In The Media

The oilpatch has borne the brunt of our pipeline impasse for years. Now it’s the taxpayers’ turn

by Claudia Cattaneo (feat. Dennis McConaghy)

Financial Post
April 18, 2018

So far, the bill for Canada’s decade-old pipeline/oilsands insurgency has been disproportionately borne by private companies and their shareholders. With governments in Ottawa and Alberta stepping in at the 11th hour to salvage the last Canadian oil pipeline still in progress, costs and risks are shifting to taxpayers and consumer.

What could they look like?

The federal government and Kinder Morgan Canada Ltd., the owner of the $7.4-billion proposed Trans Mountain pipeline expansion, are now negotiating the cost of keeping the company from walking away, which it has threatened to do because it can’t take British Columbia’s harassment any longer.

The most plausible scenario is that the federal government accepts to de-risk the project so the company is not on the hook for further delays from lawsuits and other disruptive tactics, said retired TransCanada Corp. senior executive Dennis McConaghy.

In court documents last fall, the company estimated the project had direct costs of $30 million to $35 million a month, plus a projected loss of revenue of about $90 million for every month of delay. The company has since reduced some of those operating costs, but it may want government to provide an indemnity until the major legal issues are resolved, McConaghy said.

“It’s an exercise in risk off for Kinder, so that these legal risks – something Prime Minister Justin Trudeau cannot directly tell the court what to decide — is going to be absorbed by the Canadian government in a fashion that the project doesn’t sit and just accumulate (costs) by waiting for all these claims to be resolved,” he said.

Specifically, the project is waiting for a ruling on a major lawsuit before the Federal Court of Appeal brought by the B.C. government, First Nations and environmental organizations that challenges the National Energy Board permit based on inadequate consultation.

In addition, Premier John Horgan’s B.C. government plans to file a reference case to determine whether B.C. has any jurisdiction over the federally regulated project. Both could stand in the way of pipeline construction, which is already years behind schedule.

Alberta Premier Rachel Notley has suggested her government and even the federal government could invest in the pipeline to bolster investor confidence. It’s unlikely Kinder Morgan Inc. would give up a piece of a profitable asset after such a long struggle to expand it, now that Notley and Trudeau have put their own reputations on the line to ensure it’s built.

The ownership structure adds to the complexity. The base pipeline has been in operation for more than sixty years and is consistently full. At risk is the expansion. The Canadian subsidiary is 70 per cent controlled by Houston-based Kinder Morgan Inc. through special voting shares, according to the company’s recently filed management proxy circular. When the Canadian subsidiary had its initial public offering in May, 2017, restricted voting shares with a 30 per cent stake were largely purchased by Canadian institutional investors.

Gasoline consumers in B.C. should brace for a direct financial hit. Gasoline prices are expected to surge after the Alberta government passed legislation Monday to cut oil shipments after May 31 if there is no resolution to the impasse. The Saskatchewan government said Tuesday it would pass similar legislation.

Analysts expect gasoline prices in Vancouver to jump above $2 a litre, up from about $1.50 now, since the area receives as much as 60 per cent of its refined fuels from Alberta. British Columbians who’ve been led to believe oil is all risk and no benefit would also face fuel shortages just in time for the peak tourism season.

The duration of the hit is uncertain. According to an oil industry analysis, B.C. would be hurt most from the second to the sixth week after the taps are closed.

“There could be fuel shortages, but after the first month, Washington State refiners would secure other oil supply from ocean markets and B.C. consumers would be well supplied again.  No doubt there would be some price increase at the B.C. pumps, but after flows adjust seven weeks later, it would be measured in the $3-$10 per barrel range (likely less than a dime per litre).”

Alberta oil producers would suffer from the oil embargo, on top of the oil discounts they have been absorbing for years because of insufficient pipeline capacity.

The industry analysis predicts the embargo could lead to big pain in Alberta because 10 per cent of exports would be halted with nowhere to go. This could widen the discount by as much as $10 a barrel and cause some production to be curtailed.

TransMountain moves about 310,000 barrels a day of oil and some refined products – 80,000 barrels a day of oil for export, 45,000 barrels a day to the Burnaby refinery, some volume of refined product to Kamloops and Lower Mainland and the balance of crude supply to Washington state, the analysis says.  

The biggest cost of all is to Canada’s reputation as a place to invest, which is already slowing down the economy.

It’s a good thing that governments are finally stepping in, but it’s unclear how de-risking Trans Mountain — a project that has been approved and should be under construction — will increase certainty for future projects, said Chris Bloomer, president and CEO of the Canadian Energy Pipeline Association.

There could be unintended consequences from governments intervening into commercial and market arrangements, and the regulatory reforms recently introduced by the federal government actually create more uncertainty, not less, Bloomer said.

“We are in the situation where everybody’s back is against the wall and we are trying to figure out solutions … that the (regulatory) process should have taken care of,” he said.

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