech to the Empire Club in Toronto that there are distinct disadvantages to relying solely on U.S. markets for the country's oil exports. He said with only one market, Canadian producers are price takers.

"The United States likes—perhaps even prefers—Canadian oil. It is secure and reliable," said Daniel. "But they have other options. A world of global energy options. We don't."

Building the pipeline would give Canadian industry new options by opening up global markets to Canadian supply, he said.

"Canada's west coast is the gateway to half the globe's geography and nearly half of the world's population," he said. "It is an essential driver of our future economic success."

Enbridge is making a strong economic argument in favour of the Northern Gateway. According to independent estimates, over the duration of 30 years the project will add $270 billion to Canada's gross domestic product—about one-fifth of Canada's total economic output in one year.

"It is literally a transformative injection of new economic opportunity to Canadians for a generation," said Daniel.

But opposition to the Northern Gateway is equally strong. Many First Nations along the pipeline route have banded together with environmental groups in a well-organized campaign attacking Enbridge. Both the federal Liberal and New Democrat parties support a ban on tanker traffic in coastal waters, which would kill the project as well.

Daniel said those opposing the line need a dose of reality.

"The project will proceed only if we can rise above the mounting clamour of a coalition of hard-line activists and their political allies committed to saying no to proposed projects and initiatives rather than seeking balanced, sustainable development and supporting continued prosperity for our entire country," he said. "We say no to nuclear, we say no to coal, we say no to oil, we say no to fracturing wells to recover natural gas, but we say yes to light switches, cooked food, school buses and gas pedals."

Inflection point

The Canadian Energy Pipeline Association (CEPA) says the greater environmental and regulatory demands being put on industry are making it very difficult to move new projects forward.

"This is an inflection point in our history," Brenda Kenny, president and chief executive officer of CEPA, told the Insight Information North American pipeline forum. "When you look at regulatory options, aboriginal consultation, environmental stewardship, I think that 10 years from now we will either be living in a world that is collaborative, effective and progressive or a world that is defensive, litigious and very much more painful to manoeuvre in, either as a company or as a consumer."

CEPA members transport virtually all of the crude oil and natural gas produced and used in Canada and that fact has not gone unnoticed by some of the opponents of oil and gas, whether they are motivated by a vision of off-oil and zero emission energy or by a mistrust of large corporate undertakings, said Kenny.

"We need to win the day on avoiding getting flipped into a defensive culture of fear," she said. "We need to be responsible, direct and clear that we are the ones who hold the keys to the best possible solutions and it's time that we stepped up and demonstrated that that's what we're about."

In her presentation, Kenny said the environmental assessment is migrating from a planning tool and an effective way to vet projects at a reasonable level up to a "very elaborate, detailed gut-wrenching level of investment."

Companies have told her that, while they once budgeted about one per cent of the capital cost of a project to go through environmental assessment, that is now closer to five per cent, she said. With more than $100 billion in major resource projects on the books in Canada over the next five or six years, that would amount to $5 billion on environmental assessment.

The pipeline sector will be doing appropriate and detailed investments toward environmental protection, but $3 billion of that estimated total cost could be better spent on good environmental monitoring and regional environmental assessments, the tracking of populations such as woodland caribou and strategies for boreal forests, she suggested.

"We need to take a much more holistic, integrated approach to these things and these are absolutely central to business risk," said Kenny.

Kenny said environmental groups are currently hoping to put enough roadblocks in front of projects that eventually they become unviable.

"You've got a window of opportunity for a major development and if you miss that window you've got a problem. NGOs [non-government organizations] know that and that's their strategy. It's stall and delay to kill; you don't have to kill it outright," she explained.

The forum also heard a discussion of how pipeline companies can best approach the issue of aboriginal consultation on major projects.

"When we engage aboriginal communities, we do so from a position of respect, genuine interest and humility, recognizing that they are the local experts," said Jody Whitney, manager of aboriginal consultation and regulatory compliance for Enbridge Pipelines.

"Enbridge takes nothing for granted," she said. "We appreciate that, as project proponents, we are involving aboriginal communities in a process that they themselves have not initiated."

Companies need to be prepared to provide resources for that process, be willing to compromise and expect positive outcomes for both the project and the aboriginal community, she said.

Seed money for Birdtail

In her presentation, Whitney outlined how Enbridge, as part of its recent mainline expansion program, had initiated what she described as difficult discussions with the Birdtail Dakota Sioux, a non-treaty First Nation in southern Manitoba.

"They were not initially receptive to our proposal and in fact were extremely distrusting of corporate Calgary, and in this particular case of Enbridge, where we were proposing a major project through their territory," she said.

However, through its willingness to provide resources and support of the community's interest and willingness to compromise on process, Enbridge eventually earned the community's trust, said Whitney.

In retrospect, fundamental to the company's success was gaining an understanding through its research of who the true decision makers were in the community, she said

"It was in fact not until we gained the trust of the elders who subsequently directed chief and council to proceed in exploratory discussions with us that we made any successful inroads."

Enbridge looks to First Nations near its projects to guide the company on how it might provide sustainable and meaningful benefits in their communities. One initiative at Birdtail that Enbridge is especially proud of is the seed money it provided to a band-operated store, said Whitney. The initiative was not only sustainable, but it addressed a critical local need, she said.

The most important thing the company has learned over several years of experience in aboriginal engagement is that cookie-cutter approaches do not work, said Whitney.

"One size does not fit all. Recognize local community protocols and design suitable and innovative consultation programs to meet unique needs and interests."

It also is important for companies to conduct due diligence and research at the earliest opportunity to understand the aboriginal claimants' treaty and aboriginal rights in the area, said Heather Treacy, a partner at Fraser Milner Casgrain LLP. If there are rights, consultation should take place as early as possible in the planning stages and, if concerns are raised, the company should try to understand those and develop a relationship with the aboriginal group.

Providing accurate information to the potentially affected group as early as possible will assist it in identifying any of its rights. It's also important to ask the aboriginal group about their interests in the area, as there may be information about traditional land-use studies that will assist. "In some instances it may be appropriate to provide financial contributions towards expert assistance for the aboriginal group to understand the nature of the project."

While governments are responsible for consultation with aboriginal groups, their failure to do so also has consequences for pipeline companies if there is an order to carry out additional consultation, she said.

In another area, companies will be expected to deal with issues such as migratory birds and critical habitat when it comes to pipeline construction, said Dean Mutrie, vice-president of major projects for TERA Environmental Consultants.

For example, on its Alberta Clipper crude oil pipeline across the Saskatchewan prairies, Enbridge Pipelines spent more than $1 million studying a particular species of bird, he noted. A later study found that while the birds would avoid nesting on the pipeline right-of-way, actual construction did not affect the net survival rate within the setback distance.

Critical habitat is another big issue that still needs to be determined and a major issue will be boreal caribou, as they cover half of northern Canada, said Mutrie.

Companies can also work with aboriginal communities to integrate aboriginal traditional knowledge and traditional land use into their environmental assessments, he said.

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