BUSINESS

A MESSY LESSON

An oil spill turns up the heat on environmental issues

BRENDA DALGLISH November 21 1994
BUSINESS

A MESSY LESSON

An oil spill turns up the heat on environmental issues

BRENDA DALGLISH November 21 1994

A MESSY LESSON

BUSINESS

An oil spill turns up the heat on environmental issues

When Gulf Canada Resources Ltd. decided to make a relatively modest $25-million investment in the remote Komi oilfields near the Arctic Circle in Russia in 1991, the Calgary-based company clearly did not anticipate that it would some day become mired in a major environmental disaster. Rather, Gulf Canada executives saw it as an opportunity to investigate a rich, new source of oil, while helping to transform the old Communist system into a market economy. Now, however, because of ruptures in a badly corroded crude-oil pipeline, Gulf Canada is involved with an oil spill—first reported by the U.S. department of energy on Oct. 30—that, according to some estimates,

may be more than eight times greater than the 240,000-barrel Exxon Valdez spill off the coast of Alaska in 1989.

Russian officials say that 78,500 barrels of oil have spilled, but the U.S. energy department says that the spill could be as much as 2.1 million barrels (page 36). Gulf Canada spokesman John Sparks in Calgary says that the company “has no idea” how much oil has spread across the ecologically fragile Arctic tundra. Indeed, Gulf Canada maintains that, since it owns only a 25-per-cent stake in the KomiArcticOil production company and has no interest in the KomiNeft pipeline, it actually has no responsibility for the spill. “The problem with this story is that it is not a Gulf story,” insisted Sparks last week. “We had no

influence over the operation of that pipeline.”

While Gulf executives may be intent upon distancing themselves from their Russian investment, at a time when global markets are more and more interconnected by trade and investment ties, that is becoming increasingly difficult to do. In the decade since a chemical leak at a Union Carbide pesticide plant in Bhopal, India, killed 1,600 people, public awareness about environmental issues has soared. That acute concern has, in turn, exerted pressure on governments in developed countries to introduce tougher laws for companies operating within their jurisdictions.

But even though a host of stringent environmental standards and new technologies have been introduced in Canada and other countries, there are still wide discrepancies in the international community. Since the fall of communism in Russia and the Eastern Bloc, for example, many severe, industrial environmental problems have gradually surfaced. Even though Western investors and partners are supposed to contribute their environmental savvy—as well as their capital—to business joint ventures in emerging markets, it does not always work that way. Environmentalists insist that Gulf Canada’s response to the Russian spill is a common corporate attitude. “Everyone [involved with the project] knew about the condition of that pipeline,” Steve Shallhom, campaign director for Greenpeace Canada in Toronto, said.

“Gulf just decided to take a risk. They took a risk with the environment and they lost.” Even in developed nations, major changes in environmental attitudes—and practices— have not come easily, especially in the resource sectors where such costly investment in new technology and training directly increases the cost of production. For example, since 1988, despite the cash crunch caused by the recession, Canada’s pulp-andpaper industry has had to spend almost $4 billion to renovate its mills to meet much tougher pollution laws. But at the same time as those expenses are mounting, all North American companies are confronting unprecedented competition in mining, lumber and energy sectors from such developing economies as Russia, Mexico and China, where there are fewer environmental regulations—and less organized environmental lobby power. Judith Marshall, a representative for the international affairs department of the United Steelworkers of America in Toronto, says that the union is about to launch a study to determine whether Canadian mining companies lower their environmental standards when they operate in less-developed countries. Marshall said that isolated anecdotal reports suggest “that as soon as they go to a less-regulated environment, they slip back a century and go right back to their old practices.”

To date, many industries have been persuaded to alter their practices only because of aggressive campaigning by environmental groups. In the forest-products sector, protest-

ers have successfully managed to rally public support for their battle against clear-cutting, in part because of the highly visible and unsightly consequences of such logging practices. In addition, groups such as Greenpeace have begun to organize revolts among end users who are willing to boycott paper products from companies that do not follow “green” forest practices. Shallhorn says that the Toronto Board of Education— which spends an estimated $800,000 on paper products annually—passed a motion last month not to buy paper produced from wood that comes from clear-cut forests. Some European paper buyers are also following a similar policy.

As a result of such campaigns—and

tougher legislation—companies like MacMillan Bloedel Ltd. of Vancouver, Canada’s largest forestry company, have modified many of their traditional techniques. In an effort to protect salmon spawning streams from possible contamination, MacMillan Bloedel no longer dear-cuts trees right to the water’s edge. And instead of attempting to plant manmade forests with only one or two types of commercially valuable trees, it relies on natural regeneration, in which the forest is harvested carefully so that the site is damaged as little as possible and natural vegetation is regrown as quickly as possible. Said Linda Coady, the company’s first vice-president of environmental affairs, “I guess our initial reaction to much of this is that we couldn’t do it because it was too expensive. We felt that the pendulum was swinging too much to the other side. But now our attitude is that we’re going to find out if we can.”

More recently, in an attempt to get ahead of public opinion instead of merely reacting to it, the forest industry has launched its own initiative to set international standards for socalled sustainable forestry. The industry’s stated goal is to ensure that the levels of harvesting are expected to be consistent with a forest’s ability to regenerate and maintain its rich variety of life. Nevertheless, this goal will be difficult to achieve because standards will have to be set for each of the different kinds of forest in the world—and because of the many countries, companies and interest groups that will have to reach a consensus.

Another segment of the forestry business, the Canadian pulp-and-paper industry, which traditionally relies on chlorine to bleach the pulp, has also dramatically improved some of its polluting practices. Pierre Lachance, director of media relations for the Montrealbased Canadian Pulp and Paper Association, says that, as a result of the $4 billion the industry has spent to meet most provincial governments’ tough new anti-polluting legislation, the water that comes out of most mills is substantially cleaner than it was before. He says that the total output of the extremely toxic dioxins and furans from pulp mills in Canada has fallen to six grams a year, from 350 grams in 1988. In terms of recycling, the industry has also made great strides. In 1994, the domestic industry became the largest waste-paper importer in the world. It has done this to meet the recycled-paper content regulations imposed on its biggest customers, U.S. newspapers.

The domestic mining industry has also had to undertake significant measures to contend with stringent new laws governing, among other things, so-called mine reclamation requirements. When rock that has been crushed to extract ore is left exposed to the elements, it gradually breaks down and produces an acid that can contaminate nearby streams. In the past, companies used to be able to close a mine site and have almost no responsibility for what happened after they left. However, George Miller, president of the Mining Association of Canada in Ottawa, says that several provinces, including British Columbia, Ontario and Quebec, have now introduced new laws that require mines—even before they open—to outline how they will deal with the acid drainage that will be produced at the mine site for decades to come. In one precedent-setting case, British Columbia forced a subsidiary of mining giant Placer Dome Inc. to deposit $30 million with the provincial government to cover the cost of future cleanups. Such aggressive measures have prodded the industry to come up with innovative new solutions to address its pollution problem and to reduce its cleanup costs. “We whine from time to

time,” said Miller, “but then we try to get on with the job. We know that no one cares if the mining industry whines.”

Although resource companies may be most directly affected by evolving standards, governments of all levels have also begun to extend environmental liability to any parties that may have a financial interest in a polluting company—including lenders. In 1991, eight major Canadian banks got an expensive lesson in environmental protection when they incurred more than $65 million in losses after Kemtec Petrochemical Corp. of Montreal went bankrupt. When the Quebec government threatened to make the banks pay the $80-million fee to clean up the Kemtec refinery site, they elected to walk away from their financial claim on Kemtec’s assets.

As a result of that case and others, Carol Ann Bartlett, an assistant general counsel with the Royal Bank of Canada who works on environmental risk issues, says that the banks now require most borrowers to disclose any possible

environmental liabilities. If potential problems show up, the bank may require follow-up with detailed, independent site investigations or even more detailed studies.

One of the most common things that the banks watch for is underground fuel storage tanks that may deteriorate and release oil that could eventually contaminate groundwater. This ecological hazard can occur not only with large companies, but also with small businesses that are built on old comer gas-station sites, and even with homeowners who have underground residential storage tanks on their property. Added Bartlett: “I understand that some loans are definitely being turned down, at least in part because of

environmental concerns.” Meanwhile, in the case of the Russian oil spill, Gulf Canada faces a problem not unlike that confronted

by the banks. It has invested $25 million in the oil venture, but it has yet to take a single dollar of profit out of Russia— even though the Russian government could decide to hold foreign oil companies liable for at least a portion of the cleanup costs. John Sparks defends Gulfs participation on both environmental and political grounds. He says that Gulfs involvement did improve environmental conditions at the oil-drilling site. Furthermore, he says that the company’s activities in Russia contributed to the country’s economic and political development. “If we want their revolution to work, it behooves Westerners to invest,” said Sparks. “The Russians can’t do it without Western capital and expertise.” But without more attention to the environment, they apparently cannot do it with them either.

BRENDA DALGLISH