Jennifer Wells
Profits only possible if expansion triples shipments without delay The federal Liberal government is spending $4.5 billion to buy the Trans Mountain pipeline.
There was a time and place for pipeline talk — and it was decades ago,
“Trans Mountain Pipe Line Co. has won approval for an expansion that nearly triples its ability to carry heavycrude oil on its westbound route from Edmonton to export facilities in Vancouver.
“The National Energy Board (NEB) decision means Alberta’s oil industry could break into new markets across the Pacific Ocean within 18 months.”
If a business student today were to time stamp that quote, it’s unlikely they would come up with a date three decades past. The story in the Toronto Star, circa August 1988, carried the headline “Pipeliner gets okay for westward expansion.” Company executives had earlier noted that Canadian heavy oil had already penetrated South Korea and Japan, and by the summer of 1988 had Taiwan in its sights.
Why not a corporate history lesson given that, all of a sudden, we own a pipeline? Prime Minister Justin Trudeau’s $4.5-billion commitment to put Kinder Morgan out of its misery will turn the Trans Mountain pipeline and its expansion project into a Crown corporation and transform the Canadian arm of the Houston infrastructure giant into an asset-light entity with seemingly little reason to exist. (Kinder Morgan Inc. owns 70 per cent of Kinder Morgan Canada Ltd.)
The oft-repeated bare bones of the Trans Mountain tale references its opening in 1953 and, maybe, the gargantuan task of driving a pipeline trench through the Rockies, triumphantly delivering oil to the Westridge marine terminal in Burnaby. Less reported has been the waxing and waning of product demand which, by the early 1980s, had Trans Mountain operating at below capacity and looking to diversify shipments beyond oil to butane, methane and propane.
Canadian taxpayers could end up seeing a positive return from the Trudeau government’s $4.5-billion purchase of the Trans Mountain pipeline from Kinder Morgan Canada Ltd., investors and analysts said this week.
But only if a planned expansion of the pipeline to triple shipments of heavy oil from northern Alberta to ports in British Columbia — a project staunchly opposed by environmentalists, some municipalities and First Nations and the B.C. government — can proceed without major cost overruns and further delays.
“It’s a valuable asset, but the pipeline has to be built on time and on budget,” said Paul Bloom, president of Torontobased Bloom Investment Counsel, which owns about 300,000 shares in Kinder Morgan Canada. “Unfortunately, I don’t think that’s likely.”
He said there is a strong business case for the expansion, which would help ease transit of Alberta’s diluted bitumen to the U.S. Gulf Coast and open markets in countries including India, Malaysia and China. In the process, it could also raise the price for bitumen, a tarlike oil used in products such as jet fuel, that is priced at a discount to refined light crude.
Based on the price Kinder Morgan originally shelled out for the pipeline, the government paid a premium of as much as $1.1billion, which some observers said is not excessive if future profits from expanded capacity can be realized.
According to CIBC deputy chief economist Benjamin Tal, a new model is needed to gauge the merits of the deal to encompass what he called “shadow benefits” and the opportunity cost of doing nothing and watching a resource mega project in Canada fail.
He said pipeline capacity in place or coming on stream is sufficient to handle oilsands output for the next decade or so.
Tal said U.S. demand is no doubt diminishing, but argued the Chinese market will be huge and there will be alternative suppliers. If Canada doesn’t act now “we could lose this market,” he added.
“The pipeline is necessary not for the here and now, but for 10 years from now in order to diversify our export market and to change the way we do business with the rest of the world.”
Whether the deal is a good one for taxpayers is “a very close call” involving a lot of variables, but Tal said the purchase of Trans Mountain assets was necessary in part to prevent a hit to Canada’s reputation as a place to invest.
Kinder Morgan Canada has also forecast $1 billion in annual operating profit from Trans Mountain, which raises the potential for a positive return on taxpayers’ investment even after acquisition, expansion and other costs are factored in, said Samir Kayande, a director with RS Energy Group in Canada.
Dennis McConaghy, a former Trans Canada pipeline executive and now a visiting fellow at the Ivey Business School at the Western University, said the government is best positioned to manage construction risk through its control of law enforcement resources and its ability to expedite legal appeals.
McConaghy suggested as well that a public pension fund would value the steady cash flow a pipeline investment provides.
On Tuesday, the federal Liberal cabinet approved the plan to buy Kinder Morgan’s Trans Mountain pipeline and take on the estimated $7.4 billion in expansion costs.
With Kinder Morgan’s help, Ottawa will look for another private sector buyer to take it on and build it.
But if no buyer is found, Ottawa — and taxpayers — will foot the bill to build the pipeline.
Finance Minister Bill Morneau defended the decision, saying $4.5 billion is a “fair price” for a project with “significant commercial value.” He said the move will “ensure” the expansion will be finished by 2020.
Kinder Morgan will help federal officials to market the pro- ject for the next couple of months. Morneau said he is prepared for Ottawa to own the project outright for the “shortto-medium-term.”
He said, however, he has no interest in owning it over the long-term and believes there will be interested buyers. Morneau said Indigenous groups, pension funds, infrastructure companies “and others” have already expressed interest in buying in. But McConaghy said he wouldn’t expect any other private investor to step up until the new pipe is operating, and the completion risk that Kinder Morgan found unacceptable is removed.
McConaghy said the benefit of the expansion is in the reduction of costs from shipping by pipeline rather than rail, even though some rail transport costs have come down.
Former federal government energy researcher David Hughes shares the viability concerns, arguing in a report that a 2015 analysis by consulting firm Muse Stancil that Kinder Morgan submitted to the National Energy Board overestimated the amount by which the pipeline could increase producers’ revenues.
Hughes said the existence of other pipelines and projects mitigates against bitumen price increases in a global oil market awash in low cost conventional and fracked oil that has tilted to oversupply.
He added that since it is more expensive to ship bitumen to Asia than to the U.S., a market where he said bitumen demand has softened, Canadian producers would actually receive less for their oil using Trans Mountain.