Morneau sends a message to Kinder Morgan

MORNEAU SENDS A MESSAGE: BUILD THE PIPELINE OR WE’LL FIND SOMEONE ELSE

When it comes to spending public money, governments are generally more emptor than caveat. So who can blame Kinder Morgan for trying to upsell Ottawa on the Trans Mountain pipeline? Simply put, Justin Trudeau needs it more than does Richard Kinder, who didn’t become the richest man in Houston by missing an opportunity to sell into a buyer’s market.

In a three-hour meeting in Texas last week, Steve Kean, Kinder Morgan’s CEO, is said to have played hardball with Canadian finance minister Bill Morneau.

The conclusion Morneau and his advisers reached is that Kinder Morgan is trying to back the federal government into a corner so they can sell Trans Mountain to Ottawa for a price well above its market value.

This explains Morneau’s announcement Wednesday morning that the federal government will backstop the project with a full indemnity from losses that are “politically motivated” — which means that if the pipeline’s operator loses money because B.C. Premier John Horgan’s actions create opposition to its construction, Ottawa will give them that money back. (It’s not clear what might happen with losses stemming from Indigenous protests. Are they “politically motivated”?)

Crucially, Morneau said that if Kinder Morgan still isn’t satisfied, the feds will make that indemnity transferable to others who might be willing to take on the project.

“We think plenty of investors would be interested in taking on this project, especially knowing that the federal government believes it is in the best interests of Canadians and is willing to provide indemnity to make sure it gets built,” he said.

The message was intended less for stakeholders like the B.C. government than for the vendor and potential buyers. It was Morneau calling Kinder Morgan’s bluff, letting other players know that the asset is for sale in an attempt to establish a floor price for the project — presumably one lower than the price Kinder Morgan is asking for from the government. Ottawa is thought to have already had discussions with pipeline company Enbridge about stepping in to build and operate the pipeline.

For Enbridge’s part, a spokesperson said the company is not in conversations about buying Trans Mountain, or taking it over as an operator.

Asked how he could be so certain there will be “plenty” of other investors, Morneau said his confidence comes from the project “providing economic advantage.”

People familiar with the operating projections say the project is sound, if built. However, Kinder Morgan suspended non-essential spending on the pipeline last month and said it would abandon the project if B.C. didn’t call off plans to impose new environmental regulations, setting a May 31 deadline for reaching an agreement that it felt would allow the project to move forward.

The B.C. government, meanwhile, has asked the province’s Court of Appeal whether it has the legal authority to regulate the movement of diluted bitumen through the province.

Ottawa’s fear is that the company could wait until the 11th hour before announcing plans to mothball the project.

In that event, the federal government would be left with just a couple of days to decide whether to buy the pipeline itself at whatever Kinder Morgan’s asking price might be. (The feds say Kinder Morgan’s valuation of the completed project at around $7.4 billion is notional.)

“Under no circumstances do we want to be the longterm owner,” said one source, although he conceded the federal government may have to stump up some money to get construction re-started.

Morneau said Wednesday “no conclusion” has been reached about the government taking an equity stake. “Any support that Canada provides to ensure this project proceeds must be sound, and fair, and beneficial to Canadians.”

Any exposure for taxpayers is a huge gamble for the Liberal government, which to this point has been successful in selling voters a message of balancing the environment and the economy — putting a price on carbon, while building pipelines. Losing taxpayers’ money on a private-sector pipeline would tip the balance of those competing interests.

The merest mention of the word “nationalization” in conversation with senior Liberals was enough to have them reaching for their wooden stakes and garlic.

A Nanos Research poll earlier this month said more than two in three Canadians support Trans Mountain and are concerned about the negative impact on how Canada functions as a federation.

But just as many are against the idea of spending taxpayer dollars to build it.

Yet, while there are understandable concerns over Ottawa dabbling in markets about which it knows little, the federal government has a strong case to make when it claims public funds are not necessarily at risk.

If the pipeline is built as planned — and the Liberals maintain it will be — then no indemnity payments will be made.

What’s more, the history of government investment in energy infrastructure projects in this country is long, and less checkered than might be imagined.

One of the most famous confrontations in Canadian parliamentary history — the 1956 pipeline debate — concerned the Liberal government’s proposal to build the longest pipeline in the world to move Alberta natural gas to eastern Canada, and provide a loan to finance part of its construction.

Opposed by the Conservatives on the grounds it would supply the United States with cheap Canadian gas, the Liberals nonetheless passed the bill — a move that likely cost them their majority at the next election. But the pipeline was built and remains under Canadian control to this day.

Another crucial intervention saw Brian Mulroney’s Conservative government take a stake in the Hibernia oil platform in 1993. The project was close to collapse, threatening Newfoundland’s nascent offshore industry. Ottawa was already on the hook for $2.7 billion in grants and loan guarantees when the province’s senior minister in Ottawa, John Crosbie, persuaded Mulroney to take an 8.5-per-cent equity stake. Ottawa has since been paid back in full, and has received billions in dividends since the oil started to flow in 1997.

There are no signs this government is prepared to allow Trans Mountain to die on its watch. In Calgary on Tuesday Justin Trudeau repeated what has become his mantra — the Trans Mountain pipeline is in the national interest and it will get built.

If that requires the federal government to take risks with public money and its own political fortunes, it appears prepared to do so.

The consequences of not doing so are becoming apparent. Rich Kruger, chief executive of Imperial Oil, told his shareholders late last month that capital investment is at historic lows because of expanding regulatory timelines, escalating fiscal costs and market-access challenges.

The company is mulling the future of its 150,000-barrel-a-day Aspen project but if they can’t transport the oil to their customers it may not go ahead, even if it receives regulatory approval.

In Houston, Kinder Morgan is acutely aware of how important Trans Mountain is to Canada. No wonder it is trying to squeeze the federal government until the pips squeak.

Morneau’s gamble is that if Kinder Morgan finds it can’t extract a premium price from Ottawa, the project is so sound financially that the company will proceed as planned. The entire press conference was designed to send the message to Texas that if they won’t, someone else will.

KINDER MORGAN IS ACUTELY AWARE OF HOW IMPORTANT TRANS MOUNTAIN IS TO CANADA.