When Does “No” Mean “No”?

Note: This article was published in The Globe and Mail on March 3, 2015. The version below includes additional hyperlink references not published in the original.

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On big resource projects, when does ‘no’ mean ‘no’?

By Joel Gehman and Michael Lounsbury
March 3, 2015

A recent column lamented that getting to “yes” on energy projects in Canada has never been tougher: Fossil-fuel developments, pipelines, mines, dams, transmission lines, and even wind turbines “are frequently contested, delayed or blocked.” But do such outcomes mean there is a problem? And if so, what kind of problem is it?

The argument – ‘Getting to Yes’ – assumes that “yes” is somehow on the side of angels. But a critical element of any great strategy is saying “no.” It’s Strategy 101. No organization – whether a corporation, a nation-state or a non-profit – can say “yes” to everything. Choices must be made. In his classic article “What Is Strategy?,” Harvard professor Michael Porter put it bluntly: “The essence of strategy is choosing what not to do.”

Clearly then, “no” is often the better strategic choice. And yet, organizations often fall into a “yes” trap. This is because, once set in motion, strategies are hard to reverse. There are sunk costs, learning effects, organizational inertia and network externalities, among other issues. And so, an organization can easily escalate its commitment to a losing course of action. But in real-time, as these strategic decisions are unfolding, the folly is often hard to stop.

One famous example is New York’s Shoreham Nuclear Plant. First proposed in April, 1966, the plant was expected to cost $75-million and come online by 1973. The plant was eventually completed in October, 1985, only to be decommissioned in March, 1989, having never sold any electricity. By that point total costs had ballooned to $5.5-billion. Predictably, the plant’s owner, Long Island Lighting Company, was unable to survive as an independent company. All because it refused to take “no” for an answer.

On the heels of President Obama’s recent veto, some advocates of the Keystone XL pipeline have proudly proclaimed they won’t take “no” for an answer. Perhaps their persistence in the face of “no” will prove prescient. Or perhaps Keystone XL is another Shoreham Nuclear Plant in the making. Only time will tell. But all of this suggests that perhaps Canada doesn’t have a “yes” problem; perhaps Canada has a “no” problem.

Entrepreneurs in Silicon Valley have a saying: “If you’re going to fail, fail fast.” By comparison, getting to “no” on Canadian energy projects has been taking longer and longer. That prompts some interesting questions. Why has Canada been taking so long to get to “no”? How can we get to “no” faster? Why do so many organizations keep chasing “yes” in the face of “no”? And, perhaps most importantly, what are the costs to Canada of not taking “no” for an answer?

Joel Gehman (@joelgehman) is assistant professor of strategic management and organization and Southam faculty fellow at the Alberta School of Business. Michael Lounsbury is associate dean of research, professor of strategic management and organization and Thornton A. Graham chair at the Alberta School of Business.

Hydraulic Fracturing News Roundup

According to the Wall Street Journal, Baker Hughes Inc (BHI) has warned it is facing a difficult adjustment as companies such as Chesapeake Energy Corp (CHK) retreat from natural gas drilling amid a 10-year low in the commodity’s price. Are the issues unique to Baker Hughes, or will the problems spread to other oil services companies such as Halliburton and Schlumberger?

In Pennsylvania, Judge Keith Quigley of the Commonwealth Court ordered a 120-day halt to provisions of Act 13 of 2012 set to take effect on Monday related to land use and local zoning regulations. The lawsuit, filed by seven Pennsylvania municipalities, accuses the state’s General Assembly of enacting an “unconstitutional” statewide zoning ordinance “by way of an improper use of its police powers and by enacting zoning regulations without consideration of zoning districts, comprehensive plans or how the zoning enactments would serve to protect the health, safety, morals or welfare of local communities.”

Act 13 of 2012 has also the focus of national attention because of concerns it imposes a “gag order” on doctors. Some medical professionals are concerned because they will have to sign a confidentiality agreement in return for access to proprietary information on chemicals used in hydraulic fracturing. The president of the Pennsylvania Medical Society has said the provision could have a chilling effect on research and on doctors’ ability to diagnose and treat patients who have been exposed.

According to Bloomberg, at a conference yesterday U.S. Energy Secretary Steven Chu indicated that the federal government needs to play a larger role in overseeing new technologies for developing oil and natural gas so as to prevent damage to natural resources. “The technology for recovering oil and gas through hydraulic fracturing has really raced ahead,” Chu said. “That’s something I believe that can be developed very responsibly. There has to be a regulatory role because there may be some people who want to cut corners.”

On the heels of Secretary Chu’s statement, President Obama released an executive order that will coordinate the administration’s activities on natural gas. The order creates a working group that includes various White House offices such as the Council on Environmental Quality and National Economic Council, as well as relevant cabinet departments and agencies like Interior, EPA and Department of Homeland Security.

Developed by the Ground Water Protection Council and Interstate Oil and Gas Compact Commission, FracFocus.org turned one year old this week. About 130 companies have logged the chemicals used in hydraulic fracturing of more than 15,000 wells over the past year. The site has been visited by about nearly 150,000 unique visitors. Officials for the website estimate that 75 percent of all wells drilled in the United States are logged on FracFocus, based on scrutiny of a recent Baker Hughes‘ monthly rig report.

In New York, Ulster County executive Mike Hein issued an executive order today to prevent the spreading of brine from hydraulic fracturing on any county-maintained roads, including “the purchase of any liquid waste product from hydraulic fracturing operations (fracking waste brine) or the use of such fracking brine by any part of Ulster County government.”

Natural Gas and the State of the Union

In his latest State of the Union address, President Obama announced that:

We have a supply of natural gas that can last America nearly 100 years… The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy. And, by the way, it was public research dollars — over the course of 30 years — that helped develop the technologies to extract all this natural gas out of shale rock, reminding us that government support is critical in helping businesses get new energy ideas off the ground… Our experience with shale gas, our experience with natural gas, shows us that the payoffs on these public investments don’t always come right away. Some technologies don’t pan out; some companies fail. But I will not walk away from the promise of clean energy.

In addition to upsetting those concerned about the dangers of hydraulic fracturing, this part of his speech has also provoked criticism for “exaggerating” the role of the federal government in fostering the emergence of the natural gas boom.

For instance, a US News and World Report article entitled “Obama Exaggerates Role of Federal Government in Natural Gas Boom” by Daniel Kish, senior vice president for policy at the Institute for Energy Research, asserts:

The president’s claim that the federal government helped create the hydraulic fracturing boom is specious at best.

However, even a cursory look at the historical record reveals that the government’s role in oil and gas technologies generally and hydraulic fracturing related technologies specifically is far more involved and complex than acknowledged by Kish’s article. For instance, despite his claims to the contrary, the government played an important role at many points in the last 30 years, including in the case of Mitchell Energy. According to one recent article:

Mitchell Energy’s first horizontal well was subsidized by the federal government, according to former geologist and Vice President for Mitchell. “They did a hell of a lot of work,” said Steward, “and I can’t give them enough credit for that. DOE started it, and other people took the ball and ran with it. You cannot diminish DOE’s involvement.”

Rather than an isolated example, this vignette is indicative of the substantial role played by the government in a variety of oil and gas technologies, many related to hydraulic fracturing as it is now practiced. For instance, during the 1970s the Department of Energy invested more than $92 million in research related to the extraction of natural gas from shale reservoirs.

This is not to say that private organizations have not played an important role as well. My point is not to declare a winner between government agencies and private industry, but simply to note that any thoughtful consideration of the record will show that both private organizations and government agencies were significantly involved in the process over a large period of time. In actor-network terms, innovation implicates heterogeneous social and material actors, and is likely to result in hybrid forms of organizing. As a result, framing the problem up as either private innovation or government support are likely to be dead on arrival as a practical matter.

Further, on top of its direct involvement in technology research (such as through the Department of Energy), a reasonable accounting of the government’s role would also consider the role of tax incentives (without which operators such as Mitchell would have been unlikely to have drilled wells), the role of favorable regulations such as the Energy Policy Act of 2005 (without which operators would not be exempt from the liabilities of hydraulic fracturing), and the important role played by agencies such as the EIA and USGS in quantifying available reserves (without which operators would have difficulty raising the capital necessary for drilling).

In short, consistent with President Obama’s claims, and contrary to the assertions of US News and World Report, it is difficult to conceive of the oil and gas industry as we now know it without significant support and involvement by the US government.