Oil and water

On one side, you have billion-dollar oil and power corporations hungry for growth. On the other, First Nations whose concerns have long been run roughshod over by these same industries.

Yet, there on the oil patch near Fort McMurray, Alberta, and a hydro dam in Northern Ontario, First Nations and industry have gone into business together with models that offer promise for restoring Indigenous economic independence and breaking the resource gridlock shackling the country.

The essence of the new model is creating conditions where First Nations can buy into the project as equity partners. This model demands a lot from companies, way beyond diluting their ownership; it demands the most expensive commodity of all – time. Doing business with First Nations cannot be rushed. It can take decades, not years, to rebuild trust and relationships.

But for companies willing to spend the time and share the equity, the upside can be a green-light rather than a big stop sign.

And for First Nations communities that have long been treated as economic pawns on their own territories, equity stakes that deliver sizable and steady cash flows offer the prospect for securing bank financing to invest in a broader portfolio of projects that can breathe life into their own economies.

Fort McKay First Nation is known for its solid working relationships with the surrounding oil sands companies. While it has had its drinking water trucked in since 2011, the band members enjoy an average per capita income of $73,571, about 50% higher than the average Albertan. But after oil prices tumbled from the 2014 highs and oil companies scrambled to achieve cost savings, the community felt the pinch, with oil-related revenues collapsing by half.

That was when Mark Little, a Suncor executive, and the Fort McKay chief, Jim Boucher, sat down. As Little, now Suncor’s chief executive, describes it: “Chief Boucher and myself spent a lot of time figuring out how do we try to move forward so they have predictability in their cash flow, so they can do multi-year projects to improve infrastructure. The chief and myself and the company have a deep relationship, so it was in that environment that this idea came forward, that hey, why don’t we become joint venture partners.”

That led to the largest business investment to date in Canada by a First Nations entity, with Fort McKay and Mikisew First Nations paying $503 million in 2017 for a 49% stake in Suncor’s East Tank Farm Development, a storage and blending facility mainly for bitumen from the Fort Hills oil sands mining project. The purchase was financed with a $545 million bond issue carrying a 4.14% coupon due in 2041, the largest debt offering to date by an Indigenous group in Canada.

“There are many ways to involve First Nations and we think the right way is an equity partnership.”

-Mike Martelli, president of renewables at OPG

One of the biggest barriers for Indigenous entities to buy into projects in their own backyards is lack of funds. And Bay Street has been largely missing in action due to outdated financing models and a general leeriness of lending large sums of money for long periods to Indigenous entities with modest balance sheets and little money to put down.

In the end, with some wrangling by Suncor executives, Royal Bank of Canada was persuaded to lead the structuring and marketing of the landmark Indigenous bond. Asset managers, pension funds, insurance companies and governments snapped up the bond, taking comfort in the fact that cash flows from the project are underpinned by 25-year “take or pay” contracts from strong counterparties like Suncor, which drastically reduces a host of risks including commodity price risk, volume risk and operations and maintenance cost risk. As well, the bond offering was delayed until after completion of the East Tank facility, taking project construction risk off the table and keeping interest rates lower.

Now that the project is up and running, there is a steady long-term cash flow that can be broken down into debt servicing and an equity dividend for the First Nations.

“We’re really excited about the response from the bond market,” said Boucher. “I hope we can use this as a springboard not only for resource development projects, but other economic opportunities in the Canadian economy, whether it’s manufacturing or even clean energy.”

Provincially-owned power utilities have had a painful education on the Indigenous file going back almost a century. In 1991, Ontario’s provincial power utility bought the Smoky Falls hydro station, located between Thunder Bay and Timmins, from Spruce Falls Power and Paper with plans to boost power generation along a stretch of the mighty Lower Mattagami River. But when the local Moose Cree First Nation, which felt it had been burned by the previous owners, turned down an offer from Ontario Hydro and the economy slowed, the project was shelved. In 2005, Ontario Power Generation (OPG) was given a mandate to tap more hydro power. Four years of talks later, OPG inked the Amisk-oo-Skow Agreement with the Moose Cree First Nation, which included a provision for the Moose Cree to buy a 25% equity interest in a massive $2.6 billion upgrade doubling the power capacity along the Lower Mattagami.

The Moose Cree were able to buy their equity stake with funds secured by a combination of support from Ontario’s Aboriginal Loan Guarantee Program and a loan on commercial terms from OPG.

Says Mike Martelli, president of renewables at OPG: “There are many ways to involve First Nations and we think the right way is an equity partnership as opposed to an Impact Benefit Agreement. An IBA might give the First Nations some cash up front but you can’t take that to the bank.”

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