National Geographic
World News /12 Feb 2016
02.12.16

First Nations and the Viability of Oil and Gas Projects

Oil and gas initiatives around the world have been challenged by the increasing involvement of the general public who have concerns relating to the environment, including but not limited to: the excessive use of fresh-water, the contamination of water due to spills, the alteration of land surface and the high concentration of carbon dioxide emissions in the atmosphere due to venting of hydrocarbons at the production and transportation stages.

Among the most visible cases are those that occur in fragile ecosystems, such as Arctic waters and coasts, deep off-shore waters and rain-forests; those demanding extensive use of land, such as oil-sands and bitumen; and those with extreme operational risks, such as pipelines crossing faulted sub-surfaces or crossing rivers with dynamic beds and coasts.

The formal procedures to approve such developments are being reviewed in several countries to update the applicable regulation by including the latest standards to avoid construction and operative failures and to set the minimum requirements in view of mitigating the impact that such undertakings pose on the environment and on the affected communities.

Even with such updates, there is a big concern within affected communities that their views are not being properly factored-in by the actual evaluations conducted by the regulatory bodies. A particular sub-group of affected communities are First Nations on a global basis, which, at least in some cases in South America, have been ignored in the discussions.

However, the historical exclusion of First Nations in the decision making process of oil and gas projects received the attention of the general public and there are expectations that they will be involved.

In particular, the Canadian First Nations’ active role against the construction of the Northern Gateway Pipeline (NGP) should be considered a leading case due to the recent rule by the British Columbia Supreme Court deciding that British Columbia must issue its own environmental decision under the Environmental Assessment Act and must consult First Nations on the NGP.

The Court considered the previous Federal approval conceded to the NGP as permissive, since NGP may proceed so long as the 209 required conditions are met, but British Columbia may add further conditions.

The Court decision does not preclude the previous Federal approval, however it poses more uncertainty over the final sanctioning of NGP which has been postponed in several instances. It also affects any planned undertaking that involves a harmonized evaluation by the Federal and the Provincial jurisdictions.

Balancing benefits and risks

In general, assessing the feasibility of a given project, the authorities try to balance the benefits for the whole country –in terms of revenues, taxes, employment and economic growth- with the risks of potential failures.

It is well disclosed by energy companies that there is no zero operational risk in energy development, but there are many ways to mitigate such risks or to remediate the consequences of a given failure. So, it is common knowledge that failures can happen.

Indeed, failures do happen as was proven in 2015, when about five million liters of emulsion –covering an area of about 16 thousand squared meters- were leaked from a pipeline that runs from wellheads to the processing plants at Long Lake oil-sands facilities operated by Nexen. The accident is regarded as one of the largest spills recorded in Alberta.

The underlying economic risks of a given project are not clearly disclosed by the energy companies. This has to be reversed soon, particularly in the current environment of low oil and gas prices, as the potential economic loss for a given project is much higher than it was deemed a few years ago.

Besides, the tax revenues and royalties provided by recently evaluated projects may have been highly overestimated if prices remain at current levels for a longer time-horizon than previously expected by energy developers.

Eroded economics pose higher technical and operational risks, as companies are compelled to reduce costs to make the projects economically feasible. The combination of multiple risks at a given time of a project and the pressure to continue reducing budgets is a fundamental cause of technical and operational failures. The negative externalities are not always entirely considered. It is now well documented and known by the general public that there are many supply sources of oil and gas. Consequently, there is a menu of options to satisfy energy consumption.

National Chief Perry Bellegarde pictured with Canadian Prime Minister Justin Trudeau. (Ryan Remiorz/Canadian Press)

National Chief Perry Bellegarde pictured with Canadian Prime Minister Justin Trudeau. (Ryan Remiorz/Canadian Press)

Moreover, sources are more diversified globally.

In terms of the use of fresh water and emission of carbon dioxide per unit of energy produced, there is a wide range of outcomes among the different sources of energy and oil production sources. If tariffs on the use of fresh water to produce energy and taxes on carbon dioxide emissions generated while producing and transporting energy were properly applied, the economic impact would be significant.

Consequently, the continuing development of already identified oil and gas massive resources does not guarantee that they are the best options to pursue as there could be highly valuable economic options within alternative oil and gas sources or even in renewable sources in the medium to long-term.

The economic value of a project should be discussed under a wider perspective

It is well documented that the economic value imbedded in natural goods and services is difficult to assess on a pure economic basis and differs according to the perspective of the constituent groups.

In general, First Nations attach a higher value to natural goods and services as its living standards are more directly dependent on such natural resources. In general, other constituent groups perceive the economic value of natural good and services indirectly.

It is this perception of higher economic value of natural good and services that enables First Nations to provide a wider perspective to evaluate the feasibility of oil and gas projects with high impacts on the environment.

The traditional measurements of economic growth, centered in the calculation of GDP which is based upon the economic value of goods and services produced, are being disputed by experts for many reasons, including the need to reflect the evolution of inequalities among people and the need to address the use of natural goods and services.

Growth of GDP does not lead to improving living standards for the general population, particularly in countries with economies centered on extractive industries ( oil and gas and mining). In terms of the need to address the use of natural goods and services, a new approach to assign economic value to them has to be developed.

Economic value assumes that the prices of goods and services derive from complete market settings accessible by multiple buyers and sellers. Every player knows the objective function and the quantitative variables needed to aggregate the supply and demand curves in a given market and knows the price of equilibrium at which supply and demand are equal.

When economic value assumes that the information is available to all participants, then, economic value implies certainty, which means that future revenues can be valued as a sub-product of markets and is the same for all.

As there is no such thing as complete information and certainty for natural goods and services, a first step to calculate economic value for them could be based upon assigning relative values instead of absolute ones. Such a valuation process relies on the concept of scaling –which basically integrates different sets of measurements as a map- for resource allocation purposes and for other purposes, as well.

The underlying aim for designing such a map is to reach a desired future outcome or, reciprocally, to avoid a non-desired future outcome. We can derive from such a map of options the interplay among the concepts of complexity, uncertainty and risks that are posed by different choices.

Pertinent information lessens uncertainty and, consequently, reduces the chances of non-desired future outcomes.

If information is complete enough, totally complete, would mean certainty, the only applicable criterion for choosing the best alternative among the multiple possibilities is maximizing an objective function of value.

There is a way to reach such economic valuation of natural goods and services; however, to design a map as complete as possible, the inclusion of all constituents –in particular, those who have a different perspective- is not only desirable but pertinent and indispensable.

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