Thanks for the memories: Canada’s lessons in the folly of relying on ‘inevitable’ benefits from oil and gas

Image: Network in Canadian History & Environment

A notable Canadian petroleum 40th anniversary passed by this year without a whisper of celebration. The silence was understandable.

Industry suffered a severe setback in 1977 when the Mackenzie Valley Pipeline Inquiry, British Columbia superior court judge Thomas Berger presiding, stopped a megaproject with its two-volume verdict titled Northern Frontier, Northern Homeland.

The occasion deserves to be remembered as a lesson — especially by governments, regulatory agencies and the voting public. The frozen campaign to tap arctic wealth stands out for exposing a popular article of faith as an illusion.

Berger’s recommendations, led by a 10-year timeout to settle aboriginal claims, relied on economic belief that resembles British climber George Mallory’s famous explanation for going back up Mount Everest until it killed him: “Because it’s there.”

The B.C. native rights champion stated the faith in his inquiry summary for the 1977 Minister of Indian Affairs and Northern Development, Warren Allmand. “I have proceeded on the assumption that, in due course, the industrial system will require the gas and oil of the Western Arctic, and that they will have to be transported along the Mackenzie Valley to markets in the South,” Berger wrote.

He added, “In my opinion, unlike the northern Yukon, oil and gas development in the Mackenzie Delta-Beaufort Sea region is inevitable. Notwithstanding the disappointing level of discoveries so far, the Delta-Beaufort region has been rated by the Department of Energy, Mines and Resources as one of three frontier areas in Canada that potentially contained major undeveloped reserves of oil and gas.”

Four decades and a second aborted arctic gas project later, Berger’s home B.C. is following the Northwest Territories example of learning the difference between having resources and turning them into livelihoods. The instruction began four years before the Pacific Northwest LNG and Aurora consortiums this summer canceled multibillion-dollar liquefied natural gas terminal projects near Prince Rupert. The first teachers were veterans of the Delta-Beaufort misfires.

A reality check — saying markets, not boosters, decide the fate of projects — was built into one of the biggest and most credible Pacific coast LNG export plans from its 2013 start. The WCC LNG partnership of Imperial Oil and its 70-percent owner, ExxonMobil, included a sobering lesson taught by the first attempt to make B.C. an Asian energy supplier in its export license application to the National Energy Board.

Sales and costs govern the size, speed and places of LNG development, said the request for permission for WCC to load up tankers with four billion cubic feet per day of gas, double the most production planned by the last Delta-Beaufort scheme.

Among industry and government elders, the project description recalled a sad B.C. episode. The first Canadian gas foray into overseas trade ran aground on hard markets.

Before its 1999 merger with Exxon, Mobil’s global asset portfolio included leadership of Canada LNG Corp., a consortium set up to provide a 20-year supply to Japanese gas and power utilities.

On Jan. 28, 1986, this B.C. tanker export scheme became the first large Canadian casualty of deteriorating oil and gas prices that eventually sank the entire global industry into a prolonged slump.

Sales negotiations “have been mutually ended without agreement,” said a Mobil statement at the time. The project “is at an end,” added a spokesman. “The bottom line is that these negotiations were occurring in an environment of uncertain energy prices. Future prospects for the economic viability of the project were just too risky.”

B.C.’s energy minister in 1986, Stephen Rogers, was a declared believer in Pacific coast LNG exports. The premier, Bill Bennett, visited Japan to court prospective customers.

Bennett and Alberta’s premier in 1986, Don Getty, announced an agreement to give Canada LNG “a good kick to see if we can’t get it going” with policies favoring overseas exports as diversification of western Canadian export markets beyond old mainstay destinations in the United States.

“We’re down to price,” said Rogers. “We’ve given the project discounts on electricity [from provincial government-owned B.C. Hydro], municipal tax discounts, machinery and equipment tax discounts. If it goes now it’s because the Japanese want it to go, based on the [LNG] price.”

As now, in the mid-1980s international LNG supply agreements used price indexes that tied the price of natural gas to oil. By early 1986 oil was spiraling down a dizzying slope from the Organization of Petroleum Exporting Countries’ official posting of US$28 a barrel into a hardship range of $10. LNG tracked the 65-per-cent oil price dive.

As now, in 1986 launching northern Pacific coast exports required high spending on new production, pipelines and processing. For tanker cargos of 440 million cubic feet per day Canada LNG’s projected cost was $3.5 billion (nearly $7 billion in 2017).

Nowadays, as in 1986, the outlook for LNG prices is shaky. An international market review submitted to the NEB recently in support of the reincarnated Imperial-ExxonMobil proposal said an export contract benchmark known in the LNG trade as the gas-oil “parity coefficient” was sinking, thanks to escalating competition among Canadian, Australian, U.S. and Middle Eastern sellers.

An NEB export license is only one of many elements that must come into alignment before tanker terminal construction begins, said WCC. All eligible site, supply, pipeline and sales options were under review, the application added.

“Timing could be influenced by a number of variables including but not limited to project economics and available pipeline capacity to the west coast of British Columbia,” said the export license application. “The magnitude of the investment required throughout the value chain, from upstream supply to downstream markets, requires firm long-term sales agreements.” The license was granted but the project remains on the drawing board.

From wage earners to captains of finance, Canadians can only hope federal and provincial authorities learn from experience that economic faith alone does not move industrial mountains. Recognizing and promptly adapting to change is essential.