CANADA BUYS TRANS MOUNTAIN
BUT IF OTTAWA CAN’T SELL IT, IT’LL NEED TO SPEND BILLIONS MORE TO BUILD IT
CALGARY/OTTAWA • The Canadian federal government could have a difficult time selling the Trans Mountain pipeline system it purchased for $4.5 billion on Tuesday and could end up spending an additional $6.3 billion to get the expansion project built, according to estimates by observers.
Ottawa announced a deal with Houston-based Kinder Morgan Inc. to purchase the existing Trans Mountain pipeline between Alberta and British Columbia, as well as the expansion project to twin the pipeline, before markets opened Tuesday.
Finance Minister Bill Morneau said Ottawa did not intend to be a long-term owner and declined to provide full cost estimates for the federal government to build the project. “This purchase creates value for Canadians,” he said.
“We believe this is the best way to protect thousands of well-paying jobs and the safest and most effective way to get our resources to world markets,” Morneau told a news conference in Ottawa, with Natural Resources Minister Jim Carr at his side.
The great rush to seal a deal began in April when Kinder Morgan threatened to cancel the project unless Ottawa provides assurances the company would be able to construct the pipeline through B.C. The company also asked Ottawa to provide assurances the company wouldn’t lose money given the B.C. NDP government’s strident opposition.
If Ottawa does not find a buyer, the federal government could end up spending another $6.3 billion on construction to take the project’s total price tag to $10.8 billion, said University of Calgary School of Public Policy fellow Richard Masson, who once headed the Alberta Petroleum Marketing Commission.
Masson said Kinder Morgan had already spent $1.1 billion advancing the $7.4-billion Trans Mountain expansion project, noting that despite the costs, “I don’t really see any other practical alternative.”
Canaccord Genuity analyst David Galison said that $6.3 billion figure to build the expansion project was likely “conservative” given rising steel prices and as the federal government is not as efficient at building pipelines as a specialized operator like Kinder Morgan.
Environmental group Stand.earth pegged the “real cost to taxpayers” to top $12 billion.
“This decision will haunt the Trudeau government,” said Tzeporah Berman, deputy director of Stand.earth, said in a statement.
Andrew Scheer, leader of the Conservatives, said Kinder Morgan was not asking for taxpayer money, but certainty.
“The Prime Minister is forcing Canadian taxpayers to pay for his failure. He has still failed to create certainty in the Canadian energy sector. And what’s worse, the Prime Minister is nationalizing a pipeline and he can’t tell Canadians the total cost,” Scheer said in a statement.
Alberta Premier Rachel Notley, meanwhile, cheered the federal government’s move, saying the pipeline was in the national interest as it would reduce Canada’s reliance on the U.S. market for oil exports.
She also announced her government could indemnify the project for up to $2 billion in exchange for a possible equity stake, but the province is still finalizing details of such an agreement with the federal government.
A condition of her government’s assistance, and Ottawa’s involvement, was that construction on the Trans Mountain expansion project to boost the capacity of the system from 300,000 barrels per day to 890,000 bpd must begin this summer.
Since Trans Mountain was now a crown corporation, it would be subject to “a certain level of crown immunity,” which would thwart some of the B.C. government’s efforts to delay the project, Notley said.
The Federal Court of Appeal has yet to release its decision on whether First Nations were appropriately consulted on the project and the B.C. government has pledged to press on with its reference case on whether it could regulate the flow of bitumen through the province.
“The federal government has made a choice, a decision that was motivated by the decisions of a private company that gave a deadline, not to me, not to the people of British Columbia, but to someone they characterized as stakeholders,” said B.C. Premier James Horgan, noting that the deal it does not change B.C.’s opposition of the pipeline.
Kinder Morgan, for its part, committed to starting construction while the transaction with Ottawa closes and would work to help the federal government find a third-party buyer.
“We will be paid the $4.5 billion even if a third party buyer is not found,” CEO Steve Kean said.
The Export Development Bank of Canada will finance the plan and create a Crown corporation to run the pipeline during Canada’s ownership period. The Crown will use the expertise of the employees acquired from Kinder Morgan to get the pipeline built. Morneau believes Canada’s authority to build the pipeline will be able to overcome any resistance, be it from protesters or the B.C. government.
Ottawa would need to provide the same financial indemnity to any potential third-party buyers before the government is able to sell the pipeline, said Canaccord’s Galison. “Those guarantees are still going to be required.”
Galison listed Calgarybased Enbridge Inc. and
TransCanada Corp. as companies that could benefit from owning the project, if the operational risks were reduced.
A spokesperson with TransCanada said the company is “not involved in discussions about the Trans Mountain pipeline” and would not comment on “rumours and speculation about a project that is not ours.”
Similarly, an Enbridge spokesperson said, the company is focused on executing its $22-billion growth program. Pembina Pipeline
Corp. did not respond to a request for comment.
Canada Infrastructure Bank is also seen as a possible buyer, as it was created to invest in potentially highreturn projects that wouldn’t otherwise get built without its support. A spokesperson for the CIB said it “does not comment on what, if any, role it could play for any potential project.”
While Ottawa looks for buyers for its newly purchased pipeline system, the head of Canada’s pipeline industry group expressed concerns that Ottawa funds weren’t needed.
“This was always an economic project. The capital was there to do it,” Canadian Energy Pipeline Association president and CEO Chris Bloomer said of the Trans Mountain expansion. He said the need for the federal government to shepherd the construction project to completion would not “instil investor confidence in Canada.”
It’s also unclear how Ottawa’s decision might influence foreign investors’ views of Canada, but inter-provincial political spats and constitutional challenges are a challenge specific to Canada, Ben Dachis, a researcher at the C.D. Howe Institute.
“That’s something that Canada in particular faces that you’re not going to face in a lot of other countries,” he said. “These kinds of major projects are hard to get built, and it’s especially hard in Canada with the differences over who has jurisdiction.”
While the Canadian Association of Petroleum Producers praised Ottawa for its commitment to getting the pipeline built it said, “these are exceptional circumstances and should not be considered the norm.”
“Ottawa’s investment shows that organized activists can’t derail projects in the best interest of Canada,” CAPP president and CEO Tim McMillan said.
Other oil companies applauded Morneau’s decision to intervene because domestic heavy oil trades at a big discount to U.S. and global oil prices and that has resulted in billions in lost economic activity for Canada.
“Canadian equities have been beat down relative to their U.S. peers and certainty around takeaway capacity will be helpful in getting fair value for Canadian crude oil as well as Canadian companies,” ARC Energy Research Institute senior director Jackie Forrest said. Suncor Energy Inc., the largest integrated oil producer in Canada, said it would support the government in trying to connect domestic oil production to new markets.
“What’s key is that this pipeline will be built and operated safely and responsibly. We will do our part to support this happening” Suncor Energy Inc. president and CEO Steve Williams said in an email.