By
Rebecca Penty, Hugo Miller, Andrew Mayeda and Edward Greenspon
So you’re the Canadian oil
industry and you do what you think is a great thing by developing a mother lode
of heavy crude beneath the forests and muskeg of northern Alberta. The plan is
to send it clear to refineries on the U.S. Gulf Coast via a pipeline called
Keystone XL. Just a few years back, America desperately wanted that oil.
Then one day the politics get
sticky. In Nebraska, farmers don’t want the pipeline running through their
fields or over their water source. U.S. environmentalists invoke global warming
in protesting the project. President Barack
Obama keeps siding
with them, delaying and delaying approval. From the Canadian perspective,
Keystone has become a tractor mired in an interminably muddy
In this period of national
gloom comes an idea -- a crazy-sounding notion, or maybe, actually, an
epiphany. How about an all-Canadian route to liberate that oil sands crude from Alberta’s isolation and
America’s fickleness? Canada’s own environmental and aboriginal politics are
holding up a shorter and cheaper pipeline to the Pacific that would supply a
shipping portal to oil-thirsty Asia.
Instead, go east, all the way
to the Atlantic.
Thus was born Energy East, an
improbable pipeline that its backers say has a high probability of being built.
It will cost C$12 billion ($10.7 billion) and could be up and running by 2018.
Its 4,600-kilometer (2,858-mile) path, taking advantage of a vast length of
existing and underused natural gas pipeline, would wend through six provinces
and four time zones. It would be Keystone on steroids, more than twice as long
and carrying a third more crude.
Supertanker Access
Its end point, a refinery in
Saint John, New Brunswick, operated by a reclusive Canadian billionaire family,
would give Canada’s oil-sands crude supertanker access to the same Louisiana
and Texas refineries Keystone was meant to supply.
As well, Vladimir Putin’s
provocations in Ukraine are spurring interest in that oil from Europe and,
strange as it seems, Saint John provides among the fastest shipping times to
India of any oil port in North America.
Indian companies, having already sampled this crude, are interested in more.
That means oil-sands production for the first time would trade in more than
dribs and drabs on the international markets. With the U.S. virtually its only
buyer, the captive Canadians are subject to price discounts of as much as $43 a
barrel that cost Canada $20 billion a year.
And if you’re a fed-up
Canadian, like Prime Minister Stephen Harper,
there’s a bonus: Obama can’t do a single thing about it.
Done Deal
“The best way to get Keystone
XL built is to make it irrelevant,” said Frank McKenna, who served three terms
as premier of New Brunswick and was ambassador to the U.S. before becoming a
banker.
So confident is TransCanada
Corp., the chief backer of both Keystone and Energy East, of success that Alex
Pourbaix, the executive in charge, spoke of the cross-Canada line as virtually
a done deal.
“With one project,” Energy East
will give Alberta’s oil sands not only an outlet to “eastern Canadian markets
but to global markets,” said Pourbaix. “And we’ve done so at scale, with a 1.1
million barrel per day pipeline, which will go a long way to removing the
specter of those big differentials for many years to come.”
The project still faces
political hurdles. U.S. and international greens who hate Keystone may not like
this any better. In Quebec, where most new construction will occur, a homegrown
environmental movement is already asking tough questions.
Special Relationship
Still, if this end run around
the Keystone holdup comes to fruition, it would give a lift to Canadian oil and
government interests who feel they’re being played by Obama as he sweeps aside
a long understood “special relationship” between the world’s two biggest
trading partners to score political points with environmental supporters at
home.
It will also prove a blow to
the environmentalists who have made central to the anti-Keystone arguments the
concept that if Keystone can be stopped, most of that polluting heavy crude
will stay in the ground. “It’s always been clear that denying it or slowing
Keystone wasn’t going to stop the flow of Canadian oil,” said Michael Levi,
senior fellow for energy and environment at the Council
on Foreign Relations.
Keystone Delays
This Canada-only idea surfaced
in the days after Obama’s surprise Nov. 10, 2011, phone call informing Prime
Minister Harper that Keystone was on hold. Harper, who had vowed to turn his
nation into an energy superpower, responded with a two-track strategy: Get in
Obama’s face on Keystone and identify other ways out for Canada’s land-locked
oil sands, which, at 168 billion proven barrels, contain the third-largest
reserves in the world.
Keystone remains bogged down,
awaiting the outcome of litigation in Nebraska. Last year, Obama gave a speech
at Georgetown
University and
said he wouldn’t approve Keystone if it would significantly exacerbate carbon
dioxide emissions.
The pipeline to the Pacific,
known as Northern Gateway, looks
increasingly iffy due to opposition from aboriginal groups.
TransCanada is thus expected to
file an application to build Energy East with Canada’s National Energy Board in
the coming days, according to people familiar with the plan. Approval may come
in early 2016. “This is almost certainly the most important project TransCanada
has right now in our portfolio,” said Pourbaix.
Culture Shift
While Republicans continue to
make Keystone approval an issue of the mid-term congressional elections, its
fate has become less fraught for Canadians. Make no mistake –- they still want
it approved under the theory that oil sands reserves are so vast that it will
require multiple large pipelines to develop them properly. In the interim, they
have already begun to deploy alternatives to get Alberta oil to market, moving
160,000 barrels a day to the U.S. by rail.
Canada needs another oil export
pipeline by 2018 or output may be squeezed, Martin King, a
commodity analyst at FirstEnergy Capital Corp. in Calgary, said today in a
presentation.
“That’s crunch time,” King
said. “Supply growth in the oil sands is certain to 2020.”
‘Real Shift’
Reflecting this new
post-Keystone mood, Harper told a British business audience in September that
the U.S. “is unlikely to be a fast-growing economy for many years to come” and
after a hundred years of trying to maximize exports south, it’s time for “a
real shift in the mindset of Canadian business culture.”
Which is what Energy East
represents. Yet before it emerged as a standard bearer of this shift, it had to
survive a rough gestation. Harper himself was slow to warm to it. Others
declared it “stranger than science fiction.”
And then there were the mutual
suspicions of the oil producers of the west and the refiners of the east to
overcome. The inside story of how this developed into an unusually broad
political consensus was put together after interviews with more than 50
industry and government executives who have been in and around the often tense
negotiations.
No History
One initial difficulty: The
Calgary-based oil patch and New Brunswick’s Irving Oil Ltd., operators of
Canada’s largest refinery and 900 service stations in eastern Canada and New
England, had virtually no history with each other. Alberta oil had never flowed
farther than Montreal. They were petroleum potentates operating in separate
spheres who might as well have been in separate countries.
The Calgary crowd had a lot to
learn about the Irvings. Besides extensive Canadian holdings ranging from
timber to tissues and shipbuilding to radio stations, this clan of aw-shucks
billionaires from the poorest region of the country supplies 60 percent of the
gasoline in the greater Boston area. They are the fifth-largest private
landholder in the U.S., with tracts sufficient to cover four-fifths of
Delaware. Their fortune has been calculated by Bloomberg News at more than $10 billion.
Falling Out
For Arthur Irving, who gained
control of the family oil assets after a falling out among his brothers a few
years earlier, word that an eastward pipeline was afoot was a godsend. It held
out the promise of a career-capping crowning achievement, not to mention
long-term profits -– if only the oil executives from the west saw it his way.
They didn’t. Arthur Irving and
his company had quickly sown discord in Calgary with their steadfast resistance
to commit to take a set number of barrels from Energy East, according to people
with knowledge of the controversy. As far as the oil producers could discern,
Arthur wanted the option to take crude at will, as he had done for years in
picking the most favorable sources of foreign oil at a given moment. Before
they would entertain a decades-long arrangement, the producers insisted Irving
would have to put skin in the game.
Even more critical was the
terminal, from where much of the pipeline capacity would be exported. The
Irvings dominated traffic in and out of the port of Saint John. The Calgary
producers bristled that Irving was demanding too much money for putting their
crude “the last mile” through his sprawling facility.
More Sway
The oil drillers also worried
that Irving Oil, situated alone at the end of the line, would hold too much
sway over them. They wanted more than a single outlet. Many preferred stopping
the line in Quebec and exporting on smaller ships from there, cutting Irving
Oil out altogether, or at least reducing its leverage.
According to people close to
the talks who aren’t authorized to speak, Arthur Irving, in turn, was livid
that TransCanada, in a bid to pacify the producers, was weighing an export
terminal of its own -- right on his home turf. The Irvings depended on the port
like no other, loading and unloading about 400 ships a year. Arthur couldn’t
stomach the idea of outsiders operating there.
It was in that frame of mind
that on June 18, 2013, the then-82-year-old was in Toronto on business with
Paul Browning, the new Irving Oil chief executive officer. His frustration
burbling away, Irving decided he needed the assistance of one person.
Right Man
When they called that morning,
Frank McKenna was at his desk at the Toronto-Dominion Bank headquarters. Irving
and Browning hurried over. Irving had come to the right man. McKenna had staked
first claim as the project’s philosophical father. On Nov. 28, 18 days after
Obama’s call to Harper, McKenna -- stunned like many Canadians at the Keystone
delay -- floated the notion of going east in an op-ed in the National Post
newspaper. He liked the “nation building” politics of linking Alberta’s
prosperity to Atlantic Canada’s potential. “The Keystone XL delay has shocked
us,” he wrote. “Hopefully, it has also energized us.”
McKenna, vice chairman of TD,
began working the phones. With six years under his belt at Canada’s largest
bank and a board seat on one of Calgary’s most successful energy companies, he
knew the inner workings of Alberta’s oil patch almost as well as his native New
Brunswick. By evening, with advice gleaned from McKenna, Browning boarded a
flight to Calgary on a mission to put things back on track.
Shale Boom
Just as Obama’s delays on
Keystone was worrisome for the Canadians, so was America’s shale boom. Irving
Oil’s CEO at the time of Energy East’s conception, Mike Ashar, and
TransCanada’s Pourbaix could foresee the disruption pounding their businesses
and had even discussed the concept of shipping oil east.
Pourbaix had come to appreciate
that shale gas, by depressing prices, was discouraging new gas investment in
Alberta while the Marcellus and Utica formations in Pennsylvania could compete
to supply the lucrative Ontario market. Together, these developments would
curtail usage of the company’s historic gas mainline from Alberta to Montreal
-- an ambitious and controversial nation-building exercise of its own in the
late 1950s.
Growth Projections
Energy East offered potential
salvation by converting that gas line -- which would comprise two-thirds of the
route -- to take advantage of “the incredible growth projections” for the oil
sands, said Pourbaix. “Even with Keystone, even with Gateway, it was becoming
quite clear that producers probably needed another way to get their oil to
market.”
On the other end of the
country, Irving Oil fretted that its refinery was starting to be elbowed out by
U.S. Midwest and Gulf Coast competitors. Long accustomed to picking and
choosing among imported crudes, it now watched as rivals profited from access
to cheaper shale and oil sandsproduction from the interior of the continent.
“We went from being an
advantaged refiner from a crude supply point of view to being disadvantaged,”
Browning, who succeeded Ashar, said in an interview in August. (Two weeks after
that interview, he would, without explanation, depart the company after only 16
months on the job.)
The Irvings had a lot on the
line. Their empire dated to 1924, when K.C. Irving began building out from the
foundation of his father’s general store in Bouctouche, New Brunswick. Soon, he
operated filling stations and car dealerships and snapped up timber lands and
shipbuilding yards.
Chevron Partner
In 1960, he opened a refinery
on the Saint John waterfront in a partnership with Standard Oil Co. of
California, a predecessor of Chevron
Corp. (CVX) The
Irvings took full ownership of the facility in 1988, investing heavily over the
years in expanded capacity and state-of-the-art technology.
In 2000, Arthur handed the
controls to his son Kenneth, a 17-year veteran of Irving Oil. Kenneth, now 53,
built a liquefied natural gas import terminal on the Saint John waterfront with Repsol SA (REP)and announced plans in 2006
for a second refinery, with BP Plc coming aboard as a partner in the C$8
billion project.
After the recession hit in
2008, the Irving world changed radically. The brothers fell out and divvied up
the family assets, the refinery expansion was shelved and, in 2010, Kenneth
took stress leave and checked into a Boston hospital, people close to the family
said.
Strong Patriach
In short order, he was banished
from Irving Oil and deprived of contact with the father heworshipped,
ending up, according to documents on file in the Supreme Court of Bermuda, on the losing end of a
Shakespearean court fight in which he sought a greater share of the Irving
trust. Chief Justice Ian Kawaley described it as a battle between “a strong
patriarch and an equally strong-willed son...infused with deep-seated emotions
of an intensity rarely seen outside of familial relationships.”
Kenneth Irving didn’t comment
for this story and Arthur Irving declined an in-person request for an interview
and didn’t respond to follow-up calls and an e-mail.
Negotiations with Arthur Irving
were bound to be interesting. He was a man known for his idiosyncrasies.
Finding something inappropriate about FM radios, he agitated to have them
removed from company vehicles, said a person familiar with the company. He
constantly griped about a convenience-store chain operating out of Irving
service stations because he believed the chain didn’t clean bathrooms to Irving
standards.
Moon Shot
With his son in exile, Arthur
promoted Ashar, previously recruited by Kenneth from industry stalwartSuncor
Energy Inc. (SU), as CEO. Ashar’s bona fides in Calgary made him the perfect guy
to advocate for an eastern pipeline.
It’s almost 5,000 highway
kilometers from the eastern edge of Alberta to the western edge of New
Brunswick and as far as many Albertans were concerned, it might as well be the
distance to the moon, so little was their knowledge. Ashar set about educating
them.
He promoted Saint John’s
deep-water, ice-free port, Irving Oil’s long experience in handling huge
volumes of crude coming into the country and the fact any energy project in
Saint John could make use of environmental permits left over from the scrubbed
refinery.
India Link
And there was yet something
else, once again counter-intuitive. Saint John was closer in shippingdays
than Vancouver to India’s refinery row, where incipient interest was being
expressed about Alberta’s oil. When challenged at one meeting in Calgary, New
Brunswick Energy Minister Craig Leonard pulled out a map to prove the point.
Harper’s own Natural Resources Minister at the time, Joe Oliver, was still
dubious and ordered his officials to check for themselves before he would
believe it.
The Indians turned out to be
better informed than the Albertans. When various Canadian cabinet ministers
visited Indian oil companies such as Reliance
Industries Inc. (RIL) and Indian
Oil Corp. (IOCL) they
were astounded by the depth of knowledge about Energy East, including its
shipping advantages, according to those who were there.
At one such meeting, a Reliance
executive assured the Canadians his refinery could handle Alberta’s tarry
bitumen. How could he be so sure? The company had already procured a tanker of
the stuff from a terminal in Burnaby, British Columbia, and ran it through the
facility. Both Ashar and Browning have visited the Indian refiners and Indian
Oil has since signed a letter of intent with an Alberta supplier, assuming
Energy East will be built.
Jobless Rate
The politics were also lining
up. Energy East would become the only major pipeline proposal to win the
support of all of Canada’s major political parties.
The province of New Brunswick,
though home to an anti-fracking movement, found economic reasons to back the
project. Its unemployment
rate, at almost 9 percent, runs chronically higher than most of the
rest of Canada and its per-capita income is the second lowest of any province.
Many breadwinners regularly commute across the country to work in the oil
sands.
Former New Brunswick Premier
David Alward -- voted out in elections last month in part because of his
pro-fracking stance -- joined as an early and strong force in favor of Energy
East and, with the help of McKenna, brought along his Liberal Party opponents.
He understood firsthand the frustrations of those flying in and flying out of
Alberta. His 24-year-old son, Ben, spends two of every three weeks working as a
pipe fitter around the oil-sands hub of Fort McMurray.
High Fives
Alward, during an interview,
spoke as a father when he said that while a job in the oil sands afforded his
son an “incredible opportunity... we’ve got a little farm at home and his
passion is here, it’s not in Alberta.” About 20,000 New Brunswick workers are
in the same situation, he said. Once, on the way home from an Alberta trip
promoting Energy East, Alward found himself getting high-fived in the aisle of
the plane by a group of these itinerant workers excited the project could
create jobs and allow them to go to work in the morning and home to their
families at night.
Harper himself was initially
non-committal on Energy East, eager for an alternative around Obama’s Keystone
foot-dragging but uncertain that the project was technically and economically
feasible. He didn’t want to put his prestige on the line if the oil patch and
Irving couldn’t make it work.
Build Consensus
With eight of New Brunswick’s
10 seats in the House of Commons, Conservative
Party members
of parliament pushed him to get out front. Noel Kinsella, the speaker of the
Senate and a Saint John native, hosted a meeting around the dining room table
of his Ottawa chambers. The province’s Conservative Party contingent drafted a
private March 22 letter to Harper urging “a proactive approach” that would
“build a consensus with the governments in the six provinces the pipeline will
span.”
Though not a man prone to
cross-province consensus-building, Harper liked this turn of events. Before
assuming office, he had critiqued what he labeled “a culture of defeat” in New
Brunswick and Canada’s Atlantic region as a whole. Provinces there, he thought,
were far too dependent on government programs. Suddenly, here was a
market-based plan to generate economic activity that would benefit New
Brunswick, where his father had grown up, as well as his own home province of
Alberta, according to those who know his thinking.
Secret Meetings
As he moved toward supporting
Energy East, Harper had his office arrange a secret meeting for April 11 with
oil patch executives, Arthur Irving and others with an interest in Energy East.
The stakes were high, he told the group. Keystone was faltering and the
Northern Gateway would be a tough sell. Setting out what sounded like a
challenge to get Energy East moving, he asked what can be done to get this oil
to market, said Andrew Dawson, an Atlantic Canadian trade union official who
attended the meeting.
Jason MacDonald, Harper’s
director of communications, said the government supports the “diversification
of markets for our resources.” Harper declined to comment for this story.
Others shared Harper’s original
reticence, notably Calgary’s biggest energy producers for whom transporting
Alberta oil cross-country to Saint John was testing imaginations. Many
preferred terminating the line in Quebec, where they had long operated, and
then assessing later if it made sense to proceed to the Atlantic coast.
This sentiment drove McKenna to
distraction. As premier of New Brunswick from 1987 to 1997, he had watched
neighboring Quebec’s modus operandi up close. Once the pipeline paused there,
he argued, the province would hold enough leverage to ensure it never went
beyond. You couldn’t cross a chasm in two bounds.
Edwards View
Executives of Canadian
Natural Resources Ltd. (CNQ), the nation’s largest heavy
oil producer, were among those who wanted to go no further than Quebec City.
Chairman Murray Edwards, who wields great influence among his oil patch peers,
warned at one meeting that he’d be watching to make sure Irving Oil didn’t get
too greedy, according to a person in the room that day.
Edwards, in response to a
Bloomberg News query, said he said no such thing. Rather, he argued that both
Quebec and New Brunswick needed to realize tangible benefits from the line and
that the best way to ensure shipments “will not be held hostage to the Irving refinery”
was to make sure they had export options.
“From Day 1, I’ve always been
of the view these issues had to be addressed -- benefits to the provinces the
pipeline terminates in and that barrels are not held to ransom,” he said.
McKenna just happened to sit on
the board of Edwards’s company. In the end, Canadian Natural agreed that it
would commit equal amounts of Energy East oil to Quebec and Saint John.
Ah-ha Moment
The best argument in favor of
going to Saint John turned out to be going to Saint John. The Irving facilities
were spotless and nothing like the stereotypical 1950s-style belchers of
noxious fumes. For Alison Redford, Alberta’s premier at the time, the ah-ha
moment came watching from a helicopter as a moored supertanker unloaded its
shipment into a buoy connected to underwater pipes that carried the crude
ashore. Irving Oil has capacity to store six million barrels and handle the
world’s biggest ultra-large crude carriers.
“To see that, I knew that was
essentially the key to Alberta being able to unlock a competitive price for its
oil,” she said.
Irving Influence
By the time Arthur Irving
dropped in on McKenna in June, the Energy East game was into late innings –-
and still in danger of falling apart. TransCanada had reached its official deadline
the previous day on a so-called open season during which it sought long-term
commitments from producers. Arthur Irving had removed one hurdle by consenting
to take a minimum 50,000 barrels a day for his refinery (a figure Irving Oil
would later increase.)
On June 19, Irving’s Browning
sat down with TransCanada’s Pourbaix to work through the final sticking point
-- the inordinate influence Irving could exercise through its control of the
end of the line. Should anything go wrong at the terminal, the refinery would
become the only conceivable buyer and could force distressed pricing on them.
TransCanada -- much to Arthur
Irving’s annoyance –- had worked around him by quietly winning the provincial
government’s assurance of land if it proved necessary to build its own
terminal, according to people familiar with the plan. At that June 19 meeting,
the company backed off, agreeing to form a 50-50 joint venture with Irving Oil,
with Irving as the operating partner. In exchange, TransCanada won an assurance
that the producers would not be held ransom.
Open Season
Open season was closed.
TransCanada had made it known that the pipeline needed 500,000 to 600,000
barrels a day to be viable. Commitments grew to 900,000 barrels, including oil
that would exit the pipeline at Quebec.
As TransCanada readies to file
its regulatory application, challenges still exist. Quebec, as a hydro-electric
superpower, has developed a strong green mindset even as it stands to benefit
most from Energy East’s new construction, gain refinery jobs and turn inward
shipments of imported oil from places like Algeria and Angola into exports up
the St. Lawrence River. The oil sands at the other end of the line are alien to
its political culture.
Quebec would get a small export
terminal out of the deal. Environmentalists are warily eyeing TransCanada’s
proposed location as well as the need for the line to cross the St. Lawrence, a
major source of drinking water, recreation and commerce. A Quebec judge
temporarily shut down TransCanada’s exploratory work on the terminal site until
beluga whales clear the area in mid-October.
Slam Dunk
“It would be wrong to think
this will be a slam dunk for TransCanada and that the Quebec government will
just rubber stamp it,” said Steven Guilbeault, senior director of the
Montreal-based environmental group, Equiterre.
For its part, TransCanada, slow
to respond to Nebraskan concerns that the route crossed a sensitive aquifer, is
paying attention to such matters this time. When the northern New Brunswick
city of Edmundston complained the proposed eastern line put its drinking water
supplies at risk, TransCanada quickly moved the route by four kilometers.
Back in Saint John, Arthur
Irving, now 84, stands on the threshold of the regulatory review for a project
with political, economic and environmental hurdles to clear without the counsel
of his son or Mike Ashar or now Paul Browning. Irving Oil is without a CEO.
Nation Building
Despite such personal and
commercial complications, the Irvings, builders of businesses for nearly a
century, could see their under-appreciated East Coast assets become Canada’s
chief outlet for its largest energy resource, reaping Irving Oil a stream of
profits while providing substance to Stephen Harper’s eight-year-old energy
superpower promise.
“It’s serendipitous,” said
McKenna, matching “eastern refiners with western producers and is a great
nation-building exercise.” If it also pokes a stick in the eyes of the Obama
administration, so be it.
True to form, the Irvings
aren’t talking. In early June, the wives of K.C. Irving’s two living and one
deceased sons were honored for their works at a Rotary Club dinner at the Saint
John Hilton.
As the event wrapped up, a
reporter approached Arthur to ask if he would discuss Irving Oil’s Energy East
role. “Ah, we’re just little guys up here,” he said as he turned back to his table.
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