MARRIOTT: Build it or they will leave

William D. Marriott is a retired economist who specialized in public policy analysis of the oil and gas industryCanada is indeed broken. Now is the time for a national infrastructure corridor.Canada’s economy is in serious trouble and has been for a long time. This is not in dispute and is well understood both by economists and every day Canadian voters in the grocery store and at the food bank. The current trade battle with the US will sadly drive more capital south for any businesses where fifty miles of transportation makes no difference. But this is not where Canada has an absolute trade advantage. Our primary focus must be on producing our natural resources and getting them to market. However, the best next steps are not abundantly clear. Let’s breakdown the issues to see what will be most helpful in the short run. (Also, keep in mind what can be reasonably accomplished not only in Pierre Poilievre’s first term but in the remaining time of Danielle Smith’s first term as well.)First of all, Canada becoming an energy and natural resource superpower, despite being the flavour of week, will likely never happen without some serious change to the infrastructure supports to our economy.It seems like a no-brainer to just kick things off by building a few more pipelines. However, establishing a national infrastructure corridor is the necessary first step: First the corridor, then the utilities.For, while Canadians seem to have forgotten the hard lessons of both the Northern Gateway Pipeline (NGP) and the Trans Mountain Expansion (TMX) Project, world capital markets have not. Remember, the energy industry and providers of investment capital were all given a clear message by Justin Trudeau’s Liberals on NGP — Canada is not open for business. Period!This message was especially well understood by TMX investors, even when they finally got national regulatory approval after a final brutal legal challenge by the BC First Nations. And so, even with federal approval these investors were unwilling to commence building in the face of the ongoing political and regulatory risks. Remember BC Premier John Horgan’s promise “to use every tool in the tool box” to stop the pipeline? The investors were done, willing to walk away and lose their sunk capital rather than proceed. This project was not going to be built unless they could fob it off to someone else foolish enough to take the risk. They considered themselves lucky when the federal government nationalized the project and they took their money, left Canada and have not been heard of since.The other forgotten lesson from this debacle is that the BC government extracts a toll (sort of a non-resident resource royalty) for the privilege of allowing Alberta oil to be shipped through their province. This concession, negotiated by Christie Clark, is unique and applies to no other pipeline, highway, railway or electricity transmission line in Canada. Can you imagine if trucks carrying manufactured goods from Ontario to BC were stopped at the Alberta border and forced to pay a toll for the privilege of driving through Alberta? This oil royalty-toll was a very dangerous precedent and now it will be the expectation of every provincial government in any future pipelines out of Alberta. Even Quebec would be happy to let pipelines through if Alberta oil producers pay enough toll. However, when you add all these tolls from AB to NB they render an Energy East type project dead in the water.The bottom line is there is no private interest by oil companies or pipeline companies to even begin feasibility studies and endless regulatory hearings for new pipelines out of Alberta, west, east or north. This leaves the federal government as the builder of last resort. If the government of Canada would front the capital, do the building, and subsidize the tolls to take Alberta crude for export this would suit Alberta just fine. But the rest of the provinces might object saying “where is the benefit to us?” And they would be right — even though they conveniently have forgotten about federal benefits from corporate profits tax, sales taxes and equalization. So there is a very high hurdle even if government took over pipeline construction.In this regard, Mark Carney’s musing about “emergency powers” actually makes some sense. He essentially said, “Forget about my predecessor and my predecessor’s government trying to phase out the oilsands. Trust me to not only reverse those policies but also to force uncooperative provinces (except sorta, maybe, ... Quebec to bend to my will.” It’s a big ask but at least he is being realistic about what needs to be done. If Trump needs to declare an energy “emergency” to move his energy policies forward, then surely our next elected prime minister (likely Pierre Poilievre) can too. The only question remains what are the project priorities and where should they act first?Oil and gas pipelines for export off the east coast are a non-starter because folks there just don’t want them. In fact, they don’t’ even want Alberta oil and gas for their own consumption let alone for export. They'd rather depend on oil and gas delivered in tankers from the US and Saudi Arabia, which actually makes sense as these sources are likely long-term reliable suppliers. Premier Danielle Smith is not waiting around for the feds to get their act together. She has already committed Alberta’s ‘in-kind’ royalty barrels as an incremental shipper on the already-existing pipelines. This allows those pipeline companies to expand capacity by eliminating bottlenecks thus increasing throughput. Also AB is the sole owner of the Canadian portion of Keystone XL, now of interest to President Trump, apparently.No doubt part of her one-on-one discussions with Trump centred on when and how the US portion of Keystone XL will get resurrected and built. She likely made a deal and we just need to wait for the current tariff tsunami to blow over and Trump will get on building this pipe.This leaves pipelines to the west coast and the north through Hudson’s Bay.The simplest option should be to resurrect Northern Gateway which was approved by the then National Energy Board and has a route from Bruderheim north of Edmonton to Kitimat, BC. In the exercise of “emergency” powers the federal government can simply declare that this project fulfills all the regulatory requirements and begin construction immediately using the nationalized TMX company. The only fly in this plan will be the First Nations who would want to get a better deal than the terms from ten years ago. And they would be right in doing so.Also complicating this decision, would be a competing proposal from the Eagle Spirit group which had a route much like Northern Gateway but terminating in Prince Rupert. The additional benefit in the Eagle Spirit proposal was that “the pipeline’s right of way would be on an energy corridor that would be pre-approved by First Nations to also house gas pipelines, hydro lines and fibre optic cable”. This feature will prove to be a game changer in the development of any further export infrastructure in Canada. It is a great opportunity as it allows both a higher capacity pipelines and the opportunity for further infrastructure development, for example a natural gas pipeline to an LNG terminal on the West coast.A third option would be to extend the TMX to include its Northern Leg from Valemount BC, just west of Jasper, to Kitimat. The downside for this project is that it would have to start from scratch to obtain First Nations support and regulatory approvals.What is clear is that there are three viable oil export projects on very similar routes. It would make sense to consolidate them or phase in two or three pipelines with staggered five-year completion dates. “Five-year” sounds a bit retro sort of like the old Five Year Plans from failed communist counties far and wide. While this approach may be consistent with the grand Liberal “hidden agenda”, perhaps Poilievre might propose a more free market alternative. After all shouldn’t we want to bring back global capital to invest in Canadian resources?This is where the main features of the Eagle Spirit proposal need to be highlighted. The first is the pre-approval by the First Nations along the pipeline route. No doubt this was easier as it is a First Nations investment group that was proposing the project. The second feature of a utility corridor that can be used for other infrastructure projects is unique. The idea itself is not unique, but the current orange-man crisis provides a wonderful opportunity to revisit the idea and implement it. As usual, Danielle Smith is way ahead on this file having signed a Memorandum of Understanding with the governments of Saskatchewan an MB and a First Nations consortium to advance the broad terms for a utility corridor crossing AB and SK to Hudson’s Bay. The idea is to ultimately ship oil, gas, potash and agricultural goods east to the port, and Manitoba’s hydro electricity west for use in Saskatchewan and Alberta. The three provinces get trade benefits and First Nations would receive development benefits along the corridor and financial benefits from ownership of the corridor. This ground work is already in place. Now all that is needed is to get BC to join and for the federal government to get out of the way.The idea would remove three major regulatory hurdles for utility development by dealing with them at the time the corridor is established. First, all of the land access issues would go away as these would be negotiated by the First Nations partner with the other First Nations along the route. Most of the remaining land is provincial Crown land and could be perpetually leased or given outright to the First Nations consortium. Second, all the environmental standards and mitigation regulations needed along the route can be prepared in advance once the route is finalized. The federal government can provide a role to consolidate these regulations, once and for all, and ensure that they are not subject to any future ‘green creep’. Third, all the constitutionally necessary First Nations consultation and compensation could be established at the front end. This could even include benefits to other First Nations in the four provinces but who are not directly affected by the route. This is true reconciliation that would make First Nations true partners in the development of the resources under their lands.Finally, having done all the legwork for this framework, it could be extended to other provinces and territories (particularly NWT through the Mackenzie valley to the Beaufort Sea) if they are interested in developing their resources.Canada owes its very existence to the development of a major infrastructure project, the national railway. It may not be an exaggeration to say its survival may depend on developing infrastructure once again.Pierre, it’s time to bring home the Canadian Northern Corridor.William D. Marriott is a retired economist who specialized in public policy analysis of the oil and gas industry.

MARRIOTT: Build it or they will leave

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