Fighting Words: Oil Sands Antagonists Square Off

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Big Business and environmental activists square off over the oil sands. Has the truth been caught in the crossfire? This article appears in the November issue of Alberta Venture.

By Peter McKenzie-Brown

It has been a year in which Alberta’s oil sands have gotten attention for all the wrong reasons, itsl environmental record under attack from seemingly every possible direction. In addition to the usual rabble of environmental organizations and activists, the oil sands have been the subject of consumer campaigns from communities and corporations south of the border, each claiming to be greener than the next. Worse still, there’s no reason to believe the war of words will die down anytime soon between non-government organizations and crusading retailers on one side and their targets in industry and government on the other.

Early last summer, the small city of Bellingham, Washington, passed a resolution saying the city would boycott fuels derived from Alberta bitumen. As it ended, Walgreen – a large American retailer – did the same. These were just the latest of many efforts over a number of years to stop or slow down oil sand development by boycotting fuels that come from the oil sands. Although these campaigns got a lot of press, they were small potatoes in the big scheme of things.

For example, the US Congress has already passed a law banning some government agencies from directly promoting energy projects that will emit greater greenhouse-gas emissions over their entire life cycle than conventional oil. US legislation from 2007 prevents some federal agencies from entering into fuel contracts that encourage unconventional energy development. And California regulations require fuel suppliers to reduce the emissions from the fuel they sell – and to account for those emissions right back to the original source of production, including emissions in Alberta.

Returning to the small potatoes, a particularly robust attack recently came from Lush Cosmetics – a UK-based franchise which, according to its website, “offers over 300 luxurious, ethical and indulgent bath and beauty products made by hand with fresh, organic ingredients.” In July, the company’s North American operations took on the oil sands.

According to Bruce Anderson, an Ottawa-based senior associate with Harris/Decima Research and a senior advisor to NATIONAL Public Relations, this was part of the company’s effort “to present its own brand credentials to the marketplace.” Lush has embraced a series of environmental issues – for example, they also ran a short campaign on sealing. “What is remarkable about (these campaigns) is that they are less about the specific issue than about Lush as a brand.”

Prepared by an American advertising firm, the company’s website video describes the oil sands as “the largest and most destructive project on Planet Earth” – a “toxic sacrifice zone the size of England.” “The tar sands suck water, suck money, suck energy,” it continues. “The tar sands poison water, poison wildlife, poison forests. The tar sands destroy coastal cities. The tar sands destroy Canada’s rep(utation). The tar sands kill native people. The tar sands kill old people. The tar sands kill young people.” The culprits, the video explains, include big oil, big banks and the politicians in bed with them. The company’s preferred solution is to “Shut the f*cker down.”

Not surprisingly, this incendiary attack attracted the attention of representatives from government and industry. In a statement, Canadian Association of Petroleum Producers (CAPP) president Dave Collyer said “activities like this protest blur the lines between fact and fiction and add nothing to the serious dialogue occurring among reasonable people seeking solutions to our energy challenges.”

Alberta cabinet minister Iris Evans called the company’s North American head office in Vancouver to straighten out CEO Mark Wolverton on the facts of the matter. The soap company then put out a news release saying that “Minister Evans acknowledged that today’s industry has the technology to pull oil from the tar sands without creating toxic tailings ponds yet continues to issue permits for development that include new tailing pond projects.”

The Lush Cosmetics campaign illustrates the action/reaction nature of the public relations battles that the oilsands tend to provoke, but it also underscores the dilemma the industry is facing. “The oilsands campaigners are looking for situations in which corporations are facing some kind of reputation risk,” according to Bruce Anderson. “What I have found is that companies want to lighten their environmental footprints, like consumers do, and they do regard their reputations carefully. But at the same time they need to make information-based and practical decisions.”

The emotional and divisive battles over the oil sands reflect, in part, fundamental changes in our society. New technologies have made inexpensive media campaigns not just possible but powerful, and people are more receptive to green messages. The general decline in public regard for the first and second sectors of society – business and government – has been well documented. And the third sector, which includes the ENGOs leading the charge, is growing rapidly. To a large extent this is because of the proliferation and growth of ENGOs – not-for-profit environmental enterprises which have grown in number and financial strength over the last 20 years. And the third sector includes the environmental non-government organizations (ENGOs) which, at their best, represent knowledgeable, concerned citizens who are passionate about such issues as pollution and the environmental impact of industrial development; it is growing rapidly. Combined, these ingredients make up a recipe for conflict.

Who are the players, then? On one side there is government and industry, who argue that oil sands development contributes to energy security, economic growth and the trade balance, and that the stewardship of the environment is effectively being looked after by provincial and federal regulatory bodies. Somewhere in the middle are critics like the Pembina Institute and the Alberta Wilderness Association, which have focused mandates and take credible steps to improve oil sands development. At the other end of the spectrum are organizations like Natural Resources Defence Council, the Sierra Club and Greenpeace, which want fundamental social and environmental change.

And despite the preponderance of plaid and patchouli oil among their more militant members, these activist organizations aren’t necessarily short on resources. Jerry Bellikka, director of media relations for the premier’s office, argues that many anti-oil sands organizations work with significant budgets. “They are often well funded. (Some ENGOs) have told us that when they do one of their campaigns they get lots of donations. Whether it’s accurate or not, we don’t know; they don’t give us access to that sort of information directly. But what we do know is that these are very well-funded campaigns. Greenpeace is an excellent example.”

Last year Greenpeace had total worldwide income of about US$267 million, and directed about US$35 million to off-oil climate and energy campaigns. To illustrate the rapid growth of ENGOs, it is worth noting that global income for Greenpeace in 1993 was only US$34 million. Like other third sector organizations, ENGOs are rapidly proliferating in number.

Not all ENGOs are created equal, though. For example, Corporate Ethics International gained a great deal of media attention within Canada by creating a misleading website video and making a miniscule advertising buy – a few billboards in four American cities followed by even less advertising in Britain. Their message was that prospective tourists should punish Alberta for developing the oil sands by not visiting the province. News stories, talk shows and editorials agonized over the story, which proved to be riddled with inaccuracies.

In contrast, Greenpeace has used published reports, boots on the ground and a flair for the dramatic to become a distinctive protest voice in the province. The organization conducts at least one high-profile public relations event each year. Most recently it involved unfurling from the Calgary tower a banner with the message: “Separate Oil and State.” According to Jerry Bellikka, a spokesman for the premier’s office, “we in the provincial government are not really sure what their motivations are. It’s another silly stunt from an organization known for silly stunts.”

Greenpeace activist Mike Hudema begs to differ. “We hung the banner in Calgary because that’s where the industry is headquartered. Our message is that the relationship between the industry and government is too close. Industry shouldn’t be allowed to regulate itself. Companies are allowed to have endless (environmental) exceedences without being punished.”

Surprisingly, says Simon Dyer, the director of the Pembina Institute’s oil sands program, the warring statistics around oil sands development are mostly “accurate. Some will speak to the fact that oil sands operators are investing billions of dollars trying to deal with tailings waste (true), while others will say that successful reclamation of these toxic lakes…has never been demonstrated (also true).” Dyer represents the middle ground among the critics, and he’s concerned that PR has taken over the debate.

“As long as this is framed as a public relations battle the debate is going to continue to deteriorate,” he says. “Mudslinging is going to continue from both sides. Reputationally, Alberta and Canada and the oil sands are going to receive scrutiny and the issues are going to continue to grow.” The Pembina Institute’s position is that “There are issues around oil sands development that need to be addressed. The best way to allay criticism is to engage the critics, find the root of the problems that are causing those concerns, and demonstrate through actions how those are being addressed.”

“Right now,” Dyer says, “the public relations machine is ramping up on both sides of the debate, and those of us who are actually interested in ensuring that oil sands development is conducted in a responsible way are finding that our voices aren’t being heard. (The protagonists should) demonstrate that you are willing to solve the problems associated with oil sands development with action.”

Environmental specialist Carolyn Campbell with the Alberta Wilderness Association tells a similar tale. “Our approach is to work through public awareness, discussion and persuasion, but we don’t hesitate to use legal recourse where that’s necessary,” she says. “We are very dissatisfied with some of the environment-related actions going on in this province. I think the government needs to look at itself to see why stunt-oriented organizations are focusing on Alberta. Other paths (to environmental change) have not been effective.”

There are a lot of “pressing issues” around the oil sands, she says. “The province made a cumulative-effects commitment in the late 1990s focused on the Wood Buffalo municipality area,” she says. The idea was “to set up multi-stakeholder groups to manage the effects of oil sands development, to set thresholds and limits that the fairly fragile boreal ecosystem in northeast Alberta can sustain…. We don’t feel that’s been honoured. The pace of leasing and project approvals has completely swamped the recommendations of that cumulative effects group.” The Pembina Institute’s Dyer agrees. “I think the Alberta government is getting bad advice by the people who are telling them just to spend more money on public relations. The oil sands do not have a PR problem (but) a problem around management and cumulative environmental effects.”

The ENGO third sector has been vocal and articulate. What about the other two sectors, business and government?

Given the size of the prize, business and government are wagering relatively little on public relations, but that is changing. CAPP launched a $10-million campaign in the spring. Earlier this year the Oil Sands Leadership Initiative (OSLI) – a consortium of Suncor Energy Inc., ConocoPhillips Canada, Nexen Inc., Statoil Canada and Total E&P Canada – formally invoked a mandate to improve the oil sands industry’s reputation by “demonstrating and communicating environmental and social and economic performance and technological advancements.” This year, OSLI’s budget is $10 million.

These initiatives are the exception, however. Except for highly-focused campaigns directed at public consultation sessions and other constituencies when they are applying for development licenses, the sectors with the most to gain have done little PR. Resource developers, energy companies, construction firms, trade councils and other parts of the industrial sector that identify with the oil sands have largely remained silent. So controversial have the oil sands become that producers forbid rank-and-file employees to talk to media about the business, even when they are technical experts.

That lack of engagement provoked a stinging rebuke from retired EnCana CEO Gwynn Morgan, highly respected as a progressive voice of industry. In a Globe and Mail column in September titled “leaders must counter bogus oilsands spin” Morgan, based on his years as a CEO, concludes that corporations need to ensure that what they say stands up as truthful in the face of intense scrutiny, while ignoring the critics’ innuendo and distortions.

“But,” Morgan wrote, “I also learned that you don’t win games back on your heels playing defense. Industry leaders need to do more than sitting behind the blue line trying to block shots. They need to take their oilsands story and skate hard up the ice.” And if industry remains reluctant to move the plate into the other end of his own, the provincial government is doing what it can to record the puck in the meantime. One sign: the Alberta government’s recent $268,000 advertising campaign, which included two series of newspaper ads – one for the dailies, the other for community papers. Of course, that is only part of the province’s effort. “In a way silly stunts (like those of Greenpeace) work in our favour,” says provincial spokesperson Jerry Bellikka, “since traditional media respond to that kind of thing with calls to reliable sources like us.”

Bellikka describes two prongs of Alberta’s response to the attacks on bitumen development. “We have developed a campaign aimed at Albertans themselves, many of whom have worked in the energy industry and we want them to (help us) tell it like it is.” That’s the newspaper advertising campaign.

In addition, he says, “Where there is an outright misrepresentation, we attack it directly. When they say the oil sands are destroying an area the size of England, we say ‘No, (the amount of land being directly affected is) smaller than London. In fact, it’s 0.016% of the boreal forest in Alberta.’ It’s true that oil sands production is the fastest-growing source of CO2 in Canada, but the air around oil sands plants is much cleaner than, for example, the air in Ontario’s Golden Horseshoe.”

For its part, the industry sounds like it’s ready to stop playing defence. The industry is the other. According to CAPP vice president of communications Janet Annesley, “We have spent a long time being framed as villains by environmental organizations, and we have been trying to prove them wrong. That was not an effective approach. We have to show Canadians our business. We have to show them the kinds of people who work in our companies and the solutions we find to problems in a difficult business. We need to exit the discussion about who is right and focus on doing good work.”

Harris/Decima’s Anderson agrees. “Most customers and consumers these days – at least in in the world I live in – understand that energy has some environmental impact somewhere. For them, the only wrong answers about the environment are intransigence and indifference on the matter of environmental impact. You need to show them how you are mitigating the problems.”

Annesley describes the off-oil NGOs as being driven by an agenda, but says she doesn’t fully understand what that agenda is. “They really seem to think that Big Oil is the only thing standing between society and a renewable energy future. That doesn’t make any sense, but they do seem to believe it.”

She continues, “We fundamentally beg to differ. The solutions are not available today. We know that energy demand is increasing, that energy resources are declining and that much of the conventional energy available is in countries that are very difficult to do business with. We know that energy supplies must diversify. We know that energy development is under greater scrutiny than ever before. And we know that the industry has to meet the planet’s growing energy needs in ways that are increasingly environmentally accountable. That is the rock and the hard place in which we sit.”

Given its precarious position, Roger Gibbins, the president and CEO of the Canada West Foundation, thinks a little humility would serve the industry well. “The oil sands proponents will to some degree always be on the defensive on the environmental front,” he says. “The oil sands industry has a lot of negative images to deal with. The industry has to acknowledge that its work has had an adverse environmental impact in the past, and begin there. I think that if the industry is a bit repentant, and admits it hasn’t done the best job in the past, it will be in a better place to win people’s minds and hearts. Just arguing with environmentalists doesn’t have that effect.”

That’s a message that seems to be finding an audience. In September, Marcel Coutu, the CEO of Canadian oil Sands and the chairman of the board at Syncrude, reached out to the grandfather of Canada’s environmental movement, David Suzuki, and asked him to broker a truce between the two sides. “Instead of having this polarized discussion about (non-governmental organizations) thinking we’re this, and industry thinking we’re that,” Coutu told the Edmonton Journal, “why don’t we get together and find out what the common ground is, and agree to what is best practice and go forward that way, instead of wasting so many resources on both sides, with the media in the middle trying to communicate messages?”

Suzuki scoffed at the offer, though, declining the invitation to play go-between. Which side will take the next step remains to be seen.

The Unwavering Inventor

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Is it his demand to retain property rights or problems with the technology that has kept Jan Kruyer’s bitumen separation technique uncommercial for decades? This article appears in the November issue of Oilsands Review

By Peter McKenzie-Brown
In 1982, Oilweek magazine published a brief article titled “Oleophilic sieve separation process offers advantages.” The item offers a schematic diagram, test result tables and, in general, a thoughtful description of the latest piece of oilsands technology.

This oleophilic sieve offered improved bitumen recovery from the oilsands and from the sludge in tailings ponds. It also offered reduced water pollution. The magazine indicated that although the inventor, Jan Kruyer, had conceived the technology while working for the Alberta Research Institute, there was a dispute about licensing and patents for the technology.

That was then and this is now. Strangely enough, in the intervening decades the main thing that has changed is that the debate over intellectual property has been settled. Jan Kruyer, who is now 77 years old, has spent half of his adult life trying to get recognition for his technology, and to get a major oilsands company to adopt it.

If the technology has the potential he suggests, most of the environmental problems associated with oilsands mining would blow away with the wind. Of course, there is also the adage that “if something sounds too good to be true, it probably is.” The Oilsands Review decided to investigate.

The Inventor
Jan Kruyer is a colourful character who has dedicated most of his adult life to oilsands development. An immigrant from the Netherlands who experienced the full horror of the Second World War, he arrived in Alberta as a young man of 17 in 1950. He began working on a farm, and then took a variety of unskilled urban jobs. Eventually, he settled into a night job at a service station in Calgary.

In his twenties he upgraded his high school education and then went on to the University of Alberta. So agreeable is his personality that a scholarship provided by gas station customers funded his first couple of years at the University of Alberta.

Although he hadn’t yet finished his formal schooling, Kruyer began working at the Alberta Research Council (ARC) in 1961 – the same year Karl Clark, who in the 1920s invented the hot water process for separating bitumen from oilsands, retired. Kruyer received a degree in chemical engineering in 1963 after a year’s educational sabbatical, then returned to ARC. In total, he worked at ARC and AOSTRA (Alberta Oil Sands Technology Research Authority) for nearly 20 years.

His departure involved a scandal. He had applied for the patent in 1976 without his employer’s knowledge. When AOSTRA demanded that he sign over the rights, he refused. “When I started working for AOSTRA,” he says, “the first thing they said to me was that if I invented anything I would have to give my intellectual property over to the organization. I said, ‘If I give you the patents you will market them, and I will end up with a pittance and there is no reason for me to do that because I am not a civil servant. I am an independent researcher, and I do not want to become a civil servant.’” He says AOSTRA provided “perhaps $50,000” in initial research funding, but cut off the cash when he refused to sign over the patents. He was later fired.

Kruyer’s insistence on his ownership of the technology became a cause célèbre. Few people were neutral on the case, which crawled through the courts. Perhaps a bit naïvely, Kruyer says “The Research Council after they fired me hired a very smart engineer to try and repeat the work I had done and make it work, and he couldn’t. No matter how well he tried he couldn’t make it work, so the Research Council boxed it all up and they came to me and they said ‘Let us come to an agreement. We are an organization that wants to advance the oilsands of Alberta, and we tried to kill you when we should be helping you.’ That’s the reason we ended up with an agreement. A court-consent agreement gave (Kruyer’s company) full control of the technology.”

He spent the 1980s in particular promoting his technology. A memorable photo from the Edmonton Journal shows him drinking a glass of tailings pond water after his system had processed out the sludge.

The Invention
What is this technology, and how does it work? Kruyer had developed the oleophilic sieve separation process as an alternative to Clark’s hot water process. In addition, he viewed it as an effective technology for removing bitumen from tailings ponds.

The concept behind it is simple. If you take a spade to the oilsands, most of the mixture will fall away as you empty the shovel. However, some of the bitumen will stick to the head of the shovel – and to its wooden handle, for that matter. The reason is that metal and most other materials are oleophilic: they attract oil. That is the principle upon which Kruyer’s separation system is based.

Bitumen separation takes place in two stages. The first is oleophilic agglomeration; the second is oleophilic sieving. The system is much simpler than it sounds.

Agglomeration takes place when a slurry or sludge containing bitumen is fed through a turning tumbler containing a variety of steel balls. Tiny shreds of bitumen adhere to the balls, and gradually combine with other bits of bitumen. As the tumbling goes on, the bitumen forms into streamers hundreds or thousands of times larger than the original bitumen and oil particles. In this way, the bitumen agglomerates into ever-larger streamers of bitumen. Clay, sand and water, which do not attract oil, separate naturally from the bitumen as the tumbler turns.

Once agglomeration has taken place, Kruyer’s process passes the mixture through a sieve. Also manufactured from steel, the sieve is like a mesh screen. Since it too is oleophilic, the sieve captures the oil while the clay, sand and water pass on through. The bitumen is recovered from the sieve as the process continues.

Not only does the system recover bitumen. Since metals and metallic ores like zircon and titanium adhere to the bitumen during processing, they don’t end up in the tailings ponds. This reduces heavy metal pollution. It also enables the oilsands producer to create value by extracting these materials from the bitumen and selling them for industrial purposes. Metals recovery takes place during normal upgrading operations.

Kruyer no longer pitches this technology as an alternative to Karl Clark’s hot water process. However, he believes that by using it to treat sludge and froth from tailings ponds it can recover bitumen and reduce chemical “fines.”

How much additional bitumen could the process recover? “Typically,” he says, “bitumen mining projects lose 10 percent of the oil they mine. (Of that amount) perhaps 6 percent will eventually settle to the bottom of a tailings pond as sludge. With our process, we can go into that sludge and recover anywhere from 75 percent to 90 percent of the bitumen. This includes the bitumen mats that are floating at various levels in the tailings ponds.… The amount we recover really depends on the percent of bitumen remaining in the sludge. If the amount of bitumen in the sludge is only 2 percent, which is low, we can recover 50 percent. However, if the amount is 6 percent, we have proven in our pilot plants that we can recover 90 percent.”

If the Kruyer technology really works, potential benefits range from ecological to economic. Given these levels of bitumen recovery, the system would be virtually self-financing. Process water would be cleaner. So would the clay, which would therefore be easier to dispose of. In addition, you wouldn’t need to add gypsum into the tailings pond to settle clay particles. Reducing the size of the tailings pond could enable the operator to expand the mine. Finally, of course, the public relations benefits of being able to demonstrate a “greener” oilsands plant would be huge.

The Controversy
It would be a simple matter to say that the promises are great but the proof isn’t there. In this particular case, however, papers presented by Suncor and by AOSTRA tend to support Kruyer’s case. Both date from 1985.

Among them, AOSTRA, Syncrude and Suncor invested several million dollars in testing the technology. An AOSTRA report was particularly favourable, although it should be noted that one of the three authors was Kruyer. At one point, the authors say “the pilot plant was simple to construct and operate. It functions well without major interruptions, requiring minimal operator supervision. Separation of bitumen was effectively carried out at pilot plant ambient temperatures (15°C). The only heating required was for removing bitumen from the oleophilic sieve to yield a free-flowing, warm, good quality deaerated bitumen product. Solution water was not required nor any chemicals used to separate the fresh sludge.” Suncor researcher I.C. Webster was one of the authors of this document.

Webster was also one of the authors of the Suncor research paper, which was far more critical. Suncor had tested the system for processing sludge but also for primary bitumen extraction. The researchers found that primary recovery was comparable to that of the tried-and-true Karl Clark hot water process. While the numbers in the Suncor paper suggested that bitumen recovery using the process was good whether you extracted the stuff from oilsand slurry or from tailings pond sludge, the researchers complained that operating components were unreliable. They described numerous technical challenges and were not nearly as sanguine in their conclusions as AOSTRA.

Kruyer argues that Suncor’s pilot plant made his system unnecessarily complex. The problems occurred because company engineers added too many pots and pans to a basically simple process.

Kruyer says Texaco and Petro-Canada also tested the system. Also, “Sohio was very interested in using this in the oilsands in Utah,” he adds with unintended humour, “until a court case stopped them from developing the Utah sands.”

Why has the Kruyer process not become an industry standard? The Oilsands Review believes there are two probable reasons.

The less likely reason is that his powerful sense of ownership is standing in the way. Kruyer, however, believes that intellectual property issues are the main issue. “I am a poor inventor,” he says, “and that means I have to depend on industry to fund the work I do. The problem has always been that they want to own the technology. I have always refused to give up the ownership, and that has been a hurdle that has slowed it down.” He continues, “Patenting protects the right of the person who has a bright idea. As soon as companies decide that they will develop the technology by themselves and share it among themselves, they are competing with the whole objective of the patent procedure. They are saying that patent protection is not the right of society.”

“My insisting on a royalty is the reason this technology has not yet become the standard. I fully understand why they want to have this process without paying a royalty. However, my attitude is simply different. I don’t want to be pushed aside. You see, when the sludge program was so successful and the industry couldn’t do it but we could, they came to me and said ‘We would like to develop this technology ourselves and we will just push you aside.’ I don’t think they have the right to do that. Intellectual property is the property of the person or persons who pay for development. It is not the right of industry just to grab something and take it away.”

The more likely reason the Kruyer process has not caught on is that his invention is not as effective or as low-cost as the inventor would like to believe.

The Oilsands Review asked for assessments of the Kruyer process from technical people at both Syncrude and Suncor. Neither company was willing to publically comment, citing corporate policy. Off the record, however, a manager familiar with the research said that his company “agreed to disagree with Kruyer on the value of his method.”

In a way, Kruyer raised the first red flags about this technology when he reported that his successor at AOSTRA couldn’t make the system work; there must be a message in that. Despite substantial investments in research, the industry has not identified his process as a silver bullet.

Whatever the future holds for the Kruyer process, the inventor’s dedication to his technology deserves recognition and respect. His years in the wilderness are a tribute to his belief in the importance of intellectual property, to his understanding of the worth of Alberta’s oilsands and to his Dutch stubbornness. Jan Kruyer should be celebrated as an oilsands pioneer.

Selling Canada?

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As Asian efforts to secure Canadian energy supplies intensify, can nationalist forces be silent much longer? This article appears in the November issue of Oilweek.

 By Peter McKenzie-Brown
In Canada, economic nationalism fell into a slumber twenty years ago. Is it likely to begin stirring again? According to Dr. Robert Mansell of the University of Calgary, “I could imagine a new period of nationalism. After all, public attitudes tend to go through regular cycles.”

An economist, Mansell is academic director of the university’s School of Public Policy and the founding director of the Institute for Sustainable Energy, Environment and Economy. Although he recognizes the possibility, Mansell puts a lot of caveats on the prospect of a nationalistic surge. “We’re still in a period with a high level of globalization, so I would be surprised if we said ‘No more foreign ownership.’ The markets are too big now (for Canada) to finance a lot of (the petroleum industry’s) activities, so you have to go into international markets for large amounts of money. We don’t have a lot of fiscal surpluses to finance many of these projects. This limits our options.”

However, he notes that political conflict with China, say, could lead to public concern about Chinese investments in Canada’s oil industry. In the United States, an outright political row wasn’t even required five years ago. That’s when a public outcry put an end to an $18.5 billion hostile bid by state-controlled China National Offshore Oil Corporation for UNOCAL, an American major. Chevron-Texaco acquired Unocal later that year.

Asian Investments
This has become an issue of interest because the sources of overseas funding for North America’s energy industry are undergoing a fundamental shift. “The axis of investment capital is rotating from a north-south flow over the 49th parallel to an east-west current across the longitude of the Pacific Ocean,” says author and analyst Peter Tertzakian of ARC Financial. “A recent swell of Asian money coming into the Canadian oil patch represents one of the biggest megatrends in the business.” Tertzakian does not mention a sub-feature of this shift of Asian funds: much of the money is coming from national oil companies
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By no means is this trend limited to Canada. Increasingly, developing countries with financial reserves are investing those funds in countries with large oil and gas resources. “Relative growth in energy demand has shifted quite dramatically toward Asia,” says Robert Mansell. “As demand shifts, one would expect (Asian) interest to shift to Alberta, especially since the number of countries which are attractive for petroleum investment is shrinking. There has been an expansion of interest in national oil companies for a variety of reasons, one of which is to achieve security of supply. Energy security (in Asia) is an even bigger issue than it is North America.”

Peter Tertzakian puts the issue starkly. “Since world war two there has been a symbiotic, bi-directional flow of capital and energy resources between Canada and the US. Now a new dynamic is emerging…. Growth economies like China look very similar to the United States in the 1950s and 60s – capital rich and hungry for energy.” In a series of charts and tables, he sums up the shift in funding.

“Big foreign companies like India’s Reliance Industries, China National Petroleum Corporation and Mitsui have been teaming up with domestic independents that hold large land positions in shale gas plays, mostly in the US” he says. “Under twelve joint venture agreements these foreign entities have committed $17.2 billion of funding to obtain carried interest in new wells being drilled by independent natural gas producers like Chesapeake, EnCana, Pioneer, Atlas and Carrizo.” The charts illustrate the recent flow of money from overseas economic powers into North America’s shale gas business.

Within Canada, some funds have flowed to shale gas, but more has gone to the oil sands. The table of foreign investments in the last 12 months illustrates that Asian investment in Canada has focused more on the oil sands more than shale gas. The table does not include another notable 2009 investment: Sinopec’s acquisition of Addax Petroleum for $8.27 billion.

Of the new Asian partners, four are national oil companies headquartered in China or Korea. However, the acquisition of Harvest Energy by an agency of the Korean government deserves special note. Harvest was an intermediate-sized Canadian energy trust. From a standing start, in ten years president and CEO John Zahary created an entity he was able to sell for more than $4 billion. That’s a lot of money, but relatively small potatoes in the context of Canada’s hundreds of billions of dollars’ worth of total oil and gas assets. Outside the industry, people paid scant attention
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Harvesting Energy Companies
Of course, Korea isn’t China, and Harvest Energy isn’t Unocal. Even so, the deal stoked concern that, after watching parts of the oil patch go to other state-owned companies, the Canadian government will eventually step in to block transactions.

According to John Zahary, though, the South Korean company’s commitment to boost spending is the only thing that’s relevant. “We see this as an opportunity for increased jobs in the country, increased capital investment in (Harvest’s) assets,” he said. “KNOC (the Korean National Oil Company) now owns 100% of the equity in the company – that’s true. But I believe that even under the new ownership Harvest is still a Canadian company. The management is here, the employees are here, the resources are here and the resource owner is here. We now have a board of directors of eight people: five are Canadians and three are Korean nationals.” To make the deal happen, Zahary negotiated a 47% premium to the company’s then-current price. He now expects to see Harvest continue to grow.

“Why did they want to invest here?” he asks rhetorically. “We have a resource that is relatively underdeveloped, a people base and a technology base. We have relatively stable fiscal and regulatory systems and a history of openness to foreign investment, and that differentiates us from other countries. Canada is an excellent place to invest. I look at foreign investment (in this country as part of the) maturing of the nation.” The University of Calgary’s Mansell agrees. “….In this global environment even companies that you think are purely Canadian are likely to have most shares held outside the country. The key issue is their local presence. The control is local. There are a lot of regulations in Alberta,” for example. “Whether foreign or local, companies have to follow the rules that we make. They can’t avoid them.”

Another rhetorical question: Why did Zahary want to sell Harvest Energy Trust? Partly because Ottawa’s Halloween Massacre in 2007 made energy trusts so much less attractive. Prior to the sale, Harvest’s unit price had cratered since its pre-massacre high – down about 80%. This, of course, illustrates government’s power.

The case for economic nationalism
Perhaps the most unlikely supporter of government regulation is Richard Haskayne. Known universally within business circles as Dick, he has served as the chair of six large Canadian companies: Interhome Energy Inc., TransCanada Corporation, Fording Inc., NOVA Corporation, TransAlta Corporation and MacMillan Bloedel.

“My philosophy is that Canada needs regulation to protect strategic sectors,” he says. “This is not a new hobby horse for me. A few years ago I wrote an article promoting the idea behind Canada’s Bank Act, and I got a lot of flak about it. But recent events have demonstrated that it worked really well for Canada. The reason (I support that kind of government control) is that banking is so strategic for Canada.”

He supports government regulation of energy and mining ownership because they, too, are strategic. “That’s our strength. Of the ten top stocks in Canada there are four banks, three energy companies and three mining companies. Seventy percent of the stocks on the TSX are in those industries.”

“I’m not opposed to foreign ownership as such,” he says “– only when someone takes over 100% of a classic Canadian company like Potash Corp. Look at Vancouver without McMillan Bloedel. Look at the Windsor waterfront now that Hiram Walker is no longer there. Head offices are critical to the operation of Canada and to our decision-making.”

Haskayne sees Canada’s Bank Act as a good model for bank regulation. The act prevents any individual from owning more than 10% of the shares of top tier banks, and says the aggregate holdings of non-residents and their associates may not exceed 25%. In addition, their head offices must stay in Canada and their boards must consist mostly of Canadians. Deeply concerned about what he calls the “hollowing out” of head offices from Canada, he’d like to see similar provisions applied to Canada’s biggest energy and mining companies. “It’s the concentration of shares that’s the critical part.”

An irony of Haskayne’s position is that as chairman he sold Nova’s controlling interest in Husky to Li Ka-shing. “I admit I sold that company to Hong Kong interests,” he says, “but in those days Husky was in terrible shape. It was almost broke. The banks were on their tail. We tried to sell it. I went to David O’Brien at PanCanadian and tried to get him to buy. I said, ‘It’s a hell of a deal for you. It’s got so much heavy oil and it’s got refining interests….’ David turned to me and said, ‘Haskayne, get out of my office. I don’t want that sick dog [Husky] in my kennel.’ You can’t get much more of a refusal than that. So we sold our share (to Hong Kong interests) for $375 million. Well, today that interest is probably worth $15 billion, so they made a hell of a deal. I apologise for that, in a way. However, there wasn’t much we could do. Li Ka-shing’s group was holding the golden shares, and that made it hard to sell” the company to anyone else. Husky is now one of Canada’s biggest energy companies.

Asia’s energy security
Canada’s last round of economic nationalism began in the 1970s, when nationalization of the petroleum sector within OPEC inspired Canadian governments to set up their own oil companies. The idea was to Canadianize a vital resource sector. The last vestiges of those experiments disappeared a year ago, when Suncor absorbed Petro-Canada.

Are Asia’s efforts to find energy security with the aid of national oil companies (NOCs) also doomed to fail? “For the foreseeable future,” says the University of Calgary’s Robert Mansell, “Asian countries are not likely to be getting any Canadian product directly. But they can still do swaps and so on, taking oil that would otherwise have gone to the United States, diverting production. Markets enable you to move that oil around. Different market arrangements will allow you to increase security.”

He cautions against thinking of all NOCs as being the same, however. “There are quite different NOCs. For example, Statoil is really not much different from what we think of as a privately owned company. Some of the other companies are a different animal, though – they are just an extension of the state. There are quite different variations when you start looking at national oil companies.”

Although he sees economic nationalism as a possibility, Mansell is sceptical about its staying power. “A serious political conflict between, say, China and Canada could create a public reaction, and it’s quite easy to imagine” a public outcry against Chinese ownership of Canadian resources. “However, in the long run it seems to me that most Canadians appreciate that we as a country benefit from global investment.”

Related articles

• Korean companies make oilsands move (calgaryherald.com)
• Anger over "frontier oil" :: China Dialogue (chinadialogue.net)
• Energy Independence: Are You Serious? (americanthinker.com)