Usually the Friday before Labour Day is a quiet time. A time for reflection before it gets super busy in the fall. An opportunity to calmly lay out a reasoned list of things to watch for over the next few months – issues that need a critical eye, undercurrents that may not be entirely evident but could impact the energy space, emergent trends requiring analysis or upcoming events that will be of major significance.

 

This time frame works because it is after all the last long weekend of summer, before school gets under way in earnest with its attendant traffic snarls, panicky lunch prep and the like. The last weekend of summer where many people sit, actually and figuratively, with bare feet dangling off the dock, toes barely touching the water, calmly contemplating your existence until…

 

Well until someone dumps a live hand grenade in your lap.

 

Like the Federal court of appeals (FCA) did yesterday morning in the matter of the TransMountain Expansion.

 

Who saw that coming right? A kick in the nuts from some appointed judges. Ouch.

 

So, I guess that’s it. We dropped $4.5 billion on black and it came up red. Too bad, so sad.

 

Oh come on. Really? In this gong-show saga? Not a chance.

 

Don’t get me wrong, this is a colossal clusterf*** and the government (the Crown) really has no one to blame for themselves as a toxic brew of NEB closed-mindedness and Liberal party patronizing hubris towards First Nations has poisoned what should have been a pretty good party.

 

But, and it’s a big but… Let’s all take a deep breath. There is lots of time to assign blame. I’m more interested in practical reality.

 

While I’m sure that the government is massively disappointed in this decision, are any of us prepared to believe that they didn’t have an inkling this was coming the way it did? Or that if they didn’t have advance notice that they don’t have some form of contingency plan for the ruling going against them?

 

This pipeline is now the government’s baby. Since they approved it, they have been inexorably pushing it forward and they have expended tremendous political and now taxpayer capital. I guess what I’m getting at is that for me, if it was still Kinder Morgan at the controls, this ruling would be the Expansion’s death rattle – stick a fork in it, it’s done. For a government owned asset, it’s just another day at the office.

 

So – while I do agree this is a fiasco, I do not accept the breathless media opinion that TransMountain is done and that the Federal Government and John Q Taxpayer owns a lemon (we don’t, we bought existing assets anyway, remember?). We/they bought the project to get it done, so if you think for one moment that this is it for TransMountain and are out either celebrating some fake accomplishment (I see you doing shooters at the pub John Horgan) or blisteringly excoriating the Federal government for a colossal blunder (Jason Kenney – Live on Facebook!), then I want to borrow that turnip truck you fell off.

 

Why do I believe this? Well first off, I read the ruling. And while it’s bad, it’s not as bad as it’s being made out to be. Humour me.

 

While I prefer to leave it to much more learned constitutional scholars and judicial experts to split the hairs on this ruling, I cannot in good conscience shy away from providing my layman’s interpretation of what the court said and where the government and the NEB got it wrong, how to get it back on track and a little editorial fun.

 

First a caveat – I’m not a lawyer. I play one at work because I like to read long documents. This weird habit came in useful yesterday as I read a very long document. It was really boring. I have to admit I did doze off. But between naps I got the gist. Then I spoke to the smartest lawyer I know and he said I had completely misinterpreted what I read. Actually that last part isn’t completely true – he assumed I hadn’t read anything. So here’s what I think.

 

The ruling is decisive in that it tells the government they have to stop building the pipeline and that they need to fix things, but it also pretty narrow in that the ruling and the court spells out to the government specifically what it needs to do to get it done.  And while there is always risk in having to redo parts of the approval process – the government could get it wrong again – when the court says “do these two things to get your approval back”, you do those two things.

 

 

 

All kidding aside, the problems for the NEB and the Federal Government (the Crown or Canada) started a long time ago. And for the record have absolutely nothing to do with the purchase of Transmountain and everything to do with successive governments tinkering with regulatory processes and trying to pay lip service to aboriginal/First Nations concerns while doing what governments do best – dropping the ball, messing up, assuming they know best – you get the picture.

 

In a nutshell the ruling centres around two issues – the duty to consult and a flaw in the NEB review – and everything cascades from there.

 

Duty to consult

 

As with all infrastructure projects, the Federal Government has a “duty to consult” impacted First Nations. This duty to consult is a big deal in Canada and a major component of these projects. Why do we have to do this? Well, because it’s the right thing to do and because of something called the United Nations Declaration on the Rights Indigenous Peoples or UNDRIP. In that declaration, governments are required to consult and seek consent from indigenous peoples when pursuing major infrastructure projects. Canada is not a signatory to that agreement, however we have adopted this standard of “duty to consult and accommodate” and, under the Liberals, have signalled that we would abide by the spirit of UNDRIP but stop short of consent, because our consultation regime is so robust. Oopsie Poopsie right?

 

As many people will recall, the Northern Gateway pipeline had its approval revoked/quashed under very similar circumstances – ironically by the same judge.

 

Given what they learned from the Northern Gateway ruling, the government undertook an extra phase of consultation (Phase III) wherein the much more indigenously sensitive Liberal government would adjust the process and make sure not to repeat the same mistakes. Except they did.  And just like with the Northern Gateway, the court found that the government (Canada) failed in its duty to adequately consult with the First Nations affected by the TransMountain Expansion.

 

 

While it’s easy to question when enough consultation will be enough and to completely cynical and skeptical about the whole consultation process itself, clearly this is a grey area that needs work. I’ve always felt that you can never be overdressed. Similarly, you can never over-consult.

 

The ruling against Northern Gateway said that “Canada was required to engage, dialogue and grapple with the concerns expressed to it in good faith by the Indigenous groups impacted by the Project. Meaningful dialogue required someone representing Canada empowered to do more than take notes—someone able to respond meaningfully to the applicants’ concerns at some point in time.”

 

In possession of this ruling, the Federal Liberals endeavoured to put in place a process for consultation that would pass the test – deep, meaningful consultation and, according to the FCA, if they had actually followed their process, they would have executed their duty, instead of bragging about how they were doing it right and ultimately better than the Harper conservatives had done.

 

How did they fail? They didn’t engage in meaningful two-way dialogue. They didn’t have someone in the room who was empowered to make concessions, discuss accommodations and bring concerns to the powers that be. They for the most part refused to consider that any part of the NEB report and recommendation could be misinformed or incomplete and took the position that they couldn’t alter the conditions imposed by the NEB or introduce new ones. They sent note-takers when they should have sent ministers. They listened but didn’t hear. Basically the court accused them of being all hat and no cattle.

 

They repeated all the mistakes the Harper government made in Northern Gateway, but had more hubris and better marketing.

 

 

So what’s the fix? Lather, rinse, repeat. The Phase III consultation took about six months. Time for Phase IV, A New Hope.

 

The court says in its ruling and remedy that :

 

“As mentioned above, the concerns of the Indigenous applicants, communicated to Canada, are specific and focussed. This means that the dialogue Canada must engage in can also be specific and focussed. This may serve to make the corrected consultation process brief and efficient while ensuring it is meaningful. The end result may be a short delay, but, through possible accommodation the corrected consultation may further the objective of reconciliation with Indigenous peoples.”

 

So even the court in its ruling is saying that this doesn’t need to be a lengthy process and has prescribed the remedy. Consult, accommodate where possible. Actions, not gestures. Get on it boys!

 

As an aside, the irony in this ruling of course is (to paraphrase an anonymous source) that the court has in essence called out Trudeau and the Liberals for virtue signalling.

 

Original Sin

 

If there is another valuable lesson in assessing pipelines, it’s that they affect a lot of stuff. So if there is a lot of stuff, you need to review the stuff. You need to account for everything. If the people idling in the parking lot waiting to intervene in an NEB process are generating downstream emissions that needs to be accounted for. On a similar but more serious tack, if you are reviewing an export pipeline that is meant to increase tanker traffic in a very crowded urban marine environment that just happens to also have some endangered orca populations, you should probably do a proper assessment of the environmental impact of those added tankers. Just in case someone decides to appeal to some justices who may look at that and say “yo, didn’t you skip something?” Which is exactly what happened.

 

So the FCA identified what it saw as a flaw in the NEB report and recommendation to the Cabinet. The flaw in this instance was the NEB not taking into account specifically the impact of increased tanker traffic in the Burrard Inlet and the Salish Sea, its impact on the Orcas that live there and the impact of a spill. This means that when the Governor in Council issued their certificate of public convenience and necessity they were apparently relying on a flawed report. Of course it may be in the government’s purview to proceed anyway except that in the “duty to consult” part of the ruling, one of the things the government essentially ignored that got their knuckles rapped was First Nations concerns about the impact of increased tanker traffic … Ugh, you get the picture.

 

So what’s the deal, you may rightly ask. Marine traffic is not part of the NEB’s mandate, nor are species at risk.  How is this their problem?

 

While the NEB’s mandate is to assess pipeline projects, under the Canadian Environmental Assessment Act of 2012 (passed by the Harper Conservatives) it can be argued that the NEB has the ability and responsibility to assess activities that are incidental to the project under consideration. So marine traffic, spills and species at risk, while not under the jurisdiction of the NEB should have been considered because, well, they are all ancillary to the project. Basically the FCA said the NEB couldn’t pass the buck once the pipeline reached the coast.  As per the FCA:

 

“The Board unjustifiably defined the scope of the Project under review not to include Project-related tanker traffic. The unjustified exclusion of marine shipping from the scope of the Project led to successive, unacceptable deficiencies in the Board’s report and recommendations.”

 

In English, the NEB should have done a more fulsome study of the effects increased tanker traffic and spill risk, as well as a review under the Species at Risk act. While it is hindsight to say that conclusions would have been different, this was a pretty big miss by the NEB, which probably requires some explanation on their part. Obviously the NEB, at the time the scope was being set, determined that the marine traffic issue was outside of its mandate, perhaps when it was brought up later they made the assumption that the Ocean Protections Plan, introduced by the Federal Liberals was sufficient to address marine tanker traffic concerns (and it probably is), but leaving it out was a major error.

 

However, it’s too easy to blame the NEB – they were just following their scope and ultimately the Feds could have helped themselves by not putting themselves in a “see no evil, we can’t change anything” box during the Phase III consultation phase that they pooched.

 

Maybe if we weren’t constantly playing regulatory piñata and changing the rules this wouldn’t have happened.

 

So does this part of the ruling kill the project? Far from it.

 

Here, as in the duty to consult ruling, the FCA is very specific about the deficiency and what the remedy is:

 

“The issue of Project approval should be remitted to the Governor in Council for prompt redetermination.

 

[769]  In that redetermination the Governor in Council must refer the Board’s recommendations and its terms and conditions back to the Board, or its successor, for reconsideration. Pursuant to section 53 of the National Energy Board Act, the Governor in Council may direct the Board to conduct that reconsideration taking into account any factor specified by the Governor in Council. As well, the Governor in Council may specify a time limit within which the Board shall complete its reconsideration.

 

[770]  Specifically, the Board ought to reconsider on a principled basis whether Project-related shipping is incidental to the Project, the application of section 79 of the Species at Risk Act to Project-related shipping, the Board’s environmental assessment of the Project in the light of the Project’s definition, the Board’s recommendation under subsection 29(1) of the Canadian Environmental Assessment Act, 2012 and any other matter the Governor in Council should consider appropriate.”

 

Again, in English: The Governor in Council decision should be withdrawn and the NEB should be required to go back and do its homework on marine traffic, species at risk and come back with a revised recommendation. And that the Governor in Council can set a time frame for this review. And then they can make their fully informed decision.

 

Phew. Lots of stuff. Before I go all editorial on you, one final comment on this ruling that I think is being missed and is actually quite important, so I’m going to put in bold.

 

In its decision, the FCA did not say that any other part of the NEB’s report was wrong and consistently held that the consultation process followed the rules and, with the exception of missing the mark on Phase III, did what it was supposed to do. Aside from these two identified issues, the rest of the appeal was denied. The government and the regulatory boards can take corrective measures and get back on track.

 

 

So, what’s next? What are the government’s options?

 

Appeal to the Supreme Court.

 

This is a possibility and Rachel Notley has requested this, but carries the risk that the appeal ruling is upheld. It has been suggested that a Supreme Court ruling could take up to 24 months but this seems a bit ridiculous to me. In a matter with such economic and political significance, where the Appelate is the Federal Government, I would imagine they could get an expedited hearing. Even then it’s likely six months of do nothing. So, with the risk of getting the same ruling back and the wasting of time, why bother. Maybe it’s a concurrent exercise with another option.

 

Legislative Options

 

These seem limited. There was some Twitter excitement about the “notwithstanding clause” but it doesn’t appear to be relevant for this type of judgement.

 

There may be a case that the “Governor in Council” can in some ways make this happen despite what the courts have said with some kind of national benefit ruling. This is a bit of a nuclear option and a legal grey area. It would seem more logical to push some legislation that keeps the preparatory work for the project moving forward while the other issues get sorted out.

 

Do what you were told to do

 

As detailed above, the FCA specified remedies that should be made. These are relatively narrow in scope and can be done in a timely fashion, certainly when compared to the gestation period of a pipeline. The key is to get them started sooner rather than later and get them right. As per the ruling, if they do this, the project can move forward. Full stop.

 

I would imagine that flush off their victory, the first nations groups will be less inclined to actively participate in renewed dialogue, but with a chastened federal government commanded back to the table by the Federal Court of Appeal, it may be too tempting to hold out long, given the size of the chequebook. Remember, the duty to consult requires a two-way dialogue. If the government is in good faith at the table and ready to deal and the First Nations balk, the Feds have held up their end of the bargain.

 

As it regards the further review of marine traffic. Get on it. The risk is real and quantifiable. All the data is there so it shouldn’t be that complex an exercise. As the project owner, the federal government is in a unique position to address all these issues in a satisfactory and timely fashion.

 

So what does it ultimately mean?

 

Our regulatory process is awful. And it has changed course multiple times across multiple governments. It has been used as a political football and is now costing the economy billions of dollars in lost opportunity. This is not lost on anyone in or out of government. But hopefully, finally, this can serve as a catalyst to get it right. There are a lot of people watching.

 

I can understand the doomsday predictions – capital flight, $4.5 billion into thin air, the end of the energy industry, the end of carbon taxes in Canada – but I can’t buy into it. It all plays well on BNN and social media and to everyone’s respective bases. But it overlooks one critical thing.

 

A few months ago when I laid out the case for why the Feds needed to buy this project, one of the key points was what they have uniquely in their favour – they have the time and wherewithal to outlast regulatory gridlock and the ability to set the regulatory framework.

 

The Federal government has the power to order these reviews, set the timelines, make the necessary concessions and accommodations that a private proponent will never have.

 

This ruling was coming no matter who owned the project, but only one owner can actually overcome this ruling.

 

For the Feds now, it’s no longer about the return on investment (if it ever was). It’s about saving face, the economy, an election and getting the pipeline built.  That’s why I believe it will get built.

 

As I said at the beginning. A colossal mess. But it can be fixed.

 

And no, this doesn’t mean that we should build Energy East.

 

Prices as at August 31st, 2018 (Aug 24, 2018)

• The price of oil rose during the week on Iran sanction concerns but gave ground late
  • Storage posted a decrease
  • Production was flat
  • The rig count in the US was up marginally
• After a smaller than expected injection, natural gas did nothing during the week…

 

• WTI Crude: $69.80 ($68.72)
• Nymex Gas: $2.916 ($2.917)
• US/Canadian Dollar: $0.7665 ($ 0.7485)

 

Highlights

• As at Aug 24, 2018, US crude oil supplies were at 405.8 million barrels, a decrease of 2.6 million barrels from the previous week and 52.0 million barrels below last year.
  • The number of days oil supply in storage was 22.9 behind last year’s 26.0.
  • Production was flat for the week at 11.000 million barrels per day. Production last year at the same time was 9.530 million barrels per day. The change in production this week came from increased production in Alaska and decreased production in the Lower 48.
  • Imports fell from 7.518 million barrels a day to 7.485 compared to 7.905 million barrels per day last year.
  • Exports from the US rose to 1.779 million barrels a day from 1.155 last week and 0.902 a year ago
  • Canadian exports to the US were 3.532 million barrels a day, up from 3.350.
  • Refinery inputs were down marginally during the week at 17.892 million barrels a day
• As at August 24, 2018, US natural gas in storage was 2.505 billion cubic feet (Bcf), which is 19% lower than the 5-year average and about 21% less than last year’s level, following an implied net injection of 70 Bcf during the report week
  • Overall U.S. natural gas consumption was flat during the report week
  • Production for the week was flat. Imports from Canada were up 5% from the week before. Exports to Mexico were down 2% from the week before.
  • LNG exports totalled 22.0 Bcf.
• As of August 31st the Canadian rig count was 306 (AB – 217; BC – 24; SK – 60; MB – 5; Other – 0. Rig count for the same period last year was 358.
• US Onshore Oil rig count at August 24, 2018 was at 862, up 2 from the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was up 2 at 184.
  • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
• Offshore rig count was flat at 16.
  • Offshore rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 62%/38%

Drillbits

• All that stuff above
• NAFTA
• Trump Watch: NAFTA. Insulted Canada. Eye roll emoji.