By Don Richardson, Ph.D. – Managing Partner, Shared Value Solutions Ltd., Canada
A version of this post also appears with the Shared Value Initiative Community website.
What happens when you mix Neil Young, renowned Harvard Business School strategist Michael Porter, a rapid and massive transformation of the North American oil and gas industry, frustrated Aboriginal peoples in Alberta, a massive inland heavy oil pipeline spill in Michigan, and the deaths of 47 people in Quebec? We may soon find out, and the mix might just yield a positive way forward through the most challenging industrial energy transformation the people of North America have ever experienced. The way forward involves Michael Porter’s 20-plus year old hypothesis about environmental regulation, a bit of Porter’s Creating Shared Value thinking, some creative energy industry leaders, and a people who have been stewards of the land for over 10,000 years. It’s an interesting picture.
“There’s More to the Picture Than Meets the Eye”
Until you recognize and name a problem, it’s impossible to solve it. Part of the challenge with the massive industrial oil and gas transformation in North America is that very few of us know that it’s happening and it’s hard to connect the dots to see the big picture of the very real human safety and environmental problems this rapid change is creating. Whatever you may think about Neil Young, he’s helping generate a new conversation and new awareness of some of what is going on. But, as Neil so movingly sings, “there’s more to the picture than meets the eye”. And it’s not just a picture of problems, money, polarized politics and arguments; it’s a picture that includes some positive and beneficial solutions.
Across North America, we are witnessing tremendous growth in “unconventional” oil and gas production. The decline in availability of more easily accessed “conventional” oil and gas from simply drilling wells is yielding to new and more complicated approaches to extracting oil and gas where it is more solidly embedded in the ground. As a result, we are seeing a massive investment in the extraction of “unconventional” fossil fuels. From the Bakken oil field production in North Dakota, Montana, Saskatchewan and Manitoba, to the heavy oils of the Alberta oil sands, to the rapid growth of shale gas production in areas such as the Marcellus shale formation in the northeastern United States, unconventional fossil fuel production is transforming North America into a new Saudi Arabia.
The Big Picture
This is the big picture. It’s a picture that shows some very real benefits and some very real problems. In May 2013 the International Energy Agency said that North American oil production led by unconventional oils had produced a “global supply shock” that would reshape the way oil is transported, stored, refined and marketed (IEA, 2013). The scale of infrastructure required to pull the fuel out of the ground and move it to markets is unprecedented, and the profits available to those who can make this happen efficiently are staggering.
This “shock” is not just being felt in energy markets – it is being felt by people and the environment. The speed of this massive transformation of the energy industry in North America is so fast that governments, regulators, environmental organizations and communities are struggling to make sense of the opportunities and risks. We are seeing something akin to the Yukon gold rush and our regulators are far removed from the scene. Our regulators no longer have their boots on the ground, and through a long series of cutbacks they have seen their scientific tools, resources and even research libraries cut to the bone or removed – their eyes can’t assess the picture.
North America’s energy industry transformation is so rapid that people in all sectors have very little time for planning and developing the governance needed for healthy and economically beneficial land use, environmental safeguards, public health and safety measures. But, the promise of riches from unconventional oil and gas drives the massive industrial transformation regardless. The human and environmental costs of the energy industry transformation have so far been staggering.
The costs of this massive and rapid energy industry transformation include: the environmental and economic catastrophe of the largest onshore oil spill and ongoing cleanup in U.S. history at Kalamzoo, Michigan from a July 2010 break in an Enbridge pipeline that spilled 3.3 million litres (over 20,000 42 gallon barrels) of Alberta heavy crude oil, and; the death of 47 people in Lac Megantic, Quebec from the explosion of multiple railway cars carrying Bakken formation crude oil. These catastrophes highlight the very real problems of an unconventional oil and gas industrial transformation happening faster than problems can be recognized, understood, regulated and addressed. This is the problem we have to recognize and name.
The tension between the rush for energy riches and the need for regulation is resulting in an “us vs. them” conversation that helps no one. The unconventional oil and gas supplies are being developed, the products are being transported and stored in new ways and in regions unfamiliar with the risks, and refining and processing operations are expanding. The economic benefits are profound, but so are the human and environmental consequences. Some communities and environmental organizations are saying “no more” very loudly, but the power of the market sees the energy supplies continue to flow. We may think we can address the problem by saying “no more”, but that doesn’t seem to have much impact on stopping the flow of unconventional oil and gas. How then do we address the problem?
The Regulatory Picture Around Neil Young
The government response in Canada has been for the federal government and some of the provinces to de-regulate and encourage industry to self-regulate and do better. But this approach is not working. We need tough regulatory solutions that work at the speed of market forces and harness those forces to create safe and environmentally sound unconventional oil and gas production. But we won’t see a tough regulatory environment until all the players recognize that stringent regulations will benefit the unconventional oil and gas industry and the economy and benefit people and the environment. This is a tall order.
The independent Panel convened by the Canadian Environmental Assessment Agency to review Shell Canada’s proposed Jackpine Mine oil sands project in the Athabasca region of northern Alberta stated (CEAA, 2013): “the Project would have significant adverse environmental project effects on wetlands, traditional plant potential areas, wetland-reliant species at risk, migratory birds that are wetland-reliant or species at risk, and biodiversity… Although the Panel has concluded that the Project is in the public interest, project and cumulative effects for key environmental parameters and socioeconomic impacts in the region have weighed heavily in the Panel’s assessment; All of the Aboriginal groups that participated in the hearing raised concerns about the adequacy of consultation by Canada and Alberta, particularly with respect to the management of cumulative effects in the oil sands region and the impact of these effects on their Aboriginal and treaty rights.”
Neil Young and his “Honour the Treaties” concert tour moved across Canada this winter contributing 100% of the proceeds to the Athabasca Chipewyan First Nations legal defense fund. The proceeds from Neil Young’s concerts will help with this Aboriginal nation’s court challenge to the Canadian government’s decision to permit the Jackpine Mine oil sands project to proceed. The First Nation is concerned that in spite of the independent Panel’s concerns about the environment and human well-being and in spite of the Panel’s statements about the need for the involvement of Aboriginal peoples in the management of cumulative effects in the oil sands region and the effect of those impacts on their Aboriginal and treaty rights, the government of Canada chose to permit the project to move forward.
This is not a challenge to Shell and the oil industry. This is a challenge aimed at creating a tougher regulatory environment where Aboriginal people have the power to effect decisions and establish limits and thresholds for impacts on the air, land, water and wildlife that will ensure the exercise of treaty rights now and in the future. It is a challenge with the goal of establishing the Athabasca Chipewyan First Nation as a true steward of the land under its treaty rights, a new regulator for an area that is a hotbed of unconventional oil extraction and transportation.
Behind the call to “Honour the Treaties” is a call for Aboriginal communities to retain and enhance their role as stewards of their traditional lands, with legal and enforceable powers to ensure that impacts are fully understood and managed. “Honour the Treaties” is not a call to stop the unconventional oil and gas industrial transformation: it is a call to do it carefully, with treaty rights holders at the decision-making table – not as stakeholders, but as decision-makers. The new regulatory picture emerging sees Canada’s Aboriginal peoples, as the stewards of their traditional territories and harvesting areas, stepping up to become Canada’s new regulators. Enter Michael Porter.
Neil Young meet Michael Porter
It’s hard to imagine a meeting between Neil Young and Michael Porter, but that would be a great conversation to overhear. The two have more in common than one might think.
A little over twenty years ago, Michael Porter suggested that well designed and stringent environmental regulation can lead to environmental benefits, innovation and enhanced competitiveness. While many in industry push back on tough environmental regulation, Porter sees the win-win advantages for innovative businesses to take advantage of regulations to create new products and services to meet or exceed regulatory requirements, differentiate themselves from the competition and make more money while protecting the environment. This idea is now known as the Porter Hypothesis (Ambec, Cohen, Elgie and Lanoie, 2011). It’s the idea that strict environmental regulations can stimulate efficiency and encourage innovations that help improve commercial competitiveness while enhancing environmental protection.
Michael Porter is a global authority on competitive strategy and the application of competitive principles to environmental, social, health and safety problems. He is generally recognized as the father of the modern business strategy field and has served as a counsellor on strategy to many national governments, to international corporations and to non-profit organizations. In 2011, with co-author Mark Kramer, Porter published one of the most popular and cited articles in the history of the Harvard Business Review, with the simple title: Creating Shared Value.
Porter's work is particularly relevant to the regulation of unconventional oil & gas production, transportation and refining in North America. He promotes the idea that tough regulation for the protection of the environment and for public health and safety is most definitely in the interest both business and society. The Porter Hypothesis becomes even more interesting in light of his interest in extractive industries and the recent work of the Shared Value Initiative to transform extractive industry thinking through research documenting the win-win benefits of companies taking the lead to tackle social and environmental problems, bring business and society back together, and achieve economic success in the process.
Michael Porter says we need better and tougher regulation, not just to protect the environment and people, but to enable industry to generate profits, and new products and services, through the innovation that comes with regulatory constraints. There is Canadian evidence that this works, sadly based on the deaths of seven people in Walkerton, Ontario in May 2000 due E-coli-contaminated groundwater linked directly to the dismantling and de-regulation of Ontario’s water testing system. Following the Walkerton tragedy, Ontario launched into an extensive regulatory reformation creating an extensive network of new safeguards and oversights to protect source water and groundwater and surface water supplies for communities.
One result from Walkerton has been an unprecedented investment in water innovation in Ontario that includes the innovative Water Opportunities Act. Michael Porter would love this piece of legislation – it’s as close to a piece of “Shared Value” legislation as you’ll ever see. It is designed to address the problems identified through the Walkerton tragedy by:
- making Ontario the North American leader in the development and sale of water conservation and treatment technologies;
- encouraging sustainable infrastructure and conservation planning using made-in-Ontario technologies to solve water, wastewater and stormwater infrastructure challenges, and;
- encouraging all Ontarians to use water more wisely.
Ontario’s water industry is now home to 900 firms and 22,000 employees including leading global players such as Veolia Water, Danaher, American Water, GE Water and Nalco Corporation together with world class engineering and environment consulting firms working on water projects domestically and around the world. This leadership comes through the Ontario Clean Water Agency, the Canadian Water Network based in Waterloo Ontario, the Southern Ontario Water Consortium, the United Nations University – Institute for Water, Environment and Health in Hamilton, Ontario, the Water Institute at the University of Waterloo, the National Water Institute in Burlington, Ontario and a network of University research centres focused on water. While not all of this innovation and global business development can be linked directly to the events at Walkerton, Ontario’s focus on stringent regulation created a new playing field for water innovation in Ontario and entry into new water treatment markets around the world.
“The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy,” says Porter about the Shared Value Initiative, a global community of practice committed to driving adoption and implementation of shared value strategies among leading companies, civil society and government organizations launched by Michael Porter and his colleague Mark Kramer at the Clinton Global Initiative Annual Meeting in 2012. At the very core of Porter’s thinking is the idea that “government must learn how to regulate in ways that enable shared value rather than work against it” (Porter and Kramer, 2011).
Picture the New Regulators – Canada’s Aboriginal Peoples
The Porter Hypothesis is based on the application of stringent environmental regulations. Over 20 years later, and many empirical studies to test the Porter Hypothesis, the hypothesis holds strong and there is sufficient evidence that such regulations do lead to innovation and market leadership in the jurisdictions in which they are applied.
But perhaps we are seeing a new Canadian version of the Porter Hypothesis: in some parts of the growing unconventional oil industry there are demands (yes – demands) for more stringent environmental regulation and regulatory monitoring of environmental outcomes for unconventional oil production, transportation and refining. In the U.S., both the railway industry and the petroleum industry are pushing for tougher environmental and safety standards for transporting Bakken crude (Keane and Drajem, 2014). These demands are already leading to new investments in technologies and environmental performance processes for unconventional oil transportation, opening up competitive domestic and international advantage for firms that choose to innovate respond to new market demands that result from improved regulations. Like the Walkerton tragedy, the tragedy at Lac Megantic, Quebec is pushing governments to put more stringent regulations in place.
It can be difficult for governments to grasp and push the Porter Hypothesis forward when short term thinking and strong industry lobbies push regulation in the opposite direction. Disasters can yield the results Porter envisions, but industry does not have to wait for disasters to realize the advantages of better regulation. If one looks closely at GE or Veolia (both firms recognized for being on the Shared Value spectrum) you can see companies intentionally applying the Porter Hypothesis to strengthen competitive positions in unconventional oil activities in Alberta while advocating for all firms and government to push environmental performance. In this climate, more GE’s and Veolia’s, more industry lobby like we are seeing in the U.S. around railway transport of oil, and more advocates of Creating Shared Value environmental and social outcomes in the oil sands, including stronger regulation, could result in global competitive advantage for Canadian innovators in unconventional oil and gas production, transportation and refining and improved environmental stewardship. This is a tall order, but the emergence of Aboriginal communities into the regulatory sphere may make it happen.
The emergence of Aboriginal communities as new regulators over activities in their traditional territories, where they have been environmental stewards for thousands of years, has been happening for decades in Canada, and its gaining major momentum. Many environmental and land-use challenges are being addressed through “co-management” or “joint management” where Aboriginal communities and government agencies sit at the table with the rights to have full influence on decisions. Through various forms of co-management or joint management, each unique to the local and regional circumstances, each participant brings to the process an enforceable position, ideally established in law and policy, which can then be formally institutionalized in the decision-making process.
More and more Canada is seeing co-management or joint management land use and environmental stewardship regimes that have Aboriginal communities working in full partnership with government bodies to determine land use and environmental outcomes from industrial development, and extractive industries in particular. These partnerships include balanced fact-finding and monitoring that marry traditional science with carefully collected and documented traditional aboriginal knowledge, traditional ecological knowledge, and traditional land use studies. Companies that partner with Aboriginal communities to advance environmental stewardship and careful resource extraction where these regimes are evolving can have a major competitive advantage. However, there are only a small few that have assessed the current climate to understand and act on this approach... but there will be more.
A major example of co-management or joint management includes the Forest Stewardship Council of Canada (FSC) which includes Aboriginal peoples who have the right to free, prior and informed consent (FPIC) as a requirement in FSC’s Principles and Criteria for Forest Management. When you see the FSC logo on a pad of paper, you have some certainty that the paper is produced with respect for the rights of Canada’s Aboriginal peoples. Another important example is the Voisey’s Bay nickel-copper-cobalt mine in Labrador. When Inco (now Vale) bought the Voisey's Bay mineral site in 1996, both the Labrador Inuit Association and the Innu Nation were engaged in land claims negotiations with the government of Newfoundland and Labrador. These Aboriginal communities did not want to see mining operations on their lands without being full participants in the decision-making process about land-use and environmental stewardship. After tough negotiations, the mining company signed impact and benefit agreements (IBAs) both Aboriginal communities. These IBAs, signed in 2002, provide legal assurance for commitments that include employment, training, wealth distribution through mining royalties, and environmental protection while protecting economic, social and other interests. Both the Innu Nation and the LIA signed IBAs with Inco in 2002. The Voisey’s Bay IBAs also limit mine throughput, changing a 7-10 year project into a 30 year project to allow for meaningful participation with the capacity for the Aboriginal communities to become regulators and stewards for careful and independent environmental monitoring and with the time to make good decisions.
The Neil Young – Michael Porter Picture
It would be interesting to hear a conversation between Neil Young and Michael Porter on the role of stringent environmental regulations for creating innovation and new “shared value” partnerships between industries, government bodies, non-governmental organizations and Aboriginal communities. Porter’s hypothesis about stringent environmental regulation may get a hearing on February 13, 2014 when he visits to Calgary at the Next-Gen Corporate Social Responsibility and Shared Value Forum:
"The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not at the margin of what companies do but at the center. We believe that it can give rise to the next major transformation in business thinking." – Michael Porter, 2011
In Canada, the major transformation Michael Porter speaks of will include the 600 plus Aboriginal governments seeking to advance environmental and watershed stewardship and find new opportunities for economic and social development through creative partnerships. And it will see stringent environmental regulation – brought forward by Aboriginal peoples - that catalyzes innovation, new business opportunities and some fascinating “shared value” solutions.
I wish to thank Larry Innes for commenting on an earlier draft of this post.
(c) Shared Value Solutions Ltd., 2014