DON’T MISTAKE ACQUISITION OF PIPELINE FOR A MAJOR VICTORY
An investor has taken its money and left, and more legal challenges still remain
Welcome to Canada, a country boasting the world’s third-largest oil reserves, yet it can’t expand an existing pipeline without the federal government having to nationalize the entire project.
It’s a sad state of affairs, really, but no one should be surprised that Ottawa — with an assist from the Alberta government — had to step up Tuesday to buy the Trans Mountain pipeline to see its expansion move forward.
Yes, federal Finance Minister Bill Morneau insisted the deal makes economic sense and will restore investor confidence after Ottawa acquired Kinder Morgan’s pipeline project for the “fair” price of $4.5 billion.
Yes, it should ensure the energy infrastructure is completed, tripling the amount of oil from Alberta that will reach the Pacific coast, reducing the discount on western Canadian heavy crude.
Yes, it was the right decision in a tricky no-win situation.
But, honestly, what does it say to investors, industry and the rest of the world when Ottawa has to buy a viable commercial development to make sure it can be finished?
It says the entire situation is a sorry mess.
“It’s a disturbing outcome, in the sense that we shouldn’t have gotten here in the first place,” said Chris Bloomer, CEO of the Canadian Energy Pipeline Association.
“Every major pipeline infrastructure project has been a debacle … We’ve got to figure this out and do better.”
Tuesday’s energy deal comes after the Trans Mountain expansion went through a gruelling 29-month regulatory review.
The project was deemed to be in the national interest in 2016, approved with 157 conditions. It won federal cabinet approval and has withstood 16 separate legal reviews and challenges.
Yet, construction is a year behind schedule and the privatesector proponent just pulled the rip cord to escape.
What does it say about the chances of any future oil pipeline being proposed — much less built — after Kinder Morgan went through the process and spent more than $1.1 billion, yet walked away because it didn’t have certainty to get the project done?
“I don’t see how any privatesector pipeline company would be dumb enough to embark on a major pipeline project in Canada today,” said Hal Kvisle, former CEO of TransCanada Corp.
“The government would hope this shows Canadians that things can get done in this country, when it actually shows the private sector that even the bestlaid plans are going to end up in the ditch.”
The political fracas over the pipeline came to a head last month when Houston-based Kinder Morgan suspended all discretionary spending on the Trans Mountain expansion.
The energy company said it needed firm assurances by May 31 it could get the development built through British Columbia, where the government of John Horgan has pledged to derail it.
The federal solution was to snap up the entire Trans Mountain pipeline system and related terminal assets for $4.5 billion, guaranteeing construction starts immediately.
Energy analysts said the price seems high; one report by RBC pegged the pipeline’s value around $2.3 billion, while noting another $1 billion has been spent on the expansion.
“It all comes down to what can you sell it for later,” said Richard Masson, former CEO of the Alberta Petroleum Marketing Commission.
Ottawa will seek a private sector buyer for the project, and is willing to extend federal indemnity to buffer the new owner from additional costs tied to politically motivated delays.
“We will look for prospective buyers, but … there will be construction throughout the summer and I think that may be the most important signal of all,” Natural Resources Minister Jim Carr said in an interview.
In Alberta, the Notley government will provide up to $2 billion in the form of a backstop for the project that would only come into play due to unforeseen circumstances.
No one would spell out precisely what that means, but it raises the possibility of Alberta picking up the tab on potential future cost overruns.
Premier Rachel Notley said Alberta could convert its investment into equity, and insisted no financial assistance would be paid out until the project is finished.
“Sometimes, on big national projects, the government has to step in and play a role,” the premier added.
After the failures of Energy East and Northern Gateway, the federal government and industry couldn’t afford to see Trans Mountain blocked.
But no one in Ottawa or Edmonton should mistake Tuesday’s acquisition as a major victory. A willing investor has just taken their money and gone home.
More legal challenges remain. Across the energy sector Tuesday, there was general support for the government extending a lifeline to Trans Mountain.
Yet, reservations rang out from all corners.
“It’s a positive for the pipeline but what’s really frustrating to me, though, is this is actually discouraging corporate investment in energy transportation,” said Kevin Neveu, CEO of Precision Drilling, the country’s largest driller.
“As a corporation that is investing, do I need to wait for the government to get involved in every investment before I’m confident it’s going to go forward?”
The Canadian Association of Petroleum Producers said the decision shows a commitment by governments to support the industry. But the investment was done under “extraordinary circumstances and we should work very hard to never find ourselves in this position again,” said CAPP chief executive Tim McMillan.
The governments made a big gamble Tuesday, following a familiar path that saw Ottawa and Alberta invest in decades past in projects such as Syncrude and the bi-provincial upgrader.
Some have paid off, others have lost a bundle.
However, the latest deal sends a message that investing in Canada is a tough, unpredictable slog.
Ottawa better hope Canadians grow to like the deal: after all, the entire country just bought itself a new pipeline.