PLAYING POKER – AND SHOWING OUR HAND
THE FEDERAL GOVERNMENT NEEDS A PIPELINE MORE THAN KINDER MORGAN DOES — AND THEIR LEADERS KNOW IT
Psst — want to buy a pipeline? All the signs suggest Ottawa will very shortly have one to sell.
We are not party to the discussions between the finance minister, Bill Morneau, and the boss of Kinder Morgan, Steve Kean, but I like to imagine there is a Pythonesque air to them.
Morneau: “We’d like to take Trans Mountain off your hands. How about $5 billion?”
Kean: “$5 billion? And me with a poor, dying grandmother. It cost me $7.4 billion.” Morneau: “Ok, how about $8 billion?” Kean: “$8 billion? You want to ruin me? $10 billion — that’s my last word. I won’t take a penny less or strike me dead.” Morneau: “$9 billion?”
Kean: “Done (aside) — there’s one born every minute.”
The numbers are as imaginary as the conversation but they are probably not far away from the reality.
The really ludicrous thing is that Canada can’t afford to be dogmatic about buying this pipeline, given the Liberals have shut down all the other options of getting Alberta crude to saltwater.
Ottawa needs this pipeline more than Kinder Morgan — and Kean knows it.
The least likely outcome of the current negotiations is that, by its self-imposed deadline of May 31, Kinder Morgan says that it is satisfied with the indemnity Morneau announced last week and will proceed with the Trans Mountain expansion as planned.
The most likely solution is that Ottawa buys all the assets associated with the project — including the existing pipeline, the right of way, the terminals and the existing management team, led by president Ian Anderson. It’s conceivable that the government of Alberta will become a junior equity partner, given Premier Rachel Notley’s statement that buying the pipeline was an option.
Any deal with Kinder Morgan is likely to include the proviso that the company resumes work immediately, to benefit from the summer construction season.
The government has no ambition to be the long-term owner of a pipeline and it has been soliciting interest from financial players like the Canada Pension Plan and the giant Alberta Investment Management Corporation, which manages 32 pension, endowment and government funds in that province.
This is what inspired Morneau to say last week that he believes “plenty of investors” will be interested in taking on the project.
Mark Machin, the chief executive of the Canada Pension Plan Investment Board, is on record as saying if there is an opportunity for decent returns, his organization would look at it. He said the government’s pledge to protect investors against political risk was helpful.
But none of the pension funds that may or may not be interested have had access to Kinder Morgan’s data room in the way the federal government has.
As such, their interest is notional.
The feds may have to hold ownership until the pipeline is built before any long-term investors commit.
Clearly, if Ottawa spends billions of dollars buying the project and cannot get it built because of political or judicial opposition, the taxpayer is going to be on the hook for a lot of money.
Most Canadians outside Alberta and the lower mainland of British Columbia have only a passing interest in the saga — they just want the government to sort it out. Polls suggest they are in favour of its construction, as long as it doesn’t cost globs of public money.
If the Trudeau Liberals can purchase the pipeline, get it built and then sell it on without losing shed-loads of taxpayers’ cash, their gamble will have paid off.
But the prime minister will wear this politically, if money is lost or the pipeline isn’t built — principally because it was the actions taken by his government in cancelling Northern Gateway and raising the regulatory bar on Energy East (not to mention imposing a tanker moratorium off the west coast) that have brought us to this potentially usurious impasse.
Governments sometimes can’t afford the luxury of ideological purity, as Stephen Harper discovered in 2009 when he became the least enthusiastic owner of a car company in history.
Ottawa invested $13.7 billion in General Motors and Chrysler, as sales plunged in North America and the two auto giants were in danger of running out of cash. After the U.S. government stepped up with a $66 billion bailout package, the Harper Conservatives were faced with the unpalatable options of watching the Canadian plants close
MOST CANADIANS OUTSIDE ALBERTA AND THE LOWER MAINLAND OF B.C. HAVE ONLY A PASSING INTEREST.
down or be a party to a partial nationalization. Ultimately, the endeavour cost taxpayers $3.5 billion, after the shares were sold off.
But Paul Boothe, who was Ottawa’s lead negotiator in the bailout, said: “I’m certain that if we had not provided our support, the companies would have been liquidated.”
No judgment on whether the sweet spot, where shareholders and taxpayers both get a good deal, can be made until the terms are known.
Justin Trudeau is right to say that this project is in the national interest and there will be a significant cash-flow back to Canada if it is built, regardless of whether the oil is transported to Asia or to refineries on the Gulf Coast.
But what can be said with confidence is that Ottawa wouldn’t have been forced to haggle with an 800 lb corporate gorilla, if it hadn’t limited its options to one that is the equivalent of trying to build an airport in a downtown core.