Piecing together the Kinder Morgan puzzle

Is Big Oil trying to game Alberta’s royalty structure with their risky pipeline proposal?

Growing up, I spent a fair amount of time doing puzzles. I liked the simplicity and comfort of knowing each piece had its place and, given time and concentration, I could assemble the image of a unicorn or kittens in a basket that had originally caught my eye.

My Nana was the person who taught me to “puzzle”. She showed me how to find the easiest pieces first (the four corners),  build out the edge pieces, then fill in the rest looking for little details as clues to the bigger picture. This woman wasn’t known for her patience, but when she was putting together a puzzle, she had a buddhist-like calm. That’s the soothing effect solving a complete puzzle can have on a person.

Then there were those times we would spend hours focused on solving a puzzle only to discover one (or more) pieces were missing. In these moments, when we would finish our work and see a glaring hole in the middle of an otherwise complete picture, my Nana would go for “a walk”. To her, an incomplete puzzle that had been laboured over in vain was nothing short of infuriating.

Now as an adult, I find myself working on a metaphoric puzzle — one that is just as personal to me as sitting at my Nana’s dining room table on a rainy, West Coast day. The puzzle I’m referring to is the debate over the expansion of pipelines and oil tanker projects in B.C.

For the most part, I think I have my pieces organized: scientific evidence and economic reports are the corners and the will of First Nations and British Columbians make up the edges. But the middle of the puzzle is tricky, and often I feel like a piece has gone missing, dusty under the couch or buried by my dog in the backyard. In fact, just last week I was placing pieces in my brain, trying to understand how, despite reports like that of Oil Change International, our federal government is still being rumored to approve Kinder Morgan.

Then, I found a piece — a pretty important one — that has helped me continue to build the pipeline puzzle I have in my head.

That piece has to do with current oil prices. In case you haven’t heard, they’re really low. So low they make it really hard for Canada’s heavy oil to compete. And while our provincial and federal governments seem fixated on moving ahead with antiquated infrastructure, other nations are innovating better, more sustainable technology, and getting a much needed jump on moving away from burning the fossil fuels that are destroying our Earth’s climate.

So why is the oil industry pushing to not just continue with business as usual by making billions annually, but also lobbying our government (hard, and sadly, successfully) in an attempt to secure an increase in oil production beyond what’s needed in the global market?

Two words: Albertan royalties.

The royalties oil companies pay earn almost zero attention in mainstream media, yet to me, it is one of the most compelling reasons I’ve heard to date explaining why they are desperate to continue to expand a dying industry despite the gloomy economic forecasts.

So here’s the breakdown: Because the Government of Alberta owns the majority of the oil under the ground, they charge oil companies for the rights to extract these resources. BUT, the companies can reduce the rates they pay significantly if, drumroll, they commit to capital expansion projects.

The royalty rates charged a specific project are reduced as long as that project continues to expand and spend money building out its infrastructure. Royalties are anywhere from 1 to 9 per cent during a project’s pre–payout phase (when still paying out capital costs), but then they jump to 25 to 40 per cent when costs have been recovered. So stopping expansion means cha-ching for the public purse, while increasing costs to oil sands companies to the tune of 300 to 4000 per cent, making them even less profitable than they are now.

This regime, that clearly rewards expansion, was put in place decades ago during a time oil sands were trying to prove themselves as a viable producer. Also, as a high cost producer in a world awash in cheap oil, the oil sands are not as profitable unless they can credibly make an argument for continual expansion. They need something for others to invest in… Even if it is a house of cards.  

In sum, the old Albertan royalty system encourages continued expansion despite analysis showing there is no need for additional pipelines to service existing production. The desperate demands for new pipeline infrastructure are very likely driven by the need to continue expansion.

In this context, building Kinder Morgan is less about creating jobs and getting Canadian crude to new markets, and more about maximizing the profitability of existing operations by artificially exploiting a loophole that maintains almost criminally low royalty rates on a publicly owned good.

When I heard this argument, it was like I had stepped on the sharp edge of a missing puzzle piece buried in my Nana’s shag carpeting. Oil companies will never stop trying to expand pipeline infrastructure to get their product to non-existent markets, padding their profit margins despite the damage these projects will do to our health and environment. Big Oil doesn’t care about our home, our family or our province. But we do. It’s time to blow the lid off of these shady dealings. 


10 Responses to “Piecing together the Kinder Morgan puzzle”

  1. Paul Magnus says:

    This is also the reason renewables have not taken off earlier.

    Had they, FF would have disappeared awhile back and guess what.. gov royalties and utility taxes. Solar prices would have fallen so that domestic solar would have been viable and this would mean natural gas for heating would have disappeared.

    Electric vehicles would have over taken petrol ones.. no gas supplies to profit from for oil & gas folks and also again no tax income stream for governments.

    Renewables actually mean a new world of mainly #freeenergy or at least very low cost energy. And no income n profit streams for govs and big oil & gas.

    • GS says:

      Don’t forget however that it is no just “big oil” causing the problems or creating them. they succeed because we keep buying stuff that requires oil to make or to burn.We all need tog et on this and not just through easy to sign petitions, but through positive action both in our own habits and in our active involvement in solutions and politics. How many people sign the petition on the way out the door to drive to the corer store, or sit in heavy traffic on their daily commute etc. It is up to all of us to actually DO!

  2. Ashley says:

    Wow! Very well written:) thank you for finding that puzzle piece for us.

  3. wallykunz says:

    This makes me more committed than ever to stop Kinder Morgan. Now, can you explain what the Liberals (Justin) plan to get out of the fossil fuel expansion?

  4. Alan says:

    “…getting a much needed jump on moving away from burning the fossil fuels that are DESTROYING our Earth’s climate”

    Good column. But best to avoid hyperbolic language. Man-made emissions are changing the climate. The phrase “destroying the climate ” doesn’t make sense. The other side of the debate jumps on unscientific exaggerations. Don’t give them an excuse to dismiss your argument.

  5. Jerzy says:

    I think you “nailed” this one very well. The system is “rigged” to destroy us and alas, the psychopaths are in control (and I don’t mean political control – that is secondary, they are in control of manufacturing public perception)

  6. Richard Stewart says:

    So your theory is that governments are supporting a course of action that will make them less money i.e. they can buy less votes?

    That’s almost as crazy as criticizing a few dozen tanker trips while saying nothing about several hundred cargo and cruise ships taking the same route.

  7. bee tee says:

    HI-5 Great article @ Christina. Great reply@ Paul.

  8. Gay Nemeth says:

    Where is the puzzle piece which explains why our governments support these obscene projects?

  9. Larry Woodruff says:

    While considering these Royalties and their reductions to the government you have two important items to address any costs incurred in expansion are used by oil companies to reduce royalties to Government–which one the provincial or the federal or both? Any accounting student in his first year also know these expansion costs to fall under “capital expenditures” on the tax sheet. Are these oil companies using both to escape taxes and royalities????
    Another issue is what is the financial guarantee or bond the government(s) require for cleanup and who is responsible for this clean up and who controls it? Has the government let the fox watch the henhouse? Why does the government not require that substances like bitumen not be put in pipelines as no one has a proven way to clean it up(see Michigan spill) Why is it not required for only refined crude to be transported in pipelines ? A product that can be cleaned up. Are all pipelines required to be in concrete culverts like storm ditches ABOVE GROUND and monitored for leaks? If not why not? the oil sands is already a wasteland the taxpayer will end up paying to clean up so why not refine the oil there prior to shipping it in a pipeline? Has the royalty issue been disclosed on bitumen?? the oil industry published that bitumen only gets thirty cents on the dollar compaired to crude oil so what does that do to the truth about royalities —-LETS GET THIS INFORMATION OUT IN THE PUBLIC SO WE CAN DECIDE IF WE ARE ONLY HERE TO MAKE PROFIT FOR OIL GIANTS AND OUR GOVERNMENTS IS HIDING THIS FACT TO HELP BIG OIL.

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