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Pipeline construction in British Columbia.

Gary Campbell/The Globe and Mail

Many see the emerging rift between Alberta and British Columbia over compensation for the Northern Gateway pipeline as hampering energy development by stalling the creation of a national energy strategy. However, calls for a strategy may themselves be the fundamental cause of the political fallout.

Alberta Premier Alison Redford has been leading the charge for the provinces to agree to a common plan for developing Canada's energy resources. The outcome of the latest meeting of the premiers is that Ms. Redford will be part of a working group to develop the strategy. Meanwhile, B.C. Premier Christy Clark promised not to sign on to any such strategy until the province receives "its fair share of the fiscal and economic benefits" of the proposed Northern Gateway project.

By tying the privately built pipeline to the government-led national energy strategy it advocates, Alberta has become an unwitting part of a project in which it has no role.

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A special levy by B.C. on pipeline throughput or a claim on Alberta's royalties would likely be unconstitutional. However, B.C. could levy steep property taxes on pipelines within the province. Higher pipeline property taxes would be passed on to oil producers through higher pipeline tolls.

A property tax on pipelines would likely be constitutional as long as the property tax does not discriminate between pipelines that are interprovincial in nature, such as Northern Gateway, and those that are exclusively within the province, such as future natural gas pipelines.

Higher property taxes, or the threat of taxes, on pipelines may result in businesses not developing the extensive natural gas reserves in northeastern B.C. Oil and gas companies have already spent billions for the rights to develop these reserves, with the potential for many billions more in royalty payments once production ramps up. High costs to ship the natural gas to market may result in companies choosing not to tap these reserves.

One solution to such a problem is for pipeline and oil and gas companies to negotiate with potentially affected parties. A long-term agreement that legally bound the parties to guaranteed costs could establish a reasonable rate of return to the pipeline builder and oil and gas companies, while compensating locals for the risks they bear.

The ability of any one party to the negotiations to insist on terms, to allow passage, will depend on the relative bargaining positions of each party. If B.C. was the only possible route for a new oil pipeline out of Alberta, the province and local landowners would have the negotiating power to seek significant compensation from the Northern Gateway developer.

However, if other options for pipeline companies start emerging elsewhere in the country, then the negotiating power of one province will diminish.

Such options are beginning to emerge. New Brunswick Premier David Alward has said he is "very open to seeing a pipeline come from Alberta."

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An option of shipping oil east would make governments elsewhere calculate tradeoffs of the risks of development against the benefits they could extract only to the point where developers instead choose to go elsewhere.

If each province acts in its own self-interest, where some provinces can place a higher priority on job creation and encourage pipeline development while others that place a higher value on the environment restrict it, all provinces potentially could be better off. Yet for each province to pursue its own interest does not require a strategy, it requires competition. A one-size-fits-all approach to energy development may end up fitting nobody, with private companies unable to offer the compensation they otherwise could with respect to varying local needs.

National energy competition among the provinces – not a united strategy – where each province negotiates to find suitable terms with private developers, may be the best path forward for energy development.

Benjamin Dachis is a senior policy analyst at the C.D. Howe Institute.

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