The Canadian government may have bailed out Kinder Morgan Inc.'s Trans Mountain pipeline system and expansion project, but with challenges such as environmental protests and a looming bidding war, its future remains uncertain.
Canada's federal government agreed to acquire Trans Mountain from Kinder Morgan Canada Ltd. for C$4.5 billion two days before Kinder Morgan's deadline for a regulatory accord on the stalled project. The government also agreed to fund planning and construction work for the oil sands pipeline expansion project through a guarantee of its expenditures under a recourse credit facility until deal closing, which is scheduled for the third or fourth quarter.
Houston-based Kinder Morgan expected proceeds of US$2 billion from the sale, according to a separate news release, while Kinder Morgan Canada expected proceeds of C$1.25 billion.
Though Trans Mountain's nationalization would keep the expansion project alive, Canada's energy minister said the deal will not end political disputes and environmental protests that have hampered development. Asked how the government would deal with protests akin to those that delayed the construction of the Dakota Access oil pipeline in the U.S., Canadian Energy Minister James Carr on May 29 said, "There will always be challenges in a democracy in getting things done," without providing specific plans.
Carr said at an Ottawa news conference that the deal would only mitigate the political risks associated with the deal raised by the provincial government of British Columbia. "The particular uncertainties and risks that we are seeking to assure don't delay the project were the political risks that were presented by the [New Democratic Party] government in British Columbia," he said. "Those were the risks Kinder Morgan came to us with. We recognize that no private-sector company can deal with friction between two governments. That's a federal issue that we need to resolve."
Pipeline industry representatives expressed concern about the Trans Mountain transaction. The Canadian Energy Pipeline Association "is deeply concerned that the government needed to purchase the project for it to be built and to assert federal jurisdiction," said Chris Bloomer, CEO of the group, which represents Canada's biggest pipeline companies. "We do not believe that this outcome will instill investor confidence in Canada."
Alberta, Canada's largest oil-producing province, is pitching in by pledging to put up C$2 billion if the federal government has problems completing the C$7.4 billion expansion project. Alberta's government will seek an equity stake in the pipeline expansion if the backstop is needed, according to a May 29 statement. The contribution would only be payable in the event of "unforeseen circumstances" and on completion of the project to boost the capacity of the pipeline to 890,000 barrels per day from 300,000 bbl/d.
Trans Mountain's future might lay in the hands of private investors instead of the government. While TransCanada Corp. may be the most plausible bidder for Trans Mountain, energy finance experts expect that private equity firms and pension funds will also take a look at acquiring the asset.
Canadian pipeline companies TransCanada, Enbridge Inc. and Pembina Pipeline Corp. are the top prospective buyers for Trans Mountain because they have infrastructure that could be connected to the system and the financial wherewithal to take on a large deal, according to CreditSights analyst Charles Johnston and East Daley Capital Advisors Inc. Research Director Rob Wilson. Enbridge's current focus on reducing leverage via asset sales and majority ownership of western Canadian crude oil takeaway capacity, however, reduces the likelihood of a bid, they said.
Wood Mackenzie Canadian oil and gas research manager Mark Oberstoetter, Johnston and Wilson also pointed to private equity firms and institutions such as pension funds as possible bidders. Private equity has flowed rapidly into the North American oil and gas pipeline sector, taking advantage of the prohibitively high cost of equity for public companies.
