Oh Canada! How Canada’s largest pension fund is financing drilling along Colorado’s Front Range

Crestone Peak Resources, which is owned by the Canadian Pension Plan Investment Board, drilling a seven-well site in southern Erie above a residential subdivision in 2017. (Photo by Ted Wood/The Story Group)
Crestone Peak Resources, which is owned by the Canadian Pension Plan Investment Board, drilling a seven-well site in southern Erie above a residential subdivision in 2017. (Photo by Ted Wood/The Story Group)

It’s a familiar story: A deep-pocketed country develops oil fields in a heavily indebted nation with lax environmental regulations. The locals object, claiming that oil and gas extraction degrades their land, air, water and quality of life. Protests mount, and locals appeal to elected officials, who appear powerless to intervene. The foreign country tries to influence local elections. Complaints about spills and leaks pour in. Lawsuits fly. There are rumblings that locals may resort to civil disobedience if the rich foreigners keep spoiling their resources.

This scenario has played out around the world — in Nigeria, Ecuador, Indonesia and elsewhere. In what economists call the “resource curse,” countries with minerals or oil are vulnerable to  exploitation by foreign powers and end up with sullied land, poisoned waters and dirty air.

But in a new twist to an old narrative, the foreign interloper in this story is Canada, and the area being despoiled is the United States. Specifically, Boulder County, Colorado.

The deal

In October 2015, the Canada Pension Plan Investment Board (CPPIB) announced a $900 million deal to purchase all of the oil and gas assets in the Denver-Julesburg (D-J) Basin owned by Encana, the U.S. subsidiary of a Canadian energy company with the same name that at that point was one of the largest producers in Colorado.

The Investment Board is a quasi-governmental, $368 billion behemoth that invests payroll withholding taxes from Canada’s workers on behalf of 20 million contributors and beneficiaries, and pays benefits much like the U.S. Social Security system does. Its portfolio is vast and includes renewable energy projects, real estate, business ventures around the world, as well as fossil fuel production and pipelines.

Encana had holdings in rapidly growing areas along Colorado’s Front Range north of Denver and astride Interstate 25 corridor between Colorado’s capital and its fourth-largest city, Fort Collins.

The deal to sell to CPPIB stalled as financial and social pressures bore down on the oil and gas industry. Some Encana holdings were in communities, such as Broomfield and Boulder counties, that had banned hydraulic fracturing, or fracking, in 2012 and 2013. The oil and gas industry challenged those bans, and the legal fight reached the Colorado Supreme Court as the Encana deal was being negotiated. In early 2016, while the fracking bans were still in place, oil bottomed out at $34 a barrel and Encana’s stock had dropped to below $5 (from its five-year high of more than $24 in the summer of 2014). Many companies in the oil and gas patch were stressed. Front Range citizens’ groups were organizing ballot measures to force new oil and gas development farther from where people lived, and suburban parents who had never done anything more political than attend PTA meetings became “fractivists” and planned civil disobedience actions in local libraries.

Then came the Colorado Supreme Court’s landmark May 2016 decision invalidating all “local control” bans in favor of longtime statewide authority to foster oil and gas development. That authority, entrusted to the Colorado Oil and Gas Conservation Commission (COGCC), historically has meant that the state has approved every completed drilling permit application.

Residents across the Front Range who had been working to win voter approval for local fracking bans were outraged by the ruling. Local activism continued, with new proposed initiatives, more neighborhood groups pressuring their local officials to stand up against the industry, and a number of lawsuits filed in local, state, and federal courts to continue pressuring the state to increase its regulation of oil and gas facilities, especially in residential areas and near schools.  

The ruling, however, was good news for the Canadians.

Soon after, on Aug. 11, 2016, the Canada Pension Plan Investment Board announced that it had finalized its deal with Encana. A new company was born: Crestone Peak Resources LLP, which the CPPIB registered with the state of Colorado as a “foreign limited liability company” in Delaware and listed its principle address as One Queen Street East in Toronto. The Canadian pension board reported paying Encana $609 million — approximately 30 percent less than the $900 million purchase price that had been announced just months earlier — for the right to drill in residential areas of Colorado’s urban core. The deal included more than 100 operating “legacy” wells in Boulder County that pre-dated larger-scale hydraulic fracturing and horizontal drilling facilities in wide use today. Because of the controversy that’s inevitable when wells are so close to homes and schools, they’re known among industry insiders as “toxic assets.”

In an interview, Encana spokesman Doug Hock said the fact that many of the company’s production sites in Colorado were in areas where there was growing resistance to oil and gas development “was a factor” in its decision to sell to the CPPIB. He emphasized, however, that it wasn’t the main one. “They were good wells, but they didn’t fit into our growth strategy,” he said.

Crestone, in an email from its public relations department, said there was nothing unusual about the price drop. “It’s very common in acquisitions for the valuation of a company to change from once the acquisition is announced to final closing,” its statement read. Crestone declined to discuss specifics of the sale or current valuation because it is a private company.

The deal was done. Canada Pension Plan Investment Board was moving full-steam ahead into a Colorado firestorm.

Toxic assets

Canada, unlike the United States, remains a signatory to the Paris Climate Agreement, which seeks to harness a global response to climate change by limiting greenhouse gas emissions. Amid rising environmental and regulatory concerns, at least three Canadian provinces have enacted policies pausing fracking since 2013.

The country’s growing movement to limit and more tightly regulate its own drilling operations has not prevented the CCPIB from investing in extraction companies around the world. In announcing its acquisition of Encana’s U.S. subsidiary, its managing director and head of natural resources, Avik Dey, made it clear that the deal was motivated by profits. “This investment offers attractive economics and aligns well with our strategy for the energy sector,” he said. “We look forward to working with our partner to create value and grow the business.”

Dey and other CPPIB directors serve or have served on Crestone’s board.

The CPPIB declined to comment on its investment in Colorado despite multiple requests for an interview. “We refer all questions to Crestone,” said Darryl Konynenbelt, CPPIB’s director of global media relations.

“Most Canadians would be surprised to know they own a fracking oil company in Colorado,” said John Bennett, a senior policy advisor to the environmental group Friends of the Earth Canada.

Denise Melanson, a Canadian retiree who draws a pension from the Canadian Pension Plan Investment Board, fights fracking in her community and says she is "appalled" to learn part of her pension is derived from returns on fracking in Colorado.
Denise Melanson, a Canadian retiree who draws a pension from the Canadian Pension Plan Investment Board, fights fracking in her community and says she is “appalled” to learn part of her pension is derived from returns on fracking in Colorado. (Photo by Ted Wood/The Story Group)

Denise Melanson, 70, is one such Canadian. A retired medical social worker who lives in Richibucpo, New Brunswick, she receives two pensions from the CPPIB: one that she paid into during her years as a medical social worker, and the other what she calls an “old-age” benefit that she started receiving when she was 65. When she learned that some of her benefits might be coming from fracking operations in Colorado, she said in a phone interview, “I was horrified.” Melanson had been involved in educating her community about the health and environmental impacts from fracking and in passing the moratorium in New Brunswick. “It appalls me that we are doing that to other people instead,” she said. “I’d much rather not be receiving money that was earned by making other people miserable.”

Though most residents of the gas patch where Crestone owns operations do not know about the Canadian connection, some who do are dismayed by what they perceive as an insult by our seemingly friendly neighbor to the north.

“I have to wonder if the beneficiaries of the pension fund’s investments understand what they’re investing in,” said Boulder County Commissioner Elise Jones.

As she tells it, virtually every elected official in the county, as well as the overwhelming majority of residents, oppose the kind of drilling plans Crestone has proposed — and wish they could halt them. Concerns range from the planned drilling locations in and around homes, schools and Boulder County Open Space holdings, to negative health effects from the industrial facilities’ emissions, to the oil and gas industry’s impact on the Denver metropolitan area’s persistently poor air quality, to climate change impacts from fossil fuel developments.

“Do these pensioners know how much opposition there is to their investment?” Jones wonders. “If they did, they’d realize this is not wise or ethical. It boggles the mind.”

The political play

In addition to its purchase of Encana’s controversial oil and gas operations, Crestone also invested in Colorado politics and public policy.

Oil and gas issues figured prominently up and down the 2018 ballot, from the governor’s race between Republican oil and gas booster Walker Stapleton and Democratic one-time fractivist Jared Polis, to several ballot initiatives. Crestone Peak contributed $607,500 toward the tens of millions of dollars the industry spent to defeat Proposition 112, the setback initiative that would have required new oil and gas development to be placed at least 2,500 feet from homes and schools. Crestone also donated to the pro-industry group Protect Colorado, which campaigned to defeat 112, and to other political groups backing Republican state legislative candidates who support the oil and gas industry.

Screen grab of Crestone Peak Resources campaign contributions during the 2018 election cycle
Screen grab of Canadian-owned Crestone Peak Resources campaign contributions during the 2018 election cycle

Federal law requires that foreign-owned companies’ contributions to state campaigns meet a two-part test: That they must be drawn from money made from U.S. operations, and that the person making the decision to donate is a U.S. citizen. Since Crestone is a privately held, Canadian-owned company whose only public financial disclosure indicates its value has declined since being formed in 2016, it is unclear where the money came from and who made the decision to contribute to the election. 

“How would you know?” asked Austin Graham, legal counsel for the non-partisan Campaign Legal Center in Washington, D.C.

About half of Crestone’s contributions went to the Senate Majority Fund, a 527 political organization that worked to keep the state Senate controlled by Republicans who had reliably killed any legislation opposed by the energy industry. Colorado law allows 527 groups to receive unlimited contributions from anybody, including foreign entities, said Steve Bouey, the campaign finance program manager for the Colorado Secretary of State’s office. The other organizations that Crestone contributed to include “independent expenditure committees,” which are also allowed to legally receive contributions from foreign-owned corporations.

A Crestone spokesperson stated in an email that Crestone follows all state and federal laws, and as a company operating in Colorado, “allocates a certain amount of funds each year to dedicate to organizations and initiatives that are important to our team. Crestone leadership ultimately makes the decision on which organizations these funds are donated to.”

Graham from the Campaign Legal Center said, “Regardless of whether any laws were broken, (the CPPIB) spent a substantial amount of money trying to influence Colorado voters.

“I think it’s worth bringing to the public’s attention.”

“Eerie, Colorado”

Crestone has applied for a Comprehensive Drilling Plan (CDP) to start drilling in Boulder County, but the applications for drilling permits are still awaiting approval from the COGCC, which is slated to meet about Crestone’s application in late April in Boulder. If approved, the plans will have to survive an ongoing lawsuit filed by Boulder County that a judge recently ruled must wait for the COGCC’s final determination to move forward. If Crestone prevails in court, the company will be subject to Boulder County’s oil and gas regulations that went into place in March 2017. Those regulations, in turn, are likely to be challenged in more lawsuits. A bill that would impose greater regulation upon the industry statewide, in part by beefing up local control of drilling, is now moving through the state legislature. If passed and signed by the governor as expected, it may bolster Boulder Country’s position.

The impacts of oil and gas development near residential areas are plain to see across the county line to the east.

In adjacent Weld County, which has 21,694 active wells, residents have been powerless to stop multi-well pads and mini-industrial complexes from popping up near homes and school playgrounds. At the same time, new tract homes have been built within 120 feet of existing oil and gas facilities, since state regulations allow local land-use decisions when they involve approving subdivisions next to oil and gas infrastructure.

Pressure to put some brakes on the industry in Colorado has been mounting over the past decade. Several fires at oil and gas sites and a deadly 2017 home explosion in Weld County in 2017 from an abandoned pipeline located less than 200 feet from a home in Firestone only added to the tensions. So have recent scientific reports that Weld County’s hydrocarbon production was sullying Boulder County’s air and contributing significantly to increasing air pollution in the Denver metro region. That pollution has placed Colorado in the crosshairs of the Environmental Protection Agency for its worsening “non-attainment” of federal clean air standards.

Perhaps no place illuminates these conflicts more than Erie, which straddles Boulder and Weld counties. What was a sleepy farming community with a population of about 2,000 in 1990 has grown to a bedroom community of about 25,000 residents today.

The first citizen complaint against Crestone’s operations with the COGCC was filed on Nov. 16, 2016, just three months after the CPPIB/Encana deal was finalized. Noise from a drilling operation smack in the middle of town was so loud it was “like a huge semi truck parked in our driveway,” according to the anonymous complaint. Other complaints poured in, reporting rumbling and shaking of Erie homes, pictures falling off of walls, and disturbing vibrations night and day for weeks on end. Dank smells emanated from the drilling sites, which were just a few hundred feet away from rows of large tract homes, parks, schools, a skate park and even the city offices. Residents started a black humor joke that their town should be renamed “Eerie.”

Monica Korber, 58, who works as a business consultant from her Erie home, recalls trying to sleep with her bed shaking through the night. She asked other neighbors if they had experienced the same thing, and soon dozens of people were sharing stories on social media and asking what this new company, Crestone, was doing to rattle their lives so viscerally. “We never got a straight answer,” Korber said.

Soon, Erie residents were complaining at COGCC meetings and on the agency’s website about noxious smells, leaks, nosebleeds, headaches, industrial noises and lights burning all night outside their bedroom windows. Korber learned that Crestone was applying for even more permits to drill, and drove to Denver last October to speak at a COGGC meeting. She scolded the commissioners, with her best grandmother-of-five voice: “I bet that not one of you lives in Erie.” Not one of the nine commissioners does.

Erie’s experience with the company isn’t isolated.

The number of complaints filed against Crestone is almost twice as many as the next five oil and gas companies conducting business in Colorado combined. More than 1,000 complaints against Crestone’s operations were filed with the COGCC between November 2016 and February 2019. The company with the second-highest number of grievances is Extraction Oil and Gas — another relatively new interest with holdings in many residential areas on the Front Range — which has been the subject of 245 complaints over the same time period. The other major operators in the D-J basin, including Noble, Anadarko/Kerr McGee, PDC and SRC collectively had 350 complaints over the same time period. One likely reason: most of those other top producers are operating on agricultural lands or in much less populated areas.

A Crestone Peak oil and gas operation on County Line Road in Weld County. The site contains 16 wells, 40 oil tanks, 26 combustors, 17 separators. (Photo by Ted Wood/The Story Group.)
A Crestone Peak oil and gas operation on County Line Road in Weld County. The site contains 16 wells, 40 oil tanks, 26 combustors, 17 separators. (Photo by Ted Wood/The Story Group.)

Jason Oates, Crestone’s spokesman, repeatedly has stated that residents have abused the complaint process in Erie by organizing complaining campaigns. Nevertheless, Crestone’s public relations department wrote in an email that, “while none of the complaints resulted in a violation of state standards by the COGCC or the CDPHE [Colorado Department of Public Health and Environment], we knew we needed to make some changes in our operations. We took an above-and-beyond approach to further lessen the temporary impacts that we may have on neighboring communities.”

One such flurry of impacts and complaints came after Crestone’s operations caused a release of toxic gases at a site in Erie just 25 yards from the Aspen Ridge Preparatory School playground in September 2017. Crestone was plugging and abandoning a set of wells, and had been venting large quantities of volatile organic compounds (VOCs) for an indeterminate amount of time, before a resident smelled noxious fumes and complained to the COGCC. The agency documented a large release of VOCs related to oil and gas emissions that have been linked to a number of health problems in Colorado and around the world, including increased rates of asthma, childhood leukemia, and low-birth weight babies. Those toxic emissions wafted directly onto the school playground of the Kiddie Academy Childcare Center and the elementary school, according to the COGCC’s report on the incident.

The COGCC ordered Crestone to cease operations until the problem was fixed, but parents say they didn’t hear about the leak for months. Mark Kadlececk, who has three children at Aspen Ridge, found the “Notice of Alleged Violation” posted on the COGCC website on Oct. 25, more than six weeks after the violation.

Kadlecek wrote to the COGCC and local elected officials, sputtering outrage. “All three of my young children, between the ages of 6 and 8 years old attend Aspen Ridge,” he wrote. “This is a place that I thought they would be safe.”

“Common sense mandates that oil and gas operations do not belong in close proximity to homes and schools.”

After the public outcry, Crestone issued a statement that was so bland it further inflamed residents: “We sincerely apologize for this oversight.” In its emailed statement, Crestone added, “Activity at the location wrapped up with no further incidents.”

The COGCC fined Crestone $10,000, according to Mike Leonard, the agency’s community relations manager.

Christiaan Van Woudenberg, one of Erie’s newly elected trustees, says that the Aspen Ridge incident and Crestone’s other operations have led to one frustration after another. Different complaints — about noise or traffic or vibrations or smells or lights or emissions — need to be reported to different agencies, which frequently don’t communicate with each other.

The bigger picture, he says, is that when companies like Crestone come into a small community such as Erie, dangling potential tax revenue and arguing (as Crestone spokesman Oates said at  a community meeting) that there are “no health impacts” from fracking, it is almost impossible not to be steamrolled. Local elected officials in places like Erie, Broomfield, and Boulder say they are hamstrung by state laws that limit their ability to say no to new oil and gas development.

“Erie is fracked,” Van Woudenberg said in an interview. “We lost. We’re the cautionary tale.”

A fraught investment?

Crestone continues to face legal challenges that are increasing its cost of doing business in Colorado. The company has been involved in lawsuits, protests, leaks, and alleged violations of state regulations in multiple communities, including in Weld County and Broomfield, a fast-growing city and county halfway between Boulder and Denver. Crestone, in turn, has sued the state and at least one other oil and gas company, alleging interference in its operations.

From what is known about Crestone’s financial picture, it hasn’t performed well to date. While Crestone is private, there are several clues that the CPPIB’s Colorado investment may be problematic. As of Feb. 15, 2019, the CPPIB’s website stated that the value of the investment had dropped to $543 million from the purchase price of $609 million.

Another possible clue about Crestone’s financial situation comes from Extraction Oil and Gas, which went public in October 2016 at almost the same time the Encana/CPPIB/Crestone deal was finalized. It’s not possible to make a “well-pad-to-well-pad” comparison between the two companies, since one is publicly traded and one is private, with substantially different corporate structures and reporting requirements. Still, many characteristics are similar, including the fact that both companies started by purchasing larger companies’ “toxic assets” in populated communities along the Front Range. Both are buffeted by the oil price roller coaster, from highs above $100 a barrel in late 2014 to a low of below $40 in early 2016, and has only rebounded to the mid-$50 range today.

Extraction was trading for $23 a share around the time of its October 2016 IPO. Its stock tumbled to below $4/share — more than an 80 percent drop — before rebounding to $4.54 after its recent earnings report in late February. It then promptly dropped to $3.60 a share in early March.

Analysts are mixed about the future of oil and gas development, with some predicting slow growth in 2019 and others convinced that many parts of the industry are burdened with debt and uncertainty about future regulatory regimes, international price fluctuations, and the increasingly competitive cost of renewable energy technology. Other investors remain bullish on oil stocks but are moving away from riskier investments in politically volatile countries such as Venezuela, Russia, and Saudi Arabia — and are looking to U.S. fracking operations as a safer alternative. Both Noble Energy and Anadarko reported record Colorado oil production in 2018.

From a longer-term perspective, a growing number of analysts say that investments in fossil fuel companies don’t make sense at a time when some fracking operations are losing money, evidence mounts that oil and gas operations have significant and growing environmental and health impacts, liability from abandoned wells is getting more attention, and places like Boulder County and California are aggressively moving toward decarbonizing their energy supply.

Then, there’s climate change, which looms over the fossil fuel investment debate. Canada faces some cognitive dissonance with the CPPIB’s fossil fuel portfolio. Financial and legal analysts as well as climate activists point out that Canada cannot export its fossil fuel investments and still claim it is moving to reduce its carbon footprint. In a report released in January entitled It is Time, two Canadian law professors, Janis Sarra of the University of British Columbia and Cynthia Williams of the Osgoode Hall Law School at York University, conclude that the CPPIB “has enormous potential to help shift governance practice.”

Various organizations in Canada have tried to push the CPPIB toward a more sustainable, lower-carbon portfolio, without much success. The CPPIB has expressly avoided committing itself only to sustainable and socially responsible investing.

Erie, calling Edmonton

At a January 2019 conference hosted by the Rocky Mountain Mineral Law Foundation, Crestone spokesman Jason Oates told the audience that his company had met all of the requirements laid out by the Colorado Oil and Gas Conservation Commission, and would forge ahead into Boulder County despite resident and local governments’ objections.

“It is how, not if, we are going to drill,” Oates said.

Sara Loflin, executive director of the League of Oil and Gas Impacted Coloradans (LOGIC), attended the conference and was struck by what she called the “arrogance” of Oates’ remarks. In response to multiple communities’ concerns ever since Crestone started doing business in Colorado, Loflin said, the company has only proposed moving “closer to homes, in higher risk areas, in larger scale developments.”

In an email, a Crestone spokesperson disputed Loflin’s assessment and said the company aims “to operate safely, responsibly, efficiently and with minimal impact on local communities, while acting as good stewards for the land, air and water.”

“This is a priority for us because as Coloradans, we value these natural assets, and we live here, too.”

In New Brunswick, retiree Melanson sympathizes with Coloradans affected by Crestone’s plans and intends to write a letter to the CPPIB.

“It’s utterly indecent, what they’re doing,” she said. “I don’t want my pension coming from things like that.”

Back in Erie, resident Monica Korber says that she and her neighbors endure not just the proximity of Crestone’s operations, but also the discord that their presence has unleashed on her community. She has joined a lawsuit against Erie’s mayor and trustees for not doing more to protect the town’s residents from yet more fracking.

Her message to the Canadian pension fund: “Why don’t you drill next to the homes of the people where you’re sending those retirement checks?”

 

Photos and additional reporting by Ted Wood The Story Group. A version of this story originally appeared in the Boulder Weekly on March, 21, 2019.

 

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