A bad day to buy a pipeline
AUDITOR’S GRIM FINDINGS ON CANADA’S ‘BROKEN’ SYSTEM BODE ILL FOR LIBERALS EAGER TO EXPAND IT
You couldn’t make this stuff up. On the day the auditor general released a report blasting “incomprehensible failures” in the government’s capability to do much of anything, the Liberals announced that Ottawa is getting into the pipeline business.
Michael Ferguson’s report found there were fundamental failures of project management and oversight in implementing the Phoenix pay system; that Indigenous people had been let down yet again by their government; and that delays in decision-making by the publicprivate partnership building the Champlain Bridge replacement in Montreal had cost $500 million — money that, it turns out, could have been spent buying roughly 127 kilometres of pipeline for the government.
Ferguson’s conclusion was that Canada has a “broken government system.” Yikes. These are the same people who have just agreed to spend $4.5 billion to buy Kinder Morgan’s Trans Mountain project — the existing pipeline, the terminal assets, the current management team and workforce and the right to build an expansion that will triple daily capacity to 890,000 barrels.
That price doesn’t include the construction costs — which Finance Minister Bill Morneau refused to reveal at Tuesday morning’s press conference but which one investor estimated at $6 billion — or the loan guarantees to get the project back up and running during this construction season.
On the additional costs, the government’s logic was that not talking about estimates Tuesday was good for taxpayers because future investors in Trans Mountain would use them to beat down the price of any potential purchase. But the lack of transparency on the sticker price will make it harder to sell to Canadians dubious about government getting involved in a business it knows nothing about — far less a government so recently accused of systemic “incomprehensible failures.”
Federal Conservative Leader Andrew Scheer accused Justin Trudeau of using taxpayers’ money to buy his way out of his own failure. And there is something in that. If the Trudeau Liberals had not shut down all other options to move Alberta’s oil — by fiat, unachievable regulatory targets and a tanker ban — we wouldn’t be in this mess.
“The message being sent is that to get anything built, the federal government has to nationalize it,” Scheer said.
All of that is true. But so, perhaps more by accident than design, is the fact that the feds may have snapped up a bargain.
Morneau and his officials kept emphasizing that the transaction represents a “sound investment opportunity.”
He said there have been expressions of interest from “multiple investors” in buying the project, and that the federal government has no intention of being the long-term owner.
One institutional investor in New York, who spoke on condition of anonymity, said that if the pipeline is built he expects the federal government to make $2 billion in profit when it eventually sells the asset.
Ottawa paid $13 per Kinder Morgan share and the investor said he had a target price of $35 over time, if the pipeline is built. “I would be shocked if the Canadian government didn’t make money,” he said.
Kinder Morgan has been under pressure for carrying too much debt, he added, and while the Texas company may have been legitimately concerned about the prospect of delays, it was also presented a good opportunity to de-leverage.
The caveat, obviously, is whether the pipeline will be built.
Morneau said once again Tuesday that the project is in the national interest and that because resources cross provincial boundaries it clearly falls under federal jurisdiction. That claim is contested by the government of British Columbia and increasingly militant environmental and Indigenous protesters.
The struggle to push Trans Mountain through in the face of such entrenched opposition is likely to be the most arduous this government has had to face. It may well have to crack down on civil disobedience in ways it would have preferred not to.
But Trudeau and his advisers have been preparing for this type of scenario since at least the fall of 2013, when the then-new Liberal leader spoke in favour of the Keystone XL pipeline at the Calgary Petroleum Club.
His support for the pipeline came with the proviso that it be part of an overall framework that included putting a price on carbon.
This “national energy strategy” was at the core of the Liberal commitment to a “strong economy and a clean environment” in the last election — and its implementation will be crucial to the government’s offer for re-election.
At the same time as the Liberals were drawing up their plans to buy Trans Mountain, the government’s budget implementation bill, containing the provisions to impose the federal carbon pricing “backstop” on recalcitrant provinces, was making its way through the House of Commons.
Ottawa’s grand bargain is still alive but could yet unravel in the face of hostility from the provincial government in B.C. (to the pipeline) and from potential new governments in Ontario and Alberta (to the carbon tax). Liberal ambitions rely on moving forward on these two files in synchronicity.
As far as the pipeline is concerned, Morneau assured Canadians that the federal government’s investment means it will be built.
Failure to follow through now really would be incomprehensible.