Why Keystone XL will be approved: one-on-one with Shell Oil president Marvin Odum

The U.S. will always need our oil.

(Photo by Brendan Smialowski/Getty Images)

(Photo by Brendan Smialowski/Getty Images)

Marvin Odum’s job titles could fill several business cards. He is president of Shell Oil Co. in the United States, and sits on the executive committee of Royal Dutch Shell, its parent company. But for Canadians, his most important role is serving as the executive director of Shell Upstream Americas, where he supervises exploration and production across the Western Hemisphere. Falling within his portfolio are the company’s Canadian operations, including the Athabasca oilsands project and its growing interests in liquefied natural gas (LNG), including a proposed export terminal in Kitimat, B.C., with a rumoured price tag of more than $12 billion. The company is also at the forefront of efforts to change the oilsands’ poor environmental image, investing in the $1.35-billion Quest project, which captures carbon emissions from oilsands operations and buries them beneath the surface. While seen as a pilot project for the industry, it also took millions in provincial and federal government support to launch. In an interview with Canadian Business deputy editor James Cowan, Odum spoke about whether the Keystone XL pipeline will ever receive U.S. approval, why cap-and-trade is good for industry, and what it will take for Canada to become a world leader in LNG.

Canadian Business: Last year, the International Energy Agency issued a report suggesting the United States will become energy self-sufficient within a couple of decades. For your U.S. business, I imagine this is very good news. But, as Canadians, should we be worried?

Marvin Odum: I don’t really think so. I’m not sure that U.S. energy independence is even the right discussion. It makes some sense that the next step might be North American energy independence, but not the U.S. exclusively. I think the connection with Canada, in particular, is very, very important and will continue to be important into the future.

CB: But why would the United States keep using our oil or natural gas? You have been tremendously successful finding new domestic sources of oil and gas.

MO: You know, the U.S. still imports a tremendous amount of oil on a daily basis, and I don’t think it’s realistic to expect to offset that over a very short period of time, so the connection with Canada is critically important. When it comes to the natural gas side of things, then I think it’s a question of what is the most efficient market dynamic. So, you know, if I produce a molecule of gas in Louisiana, it might be actually more efficient for a molecule of gas to be supplied in Washington state to come from Canada rather than come from Louisiana.

CB: Crossing the border brings us to the issue of Keystone. In a speech in October 2011, you said, “My confidence is high the pipeline will go forward.” Eighteen months later is your confidence at the same level?

MO: It’s still high. It’s already been slower than I expected, so I need to start with that point, but my confidence is still high that it’s going to ultimately be approved. Now, I don’t know exactly what the terms will be on the approval. But I think the assurances that have been added around safety performance and so forth are important, and I think now that the routing of the line is being finalized, my expectation is it will be approved.

CB: The U.S. ambassador has made some comments suggesting the Americans are pushing Canada to embrace climate-change initiatives, perhaps cap-and-trade, in exchange for approval of the pipeline. Does it worry you that the pipeline might be approved but at the cost of further regulation and further restrictions?

MO: We’re very conscious of the fact that the world is likely moving to a place of regulating carbon in some respect. What’s important to us, and what our primary push has been with governments, is ensuring that as these regulations come into play, that they’re market-based systems to allow carbon regulation to happen at the lowest possible cost. So no, I’m not concerned about that. Also, I have to say I’m fairly skeptical that there’s going to be any cap-and-trade or CO2 trading system like that in the U.S. any time soon.

CB: If you’re looking for a market-based solution, though, cap-and-trade might actually be preferable to other options.

MO: Yeah, which is a system that, from early on, we supported and said, “This is probably one of the clearest examples of a market-based system.”

CB: Would it make it easier for you folks if Canada implemented a price on carbon, even without the Americans?

MO: Well, I think there’s a case to be made that the most helpful thing would be some sort of globally aligned policy. That would be the most helpful. Then the next layer down is some sort of regional or hemispheric way of approaching it. And then the next level down is a country-by-country approach. You become less efficient as you move down that chain.

CB: Beyond this apparent push toward cap-and-trade, what do you think it will take to finally get Keystone approved in the States?

MO: I don’t know. But for those who are concerned about Keystone pipeline coming through the U.S., some look at what they think they know about the environmental performance of the oilsands and say, “I’m not comfortable with that.” So I think more information on the environmental performance of the oilsands and how that’s changing over time and how that’s improving over time might go along with an approval process. Shell’s been working with the Alberta government and the Canadian government on the Quest carbon-capture and storage project at our oilsands operations. It’s a great example of efforts to reduce carbon emissions from oilsands. If you’re strictly worried about CO2 intensity, the Quest project is a step toward bringing the oilsands closer to having the same emission levels of other sources of oil.

CB: The Quest project is an interesting example, because it took a significant amount of government support to get it up and running. In the long term, could a carbon-capture and storage project be wholly funded by the private sector?

MO: If you want the market to derive these kind of solutions, there has to be a market driver. At the same time, these pilot projects are where you learn how to lower the cost. So without doing it, you don’t learn, but you can’t do it based on market dynamics. And so it takes this partnership between government and business. But ultimately, it could be something in the right policy framework—like a price on carbon—that companies could do on their own.

CB: We’re in the midst of a big push toward LNG terminals along the West Coast, designed to export to Asia and other markets. But there are other countries chasing the same markets. Are we going to get our infrastructure in place fast enough to beat, say, Australia?

MO: I think the global increase in demand for LNG will support Canadian entry into that market, and North American entry into that market. But Canada and North America, as you indicated are not the only places that can come from. So making sure we’re doing it in a way that’s competitive is going to be key. Canada’s provincial and federal governments need to think about fiscal structure, taxes, royalties, all the other elements of that fiscal framework that will ultimately bear on the profitability of those projects to allow them to be competitive with the Australians and with the African projects and so forth. I don’t know that the window will close on them completely, but there’s going to be a next wave of projects, and Canada will need a competitive framework to be in that wave.

CB: So you’d caution against moves like the B.C. premier coming out and saying that they’re thinking about an export or excise tax on LNG?

MO: That discussion is no different than the discussion we have anywhere in the world on any project in the world, so to me there’s nothing surprising about the conversation. But by the time you get to the end point of making a decision to invest, it needs to be a globally competitive structure. But there’s nothing unusual about asking questions.

CB: You’ve mentioned a window of opportunity. How long do we have?

MO: I think we’re looking at a next wave of LNG projects in the next decade. And if you think about the time line associated with these, there’s multiple years of permitting process, there’s a decision to make the investment, and then there’s multiple years of building, constructing, and then being ready to export. So we’re somewhere inside that six- to 10-year time frame. That’s the window of opportunity for Canada to show itself as competitive with those other global opportunities.