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Vol. 18, No. 19 Week of May 12, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Northern Gateway opens new era as regulatory costs nudge C$500M

Enbridge and its financial backers will have spent about C$500 million whether or not they get regulatory approval later this year for the Northern Gateway twin-pipelines project.

A gamble of that magnitude reflects the growing burden on proponents of major energy projects in Canada as regulatory hearings expand far beyond their traditional role and enter the realm of a no-holds-barred debate.

Since an application was filed in 2010 with Canada’s National Energy Board, the regulatory costs of Northern Gateway have reached about C$450 million, John Carruthers, president of Enbridge Northern Gateway Pipelines, told a Canadian Energy Research Institute conference.

He said that includes C$150 million on engineering studies of the 730-mile pipeline to export 525,000 barrels per day of crude bitumen from Alberta and import 193,000 bpd of condensate.

“You’re looking, by the time we get a decision, at half a billion being spent,” he said, adding that does not include the costs of the regulatory process that are paid by taxpayers that have climbed as hearings have stretched over almost 18 months to handle opposition from First Nations and environmentalists.

Barry Munro, oil and gas leader at Ernst & Young Canada, told the conference that although the risk capital for a project such as the C$6 billion Northern Gateway venture has always been huge, it has previously been assumed that was part of the total project cost.

Change in regulatory environment

Carruthers endorsed those comments, noting that proponents had confidence that they could demonstrate their projects were in the public interest and could be built and operated safely.

“You had more confidence than you would today,” he said. “We see a lot of change in the regulatory environment and clearly Canadian stakeholders are seeking increased engagement in the review process.”

Carruthers said Enbridge is working with 45 aboriginal communities to address their concerns and claimed 45 percent of opposing communities are “in line with us that safety and environmental protection is top on our list.”

“There are lots of checks and balances built into the proposed pipeline and we carried out a lot of detailed engineering studies before submitting a regulatory document that ran to some 20,000 pages,” he said.

Without arguing against the expanded debate from the traditional safety, environmental and public interest issues to matters such as the role of Alberta’s oil sands in Canada’s economic development, he said the change has created a “different risk/reward scenario for all of us.”

But he did suggest political questions should be moved to the political arena, allowing the NEB to concentrate on regulatory matters, defending the Alberta government’s attempt to gain support for a Canadian energy strategy.

In making the case for an energy strategy, Alberta Energy Minister Ken Hughes told the conference that Canada needs a “more thoughtful conversation” than merely arguing over whether the oil sands “are the end of our society as we know it, or not.”

Despite the drawn-out deliberations, Carruthers said the delay in obtaining an NEB ruling is unlikely to affect the attempts by potential Asian customers of Northern Gateway to secure crude oil supplies from Canada.

The Michigan spill

However, the edginess within Enbridge is reflected in the company’s latest move to take a party of about 20 community leaders from northern British Columbia to the site of the possibly biggest black eye Enbridge has ever received — a spill of 20,000 barrels into the Kalamazoo River in Michigan three years ago.

Rated the largest onshore oil spill in U.S. history and expected to cost $820 million when the final cleanup bills have been paid, the event has become the lightning rod for opponents of Northern Gateway.

Enbridge apparently hopes it can cool some of that heat by demonstrating how quickly it responded, how much concern it showed to residents and how successful the mopping up process has been in restoring the environment.

New risk assessment

But, whatever its chances of conveying those messages, Enbridge has been blindsided by a new pipeline risk assessment by researchers at Vancouver’s Simon Fraser University.

Their study concluded that there is a “very high likelihood of a spill (from Northern gateway) and that the risk of spills has been understated by Enbridge.”

Although too late to be part of the regulatory hearings, the findings, based on the United States Oil Spill Risk Analysis, predict tanker spills on the British Columbia coast every 10 years, compared with Enbridge’s estimate of one every 250 years.

Terminal spills are projected to occur within 15 to 41 years vs. Enbridge’s claim of 62 years, while multiple pipeline spills would occur at the rate of up to 15 per year, not once every two years.

The researchers predict 776 oil and condensate pipeline spills over 50 years — 31 times more frequent than Enbridge’s estimate of 25 spills.

Tom Gunton, director of the university’s School of Resource and Environmental Management, said that although there is always a high degree of uncertainty in making such forecasts, the dramatic variation in results puts Enbridge’s projections in doubt, insisting the regulatory review panel is not in a position to accurately assess the risk.

Enbridge declined to comment until it had a chance to examine the report.

However, the company has agreed to inject an additional C$500 million on measures to increase the thickness of the pipeline walls, to install dual leak detection systems and to increase the number of remotely operated isolation valves.

The risk issue

The matter of risk was tackled head on by Brenda Kenny, president of the Canadian Energy Pipeline Association, who told the conference that Canada is now facing a “risk dichotomy” in a culture where risk has become taboo.

“You can’t be a responsible operator and not be expected to virtually eliminate risk,” she said. “Look at any politician who talks openly of risk and is expected to eliminate it. Credible regulators are also expected to eliminate risk on their watch.”

The irony is that from an engineering or environmental standpoint, the “risk-based approach is the fundamental underpinning that has allowed us to be so safe,” Kenny said.

She said that companies must work with regulators to identify where the risks are and “drive them out.”

Kenny said the fact that there have been so few serious pipeline incidents in Canada means the industry has been “too safe for too long” and that has contributed to its current challenges.

She conceded that in an age of social media the pipeline sector has not done a very good job of “crafting what our nation is going to become,” thus the Canadian public was suddenly tossed into a vociferous debate and the pipeline industry was confronted with the “deliberate creation of myths.”

Kenny argued that opponents of projects don’t actually have to tell the truth. All they need to do is “create doubt and fear.”

—Gary Park

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