The Justin Trudeau government has seven weeks to provide “final clarity,” or Kinder Morgan Canada (TSX:KML) says it will take a $1.1 billion write-off and pull the plug on its $7.4 billion Trans Mountain pipeline expansion.
At least one provincial government – Rachel Notley’s NDP in Alberta – and the Trudeau government’s national carbon pricing scheme appear to be at risk of being sucked down the drain along with it.
But before any of that happens, Notley’s government is preparing to inflict some pain on B.C., in retaliation for the John Horgan government’s attempts to halt the expansion project.
Notley announced Sunday April 8 her government would consider taking a stake in the expansion project to give shareholders some assurances, and on Monday challenged the federal government to do likewise during an emergency debate in the Alberta legislature.
In the meantime, however, Alberta plans to introduce legislation in the coming days that is designed to restrict exports to B.C. Presumably that means oil and-or gasoline.
“They’ve made some decisions, and we’re going to inflict pain on those economic decisions so they understand what they’ve done,” Alberta Energy Minister Margaret McCuaig-Boyd said during the debate.
On April 8, Kinder Morgan Canada abruptly announced it was suspending all non-essential activities on the pipeline expansion project, and gave the federal government until May 31 to provide the “clarity” the company needs to proceed.
Should it not get that clarity, Kinder Morgan Canada CEO Steve Kean made it clear his company will cancel the project and move on to other investments elsewhere.
With a summer construction ramp-up looming, the company said it would need to spend $300 million to $400 million a month on the expansion project this year. But it’s still unclear who is in charge – Ottawa or the B.C. government.
Until the company gets clarity either from the Horgan or Trudeau government that the project can proceed, the company will halt all but “essential” spending on the project, which includes the permitting process.
Horgan made it clear April 8 that he isn’t backing down on his government’s challenge to Ottawa’s authority over the pipeline, so that leaves the issue of getting clarity entirely in Ottawa’s court.
The project still awaits a federal Court of Appeal ruling on a challenge of the project’s approval by National Energy Board and federal Order in Council. The B.C. government has also asked the courts to settle the question of whether it has the authority to restrict the flow of diluted bitumen through a federally approved pipeline.
It’s one thing to deal with the uncertainty over court challenges, Kean said in a Monday morning conference call.
But the new conditions that B.C. plans to impose won’t even be known until 2019, he said, by which time a significant amount of spending would have had to occur. The company has already spent more than $1 billion on the expansion project.
“We will not even know what we might be dealing with until well into construction,” Kean said. “We’re heading into very high spend. We do not want to kick the can down the road until we have another $2 billion in the project.”
B.C. wants to know if it has the authority to restrict flows of diluted bitumen through B.C. and has asked the courts for clarity.
“That matter will be taken up in an unspecified court in a proceeding that still, two months on, has not been initiated,” Kean said.
“The bigger question is, ‘What’s next?’ A provincial government can take action to frustrate a project, even though its jurisdiction is limited in this context. Such actions may ultimately be turned back or carved back in the courts, but only at the cost of uncertainty in the meantime.
“Given the stated opposition to the project and the stated intent to further regulate it, and appeal adverse decisions, the action British Columbia initiated a couple of months ago may very well not be the last thing we see. We’ve been successful in our court actions to date, but we can’t build a project in the courthouse.
“Prevailing eventually is not enough to support an investment of this size and duration, especially at this critical moment. But we do have the power not to put additional shareholder resources at risk.”
While a $1 billion write-off is nothing to sneeze at, the project is not vital to Kinder Morgan’s strength as a company.
When the American parent company last year spun out KML as a Canadian publicly traded company through an initial public offering, it ended up owning valuable revenue-generating assets that include the existing Trans Mountain pipeline, a jet fuel pipeline, the Westridge Marine Terminal and other assets.
“We set this company up with what was, at the time, KMI’s Canadian assets,” Kean said. “ So this is a very viable and strong entity on its own without the project.”
The project’s cancellation would most negatively affect the 13 shippers that signed up for more than 700,000 barrels per day of new pipeline capacity.
That list indirectly includes Vancouver’s Teck Resources (TSX:TECK.B), which owns 20% of the new Suncor Energy Inc. (TSX:SU) Fort Hills oil sands project. Suncor is one of the 13 shippers.
Trudeau and Natural Resources Minister Jim Carr have repeatedly said the project is in the national interest that it will be built.
But they are now under pressure to put their words into action. In today’s emergency debate, United Conservative Leader Jason Kenney urged Notley to pressure the Trudeau government to make a declaration under Section 92 (10) (C) of the Canadian Constitution – which would essentially nullify any provincial authority B.C. might try to exercise.
Notley’s tactic, however, seems geared towards making the Alberta government a partner in the pipeline project. She has urged Ottawa to also become a partner. Such an arrangement might see the government providing loan guarantees or actual equity stakes in the pipeline. Kenney said he could only support Alberta investing in the Trans Mountain project if Ottawa is also a partner.
“It’s been done before,” said Trevor Tombe, associate professor at the University of Calgary’s economics department. “It’s not unprecedented.
“If the feds were to say, ‘we’re going to provide financing to help address the regulatory risk that Kinder Morgan faces… that can go a long way to ensure that investors realize that, when a regulator makes a legal decision to approve something, yes means yes.”
It’s not just growth in Alberta’s oil sands that hinges on the Trans Mountain. Notley and Trudeau have both invested significant political capital in getting the pipeline over the finish line, and their respective climate change strategies, which include carbon pricing, were part of the bargain. Alberta would get its pipeline, and Trudeau would get the province with the biggest carbon profile to get on the climate change bandwagon.
If the pipeline part of the deal fails, there is some question whether the Alberta and federal governments can continue to defend what are already unpopular new taxes.
Trudeau himself has said that Canada’s national climate change plans and $1.5 billion Oceans Protection Plan were tied to the successful completion of the pipeline expansion.
“I think both the prime minister and Alberta premier have been clear – and I think so clear that they can’t let the pipeline not go ahead,” Tombe said. “ It’s really going to come down to the overall credibility of their governments in the elections they face in the not-too-distant future.”
Should the Trans Mountain expansion project be cancelled, it would mean $45 billion worth of energy investments were killed in B.C. under the Horgan government in a single year – the $7.4 billion Trans Mountain expansion and the $37 billion Pacific NorthWest LNG project.
And it would represent $16 billion worth of oil pipeline projects killed while the Trudeau government was in power: Trans Mountain, the $8 billion Northern Gateway project and $12 billion Energy East pipeline project.
“The implications here are seismic,” said BC Chamber of Commerce president Val Litwin. “If we can’t build this project it will show the world that government approvals and rule of law count for nothing in Canada - we can’t let this happen.”