Oil Sands Truth: Shut Down the Tar Sands

How Shell lost the goodwill of stakeholders [Enviros greenwashing Shell].

Shell: Shifting Sands
From Canadian Business magazine, July 20, 2009
How Shell lost the goodwill of stakeholders.

It is surely one of the most worn truisms of business: You’ve gotta live up to your commitments. It’s a throwaway line in stock speech at conferences and luncheons, and Shell Canada executives have long known when to employ it. To wit: “We accepted some years ago the need to respond to growing concerns on climate change and set tough goals to reduce our own greenhouse-gas emissions,” said Tim Faithfull, the company’s then CEO, in a 2003 speech. “Of course, we have to deliver on our goals to earn the trust and respect of our stakeholders.”

It’s difficult to argue with such logic. Yet Shell’s former friends believe the company is testing it.

Several years ago, the company signed two written agreements with an umbrella group of environmentalists known as the Oil Sands Environmental Coalition (OSEC). Under these accords, Shell promised to set ambitious targets for reduced greenhouse-gas emissions at two separate oilsands projects. Both projects are now under construction in northern Alberta. In April, though, OSEC accused Shell of repudiating the agreements. Shell, meanwhile, claims it’s always been in “material compliance.”

The squabble marks the bitter end of a long and fruitful relationship between Shell and environmental groups. It also lays bare the failure of Canada’s favoured approach to controlling industrial greenhouse-gas emissions of the past several decades. But will nascent government regulations work any better?

Ever since the late 1980s, when the Canadian government first called for co-ordinated international efforts to fight climate change, the oil and gas industry sought to shape regulations on industrial greenhouse-gas emissions to its advantage. University of Toronto lecturer Douglas Macdonald portrayed this struggle in his 2007 book, Business and Environmental Politics in Canada. “By 2005, federal government negotiations with the oil and gas and other industrial sectors had resulted in a significant relaxation of the targets for industry reductions,” Macdonald writes, “but no law-based regulatory action had been taken.”

Instead, voluntarism prevailed. Since at least the 1990s, provincial and federal governments encouraged industries to reduce emissions of their own accord. Observers have suggested that governments did so because of insufficient resources to regulate GHGs outright, owing to aggressive budget cuts during that decade. And Macdonald argues that lobbying efforts by industry, which emphasized how regulations stifled employment and innovation, were successful. “There is no doubt that voluntarism constituted a relaxation of regulatory pressure,” he writes. “Firms were under no requirement, financial or legal, to change their environmental behaviour, and many chose not to do so.”

Shell Canada stood apart. While some of its competitors actively raised doubts about global warming and promoted contradictory viewpoints, Shell acknowledged it. In becoming the lone Canadian oilsands operator to set explicit emissions targets for greenhouse gases, Shell also became a leading evangelist for voluntarism. “[Shell’s] activities illustrate how a clear set of goals, even when voluntary, encourages innovation and investment that result in reduced greenhouse-gas emissions,” affirmed Linda Cook, Shell’s CEO in 2003. “I do not think we should underestimate the effectiveness of voluntary action—perhaps summed up by the phrase ‘where there’s a will, there’s a way.’”

The Athabasca Oil Sands Project, Shell’s first foray into the oilsands, embodied this philosophy. Completed in 2003, it included the Muskeg River Mine (situated north of Fort McMurray, Alta.) and the Scotford Upgrader north of Fort Saskatchewan, Alta., which processed the mined bitumen into synthetic crude oil. (Shell owns 60% of the operating company, Albian Sands Energy Inc.) Exploiting the advantages afforded by newer technology, it put the decades-old existing oilsands mines of Syncrude Canada Ltd. and Suncor Energy Inc. to shame on environmental performance.

But Shell didn’t stop there. It pledged to slash the project’s emissions by half between startup and 2010, either through improved efficiency or other means, like buying emissions credits. Shell also engaged its critics. It formed a Climate Change Advisory Panel, which included not only company executives but also representatives from environmental groups. Successive Shell CEOs praised the panel not only for helping the company devise its climate-change strategies, but also for holding the company accountable.

Granted, Shell and environmentalists remained awkward bedfellows. Green groups loudly took industry to task on everything from emissions to water use to land reclamation. Climate change was a singular flashpoint: an expanding oilsands industry meant Canada had little hope of reaching its international emissions obligations.

Nevertheless, Shell’s behaviour earned grudging respect. When Alberta’s Pembina Institute (an OSEC member) rated oilsands companies on environmental performance in early 2008, the Athabasca project scored 56%. While hardly a ringing endorsement, it was the best score in the industry. Pembina praised Shell for setting voluntary targets and meeting them. “Shell was traditionally the leader in the oilsands,” says Simon Dyer, Pembina’s oilsands program director. “It understood the greenhouse-gas issue perhaps better than most.”

That goodwill came in handy when Shell waded into the oilsands again. In 2002, Shell proposed another mine east of the Muskeg River site, which it called Jackpine. As with all such projects, Shell needed to secure approval from a joint panel appointed by provincial and federal regulators. But environmental groups and other concerned stakeholders often mount opposition at public hearings. OSEC would be there: an alliance of the Fort McMurray Environmental Association, the Toxics Watch Society of Alberta and Pembina, it harried virtually every major developer during the application process. Jackpine was an obvious target: the proposed intensity of its greenhouse-gas emissions (that is, its emissions per unit of production) was actually higher than that of the original Muskeg River Mine.

Instead of girding for battle, Shell and OSEC compromised. The company promised that at a minimum, Jackpine’s emissions would equal those of imported barrels of oil on a “wells-to-wheels” basis. (Environmental groups often claim that producing a barrel of oilsands crude generates between three and five times as much greenhouse gases as producing a conventional barrel. “Wells-to-wheels” encompasses all emissions associated with a barrel of oil, such as by a tanker transporting it crossing the Atlantic Ocean, or a Chevy pickup’s eight-cylinder engine burning gasoline.) To meet that objective, Shell vowed to develop a plan within nine months of having completed a feasibility study. In return, OSEC mounted no opposition at the regulatory hearings. Influenced partly by this agreement, the panel gave Jackpine a green light.

Then, in 2006, Shell went before another joint panel regarding a proposed expansion to its Muskeg River Mine. After Shell and OSEC signed a similar written agreement to the one they’d reached regarding Jackpine, OSEC again stepped aside. That project, too, was approved.

In retrospect, it’s tough to say how enforceable these agreements were. OSEC asked the joint panel to make the agreements conditions of Shell’s approvals. Both panels refused; one merely said it “does expect Albian to meets its commitments.” Moreover, OSEC was counting on targets that hadn’t even been calculated yet. And the agreements contained a number of possible escape clauses, such as vague wording and a broad set of factors Shell could consider when developing its emissions strategy. Nevertheless, OSEC believed it had struck a hard bargain. “It was a very significant commitment,” says Dyer. “And that’s the reason we didn’t oppose the Shell projects at the hearing that year.”

The honeymoon didn’t last long. “As early as 2006, Shell missed its first deadlines to set some of these targets,” Dyer says. “We started to grow concerned at that point.” Over the following three years, OSEC prodded Shell through letters and meetings, but made little progress.

What was going on? Publicly, Shell Canada executives continued talking up the virtues of voluntary commitments. As recently as May 2007, then CEO Clive Mather claimed that meeting them was “vital to our credibility as stewards of the oilsands resources.” Yet Mather represented the company’s past, not its future; its foundations were shifting beneath his feet.

In early 2006, rumours surfaced that Shell Canada’s majority shareholder, global oil giant Royal Dutch Shell PLC, wanted to buy out minority shareholders and bring the entire Canadian operation under its wing. By early 2007, Shell Canada was swallowed by its parent. Mather retired, and the Climate Change Advisory Panel was promptly disbanded.

Shell Canada’s old ethos was incompatible with that of its parent. Though Royal Dutch Shell had once backed voluntarism, by 2007 it had become disenchanted. As it explained in a recent sustainability report: “Voluntary targets by a handful of companies just won’t work. Government policies are needed to reduce emissions across the entire economy without distorting competition.” So after its existing voluntary targets expire in 2010, Royal Dutch Shell declared, it would abandon the practice.

Following its integration, Shell Canada’s own praise for voluntary emissions reductions promptly ceased. In a letter to OSEC in January 2008, a new president, David Collyer, wrote that while the company remained committed to meeting its 50% target for the original Athabasca Oil Sands Project operation, it would not establish further voluntary targets. In a subsequent letter, Collyer indicated Shell would develop a GHG plan “aligned with the spirit of the agreements.” Asked for further clarification, Collyer wrote last fall that Shell felt it could fulfill its obligations to OSEC simply by following new and proposed emissions regulations introduced by government in recent years.

In April, OSEC threw down the gauntlet. It formally complained to the federal Canadian Environmental Assessment Agency and Alberta’s Energy Resources and Conservation Board (ERCB), the two bodies that granted Shell’s regulatory approvals. OSEC wants the regulatory hearings for Jackpine and Muskeg River’s expansion reopened. “This is absolutely the last resort for us,” Dyer says. If regulators side with OSEC, Shell’s approvals could be in jeopardy. “We’ve had hearings reopened,” said ERCB spokesman Bob Curran. “It does happen.”

Shell, though, says its rights would be violated if hearings were reconvened, and OSEC lacks proper standing to bring such an application. “Public confidence in the ERCB is dependent on certainty and finality in the regulatory process,” the company wrote in a submission, noting that more than $8 billion had been spent on the projects since the approvals were granted. “These approvals should not be lightly interfered with simply because OSEC is not satisfied with the manner and pace in which Shell fulfils its public stakeholder commitments.”

One obvious question for regulators is: How binding were Shell’s commitments, really? The company’s pronouncements suggest that so far as it’s concerned compliance was voluntary, not contractual. “The need to reduce emissions is too important to rely on voluntary commitments,” said spokesperson Philip Vircoe. “These current regulations and the emerging Canadian ones are superseding the need for voluntary targets. …Voluntary was back several years ago, before regulations.” From OSEC’s perspective, Shell’s commitments ceased to be voluntary the moment the company put them in writing.

The dispute remained unresolved at press time. Its outcome might hinge on whether Shell’s correct that by meeting its regulatory requirements, it meets all obligations to OSEC. Shell’s emissions are restrained only by Alberta’s rules, which came into effect in July 2007. Under them, each of Shell’s existing and proposed facilities have three years after startup during which they can ramp up production. Their emissions in the third year will be divided by the facility’s annual production to calculate its emissions intensity, and that number becomes the facility’s baseline. In each of the following six years, the facility must reduce its emissions intensity by 2% from that baseline, for a total improvement of 12%.

By OSEC’s calculation, Shell would have to reduce emissions at Jackpine and the Muskeg River expansion by 30% or more under the written agreements. If true, it’s tough to see how Alberta’s rules could deliver an equivalent performance. In fact, there’s considerable uncertainty regarding what targets the province will set for the projects Shell’s now building. For example, Alberta has yet to decide whether the new facilities will receive their own baselines, or whether they will assume the existing one already set for Muskeg River Mine. As for proposed federal rules, Dyer points out they’re not available even in draft form. “Talking about regulations that don’t exist is a very curious way to say you’re meeting an agreement,” he says. Shell, though, emphasizes that its agreements with OSEC said Shell’s targets would takeinto account emerging regulatory requirements — and that external changes have since made it difficult for the company to satisfy OSEC’s expectations.

Why did Shell spurn OSEC? It may be that the company deemed following competing sets of commitments unduly onerous or costly. (It’s a common complaint—many major emitters don’t relish following both Albertan and federal emissions rules, and would like to see the two harmonized.) Or perhaps after years of championing voluntarism, the company tired of watching competitors reap the benefits of inaction. (In a statement responding to OSEC’s complaint, Shell executive vice-president of oilsands, John Abbott, said Shell demanded a regulatory framework that would reduce emissions “on a level playing field.”) Whatever the reason, Shell likely faces tougher opposition from environmental groups at future regulatory hearings, including those for later phases of Jackpine and its proposed Pierre River mine. “Obviously, there is no interest in continuing negotiations with Shell on future projects,” Dyer says.

What about relationships with other stakeholders? During the approval process, Shell also signed agreements with First Nations groups. Melody Lepine, director of industry relations with the Mikisew Cree First Nation, says Shell follows its agreements to the letter. “They have a very sophisticated system of tracking their commitments,” she says. “If it clearly says they will do it, they do.”

The problem, Lepine says, is that Shell won’t do anything beyond what the legal language requires. “At the time of making the commitments, it seemed like they were saying, ‘Trust us…we’re going to be your neighbour for 40–60 years. We can make changes as we move forward,’” she says. But her impression evaporated after Shell got its approvals. “If you didn’t get it in writing, then it’s very difficult to get it afterward. That’s the lesson I’ve learned personally in dealing with Shell. So now, I don’t take what they say very seriously.”

Lepine says the change in attitude began with Royal Dutch Shell’s takeover. Since then, its employees have been “much more difficult to work with — they’re almost somewhat adversarial and condescending,” she says. “In the early days with Shell, it was much more transparent and open. Today, that’s not the Shell we’re dealing with.” Clearly, some of the company’s partners will be paying closer attention to the fine print.


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