The festering jurisdictional dispute between the Canadian and British Columbia governments over the Trans Mountain Expansion (TMX) pipeline exploded into a constitutional crisis April 8 after Kinder Morgan suspended the project until May 31. The company warned that if federal authority isn’t asserted more forcefully it will swallow its $1.1 billion expenditure to date and cancel the 525,000 bbl/d line that was scheduled to start construction last fall.

The fight has become a proxy for Canada’s openness to foreign investment, with the energy sector warning of dire consequences if the Texas-based pipeline operator cancels TMX.

At issue is B.C.’s assertion that its jurisdiction to regulate pipelines is equal to the Canadian government. The governing NDP, a left-leaning party that campaigned vigorously against the project in last year’s election and has pledged to use “every tool in the toolbox” to have it canceled, argues that when governments have overlapping jurisdiction, they should share regulatory authority. Canada says that the Constitution and legal precedent stretching back to 1954 gives the federal government final say.

"A company cannot resolve differences between governments. While we have succeeded in all legal challenges to date, a company cannot litigate its way to an in-service pipeline amidst jurisdictional differences between governments," said Kinder Morgan Canada CEO Steve Kean in a press release.

The stakes are high for the national economy and Canada’s international reputation, according to Chris Bloomer, CEO of the Canadian Energy Pipeline Association. “Federal and provincial leaders must resolve the current impasse and signal to the world that Canada remains open for business,” he said in a press release.

Dennis McConaghy agrees. The former TransCanada Pipelines executive, who oversaw the Keystone XL project before his retirement, believes that canceling TMX would have catastrophic consequences for Canada. “If the Canadian government can find a way to step up and ensure that this project is salvaged, then I think investors will say that the Trudeau government actually has the capacity to stand behind its own decisions and enforce the rule of law in Canada,” he said in an interview. “If the project breaks down and is abandoned, that’s a terrible circumstance. The reaction to investment in this country will be God-awful, frankly.”

Jim Carr, Canadian natural resources minister, said April 8 that the national government has every intention of ensuring the pipeline is built, but stopped short of tipping his hand. “What we’re witnessing is the consequence of uncertainty. And in this case it’s uncertainty that’s generated by the government of British Columbia by threatening court action,” Carr told reporters. He said the Liberal government stands by the approval it issued in 2016 and is “determined to find a solution.”

The Alberta government isn’t waiting while the feds ponder their options. Premier Rachel Notley, who also belongs to the NDP but is a staunch supporter of the province’s oil and gas sector, announced that Alberta is willing to invest in the project in order to reduce project risk. “Alberta is prepared to do whatever it takes to get this pipeline built, including taking a public position in the pipeline. Alberta is prepared to be an investor in the pipeline,” she said during a press conference. “If we take that step, we will be a significantly more determined investor. This pipeline will be built.”

Notley ratcheted up the pressure another notch: “Premier Horgan believes he can harass this project without economic consequences for his province. He is wrong. We will be bringing forward legislation in coming days giving our government the powers it needs to impose serious economic consequences on B.C. if its government continues on its present course.”

Horgan says he has every intention of staying the course. “I want to say to all Canadians that I profoundly believe in the rights of British Columbians to stand up and do everything we can to protect the interests of our province. I don’t want to do that in a provocative way, I don’t want any threats or ultimatums,” he said during a press conference. “In a co-operative federation, we should all be able to work together for the best interests of the Canadian fabric.”

The “co-operative federalism” approach was rejected by the National Energy Board, the Canadian energy regulator and also a superior court, in a Dec. ruling and again by the Federal Court of Appeal in late March when BC tried to appeal the NEB decision. The only legal challenge outstanding at the moment is a judicial review by the Federal Court of Appeal, whose decision is expected in May.

The Canadian government could wait for that decision before acting, but the political pressure brought to bear by pipeline supporters is likely to be too great. Bloomer called on  the federal government “to use ‘every tool in the toolbox’ to ensure the expansion by Trans Mountain” and that message has been echoed by national media and business leaders.

The integrity of the Canadian regulatory regime for natural resource development hangs in the balance. Investors will be watching Ottawa closely for clues about how the federal government intends to counter B.C.’s challenge to its constitutional authority.