William D. Marriott is a retired economist who specialized in public policy analysis of the oil and gas industry. There are so many challenges facing Canada. An economy in free fall, serious price inflation on basics, hostile trading partners, independence angst both East and West, a war in Iran, not to mention losing international hockey supremacy. Could a bitumen pipeline save us from this abyss? Maybe a bit far-fetched, but at least Canadians would be talking about doing something for ourselves rather than carping about what someone else is doing to us.Prime Minister Mark Carney’s vision to make Canada an “energy superpower” is laudable. However, his mechanism of state capitalism, undergirded by duelling bureaucracies, may or may not work. It will certainly prove to be fascinating for students of economic history. Whether he can reverse Canada’s ten lost years is even more uncertain, as broad recovery will take much more than kick-starting a few big projects. But perhaps looking into the negotiations around Danielle Smith’s bitumen pipeline is a good way to gauge likely success in other areas.Carney’s intentions seem to be noble, and it looks like he is bargaining in good faith. He is intimately familiar with Justin Trudeau’s fall from grace and would not want to kick off a contest to see who could become Canada’s most hated leader. On the other hand, he has to pay lip service to those in the public and in his caucus who firmly believe in the existential threat of global warming.So what’s going on inside the Memorandum of Understanding (MOU) negotiations if we view them from the perspective of the overall objectives of the major players?MOU’s are common instruments for parties to formalize their intentions to engage in mutually beneficial activities. They are a substantive step beyond wishful thinking, but stop way short of hard-wired contractual obligations. They essentially say, “we the undersigned, really want to do something, and we have agreed on a bunch of things, but we can’t finalize all the terms and possible conditions until we do more negotiating.”.Unfortunately, many commentators point to the weaknesses or obvious gaps in the MOU and somehow conclude that the project cannot proceed under the declared terms. Of course, that is why there are further negotiations.But, worse, some claim the entire exercise is a fraud perpetrated on behalf of the evil Laurentians by the evil Liberal party. This view doesn’t give much credit to either Smith, Carney, or the other major industry and government players. This pipeline is something that Canadians want, and as a symbol of economic rebirth, it would be powerful in rekindling Canadians’ faith in the government’s ability to manage (or at least not stifle) the economy. The stakes are huge.As Carney said, “the MOU contains the necessary but not sufficient conditions” for the completion of a deal. What it also excludes is any assessment of the costs to the federation if it fails. The project investment economics can always be negotiated, given that parties fully understand their respective economic costs and benefits. However, the political costs and benefits remain in the background, unstated but hugely influential in terms of the final deal. In this regard, Alberta independence supporters are exerting significant pressure on the negotiations without being at the table. Stalling, blocking, or even a perception of federal bad faith could easily push the “Yes” vote over 50% in an independence referendum. At that point, we won’t be disagreeing on the spoils from the pipeline but rather who gets to keep Alberta’s oil wealth when the country splits in two. We need to get this right.Also, the current military activity in the Middle East is underscoring the incredible risk to the world of not diversifying its oil and gas supply. Canada can help with ensuring the security of the world's supply, which is becoming increasingly obvious, not just to the world but to the average Canadian as well. This widespread political epiphany provides incredible leverage in the negotiation of the final terms of the deal. The oil industry and the Alberta government were just given a huge gift by the President we love to hate, Donald Trump. Regardless of world sentiment about the legitimacy of the war, if the people of Iran can get the support of the military, they are in a position to effect regime change. Trump wants to give them every chance of success by decimating Iran’s military infrastructure, starving Iran of oil revenues, and taking over the policeman’s role in keeping the peace in the Strait of Hormuz. If Trump can accept the barbaric Saudi Arabia dictatorship, then he can accept anything the Iranians come up with as long as it doesn’t include waging war on Israel and its neighbours. If he succeeds, the world will be a safer, more secure place. Right now, it is up to the Iranians because Trump will never put boots on the ground in Iran..So let’s look at the major players and see what they need.First up is Quebec. Quebec? You say? Yes. The key characteristic of Canada’s very own distinct society is not linguistic or cultural but rather their opportunism in negotiating additional benefits for themselves, regardless of the issue or its location in Canada. Getting a deep-water port project for Montreal is not nearly enough, even if they are guaranteed that an oil tanker ban would never be implemented there. If we are to take the “energy” part of the “superpower” slogan seriously, then no doubt some prize to enhance Quebec’s electricity wealth is still required. And any Quebec acceptance of the pipeline will be contingent on no changes to the equalization calculation that mysteriously excludes Quebec’s massive electricity revenues but includes Alberta’s oil revenues. Does Alberta need electricity from Quebec? Not really, but if Carney is willing to build the transmission lines and Quebec is willing to endure Alberta’s wholesale pricing market, and it buys Alberta a bitumen pipeline, then so be it. “Grande compromis” indeed. The only thing more absurd than exporting electricity from Quebec to Alberta, or building a super train to nowhere, would be not exporting Alberta natural gas to Europe via east coast terminals. And yet here we are.Next up is British Columbia. Constitutionally, the writing is on the wall. And Carney will impose project terms on Premier David Eby if he won’t agree willingly. In this regard, Carney is providing an important role as an arbitrator in order to force agreement between the parties. But the main details of the project have already been decided. Even the final terminus location is not in doubt, as only Prince Rupert has existing port infrastructure and can accommodate the biggest tankers with ease. Recently, Smith even revealed the capacity of the line at 1.3 million barrels per day. That just leaves the small matter of the size of the ‘bonus’ payment by the pipeline/producers to BC. TMX forked over $1B, so we can expect the “royalty” paid to BC by Alberta oil producers to likely increase.However, Eby also has a significant negotiating position. Remember that he was the architect of the regulatory obstruction that ballooned the cost of the TMX expansion from roughly $5 billion to $30 billion. This is a huge problem for the pipeline companies, as the Major Projects bureaucrats can only override other federal government bureaucrats but have no jurisdiction over provincial or municipal bureaucrats. (This situation could inspire a clever satirical sketch, except The Ministry of Silly Walks was already done by Monty Python over 50 years ago.) Likely, a couple more BC projects will sweeten the pot, as the ones already announced were actually already approved and were just in the first round of approvals for show. Look for maybe another LNG project for Kitimat and perhaps a gas pipeline to feed it, possibly utilizing Alberta gas as well. A large mining project is also not out of the question..Smith has also hinted recently that building electric power interties from BC would be acceptable to Alberta, thus allowing BC’s Site C hydro resources to be exported to Alberta, and also to allow Alberta’s excess power on windy and sunny days to be exported back to BC. That this could solidify Alberta’s stature as the go-to province for AI data centres was no doubt part of the strategic thinking, as Alberta doesn’t need BC power any more than it needs Quebec power. Smith may have also mentioned to Eby that an independent Alberta may be less willing to allow NE BC gas to be exported using Alberta’s pipelines. It turns out that even a superficial understanding of Canada’s economic integration shows that Alberta is not the only landlocked province.This brings us to the pipeline companies. It is likely that the required private sector proponent will be a joint venture by the three largest companies already helping Smith with the design and route considerations. Joint ventures are a common mechanism to reduce risk exposure in the oil industry and make sense here. However, they may be looking to Carney to provide coverage for any cost overruns due to BC regulatory interference. These will likely be required regardless of whether Eby somehow agrees to not “use every tool in the toolbox” to frustrate the pipeline. If Eby’s shaky government is defeated by the Conservatives in the interim, this problem should go away, but look for federal backstops to the pipeline companies in the short term.Next are the oil companies that will be required to develop the bitumen for export. They will readily make commitments to be shippers of record on the new pipeline and will enter into long-term delivery contracts. But more than that, they have committed through the Oil Sands Alliance (previously known as the Pathways Alliance) to a massive project to capture, transport, and store vast quantities of CO2. This will give Carney the “de-carbonized barrels” buzzword that he needs to appease the ever-weakening green resistance. Further, it will give green bragging rights to the Alberta oil industry till 2050 and beyond. The only thing that needs to be decided is how much taxpayers will subsidize this camouflage. So far, it is up to 62 cents on the dollar of capital investment. The industry says it needs 75. Expect some movement in the final deal. There is also the issue of the higher CO2 tax that must be paid. Many pundits have concluded that the price mentioned in the MOU is enough to kill the overall production economics. What they ignore is that the MOU states “ramp up to $130” without committing to a fixed schedule or a final implementation date. Further, Alberta has already staked out sole authority over CO2 pricing through the TIER system, so it is in the driver’s seat to accommodate the oil industry and other industries that might be adversely affected by onerous carbon dioxide taxes. But don’t underestimate the creativity of the negotiators or the degree of obfuscation by government agencies. Clearly, the industry will not undertake something that has no benefits, even if the details are hard to understand by lay observers..Lastly, First Nations are a real wildcard here and could cement the early success of the project if they desire. The Northern Gateway debacle served as a warning of what can go wrong and who will pay for it. Arguably, the biggest losers then were the small, isolated First Nations along the route who lost out on both employment and income opportunities. The current Chiefs, both in Alberta and BC, are well aware of this and are hopefully willing to engage in good-faith negotiations. Alberta is leading this charge as it has agreed to backstop the purchase of the First Nations equity position in the pipeline. And Alberta will determine the final route and thus which Nations will be eligible for an ownership share of pipeline income. This creates a large incentive to bargain in good faith. Smith saying there are five potential ports is another way of saying there are five potential routes and five potential sets of Nations that will become partners. Once the Nations and the route are finalized, the federal government can piggyback on these efforts to ensure the federal constitutional “duty to consult” is satisfied.One further outlier is the remote possibility of developing a multi-use utility corridor all the way across Canada. This infrastructure prerequisite could facilitate the possibility of large-scale movements of natural resources both east and west. If Ontario and Quebec want to be a part of this truly “nation-building” project, they can join Alberta, Saskatchewan, and Manitoba in the work they have already initiated. If they don’t, then the good news is that they still can’t stop the pipeline going west through a similar Alberta-BC corridor.In conclusion, the interim April deadlines outlined in the MOU will be met with solid contractual commitments. In July, Carney, Smith, and First Nations Chiefs will jointly announce (with documents signed with big, sharpies) that the pipeline will go ahead. Eby will not attend. But will it be enough to quell the independence fervour in Alberta? It’s too early to tell, but what is certain is that Danielle Smith will be several steps ahead and laying the foundation for an even stronger Alberta after the referendum.William D. Marriott is a retired economist who specialized in public policy analysis of the oil and gas industry.
