PEACE RIVER, ALTA. - Trevor Newton braves the driving sleet and the boot-sucking bog as he moves along an unmarked path through the Middle of Nowhere.
In Alberta’s northwestern shoulder, it’s easy to slip off the edge from somewhere to nowhere. It’s a land beyond signposts, a scrubby, aspen-lined stretch that wouldn’t be out of place in parts of Siberia. And it’s hard at times to know even who the neighbours are.
A trim, sandy-haired man who spends part of his time on his cattle farm near Vancouver, Newton is chairman of the board of a small oil company. And until recently, he had no idea that he was surrounded by vast tracts of land acquired by Koch — the oil giant at the centre of a political storm in Washington and beyond.
“We knew they were alongside us, but we didn’t realize the extent to which they were all around us,” Newton says through the gusting wind. “When we looked at the recent (geological) survey we found they had assembled an absolutely massive land package in the Peace River area.
“Total Koch holdings in the region would be more than 360,000 acres — an area larger than Los Angeles. Koch’s holdings in the area dominate all the other leaseholders, including Shell.”
Newton isn’t the only one who’s surprised. Even here in Alberta, where Koch controls at least 1.1 million acres of the oil patch as its largest foreign investor, the name leaves many asking “who?”
Canadian oilmen, however, know — and can only dream of — Koch’s success in a business that often demands certain risk for uncertain reward. But few can boast the network of financial interests that boosts Koch profits, cushions its losses and has catapulted the family that owns it into the rarified circle of the richest international billionaires.
For more than 40 years, Canada has been a wellhead of Koch’s burgeoning fortune in oil, refineries, pipelines, petroleum products and financial trading as well as an expanding list of diverse interests — producing an estimated $115 billion in revenues last year, according to Forbes.
In Canada, Koch presides over an interlocking empire of interests, from the Alberta oil sands to fibre and fuel-additive producer INVISTA in Ontario and building products distributor Georgia-Pacific in Quebec. It employs, by its own account, 2,000 people, donates to charitable causes and supports the influential pro-oil Fraser Institute.
Its oil sands interests are top-to-toe, from leasing and selling holdings for prospective development to exploring, drilling and mining bitumen, to marketing and exporting oil to the U.S. through its own and other pipelines, to selling lucrative byproducts.
Critics claim Koch’s profits — bigger than the GDP of Tunisia — would climb even higher if the Keystone XL Pipeline were approved, providing easier access to American and foreign markets, a suggestion Koch strongly denies, insisting it has “no interest” in the contentious pipeline and is not a potential customer.
But its support for groups that promote the pipeline and oppose climate change legislation only fuels foes waging a media war against both Koch and the treacly Canadian oil sands in which it is the biggest foreign leaseholder.
Koch (pronounced “coke”) is a name that’s radioactive in a U.S. mid-term election year: brothers Charles and David are singled out by opponents as the First Family of Feckless Greed, enemies of democracy and the environment. The use of their wealth to support their radically libertarian goals in the interest of unfettered free enterprise has changed America’s political landscape.
Koch’s successful strategy is based on influence and secrecy. The former is applied through the political tentacles that have earned the brothers the title of Kochtopus, the latter through its private company status, which keeps their business dealings opaque.
So it’s appropriate that our first glimpse of Koch’s Peace River holdings is through a curtain of freezing rain.
“This is Koch,” Newton says, pointing to an expanse of dripping forest behind him.
“And this is us,” he adds, glancing ahead. By us, he means his company, Strata Oil & Gas. It is a “junior,” and its Peace River holdings were acquired in 2006.
Newton planned to get in on the oil sands technology called steam-assisted gravity drainage, or SAGD, which pumps steam into sluggish bitumen so it can be swooshed to the surface easily. But what he found was something “more interesting.”
It was bitumen enclosed in carbonate rock.
“A lot of people said they didn’t know if it would amount to anything,” he says with a grin. “But now they’re thinking this is Oil Sands Part Two. This is the big prize.”
Until Newton’s company made its discovery eight years ago, he says, the main thing that drew producers to the Peace River area was underground oil sands deposits.
Carbonate bitumen, he explains, has the same properties as oil sands bitumen, but it’s deeper underground and leaves a smaller environmental footprint.
It’s also more expensive to extract. So Newton approached Koch, then acquiring leases in the area, with an offer to partner on developing the deep reserves. “We knew they were here four or five years ago, and one of our guys got together with them. They were interested in our data.”
Koch didn’t accept the offer but did expand its Peace River holdings to about one-third of its total Alberta acquisitions.
“Did their land position increase because of our data?” asks Newton. “I don’t know.”
Like Koch’s intentions in Peace River — where it has one reported prospective project on the go — much of the oil business is as hard to penetrate as the deep-lying rock. Even the identities of the leaseholders are murky. Oil leases can be obtained by third-party agents as well as companies, and the actual owner may not surface until his project does, or never if the lease expires unused.
In laid-back Peace River (population 7,000) there’s little sign of the Koch empire’s global muscle. Only a modest, white-painted, one-storey building housing three company offices. In the middle is an unadorned sign that reads “Koch Exploration Canada Corporation.”
The door is locked and the room is dark. If you squint through the blinds, you can see a desk, a sparsely furnished room and an empty coffee pot. Knocking on the door is fruitless. An interview request sent days earlier to Koch’s Calgary-based Canadian subsidiary was relayed to Kansas, where communications director Paul Baltzer refused, just as he had earlier turned down requests to interview Charles and David Koch. Questions from the Star were not answered.
Koch’s presence, though, hasn’t gone unnoticed by Alberta competitors or by those who find themselves in too-close encounters with its oil interests.
In 1998, Calgary-based Gibson Petroleum Co. appealed Koch’s application to build a crude oil terminal at Hardisty, southeast of Edmonton — now the launching pad for the proposed KXL pipeline and a transport hub for Enbridge, which ships bitumen to Koch’s Minnesota refinery.
Gibson claimed that Koch Oil Company’s plan was “not in harmony with economic, orderly and efficient development” of oil infrastructure set out in government guidelines. But Gibson failed to convince the Alberta Energy and Utilities Board that it already had adequate terminal facilities at Hardisty and could accommodate Koch with a modest expansion.
Ranchers in the Cold Lake area, near the Saskatchewan border, were more successful when they locked horns with Koch.
They filed complaints and hired lawyer Bill McElhanney, who negotiated with Koch Exploration Canada for an environmental review of a proposal to drill beneath neighbouring Angling Lake, a teardrop-shaped body of water fringing land that feeds their cattle.
The 90-acre Gemini project was planned to retrieve bitumen from under the lake through the SAGD steam process and to produce 10,000 barrels of oil a day. That figure, McElhanney says, is the cut-off point for a mandatory environmental impact assessment.
That didn’t sit right with the family of Larry Kathan, a cattle rancher whose grazing land was targeted for drilling. Because Alberta, and not the landowners, owns the right to the minerals beneath the land, it is hard for farmers and ranchers to stand in the way of the oil business.
After preliminary consultations with landowners, says Kathan, “Koch drilled a number of wells, and it was apparent there was a problem with gas migration from at least one of the holes.”
When the landowners saw that vegetation around a gas pipe had stopped growing, they complained, and McElhanney won an independent environmental review.
“We were successful in accomplishing two things,” he said during an interview in Calgary. “One was that Koch agreed to pay for the review by a company of my client’s choice, and it also agreed to suggestions that were made to better the project.
“The other was to ensure that the SAGD process that was used was state-of-the-art, so there would be no breach of the caprock (which traps oil) beneath the surface of the lake.”
After the legal victory, however, Koch sold the lease to Baytex Energy Corp., which has had its own legal wrangle over emissions in the Peace River area.
“Baytex has drilled holes into the oil beneath the lake and they are heating it and getting ready to lift (oil),” says Kathan. “That could take several years.”
Baytex is operating under the conditions agreed to by Koch. But as work continues, Kathan is still concerned. If the tectonic rock plate beneath the lake is breached, he says, the worst-case scenario could be a gush of oil that would catastrophically pollute the water.
Worries are compounded because legal options have been shrinking for the Alberta ranchers. As oil exploration escalated over the past decade, says McElhanney, an expert in land claims, there have been hundreds of cases in which land owners have had to make way for the drills.
“There are very few projects that have been denied in this province. From a land owner’s perspective, the best is to prevent, the second best is to seek constraints from the regulator. What typically happens is second best.”
The media firewall around Koch’s Alberta oil offices comes as no surprise. The company’s private status tells nosy competitors, as well as reporters, “Keep out. That means you.”
It has allowed Koch to make risky decisions, to keep competitors off-balance and to barrel ahead in both oil and other industries in which it is rapidly diversifying, says Daniel Schulman.
He’s the author of Sons of Wichita, which traces the brothers’ rise as America’s most powerful and private dynasty.
The family fortune was founded on oil and its products. And, Schulman says, its eureka moment was in 1959, when patriarch Fred Koch bought a 35-per-cent interest in Great Northern Oil, which owned the Pine Bend refinery in Minnesota. A decade later, son Charles acquired a controlling interest in Pine Bend.
The refinery gave Koch access to Canadian crude oil when there was little competition. It’s now under the ownership of Koch’s subsidiary Flint Hills Resources.
If Alberta is the heartland of the oil sands, the U.S. Pine Bend refinery is its gut. With a capacity of 320,000 barrels a day, it churns about 25 per cent of the province’s gooey bitumen into lucrative oil products, automobile and jet fuel and asphalt that are distributed through the U.S. It also opened the door to reportedly vast profits from the commodity trading market.
In Canada, Koch is a major leaseholder of the oil sands, but its ultimate intentions are unclear: whether to hold on to the land for development or sell it off at a prospective profit. According to the province, it holds 294 crown leases covering 1.1 million acres but produced a “relatively low” yield of oil last year.
Koch’s real profits come from its diversified oil interests rather than what it takes from the ground.
But for producers whose mainstay is the sale of Alberta oil, the returns are less certain. The heavy, sulphurous oil currently sells at a $30-a-barrel discount below the world price.
“Heavy oil takes more energy,” says Greg Stringham, a vice-president at the Canadian Association of Petroleum Producers — of which Koch is a member. “There’s always a natural discount in the range of $15 to $25.”
That discount is due to the higher cost of refining crude oil compared to light. But there is an additional loss because of limited access to world markets where crude can fetch higher prices. Oil that is landlocked is dependent on the lower-selling U.S. market.
Koch — the second largest refiner in the U.S. Midwest — profits from processing Alberta oil at Pine Bend. Its four U.S. refineries are capable of handling some 700,000 barrels per day, according to the U.S. Congressional Research Service.
But the profits of refining have taken a downturn since the 2008 recession and the implementation of new environmental regulations.
The risks of the business are why Canada diminished rather than expanded its refining capacity as the oil sands boomed. The expense of setting up the operations is massive, and they have built-in market limitations such as costly maintenance shutdowns, unpredictable sales and the need to cater to diverse regional specifications.
But for Canada’s oil producers, the elephant in the room is transport — one of the most contentious issues of the oil sands debate.
In North America, “pipeline” is now a four-letter word. And it has polarized the continent, with the opposing factions playing for high stakes.
On one side is concern about damage to the environment and climate change caused by escalating production and use of fossil fuels.
On the other are huge projected profits if companies can export Alberta oil from coastal terminals to higher-priced world markets offshore. By some estimates, Canada’s GDP could spike by more than $130 billion between 2016 and 2030 — although a rising tide of U.S. oil flowing into Gulf Coast refineries could temper the most optimistic predictions.
To boost profits by unlocking oil sands crude, producers are looking to the Northern Gateway pipeline to transport oil from Edmonton to Kitimat, B.C., to expanding the TransMountain pipeline from Edmonton to Burnaby, B.C., and to allowing Energy East’s gas pipeline to pump oil from Alberta to Canada’s east coast.
One of the most controversial options is TransCanada’s Keystone XL, which would connect the oil sands with the U.S. Gulf Coast and eliminate the current need to sell almost all Alberta oil to the U.S. at a lower price.
The Kochs have been pointed at as obvious beneficiaries of the KXL, though they insist they have no interest in the pipeline, have made no bids for it and have reserved no space.
Critics are not convinced.
“They are intensively behind think tanks and institutions that support the pipeline,” says Danielle Droitsch of the Natural Resources Defense Council in Washington, D.C.
The KXL originates near the Kochs’ Flint Hills oil terminal at Hardisty, which has daily capacity for 670,000 barrels of bitumen, which is blended and diluted for shipping to their Pine Bend refinery.
But over the past decade, Koch has abandoned other pipeline interests in the U.S. and Canada. Earlier this year, it scrapped plans to expand a crude oil pipeline from Illinois to North Dakota. That followed a 17,000-gallon spill of crude from the Koch Pipeline Co. in Texas.
From the 1990s, pipeline problems have been a burr under the Kochs’ saddle.
After buying up some pipelines as “junk assets,” says Schulman, they were hit by a double whammy of government regulation and environmental complaints. In 1996, an explosion in Texas that killed two teenagers exposed a “shockingly cavalier attitude to maintenance” and led to one of the largest jury awards in U.S. history, $296 million.
As a result of that and other multi-million-dollar cases against Koch for environmental infractions, it “downsized from 40,000 miles of pipeline to 4,000,” says Schulman.
The bad publicity also led to a turnaround in tactics, and Koch points out that it has won a number of safety and environmental awards — although two of its companies have been fined for infractions in the past two years.
In Alberta, Koch transports oil from Hardisty through the Enbridge pipeline into the U.S. Midwest. In Minnesota, it’s transferred to Koch’s system, co-owned with Marathon Oil, moving to the Pine Bend refinery outside Minneapolis. But it has no direct link to the export hub of the Gulf Coast.
Would the KXL fatten Koch’s bottom line?
Koch’s Flint Hills Corpus Christi refinery complex — which has a capacity of 150,000 barrels per day — is 500 kilometres from the Keystone terminus of Nederland, Tex., so its southern refinery would not directly benefit.
But because Koch is engaged primarily in refining, it can also make money without the pipeline, says Keith Stewart of Greenpeace Canada.
“Their Midwest refinery handles about 25 per cent of the bitumen that’s exported to the U.S. That’s huge.”
If the KXL pipeline is halted, he explains, companies selling Alberta bitumen could be forced to sell to refiners at a substantial discount due to a lack of pipeline space.
With many producers fighting for space to get their crude to refineries, the producers are at a bargaining disadvantage. “It’s the shippers and refiners who have the market power,” Stewart says.
Because the Kochs have kept their business empire almost entirely in private hands, their oil interests, profits and net worth are closely-held company secrets — and a media guessing game.
But for all the brothers’ efforts to stay under the public radar, the Kochtopus has replaced Goldman Sachs’s blood-sucking Vampire Squid as the carnivorous capitalist symbol du jour.
It isn’t the Kochs’ financial interests so much as their ideological agenda that makes the brothers the bogeymen of their political foes.
In Canada, Koch’s presence in the oil sands has set environmentalists’ teeth on edge as the brothers back U.S. climate skeptics, tout fossil fuels and oppose the Obama administration’s environmental agenda.
Their support for the pro-oil — and anti-regulation — Fraser Institute is seen by some as a border-creep of the Kochs’ radically libertarian agenda. The think tank has received more than $700,000 over the past decade for carrying out studies of economic freedom, a focus it shares with the Kochs.
Koch has registered as a federal government lobbyist on the environment, health and international trade — and is currently listed as a lobbyist on tax issues. Documents show it hired the lobby firm Global Public Affairs to press its interests with the Alberta government on “energy and resource development,” as well as economic development and taxation policy.
When it comes to political influence, the Kochs are prepared to play a long game.
In the U.S., their political presence developed slowly from the 1920s, when the clan’s founder, Fred Koch, who did business with the Soviet Union during the savage years of Joseph Stalin’s terror, began a lifelong jihad against Communism.
“He was constantly speaking to us children about what was wrong with government and government policy,” David Koch told Brian Doherty, author of Radicals for Capitalism. “It’s something that I grew up with — a fundamental point of view that government was bad and imposition of government controls on our lives and economic fortunes was not good.”
Sons Charles and David took their father’s free-market philosophy further, into the fledgling libertarian movement, plunging into a multi-million-dollar, decades-long battle to plant its flag in mainstream America.
During an ill-fated run for vice-president in 1980, David Koch campaigned on a platform that promoted destruction of the social welfare system, repeal of taxation and an end to public education, children’s services, government medical care, minimum wage laws and environmental regulation.
His brother recently argued in the Wall Street Journal that it was a “falsehood” to say the Kochs were against environmental protection or work safety standards, and that employees have won “well over 700 awards for environmental, health and safety excellence since 2009.”
But through the Kochs’ persistence and lavish funding, their libertarian ideas are now part of the Republican Party’s agenda, and they have helped to change the face of America.
Founding or funding groups like the Cato Institute, Americans for Prosperity, the American Enterprise Institute and the State Policy Network — which acts as a seed bank for dozens of others — the Kochs gradually inched across the political landscape. The birth of the Tea Party movement pushed the Republicans into new and divisive right-wing territory.
The brothers deny links with the populist movement, though it has documented ties to Americans for Prosperity. Through their organizations, the Kochs have also backed some of the U.S.’s most right-wing politicians, who campaign against unions, the minimum wage and social and environmental protections.
“The problem isn’t that the Kochs are so rich, or their political views are so regressive,” says a Huffington Post blog by former U.S. labour secretary Robert Reich, who launched a petition protesting their political influence. “The problem is they’re using their exorbitant wealth to impose those views on the rest of us, undermining our democracy.”
Nevertheless, they have little use for any established political party, except for its ability to carry out their government-shrinking agenda. “I would call them anarcho-capitalists,” says Schulman.
The Kochs do more than just wind up their ideological warriors. To make sure that they stay on message, David Koch told author Doherty, “If we’re going to give a lot of money, we’ll make darn sure they spend it in a way that goes along with our intent. And if they make a wrong turn and start doing things we don’t agree with, we withdraw funding. We do exert that kind of control.”
On a sunny Calgary spring day, Kenneth Green is toiling in his Fraser Institute office in his shirt sleeves. A jovial, portly man, he’s packing up for a move to new premises in the city. Although Alberta seems the natural heartland of Fraser, which identifies as a non-partisan body, its head office is in Vancouver.
Green is Fraser’s senior director for energy and natural resources, a climate change spokesman who spent “too long” inside the Washington Beltway after a series of jobs in Canada and the U.S. and a doctoral degree in environmental science and engineering from UCLA.
He has joined the Fraser Institute for the second time after acting as its chief scientist in the early 2000s. Now, he says, he’s done with DC: “neither the political nor the geological climate were to my liking.”
It’s the world’s climate that has focused attention on Green and the Fraser Institute.
The think tank, which declares itself neither partisan nor political, has been attacked as an anti-environmental front group for reports such as its scathing paper on Ontario’s Green Energy Act, its defence of the KXL and Northern Gateway pipelines and its backing of oil sands development. Its support from the Kochs has only sharpened the criticism.
But Fraser Institute president Niels Veldhuis says that although Koch contributed $115,000 to the Fraser Institute in the past year, “it is for our Economic Freedom of the World project” and not environmental work.
The institute, he maintains, “doesn’t have a philosophy. We ask the questions. We are not interested in influencing politicians. Our aim for the last 40 years has been educating the public.”
Its pronouncements, however, dovetail neatly with the Koch’s philosophy of embracing economic freedom in “a system in which private property rights are fully respected” and government is kept “small and limited.”
Green’s arrival has only heightened the suspicions of environmental groups.
“Green is affiliated with Koch-funded denial groups like the Heartland Institute, the American Council on Science and Health as a ‘science advisor’ and the Reason Foundation, of which David Koch is a trustee,” says Connor Gibson of Greenpeace USA, who tracks and documents groups that oppose climate change legislation.
Seated in his Calgary office, Green scoffs good-naturedly at suggestions that he’s a climate change denier. “Do I believe in global warming?” he asks. “Certainly. I believe that greenhouse gases trap heat in the atmosphere. I could even tell people how it works.”
His interest in the environment, he explains, began with asthma, which gripped him as a boy in California’s San Fernando Valley. “It was one of the worst-polluted places in North America in the 1970s,” he says. “I found that out by collapsing on the gym field from the smog.”
It may seem counterintuitive, then, that Green has been in the forefront of groups that embrace climate change skepticism, including the now-defunct Environmental Literacy Council, which he once headed.
But he says, although “everyone reasonable agrees” that human activity has produced greenhouse gases, “that’s the easy part.”
Making policy to combat climate change “leaves science behind,” he argues. “Public policy becomes all about values.” For instance, on the greenhouse gas emissions: “It is not always obvious you need to capture the emissions and stop them going into the air rather than pull them back down later if you have the technology.”
He adds, “if Canada mitigated all its greenhouse emissions to zero, would it make any difference to climate change? The answer is no. Energy abundance leads to economic growth.”
So instead of mitigating climate change by restraining emissions — like the ones from the oil sands projects a few hours down the road — we should get more comfortable with global warming. Start looking at ways to accept the inevitable. Adapt. A hard sell, admittedly, to those in coastal cities and small, sea-swept islands.
“How can we live with it — make it livable? How can we defang that challenge? Using social resilience as a means of accepting that we are going to have some climate change as a result of our development globally.”
In the end, it all comes down to a fossil-fuelled future. And to the oil sands. Something Ottawa, Alberta and the Kochs could only agree on