The Canadian government is taking a head-long plunge into the realm of state-owned energy enterprises through a C$4.5 billion purchase of Kinder Morgan’s Trans Mountain oil pipeline assets and committing unknown billions of additional taxpayer dollars to complete an expansion of that pipeline.
It will be Canada’s largest move to nationalize petroleum assets since 1973 when the government, under Prime Minister Pierre Trudeau (the father of Justin Trudeau, Canada’s current prime minister), built Petro-Canada from C$1.4 billion in federal startup money and by purchasing Atlantic Richfield Canada, Pacific Petroleums and Petrofina until Suncor Energy staged a buyout of Petro Canada in 2009.
This time the transaction, which is due to close in August, is aimed at applying federal control over the movement of crude bitumen across provincial borders to end a bitter legal and political feud between Alberta and British Columbia that has bogged down plans to triple capacity on Trans Mountain to 890,000 barrels per day.
Expansion work resumes
The immediate result is the resumption of work on the expansion almost two months after Kinder Morgan halted all “non-essential” activities and set May 31 as a deadline to overcome the pipeline’s legal and political challenges.
Finance Minister Bill Morneau told a news conference May 29 that a commercial agreement with Kinder Morgan “is the best way to protect (an estimated 9,000 construction jobs), while delivering a solid return on investment for Canadians.”
The purchase price, financed by government-owned Export Development Canada, does not include the labor and materials costs of the Trans Mountain expansion, which carries an earlier price tag of C$7.4 billion.
Natural Resources Minister Jim Carr, openly concerned about the loss of investment in Canada’s resource sector, said the deal will “advance Canada as an energy leader, as a place where good projects get built.”
Kinder Morgan
Steve Kean, Kinder Morgan’s chairman and chief executive officer, told a conference call his company welcomed a “transaction that benefits the people of Canada,” as well as shippers on the Trans Mountain expansion and Kinder Morgan shareholders.
He said the agreement “represents the best opportunity to complete (the expansion) and thereby realize the great national economic benefits promised by that project. We’ve agreed to a fair price for our shareholders and we’ve found a way forward for this national interest project.”
Kean said Kinder Morgan will continue to manage its Western Canadian portfolio that includes crude oil terminal facilities in Edmonton, an import/export resources shipping terminal in Vancouver and the Cochin pipeline system that carries light condensate from Washington state to blend with raw bitumen from the oil sands for shipping from northern Alberta.
Given Canada’s shaky history of owning Petro-Canada and taking an equity stake in the oil sands, Arctic exploration and development of Newfoundland’s offshore oil deposits, including an interest in the Hibernia venture, Morneau was quick to emphasize that his government does not intend to be “the long-term owner of (Trans Mountain).”
Kinder Morgan said it has agreed to work with the government until July 22 to find a third-party buyer for the pipeline, although Kean said his company will be paid the C$4.5 billion (from which it expects after-tax proceeds of C$1.5 billion) regardless of whether a new suitor is found.
Morneau, without offering any names, said “many investors have already expressed interest in the project, including indigenous groups, Canadian pension funds and others.”
Alberta could contribute
A federal news release said the Alberta government could contribute up to C$2 billion through an emergency fund that “would only come into play if required due to unforeseen circumstances,” in return for which it would “receive value commensurate to their contribution, through equity or profit sharing.”
Alberta Premier Rachel Notley told reporters that the future of Trans Mountain now has more certainty than ever.
She said it is unlikely that her government will enact legislation passed in May providing the power to throttle back shipments of crude oil, natural gas and refined fuels to British Columbia.
Notley also noted that Kinder Morgan has accumulated 16 victories in 16 federal and provincial court battles.
BC will continue case
British Columbia Premier John Horgan said his government will continue its case before the B.C. Court of Appeal to determine if it can restrict heavy oil shipments and impose new oil spill and clean-up rules.
He said federal ownership of Trans Mountain won’t alter his government’s action because the case is not specific to any one pipeline.
Horgan said the federal government is now totally accountable not just for regulation and approval of a pipeline but for the movement of crude from the wellhead to the Pacific Ocean and beyond.
“That allows me to have more candid discussions with the owners of the pipeline than I would have when they were shareholders of a Texas-based company,” he said.
Some immunity?
However, Dwight Newman, a University of Saskatchewan law professor, said turning Trans Mountain into a federal corporation could somewhat immunize the pipeline from provincial and municipal interference.
Industry observers say that until jurisdictional and ownership issues are resolved, the Canadian government will have difficulty attracting a serious buyer.
As part of the planned takeover, existing profit sharing or other agreements established between Kinder Morgan and 32 indigenous groups in British Columbia and Alberta will be maintained under whatever transactions are negotiated.
A new project proponent would be eligible for financial support “for additional costs caused by the discriminatory and unjustified actions of a province or municipality in an attempt to delay or obstruct the expansion,” the government said.
As well, the proponent would be indemnified for “future costs and a reasonable return” if it abandoned the project because: (1) a final adverse judicial decision is made in relation to federal jurisdiction that would have a “catastrophic impact” on the expansion, or “despite commercially reasonable efforts” the proponent could not complete the expansion by a predetermined date, and (2) if either of these events occur, the Canadian government has the option to repurchase the expansion and existing pipelines.
The government has also pledged to provide full cooperation and support to a new proponent, “including taking steps to deal with unreasonable provincial and municipal permit delays.”
By way of asserting its resolve to keep the project moving ahead, the government said it would provide funding for the 2018 construction season through loan guarantees.
