Flipping pipeline is not easy; Canadian govt faces unknowns

Gary Park

for Petroleum News

The Canadian government is about to get a harsh lesson in the ownership of Kinder Morgan’s existing pipeline from Alberta to the British Columbia coast and the challenges it faces in bringing expansion of that system to completion.

So far the government has put C$4.5 billion on the table to acquire the 300,000 barrel per day Trans Mountain line and assets in the planned 590,000 bpd expansion, all to fulfill their commitment to ship Alberta oil sands bitumen to Asia.

But it faces a pile of unknowns - how much the actual expansion will cost above current projections of C$7.4 billion, what consequences it might face in a series of court actions that could further delay, or even halt construction, and the risks posed by demonstrators who are resolved to block work on the addition by whatever means.

All of which pose complications to the timing of a promised sale of Trans Mountain.

“We’re not seeking to make a profit,” Finance Minister Bill Morneau told reporters. “We’re seeking to ensure the project gets done.

“We’ve also said that our long-term preference is to (put the pipeline) in private hands, so the challenge would be what timing is most appropriate to meet the goal of getting the project done.

“We’ll be listening to potential bidders in the near term to ascertain whether that will provide us with project certainty and a financial deal that’s appropriate for Canadians.”

Marketing materials

Among those listed as prospective bidders are heavyweight U.S. investors such as Berkshire Hathaway and Blackstone Group.

Greenhill & Co., a New York-based investment bank, was the exclusive financial adviser to the government on its purchase of Trans Mountain and is reportedly working on a sale ahead of an expected Kinder Morgan shareholder vote to close the current transaction in late July.

However, most observers doubt any company will be willing to go near Trans Mountain when the fate of the project remains clouded with doubt.

They say no corporate board wants its corporate brand associated with scenes of pipeline protestors being led away in handcuffs, or to deal with endless court challenges initiated by the British Columbia government.

Some insist there is no hope of Prime Minister Justin Trudeau’s government getting full value for Trans Mountain until bitumen is flowing through the expansion to Vancouver’s tanker terminal.

Reassuring shippers

Although long-term shipping commitments made by producers dropped by 22,000 bpd or 3 percent last year, those were quickly seized by other producers.

However, any capital cost increases are normally passed on to shippers. Under that formula, every C$100 million hike in the budget translates into a 7 percent rise in tolls, which were previously pegged at C$5-C$7 a barrel.

Hal Kvisle, former chief executive officer of TransCanada, said that if the capital cost rises 50 percent tolls will climb by a matching amount.

But Natural Resources Minister Jim Carr noted that the government’s ability to quicken the pace of construction reduces the prospect of cost escalation from political interference by the B.C. government.

“There is a high level of confidence that (Trans Mountain) will be a revenue-producing asset that will be attractive to prospective investors,” he said.

The big unknown is how much the expansion price tag has climbed above the C$7.4 billion figure previously cited by Kinder Morgan, industry and government sources.

Since then, Kinder Morgan has refused to estimate project costs since it halted non-essential spending in April or comment on federal government sources who have calculated that construction costs will grow from C$15 million to C$150 million a month when active construction resumes.

- GARY PARK