The decision

Since day one as TransCanada’s new CEO in 2010, Russ Girling’s agenda has been dominated by the fate of the Keystone XL pipeline—a $7-billion shipping lane to move Alberta oilsands oil to Texas. Come autumn, it’s Hillary Clinton’s call
By Mark Anderson

Since day one as TransCanada’s new CEO in 2010, Russ Girling’s agenda has been dominated by the fate of the Keystone XL pipeline—a $7-billion shipping lane to move Alberta oilsands oil to Texas. Come autumn, it’s Hillary Clinton’s call

It’s either a golden opportunity or a fatal mistake. A bulwark against terrorism or state-sponsored eco-terrorism. The linchpin of the North American economy or the end of the world. It, of course, is the proposed Keystone XL pipeline, a $7-billion extension of TransCanada Corp.’s (TSX:TRP) massive Keystone Pipeline System which, if it gets built, would allow oil from Alberta’s tar sands to flow 3,200 kilometres to the massive Gulf Coast refineries of southern Texas.

It’s also the biggest challenge, and biggest opportunity, facing TransCanada’s freshman chief executive, 48-year-old Russ Girling, who took over the top job at Canada’s largest pipeline and power producer from Harold (Hal) Kvisle in July 2010, upon Kvisle’s retirement. Not that Girling is exactly inexperienced: as president of TransCanada’s pipelines division since 2006, he was responsible for getting the first legs of the $13-billion Keystone project built on time and on budget.

Keystone XL, however, is proving to be a different animal entirely, a project that’s been massively politicized, constantly buffeted by external economic, environmental and geo-political forces, and features enough moving pieces to confound a chess master. Indeed, it seems to have been designed to test the youthful CEO’s political chops as much as his business acumen. If he can see it through to fruition—a final decision from U.S. Secretary of State Hillary Clinton is expected later this year—the 17-year TransCanada veteran will have established himself as a worthy successor to the legendary oilman Kvisle, named Canada’s Outstanding CEO of the Year in 2008.

To suggest Keystone XL is controversial would be a ludicrous understatement. Indeed, much to Girling’s frustration, the project has become ground zero in an ideological war between those who believe the continued development of the oilsands is the best way to ensure North America’s energy security and economic well-being, and those who believe Keystone XL and its 500,000- barrel-per-day payload of Alberta bitumen represent nothing less than environmental Armageddon.

In pursuing the project, TransCanada, Girling and the company’s board knew they would be in for a rough ride. As a long-time nuclear power plant operator and pipeline builder, TransCanada was already in the crosshairs of environmental activists; Keystone couldn’t help but ratchet up the pressure. And yet the project is crucial to TransCanada’s ongoing growth and prosperity: if XL is completed as planned, the entire Keystone system will eventually represent 20% of TransCanada’s revenue.

But knowing what to expect in terms of opposition, and being able to effectively counter that opposition, are two different skills. And it’s the latter that’s been most aggressively tested in the countdown to a decision.

As befit the stakes, powerful lobbies have sprung up on either side, attempting to sway public and political opinion. The anti-pipeline forces are led by a coalition of environmental groups, including the Natural Resource Defence Council, Friends of the Earth, the Sierra Club, National Wildlife Federation and dozens of lesser known but influential national and regional outfits. Their combined membership numbers in the tens of millions, and they’re not alone. In March, 25 mayors of American cities registered their opposition to Keystone XL, citing climate and dependence on foreign oil. State legislators have also come out against the pipeline, particularly in Nebraska, where senators from both sides of the house, Republican and Democrat, have objected on the grounds that the massive Ogallala aquifer, a critical source of irrigation for farmers and drinking water for millions of American citizens, could be contaminated should the pipeline spring a leak.

And finally, there’s grassroots opposition from landowners in the path of the proposed pipeline. In order for the project to proceed, TransCanada has had to negotiate rights-of-way and easements with literally thousands of farmers, ranchers and rural landowners, some of whom have complained about bullying and heavy-handed tactics on the part of pipeline negotiators. Even the Tea Party has at times joined the fray, portraying it as an issue of individual property rights.

If there’s a single symbol of the complexity and contentiousness of Keystone, it could be that: the strange sight of Tea Partiers and tree huggers sitting down together and agreeing to oppose an oil pipeline—for entirely different reasons. “When you start impacting people’s land and water, everyone’s on the same page,” says Susan Casey-Lefkowitz, director of International Programs at the Natural Resource Defence Council (NRDC).

OK, not everyone. Because an equally powerful—and somewhat more homogeneous and single-minded—lobby has been cobbled together to support the pipeline. The Canadian Association of Petroleum Producers (CAPP) has thrown its considerable muscle behind Keystone XL, as has the American Petroleum Institute. Both the Canadian federal and Alberta provincial governments have been aggressively, even belligerently, lobbying on behalf of the pipeline at the highest levels in Washington. And just as Nebraska’s senators have both come out staunchly opposed to the project, Oklahoma’s senators, together with the state governor, have enthusiastically endorsed the pipeline—almost as if the duelling states have found another outlet for their legendary Sooners-Cornhuskers football rivalry.

Here’s the thing: if the debate were merely academic, a philosophical exercise, the oil would be flowing by now: after all, when has environmental activism actually succeeded in idling bulldozers, especially on a project as massive and capital-intensive as Keystone? But because the pipeline crosses the Canada-U.S. border and therefore requires regulatory approval from the U.S. State Department, the decision is loaded. In the process of pondering thumbs up or thumbs down, Secretary of State Clinton is also gauging voter appetite for tar sands crude in advance of a 2012 presidential election.

In April, The New York Times made that approval more difficult with an editorial sharply critical of Keystone XL on the grounds that the additional capacity is not needed, and the negative environmental impacts on both sides of the Canada-U.S. border can’t be justified.

Among its litany of objections, the editorial flagged the strip-mining of Alberta’s boreal forest, the highly corrosive nature of diluted bitumen on pipeline steel, the disastrous consequences of a spill in Nebraska over the Ogallala aquifer, and the carbon-intensive process of turning bitumen into oil.

Back at TransCanada’s Calgary headquarters, the Times editorial was received with a sigh, another setback to be born if not exactly in mute silence, then with practiced resignation.“We always hope for a balanced approach from the news media,”says Russ Girling, in an early morning April interview with Listed.“Unfortunately the Times didn’t phone us for our perspective, and the facts in their editorial were wrong.

“Our crude oil is no different from any other in terms of corrosiveness or danger. We pump it at 38 degrees Celsius, which is about body temperature, not the scalding hot 150 degrees [Fahrenheit] the editorial stated. There are already thousands of miles of pipeline running through the Ogallala aquifer, and ours, like the others, won’t have an impact on the water supply. In fact, Keystone XL will be far safer, since it’s built to higher standards, with 16,000 sensors on the system. If we detect even the smallest of leaks we’ll be able to shut it down and repair it almost immediately.”

It was all the more galling, then, that the Times editorially parroted the arguments of Keystone’s most strident opponents, and that the article seemed to have an immediate impact. Less than a week after its publication, President Obama, whom Prime Minister Stephen Harper had lobbied to support the pipeline as recently as a meeting in February, weighed in for the first time ever by saying: “These tar sands, there are some environmental questions about how destructive they are, potentially, what are the dangers there, and we’ve got to examine all those questions.”

University of Alberta economist Andrew Leach says he’s not surprised the Times piece resonated in Washington.“The Times is an opinion bellwether, but also an opinion maker with an incredible reach on a very negative story. It’s an indication that TransCanada and their allies aren’t doing a good enough job getting their message out to the American people.”

Replies Girling: “What can we do? We’ve answered all the questions. The facts are out there, but there’s not a lot we can do for those folks who aren’t interested in the facts.”

What he can do—and in fact has been doing with a considerable success—has been to work quietly behind the scenes to orchestrate political and industry support on both sides of the Canada-U.S. border, while keeping TransCanada, as much as possible, out of the public spotlight. In this way, just as Keystone has become a proxy for the debate over tar sands development, he’s been able to rely on provincial, federal and industry lobbyists to carry the fight to the environmentalists, to in effect become a proxy for TransCanada’s own corporate agenda and messaging.“He doesn’t want to answer accusations from the likes of the NRDC and Sierra Club directly, for fear of legitimizing these organizations and getting into a public pissing match,” says Morningstar analyst Avi Feinberg. “Far better to stay on message, keep repeating the mantra that Keystone creates jobs, is good for the economy, and is the safest, best way to ensure North America’s energy security.”

TransCanada is not a major tar sands producer. It doesn’t dig gaping holes in the boreal forest, nor create toxic tailing ponds. It doesn’t pollute the Athabasca River. Its environmental record is, if not spotless, relatively clean—better, at any rate, than rival pipeline builder Enbridge Inc. (TSX:ENB), which last year dumped almost a million gallons of tar sands crude into the Kalamazoo River when its Michigan pipeline ruptured.

U.S. regulatory approval for Keystone Phase I, which crosses into the U.S. at the Manitoba-North Dakota border, was granted by the Bush administration in 2008 as a matter of course. Opposition from environmental groups at the time was muted. Phase I, from Hardisty, Alta., to Steele City, Neb., and Wood River/Patoka Ill., has been operational since June of 2010; Phase II, from Steele City to Cushing, Okla., has been operational since February of this year. Other than a handful of minor leaks that TransCanada quickly identified and repaired, as recently as early May, the project has gone remark-able smoothly, a triumph of engineering and logistical management on a truly colossal scale.

Among environmentalists, TransCanada isn’t even the most reviled of the pipeline carriers: it was Enbridge, rather than TransCanada, that was recently dubbed “King Carbon” because of its role in transporting so-called dirty oil.

So why is Keystone XL getting such a rough ride from the environmental lobby? One answer lies in the fact that Keystone XL isn’t just another pipeline. “Environmental organizations have identified it as a game-changer,” says Ryan Salmon, the National Wildlife Federation’s energy policy adviser.“It gives tar sands producers access to the Gulf Coast refineries and deep-water ports. It allows the Canadian producers to access the international markets.”

Or, as Alberta Energy Minister Ron Liepert noted in April, in an unusually bald assessment of the future of the oilsands industry,“We know what our production’s going to be by 2020 (close to four million barrels a day, according to the Canadian Association of Petroleum Producers, up from just over 1.5 million today) and if we don’t have either increased access to the U.S. Gulf Coast or a pipeline to the west coast of Canada, we’re going to be a province that’s landlocked in bitumen.”

Which, of course, is exactly what the environmental lobby is hoping for—an opportunity to choke the tar sands by denying it access to market.“In order to develop the tar sands at the rate they’re projecting, they’re going to need a way to get the oil out,” says Salmon.

Five years ago, it’s safe to say, few Americans had heard of the Alberta tar sands—fewer still were aware that America imported more oil from Canada than anywhere else, or that the sticky bitumen deposits around the Athabasca River represented the second largest oil reserve in the world (after the Saudi oilfields), with an estimated 315 billion recoverable barrels. Unfortunately for the oilsand majors, and by extension pipeline companies like TransCanada, that relative anonymity wouldn’t last. In April of 2008, 1,600 ducks landed on a Syncrude tailings pond, and promptly perished. The story made international headlines.

Never mind that 1,600 ducks represents a miniscule, entirely insignificant fraction of the tens of millions of migratory waterfowl that cross the Canada-U.S. border each year: the images of lifeless, sodden bodies being scooped from poison ponds became a key piece of collateral in what would soon become an all-out propaganda war, as environmental groups and clean energy advocates sought to vilify the tar sands as “the world’s dirtiest oil.”

Worse was to come. In March of 2009, National Geographic—circulation 50 million—published a 24-page article on the tar sands with the ominous title “Scraping Bottom.” The article opened with a three-page photo of pristine, lake-studded boreal forest (the “before” photo) followed by another three- page spread (the “after” shot) showing a devastated landscape of tailings ponds, gouged earth and “satanic mills.”

The article, predictably, sent shockwaves through the industry. When the environmental lobby immediately incorporated the images into anti-pipeline messaging, CAPP countered directly—president David Collyer authored a longish rebuttal on the organization’s website, pointing out, among other things, that National Geographic didn’t include any “after-after” photos, showing the 65-square-kilometres of oilsands land that has been reclaimed and returned to its natural state—and indirectly, through multi-million-dollar print and television ad campaigns touting new, greener extraction processes and reclamation technologies.

Throughout the rest of 2009 and into 2010, lobbying efforts on either side began to focus increasingly on Keystone XL—the so-called game-changer, the one project seen as critical to either facilitating the ongoing expansion of the oilsands, or starving it for lack of a market.

“It’s frustrating,” says Girling,“because TransCanada has a great record, and we’ve become the lightning rod for the development of the oilsands. We were supposed to start on XL right after the Nebraska to Oklahoma section was completed almost a year ago, and we’ve had to send all those people home because of delays in getting the regulatory approvals.” Those delays have eventually added $1 billion to the Keystone price tag.

The first delay came in July 2010, when the U.S. Environmental Protection Agency tore apart the State Department’s draft environmental review of Keystone, giving it the EPA’s lowest possible rating, in part because it didn’t address the impact of additional greenhouse gases Keystone would “generate” by facilitating expansion of the oilsands. Clinton responded by ordering a second, more expansive, environmental review, due in April of this year.

Back in Canada, the news must have landed like a fly in Russ Girling’s soup. Mere days into his tenure as TransCanada’s chief executive, he was now faced with a powerful American agency explicitly positioning Keystone XL as an agent of global warming, because of its role as an enabler and catalyst of oilsands development.

Girling’s response was telling: instead of attempting to address the charge on its merits, he liaised with the federal and Alberta governments to frame the issue as one of political interference. In September, in an interview with Maclean’s, he referenced the “push to extend the scope of the pipeline review beyond the U.S. border, upstream into Canadian jurisdiction,” calling it “obviously a question of Canadian sovereignty.”

A week later, on September 24, Alberta assistant deputy environment minister Ernie Hui wrote a letter to the EPA, essentially reiterating that position. “While we respect the intent of your input to this process, we also believe that the impacts occurring outside your jurisdiction” (i.e. Canadian greenhouse gas emissions) “are not substantive to the assessment of the pipeline,” Hui wrote.

That letter was followed by another from Canadian Ambassador to the U.S. Gary Doer to the EPA’s most senior official, Administrator Lisa Jackson, on the same themes, using the words “respect one another’s sovereignty.”

The EPA ultimately rebuffed both pleas.“Given that the possible consequences of greenhouse-gas emissions are global in nature, they include potential impacts on the United States, and we believe that it is appropriate that the State Department consider these upstream greenhouse-gas emissions in its evaluation,” Jackson wrote to Doer. With the State Department once again entertaining submissions from pro- and-anti-pipeline lobbyists, Girling decided to sidestep the environmental issue entirely, opting instead for some hardnosed realpolitik. “If the U.S. denies the pipeline, there will be no net environmental benefit to the planet,” he told Listed. “The oilsands will be developed either way. It’s the second-largest reserve in the world, and it’s going to be developed.”

The implied threat is that if Keystone XL is denied, Canada will find another way to get the oil out, namely, through pipelines to Canada’s Pacific Coast. Enbridge is advocating just such a move with its so-called Northern Gateway pipeline proposal, which would carry tar sands oil from Edmonton to a new marine terminal at Kitimat, B.C. If that were to happen, Alberta oil could end up in the Far East, rather than the Gulf Coast.

“If the tar sands are developed and the oil goes elsewhere, say to China, those environmental impacts will take place regardless of whether Keystone XL is built,” says Morningstar’s Feinberg.“It raises the question of whether the State Department should even be considering impacts of the extraction process on water and greenhouse gases, because the resource will likely be developed anyway, it’s not just going to sit there.”

The NRDC’s Casey-Lefkowitz calls that a “cheap bargaining chip,” noting that the Enbridge proposal is fraught with its own environmental issues and PR hurdles, and may never be approved. Be that as it may, Feinberg says that when it comes to tar sands crude, Canada’s message of “use it or lose it” is likely resonating in Washington.

Also resonating, he adds, is the message of job creation and economic impact on America’s moribund economy.“TransCanada estimates the pipeline will create 13,000 jobs, but a report put together by the Waco, Tex.-based Perryman Group for the U.S. department of energy says the spinoff effects could result in the creation of more than a half-million new jobs, and increase economic output by $64 billion. Granted, that’s just one report, but it’s data the State Department will be looking at.”

Indeed, it could be argued that TransCanada owes a debt of gratitude to the subprime mortgage lenders and Wall Street alchemists whose profound trashing of the American economy has helped shift public discourse and governmental priority away from the environment and toward job creation and economic stimulus.

That being the case, a second, larger bouquet of roses should be winging its way from Calgary to the people of Tunisia, whose revolution and ouster of President Ben Ali in December set in motion the popular “Arab spring” uprisings throughout North Africa and the Middle East. Because ever since then, “energy security” has become the mantra of anyone with any interest in seeing Keystone XL succeed. Girling admits as much: “In terms of energy security, events that have occurred in the Middle East highlight the choices that are available to the American people, which is to continue to rely on unstable non-North American regimes, and continue shipping money to those regimes, or to ally themselves with a friendly neighbour, Canada, whose values are the same as theirs.”

The State Department released its supplemental draft environmental impact statement on Keystone XL on April 15. It wasn’t Secretary Clinton’s final call on the project—that isn’t expected until October at the earliest—but a great deal of suspense surrounded the announcement as it was seen as a barometer of her department’s thinking. And so it was to Girling’s relief as well as that of his shareholders, and to the chagrin of XL’s opponents, that the department’s statement on Keystone XL effectively subsumed environmental considerations to America’s need for “stable and reliable” Canadian crude. The headline the next day in The Globe and Mail—“U.S. sets course to approve Keystone pipeline”—implied a fait accompli, triumph for TransCanada after an epic 30-month battle.

That said, opponents have kept up their fight. Officially, Clinton’s approval (or disapproval) isn’t due for another few months, and there’s still the wild card of a 2012 U.S. election to contend with.“The Obama administration is going to have to weigh how permitting a dirty oil pipeline is going to play with its base,” says NWF’s Salmon.

Still, there’s a gathering sense of closure on the file. In late April, Russ Girling presided over his first annual general meeting as CEO of TransCanada. Speaking to reporters after, Girling was challenged over the uncertainty of the Keystone XL decision. The markets, however, seem to be viewing the prospects more favourably. In the wake of the meeting and some sharply higher first quarter results, several research analysts who follow TransCanada all raised their earnings and share-price forecasts.

Says Girling:“I always worry that short-term politics can sometimes impact long-term public interest, but I don’t feel that way in this case. I think the facts are so compelling on a number of fronts that it’s in the short-term and long-term interests of the U.S. to approve the project. We haven’t won yet. It’s a lengthy and thorough process. But it looks now like there’s light at the end of the tunnel.”

Mark Anderson is a writer and editor based in Ottawa.

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