The 10 most regrettable oil patch gaffes
Remembering 10 decisions the decision-makers might rather forget
1. Hallowe’en Horrors
In the fall of 2006, when BCE Inc. CEO Michael Sabia announced that Bell Canada would convert into the largest income trust in the country, Ottawa panicked. Two weeks later, on October 31, 2006, then-finance minister Jim Flaherty announced that income trusts would be taxed like corporations starting in 2011. The new tax rules for income trusts eliminated their ability to pay out corporate-tax-free distributions to investors.
The sudden announcement drew the ire of the energy sector, which had been enthusiastically employing the energy trust model since the formation of the Enerplus Resources Fund in 1986. The oil patch came to call Flaherty’s move the “Halloween Massacre.” Energy trusts, which saw their cumulative equity value plummet by $35 billion, began converting into corporations en masse. Flaherty also drew particular outrage from seniors across the country, many of whom had put their money in income trusts to provide a steady investment yield in their retirement.
2. Reviewing the Royalty Review
On October 25, 2007, one month after the release of the Alberta Royalty Review Panel’s document Our Fair Share that recommended an increase in oil and gas royalties, Ed Stelmach’s government introduced a new royalty regime. All oil and gas development was subject to new royalty rates, effective immediately. Royalty rates on oil and gas projects commissioned and brought online years before the new rules were announced would not be grandfathered. Producers were outraged and threatened to reduce oil and gas spending in 2008 (by as much as $1 billion annually, in the case of Encana Corp.).
Just a few months later, in April 2008, the provincial government retreated from its new royalty framework, citing “unintended consequences,” and reduced royalties on drilling of deep oil and gas wells. Months later, as the global financial crisis hit, the province again retreated from its new royalty regime and allowed oil and gas producers to choose between the old and new rates over the course of the next five years. On March 11, 2010, the province pulled back further from its pre-recession decision to up royalties, releasing a “competitiveness review” that introduced a regulatory framework similar to the one in place before 2007.
3. Timing is Everything
An Enbridge Inc. pipeline spilled 35,000 barrels of heavy crude oil into a Kalamazoo River tributary in Michigan on July 25, 2010. Enbridge CEO Pat Daniel flew to the scene to apologize and handle the ensuing environmental and public relations nightmare, which would only get worse when an investigation revealed the company’s control room in Edmonton had not taken the necessary measures to stop the flow of oil through the ruptured pipeline, Line 6B, for a whole 17 hours, until an employee at a Michigan utility company reported the release of crude oil.
Even worse for Enbridge, a National Transportation Safety Board report found that the company failed to fix multiple cracks in the pipeline before the spill occurred. A NTSB committee member likened the Calgary-based pipeliner to the comically inept Keystone Kops of silent film fame. Enbridge spent roughly $800 million cleaning up the spill, which thrust the company into the spotlight just as it was preparing an application to develop its West Coast-bound Northern Gateway project.
4. Color Me Embarrassed
A coloring book called Talisman Terry’s Energy Adventure distributed by Talisman Energy Inc. in natural gas-rich Pennsylvania earned the Calgary-headquartered producer the sarcasm of comedian Stephen Colbert on North American television in July 2011. The coloring book featured a dinosaur, more specifically a “friendly Fracosaurus,” in a hard hat and work boots that described the benefits of natural gas.
The coloring book turned into a public relations gaffe for Talisman, which was criticized in Canadian, American and global media outlets for distributing petroleum-industry propaganda to children. Talisman was not the first oil and gas company to release a coloring book for children. In 2008, Chesapeake Energy Corp.’s coloring book, featuring a cartoon dog named Chesapeake Charlie, drew a similar outcry from U.S. environmental NGOs.
5. Setting the Tone
When then-premier Alison Redford flew to Washington, D.C., in November 2011 to lobby for the approval of TransCanada Corp.’s Keystone XL pipeline, she acknowledged to reporters that she couldn’t interfere with the ongoing bureaucratic approval process. However, she said it was important to set the tone. To do so, Redford met with a host of Democrat and Republican politicians on that and four subsequent trips to the U.S. capital.
Unfortunately, her efforts to gain the support of Republicans in Washington also meant her galvanizing those same Republicans into passing bills in Congress to force the approval of Keystone XL – which is what happened multiple times, including in May 2013. Those bills, and indirectly Redford’s efforts, had the opposite and undesired effect of positioning President Barack Obama to delay approvals for the pipeline again and again. The chances of widespread bipartisan support for the project had disappeared.
6. Hijacking the Debate
An open letter, published on January 9, 2012, from former federal natural resources minister and current Finance Minister Joe Oliver can still be found on Natural Resources Canada’s website. In it, Oliver says that “environmental and other radical groups” are to blame for Canada’s bitumen export constraints and that “these groups threaten to hijack our regulatory system to achieve their radical ideological agenda.”
Political observers pointed out how the minister’s language created the impression of an alignment of interests between the government and the energy industry. Columnists in the Globe and Mail said the letter “tainted” the debate. When the National Energy Board’s Joint Review Panel issued its 2014 recommendation that the federal government approve the Northern Gateway project, critics howled that the whole process had been similarly tainted, asking whether or not the JRP could have recommended otherwise.
7. Carbon Dreaming
On July 8, 2008, former premier Ed Stelmach announced the creation of a $2-billion fund to assist in the development of carbon capture and storage projects in the province. In April 2012, TransAlta Corp., Enbridge Inc. and Capital Power Corp. pulled out of the $1.4-billion Project Pioneer, a CCS project at the coal-fired Keephills 3 power plant west of Edmonton. TransAlta and its joint venture companies pulled out of the project despite the government’s commitment to pay for more than half of the cost – $778.8 million of the $1.4 billion total.
The province then canceled $285 million in funding for another CCS project at the proposed Swan Hills gas plant north of Edmonton in February 2013,
after project proponent Swan Hills Synfuels LP delayed the project’s commissioning. One of the two CCS projects in Alberta to not be canceled since the provincial government created the $2-billion fund is Shell Canada Ltd.’s Quest project. It’s increasingly unlikely that the next premier will continue the former premier’s commitment to CCS investment.
8. High-Pressure Debate
When bitumen emulsion seeped up through the earth at Canadian Natural Resources Ltd.’s Primrose East oil sands facility on January 3, 2009, the cause of the emulsion seepage was thought to be a faulty wellbore. The Energy and Resources Conservation Board eventually concluded (in a report released four years later) that it was the volume of steam injected that caused the emulsion seepage, rather than a faulty wellbore or pre-existing faults in the earth.
When bitumen emulsion seeped to the surface again in the spring and summer of 2013, CNRL again suggested that a faulty wellbore – drilled by another operator – was the cause of the emulsion seepage. The ERCB, which has since been reorganized into the Alberta Energy Regulator, said it’s impossible to know what caused the seepage until a full investigation has been conducted. This time, however, the AER is conducting an investigation into pressurizing shallow-lying bitumen deposits across the oil sands, rather than just at Primrose East.
9. Hindsight is 20/20
On November 25, 2009, EnCana Corp. shareholders voted 99 per cent in favor of splitting the company in two. The split would result in the formation of an oil-focused producer in Cenovus Energy Inc. and a natural-gas focused producer that would retain the name EnCana (but would later drop the upper case “c” and become Encana Corp.). At the time of the vote, natural gas spot prices had already fallen from highs of $13 per million Btu to around $5 per mBtu. Those in favor did not expect natural gas prices to persist at levels below $5, and even below $3, for the next four years.
By the time CEO Doug Suttles was hired to lead Encana in June 2013, the company had posted annual net losses for three straight years and he said a new, tighter focus was needed to get the natural gas producer back on track. The new focus meant that Encana would no longer be a natural-gas focused producer, as was intended in 2009. Encana would turn its focus back to oil and natural gas liquids.
10. Expect Delays
At the end of February 2011, Imperial Oil Ltd. made the difficult decision to split 33 of the mega-modules it had commissioned for its Kearl oil sands project into smaller segments. The modules had been built in South Korea, shipped across the Pacific and tugged by river barge to the Port of Lewiston, Idaho, where they sat for months awaiting oversized-load permits from the state’s department of transportation.
The company disassembled 33 of its 207 oil sands modules in Idaho, so that the company wouldn’t require oversized transportation permits. The next month, Imperial said it would “revisit” its decision to build oil sands modules in South Korea in the future. In a 2013 interview with Alberta Oil, Imperial’s CEO Rich Kruger said that transportation costs contributed in a large way to $2 billion in project overruns at Kearl. “So that last $2 billion,” Kruger said, “in a perfect world, we wouldn’t have spent that.”