Kearl Lake: Round 2; Companies in new regulatory realm

Deborah Yedlin, May 15, 2008, Calgary Herald -- Bruce March, the (relatively) new chief executive of Imperial Oil can't be in his happy place these days. Everywhere he turns, the company is beset with uncertainty.

Whether it's Imperial's Kearl Lake project and the revoking of key permits that would allow development to proceed on schedule; its 25 per cent interest in Syncrude -- whose lease continues to be the subject of renegotiation with the provincial government; or the ongoing issues plaguing the Mackenzie Valley pipeline, March must wonder why he took the job back on Jan. 1 of this year.

The $8-billion Kearl Lake project, which was expected to be producing by 2011, had its first setback in early March, when the Federal Court said a joint review panel had not adequately assessed the impact of the greenhouse gas emissions that would be generated by the project.

This was then followed by the withdrawal of a water permit granted by the Fisheries and Oceans Department in late March.

Lawyers familiar with the process say they were not surprised by Wednesday's ruling -- pointing out the process by which companies receive approvals and permits is sequential; the water permit arguably should not have been issued before the question of greenhouse gas emissions had been examined and satisfied.

Either way, it's crummy news for March and his boss, ExxonMobil president and CEO Rex Tillerson; Tillerson hasn't exactly been enamoured with what's going on in Alberta -- in particular the fact that one of the outcomes of last fall's royalty review was the renegotiation of the oilsands lease terms governing Syncrude. The terms of those leases -- for the legacy companies of Syncrude and Suncor -- were supposedly in place until 2015.

The fact rival Suncor has already come to terms with the provincial government while Syncrude has not speaks volumes to the level of contention on this file.

While Imperial likely feels as though it is a lightening rod for everything that's wrong with the energy sector these days -- 500 dead ducks on a Syncrude tailings pond last month certainly didn't help -- the real story in all this has to be how the oilpatch perceives environmental risk.

"The energy sector has underestimated the resolve of environmental groups to challenge decisions made with regard to oilsands development," said Shawn Densdstadt, a partner with law firm Osler Hoskin & Harcourt whose practice is in environmental law.

Indeed, the Pembina Institute -- a long outspoken critic of the oilsands development -- went so far as to say it wants to see the Kearl Lake project cancelled.

People might be inclined to brush off the Pembina Institute, but given the recent successes of the environmental lobby at the expense of Imperial, it's unlikely none of the environmental groups opposed to future oil sands development are about to stop their challenges.

"What the industry is waiting to see if what's happened with Imperial is a one-off occurrence or whether these kinds of delays will become more commonplace," said Greg Stringham, vice-president of the Canadian Association Petroleum Producers.

In terms of Imperial, Wednesday's ruling means more delays as the company submits the necessary information in order to address the concerns regarding the greenhouse gas emissions; once that is satisfied, the water permit can be reissued.

But it can't, and shouldn't, stop there.

Canada's oilpatch has a lot of work to do -- both within the country and south of the border. There has been, in the words of the Captain chain gang from the 1967 movie Cool Hand Luke, "a failure to communicate" in the context of how the oilsands development is being managed. Derek Evans, the former CEO of Focus Energy Trust, went as far as saying during a speech on Monday that the energy sector has lost its voice and is not doing a good job of advocating for itself.

Densdstadt points out that the current perception in the U.S. of the environmental issues facing the oilsands is that they are insurmountable -- and that's largely because the environmental groups have taken control of that agenda. And 500 dead ducks -- or the polar being declared a threatened species by the Interior Department in the U.S. on Wednesday afternoon - isn't helping the situation.

What everyone needs to hear -- including Albertans -- is that the environmental legislation currently in place is more than adequate to balance the interests of industry, the environment and the broader population.

"I absolutely believe that the legislation is sufficient to allow for the sustainable development of the oilsands which means striking the right balance amongst all the different interests," said Densdstadt.

That may be true, but for now, the current situation facing Imperial means that any company facing the regulatory approval process in the context of an oilsands project best build in a lot of extra time into its schedule of development.

Wednesday's ruling is a clear sign, for better or worse, that the approval process isn't about to get any shorter.

And in a hot business cycle where time is money, that in itself isn't good news.