April 26 (Bloomberg) -- On Thursday, Nov. 10, 2011, Canadian Prime Minister Stephen Harper, seated in his Ottawa office across from Parliament Hill, took an urgent call from U.S. President Barack Obama. Harper’s advisers were listening intently around a muted speakerphone in an adjoining room.
The State Department, Obama said, would be making an announcement later that day putting the Keystone XL pipeline project on hold. There was no choice, according to the president. Nebraska wanted the route changed to protect a key aquifer under millions of acres of prime farmland. This would necessitate a new environmental assessment. He assured Harper the call wasn’t a game changer; neither a yes nor a no, just a delay.
Harper was far from assured -- he was irritated. The project had already undergone three years of study and was, so the Canadians believed, on the cusp of approval. Delay, he told Obama, served no one’s interest.
By the time Harper hung up, according to people with knowledge of the episode, he had sized up the potential economic calamity for Canada and its oil ambitions. Western Canada’s land-locked Alberta oil sands hold roughly 168 billion recoverable barrels of heavy crude known as bitumen. America gobbles up almost all of Canada’s oil exports. An energy research group in Calgary had run the math: If Keystone died, it could cost Canada C$632 billion ($573 billion) in foregone growth over 25 years -- 94 percent of it from the economy of Alberta, the province Harper calls home.
So here was Obama, in Harper’s view, jeopardizing Canada’s welfare by throwing a sop to his anti-Keystone environmental supporters. He had blinked and might well blink again. A year or two could be three or four. Or never.
That the U.S. couldn’t be counted on to take Canada’s oil came as a shocking epiphany, said a former senior government adviser with knowledge of the call who asked not to be identified because the person isn’t authorized to speak publicly.
The president’s call that day jolted the Canadians awake. It convinced Harper that Obama was treating a long-presumed “special relationship” between Canada and the U.S., enshrined in the 1989 Free Trade Agreement, as a political football. It would set a brittle tone on both sides of the border as the Keystone battle became a contest of contrasting political wills and sensibilities as much as a fight over oil development.
Canada was so blinded by its long-held expectation that the U.S. wanted to buy its oil as much as Canada wanted to sell it that it missed critical cues -- including the hydraulic fracturing revolution that was starting to flood the U.S. with vast new energy supplies -- that Keystone was running into political trouble.
This story of Harper’s and Obama’s frayed relations and how Keystone got bogged down was put together after on- and off-the-record interviews with more than 75 people -- current and former Canadian and U.S. government officials; Harper’s political advisers; industry executives; and Nebraska and Alberta politicians involved in the Keystone fray. A number of well-placed Canadian officials in a position to know the inside story asked not to be identified because they aren’t authorized to speak.
Today, Harper’s pessimism over that 2011 call seems justified. On April 18, as Christians marked the Good Friday holiday, the Obama administration notified the Canadians that the pipeline would be held up one more time over unresolved legal issues involving the Nebraska route.
The delay comes despite a favorable State Department environmental assessment in January that seemed to clear Obama’s major hurdle for approval -- that the pipeline wouldn’t significantly worsen global warming because the oil sands would be developed even if Keystone is blocked.
The stakes are high in the U.S. too. Building the pipeline would create 3,900 jobs over its two-year construction period, contributing $3.4 billion in economic growth, according to the State Department. On the Gulf of Mexico, refiners from Total SA to Royal Dutch Shell Plc have spent more than $25 billion to upgrade U.S. refineries so they could process what they thought would be an avalanche of heavy oil from Canada.
In public pronouncements, both the White House and Harper’s office say the countries remain staunch allies despite Keystone friction. “Canada is one of our closest partners,” said White House spokesman Matthew Lehrich, who characterized the latest delay as White House deference to the State Department’s role of “evaluating whether the Keystone pipeline project is in the national interest.”
Harper, in a Jan. 14 interview with Bloomberg News, characterized his relationship with Obama as “good” while noting that “there are times when we do have to stand up in a way that’s not necessarily the same view as the American administration.”
Even before the Keystone clash, the relationship between Harper, leader of Canada’s Conservative Party, and the Democrat occupying the White House was at best coolly cordial, said officials familiar with the dynamic. Keystone has made it frosty. Irritated themselves, Obama and the State Department had offered Harper some advice – toning down Canada’s aggressive Washington lobbying would let the regulatory process play itself out without the appearance of unseemly outside pressure.
Harper, an economist by training who had cut his teeth in petroleum-rich Alberta, wasn’t swayed. He has staked a great deal of his political capital on getting Keystone built as part of an ambition to re-brand Canada as a global energy superpower. Harper, according to many of his advisers, thinks of Obama as a kind of frustrator-in-chief.
Instead of toning it down, Harper chose to make Keystone a “bilateral irritant” that Obama couldn’t ignore, according to these insiders. Two months before Obama’s heads up call, Harper, during a swing through New York, called approval of Keystone a “no brainer” -- a zinger aimed at challenging the judgment of Keystone opponents while goading Obama into action. He hasn’t hesitated to repeat similar digs.
In the January Bloomberg interview, Harper criticized Obama for kicking the can down the road. Asked what he had learned from Keystone about dealing with the president, he replied: “I don’t think I’ve learned anything I didn’t know already. I’ll just leave it there. Look I’m not telling any tales out of school that the reason for the holdup is politics, and it is politics of a fairly narrow nature.”
To raise the pressure, the Canadian oil industry and its Keystone allies have also aggressively been pushing a theme that, whether it irritates Obama, certainly irritates his anti-Keystone environmental supporters. Kill the pipeline and we’ll truck, barge or ship by rail that oil to the U.S. anyway -- and, by the way, also find ways to sell it to the Chinese.
The 54-year-old Harper’s role in this has been unquestionably shaped by his background. He grew up in Toronto, where his father worked as an accountant for Imperial Oil Ltd., part of the Exxon Mobil Corp. empire. He dropped out of the University of Toronto in his first year to take a job in the mail room of Imperial’s Edmonton office.
Soon enrolled at the University of Calgary, he imbibed Alberta’s sense of alienation, especially when former Prime Minister Pierre Trudeau’s Liberal government introduced its National Energy Program, reviled in Alberta as a nationalistic tax grab over a provincially owned resource.
Harper’s views that Western Canada and its oil interests had been continuously dealt an unfair hand by unfriendly governments in faraway Ottawa would become a cornerstone of his politics. By the time he was sworn in as prime minister in February 2006, Harper saw the oil sands as his nation’s route to riches and stature.
The new prime minister began charting his own energy course that July. On his way to his first G-8 summit in Russia, he arranged a stopover in the U.K. to deliver an address to the international community.
His unspoken goal was to meet his political hero, former Prime Minister Margaret Thatcher, whose politics of conviction were in full flower as he came of age in the conservative movement. Harper aides recall that she was kind enough to come to his suite at the five-star Jumeirah Carlton Tower hotel in London’s affluent Knightsbridge neighborhood. His minders scrambled to stock her favorite brand of scotch.
The meeting proved both exhilarating and heart-breaking. Thatcher’s struggle with the early stages of dementia became apparent from her rehearsed responses and tendency to repeat them. Harper did come away with one indelible piece of advice, according to people with knowledge of the meeting: Stand four-square with the Americans, Thatcher told him. For Harper, this seemed like good counsel -- until Obama entered the picture.
With the hands of the Iron Lady laid upon him, the prime minister went downstairs to a cherrywood-paneled ballroom outfitted with Viennese crystal chandeliers. There, he talked up Canada’s energy resources generally and northern Alberta’s expanse of thick, sticky crude - known to its proponents as the oil sands and its detractors as the tar sands – most particularly.
The new Canadian government intended to turn the country into an “energy superpower,” Harper told the influential audience of more than 300. The unconventional petroleum beneath the forests and muskeg of his home province offered “the most attractive combination of circumstances for energy investment of any place in the world.” Its extraction and refining represented a “monumental challenge,” he said, yet one Canada was prepared to meet. “It is an enterprise of epic proportions, akin to the building of the pyramids or China’s Great Wall. Only bigger.”
As it turned out, Harper had never actually seen the fabled oil sands. It was a shortcoming he would rectify with a brief visit in late 2007 highlighted by a ride on a heavy-hauler truck with 13-feet high wheels and a bone-chilling flyover in an unheated Canadian Forces helicopter.
Development, he could see, was brisk, with private and state-owned producers from around the globe investing C$18 billion that year. Harper’s challenge then and now was how the growing volumes of viscous crude would get to market. With the U.S. essentially its only market, Alberta oil sells at a discount to the world price, resulting in some C$18 billion a year in lost revenue, according to the Canadian Chamber of Commerce. Lack of pipeline capacity to get that new crude to the U.S. would cost billions more.
Enter Keystone XL. On Sept. 19, 2008, TransCanada Corp., Canada’s second-largest pipeline company, submitted an application for a 2,673-kilometer (1,661-mile) route from Hardisty, Alberta, to refineries along the Gulf Coast. Nobody gave it much thought. As former Natural Resources Minister Joe Oliver observed during an interview, “pipelines were like watching paint dry, the absolute definition of boredom.”
In retrospect, the timing was inauspicious. Four days earlier, Lehman Brothers had collapsed, deepening a financial crisis that would roil the U.S. and world economies for the next half-dozen years. Millions of jobs would be lost. With the U.S. reeling, Obama, a junior senator from Illinois who liked to talk up the threat of climate change, was gathering a head of steam in his pursuit of the White House.
Politics of Hope
Obama, according to one of Harper’s university contemporaries, represented many of the characteristics Harper most disliked: An oratorically gifted Harvard Law grad embraced by the Hollywood culturati and preaching the politics of hope. They shared keen intellects, aloof personalities and, as they would note on Obama’s first visit to Ottawa, young families. However, they lacked the personal chemistry that allowed some former U.S. and Canadian leaders to cut through difficult issues. Prime Minister Brian Mulroney, for example, got along famously with Ronald Reagan and George H.W. Bush and Prime Minister Jean Chretien hit it off with Bill Clinton.
In May 2011, Harper won his coveted majority after two minority terms. Keystone seemed to be making its way through the hoops of a complex process, poised to deliver on the energy superpower promise.
Still, the prime minister was unhappy that depictions of Canada as a “dirty oil” nation were not being adequately confronted by the industry or his ministers. He had become enamored with an argument put forth by conservative commentator Ezra Levant in a book called “Ethical Oil.” It posited that many petro-nations used their oil riches to finance nefarious activities and subjugate their own citizens.
Canada, in the view of Levant, stood practically alone as an ethical producer. In a “mandate letter” setting forth his priorities, Harper instructed Oliver, his new Natural Resources Minister, to become a take-no-prisoners salesman for Canada’s greatest resource.
In informal chats, U.S. officials suggested it would help Obama with his green constituency if Canada would move to regulate emissions from the oil and gas industry. The embassy in Washington, according to an official posted there, constantly relayed messages back home that Canada was being depicted as lax, almost indifferent on the environment. The message would come back that regulations were in the making.
The regulations didn’t surface because Harper and his closest advisers were dubious they mattered. They had come to the conclusion that Obama swallowed concessions whole and gave nothing back. Without an administration commitment to a joint approach, they felt Canada would be digging itself into a competitive hole, according to people familiar with the back-and-forth of the discussions.
Keystone remained well down the list of bilateral issues preoccupying the prime minister’s office in the late summer and early fall of 2011 -- below a pending agreement to ease the flow of goods and services over a “sticky border” and below a request for U.S. help to get Canada into the Trans Pacific Partnership talks.
Unappreciated by Canada, anti-Keystone storm clouds were gathering. U.S. environmentalists, who raised large sums of money for Obama, organized a celebrity-studded, two-week protest that summer against the pipeline and the “dirty oil” it would carry. Republicans, sensing a wedge issue in the making, also were stirring, raising concerns in Canadian quarters that the White House wasn’t clearly distinguishing between its political opponents and northern Conservatives with the same cause.
People in regular contact with the prime minister say that despite periodically talking up a need for greater trade diversity, he felt no major cause for alarm. His outlook seemed validated in late August when the State Department conferred its environmental seal of approval on the project. Foreign Affairs Minister John Baird maintained close contact with Secretary of State Hillary Clinton, viewed as pipeline friendly. Keystone looked set for approval.
Then just like that, or so it seemed in Canada, the emerging energy superpower got stopped in its tracks in Nebraska, America’s 37th-largest state by population and one crisscrossed by pipelines. The Canadians were surprised and stunned by the pushback, said a Canadian diplomat who worked on the file.
In Lincoln, the state capital, Republican Governor Dave Heineman was being lobbied by an unprecedented alliance of environmentalists, farmers and ranchers over a tiny stretch of the project in the Sandhills region. The pipeline crossed the Ogallala aquifer there, a natural endowment that provided drinking water for 1.5 million people and irrigated almost half of Nebraska’s cropland.
On Aug. 31, just after the State Department passed its favorable assessment, Governor Heineman wrote Obama and Clinton. “Do not allow TransCanada to build a pipeline over the Ogallala Aquifer and risk the potential damage to Nebraska’s water,” he stated, adding he generally favored pipelines.
TransCanada was eager to get the line operating and deliveries started to the Gulf refineries. It resisted calls by legislators to reroute the line and antagonized some landowners with letters threatening legal action if they didn’t agree to allow Keystone to cross their property.
Chief Executive Officer Russ Girling said in an interview that the success of the grassroots campaign, employing scare tactics about unrelated matters like BP Plc’s Gulf of Mexico blowout, made TransCanada realize the game had changed for the pipeline industry.
“We were caught flat-footed because historically we hadn’t had to deal with that issue on the ground,” he said.
In mid-October, with talk building of a special legislature session to stop the pipeline route, Speaker Mike Flood organized a last-ditch four-hour meeting in his Norfolk office between four state Senators and two TransCanada representatives. Compromise was not to be found. A week later, the company dispatched a letter declaring that at such a late stage “it is impossible for us to move the route to avoid the Sandhills.”
The Canadian embassy was aware of tensions -- Ambassador Gary Doer paid a visit to Heineman in September -- but didn’t fully grasp the speed at which the Prairie fire was spreading. Nor was TransCanada sounding alarm bells. Heineman summoned legislators for a special session on Nov. 1 that granted the state authority over the pipeline’s path through Nebraska.
For Obama, the political calculus of Nebraska was indirect yet important. The national campaign had little interest in the state’s five electoral votes, Bob Kerrey, the Democratic Senate candidate, recounted. Yet with a Republican governor opposed, it raised the pain point with environmentalists for the president to say yes.
Only on Nov. 10, with Obama’s call, did Canada fully appreciate that building a pipeline no longer amounted to watching paint dry. Little empathy existed for Obama’s political challenge versus the benefits of a project seen to be so clearly in the national interests of both countries.
Within four days of the Nebraska vote, TransCanada agreed to come up with an alternative route and Heineman climbed on board. It was too little, too late. Just yards from the goal line, Keystone’s drive had been halted by a pro-pipeline governor in a pro-pipeline state.
In the hours after Obama’s Nov. 10 call, Harper ordered the agenda cleared for the next weekly priorities & planning committee of cabinet, a grouping of the most powerful ministers, scheduled for Nov. 15. He then flew to Hawaii for a weekend Asia-Pacific Economic Co-operation summit hosted by Obama, where they found 15 minutes for a short stroll on the grounds with suit jackets slung over their shoulders. It ended in the proverbial frank exchange at a picnic table, according to people with knowledge of that meeting.
Back in Ottawa Tuesday, a frustrated and determined Harper gathered with his senior ministers in the cabinet room on the third floor of the main Parliament building. The level of urgency and import had rarely if ever felt higher, participants recalled.
Harper opened by describing a world in which Europe’s economy was in shambles yet it preferred to talk about matters like climate change. The U.S. had shown itself prepared to sacrifice energy security and job creation to curry environmental favor. Only Asia, he said, treated economic growth seriously.
Harper decided to put the government’s weight behind the most imminent option -- the Northern Gateway pipeline that would assure landlocked Alberta oil reached the West Coast, where it could then be shipped to Asia. Other ideas would be considered, too. Canada somehow needed to get bitumen to tidewater – that was the new imperative. It could never be an energy superpower otherwise.
The meeting, recalled a person who attended, was filled with drama and tension, with Harper demanding creative solutions. He also insisted his ministers stop the infighting that had stalled measures to speed up environmental assessment reviews of major projects and give his cabinet, not regulators, final say.
The government had been horrified that approval for the C$16 billion Mackenzie Valley pipeline that would transport natural gas from the Beaufort Sea had taken about seven years, almost all on their watch, according to people with knowledge of the thinking. By then, fracking in the U.S. had decimated the export market and the Mackenzie line wasn’t built.
Harper’s government was determined to do whatever it took to avoid a similar fate for Gateway and other oil sands outlets, much to the eventual outrage of environmentalists, aboriginals and opposition parties.
Also emerging from that meeting was a strategy to refocus U.S. lobbying on vulnerable Democratic senators representing pro-oil states. The White House, State Department and embassy kept cautioning that making a fuss of any kind would merely taint a sensitive process subject to litigation. Harper demurred.
Despite Thatcher’s advice that he stick with the Americans, Harper believed it was Obama who had failed to stand with Canada. He had observed over the years, one of his advisers explained, that Obama didn’t like to make decisions unless absolutely required —- and that the squeaky wheel often got the grease.
By making Keystone a bilateral irritant -- being in Obama’s face at every turn and pushing every conceivable button -- he would raise the pain threshold of a Keystone rejection. Lobbying and advertising would be stepped up. Future remarks such as “not taking no for an answer” were no accident, according to government officials. They flowed from a tactical decision taken that November. An added bonus: if Keystone was eventually turned down, the Conservative base would know the government had gone to the wall. A squeaky wheel served that purpose, too.
On Jan. 18, 2012, Obama phoned again. This time, he told Harper the Republicans had forced his hand by attaching to a tax bill a mandate that he make a Keystone decision within 60 days. Obama said it didn’t allow sufficient time to conduct a proper assessment of the route change through Nebraska. Harper, sitting in the same spot across from Parliament Hill, asked the president point-blank if Keystone was dead.
Definitely not, Obama replied. TransCanada could re-apply. The prime minister, preparing for a visit to China, reiterated he had no choice but to go out and state Canada would turn to Asia to realize its energy ambitions. Obama said he understood. They said their goodbyes.
Harper couldn’t let go. Even his inner circle was a bit taken aback by the depth of his criticism for Obama and the frankness with which he expressed it. Dining with National Hockey League owners at an All-Star game weekend soiree in Ottawa that January, the Prime Minister surprised a listener with his harsh words about the President’s half-hearted commitment to job creation.
Down the road, his chief of staff told Trade Minister Ed Fast the Prime Minister was tired of being lectured to by Obama on Canada’s lax intellectual property rights, and that negotiators should hold their ground. The Canadian side was agitated when Obama failed to put money into the budget as part of the Beyond Borders plan to relieve congestion at the critical Detroit-Windsor border crossing.
TransCanada did re-apply and in January won State Department support again with a positive environmental review. Last weekend, with the lawsuit challenging Nebraska’s authority over the changed route working its way through the courts, Obama returned to his 2011 play book.
David Domina, lawyer for the Nebraska landowner complainants, blames the mess on TransCanada, which he said “got the cart way ahead of the horse by contacting landowners with first threats, then promise, then threats” -- all before securing approval. TransCanada spokesman Shawn Howard said the company was legally required to send letters to landowners explaining its offers and what would happen if agreements couldn’t be reached.
In the meantime, Canadian oil producers have come up with new ways of moving bitumen to market, notably by rail. The method generates greater emissions than pipelines and so presents a dilemma for environmentalists who argue Keystone is a climate-change issue.
For Canadian policy makers and some U.S. Keystone supporters, each new Obama delay is more indefensible. Representative Lee Terry, a Nebraska Republican, criticized the Good Friday announcement, saying Obama had “punted a tough decision in the name of political expediency.” Saskatchewan Premier Brad Wall, seen as a possible contender to replace Harper one day, said the decision “will place unnecessary strain on relations with our trading partner.”
“We hope sooner rather than later this is depoliticized,” Canadian Natural Resources Minister Greg Rickford told reporters in Mississauga, Ontario today. “We’re still very hopeful this will go ahead.”
Yet analysts say Canada has made its share of questionable judgments, too, most obviously its original misreading of Nebraska but also allowing itself to become stigmatized as an environmental laggard. John Kirton, a director of the G8 and G20 Research Groups at the University of Toronto who is writing a book on climate-change politics, said Harper has always taken a hesitant stand on climate change issues in domestic politics and at international summits, failing to build bridges and leaving Obama little to work with.
Many long-time players in Canada-U.S. relations, including some of Harper’s own diplomats, also question whether Canada was wise to position itself as an equal partner and choose to irritate rather than accommodate. “We’re not the G-1, the U.S. is,” said Peter Harder, foreign affairs deputy minister during Harper’s first year in office. “We’re the ones who need to be working harder to have a good relationship.”
The Canadian government also failed to appreciate how the explosive growth of shale gas and oil produced by fracking has changed the rules of U.S. energy politics. Canada was still playing the classic energy security card at a time when import pressure was subsiding under a green president.
“If there’s a lesson in this,” said Preston Manning, Harper’s party leader when he first entered Parliament, “it’s that these market opportunities won’t last forever. I think Canadians just took it for granted that the U.S. could take all the oil and gas that Canada could ever produce.”
Some see a larger issue for Canada beyond pipelines and oil. “With Obama saying no to Canada or what amounts to a no, the lesson is that we cannot rely anymore on the United States for our economic well-being,” said Allan Gotlieb, former deputy minister of foreign affairs and Ambassador to Washington during the free trade talks. “Not getting the oil sands out will cost many billions of dollars of lost economic opportunity for Canada. We are at an historic turning point in this special relationship.”
-With assistance from Jeremy van Loon in Calgary and Angela Greiling Keane, Jim Snyder and Nicole Gaouette in Washington.
-With assistance from Jeremy van Loon in Calgary and Angela Greiling Keane in Washington.
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