trending Market Intelligence /marketintelligence/en/news-insights/trending/YaEWK3Bn5wGNMx8cxvq6Iw2 content esgSubNav
In This List

Protests, lawsuits may dog Trans Mountain even after Canadian federal takeover

Podcast

Next in Tech | Episode 49: Carbon reduction in cloud

Blog

Using ESG Analysis to Support a Sustainable Future

Research

US utility commissioners: Who they are and how they impact regulation

Blog

Q&A: Datacenters: Energy Hogs or Sustainability Helpers?


Protests, lawsuits may dog Trans Mountain even after Canadian federal takeover

A move by Canada to nationalize Kinder Morgan Inc.'s Trans Mountain pipeline network will keep an associated C$7.4 billion expansion project alive, although the nation's energy minister admitted that the deal will not end political disputes and environmental protests that have hampered its 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 detailing specific plans. Hundreds of arrests of protesters were made in recent weeks at Kinder Morgan Canada Ltd.'s Westridge terminal as the company did preliminary work on the project, and opponents have vowed to step up their actions as construction continues. The dispute has pitted the governments of British Columbia and neighboring Alberta against each other.

Carr acknowledged 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," Carr 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."

As Kinder Morgan Canada's shareholders ponder the C$4.5 billion offer to purchase the oil sands pipeline and expansion to boost its capacity to 890,000 barrels per day from 300,000 bbl/d, the government will spend the summer working to pass legislation to enable and fund the deal. That process involves the creation of a so-called Crown corporation, an arms-length entity with the government as the sole shareholder.

SNL Image

Kinder Morgan's Westridge marine terminal has been a flashpoint for protests against the Trans Mountain pipeline expansion.
Source: Kinder Morgan Canada Ltd.

Under this structure, the government can use its financial clout to guarantee financing for the company and the expansion project without directly incurring the debt. The government will start working with the several hundred contractors needed for construction to ensure continuity. No details were released on the transition of Kinder Morgan Canada's employees attached to Trans Mountain to the new federal entity. The deal is expected to close in the third or fourth quarter.

Nationalized ownership

A Trans Mountain nationalization would not be without precedent in Canada. Prime Minister Justin Trudeau's father, then-Prime Minister Pierre Trudeau, established Petro-Canada in 1976 amid fears of global supply instability brought on by the Arab oil embargo and reluctance by Alberta, the nation's largest oil-producing province, to sell its oil within Canada at prices below world rates. The government folded assets it already owned into Petro-Canada, and the company grew to one of the nation's largest integrated oil companies by buying producing, refining and fuel-selling businesses from BP PLC, Atlantic Richfield Co., Phillips Petroleum Co. and others. It remained a Crown company until 1990 and was eventually absorbed by Suncor Energy Inc.

Still, 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," Chris Bloomer, CEO of the group, which represents Canada's biggest pipeline companies, said in an email. "We do not believe that this outcome will instill investor confidence in Canada."

The government's ownership of the Alberta-to-British Columbia pipeline system may be a short-term proposition. Canada has permission from Kinder Morgan to peddle the asset to potential buyers even before the deal closes, Finance Minister Bill Morneau said at the Ottawa news conference. The government had previously expressed optimism that a private investor or pension fund might come forward to buy all or part of Trans Mountain and the expansion project.

"We did come to an agreement with Kinder Morgan that they would enable us during the time period from the agreement today to the close to look at the potential of selling it to the private sector," Morneau said. "Our goal is to be a private-sector-run pipeline in the long term, and what we have not ascertained is whether it's more appropriate to do that in the shorter term or the longer term without all the information."

The federal government did not rule out equity participation in the deal from the government of Alberta. The province has the largest reserves of oil sands bitumen in the world, and its government has been counting on royalty revenue from increased sales and better pricing to bolster its finances. Alberta and neighboring British Columbia have been at odds over the expansion, which British Columbia opposes on environmental grounds.

'Major step forward'

Alberta Premier Rachel Notley hailed the announcement, which came two days ahead of a Kinder Morgan-imposed deadline to break the regulatory deadlock over the expansion, on her official Twitter account. "This is a major step forward for all Canadians," Notley said. "We have met the deadline. This project has more certainty than ever before. We won't stop until the job is done!"

Notley's British Columbia counterpart John Horgan said the deal will not change his government's opposition to the project. "I said to the prime minister that ownership of the project doesn't change my concerns," Horgan said on the Canadian Broadcasting Corp.'s radio network on May 29. "The good news, though, is that I now know the owner and have his phone number and can call him with my concerns." British Columbia has joined legal challenges to the federal government's approval of the line. Canada's federal government has constitutional authority over inter-provincial energy transportation.

While political and legal challenges to the project have created risk for its advancement, shipper support for the pipeline could also become an issue under government control. While Kinder Morgan was successful in securing long-term contracts for the expansion, the company must have the capacity available by a specified date or shippers can walk away from those deals. Competing projects, such as TransCanada Corp.'s Keystone XL pipeline and Enbridge Inc.'s Line 3 and Alberta Clipper expansions, could siphon barrels away from the Trans Mountain project if they are completed first. The government has vowed to begin construction of the Trans Mountain expansion in keeping with Kinder Morgan's scheduled start in the summer.

The Trans Mountain spinoff would leave Kinder Morgan with a network of NGL pipelines that link Appalachian shales in the U.S. with Ontario, Canada's most populous province. It also owns the Cochin pipeline, an NGL conduit that carries product from Ontario to Alberta; an oil terminal near Edmonton, Alberta; and a mineral export terminal in Vancouver, British Columbia.

Kinder Morgan Canada may pick up more midstream assets in Canada after the deal closes, Steve Kean — CEO of both the Canadian and U.S. Kinder Morgan parent companies — said on a conference call to discuss the deal May 29. "We continue to be interested in midstream assets in western Canada within the midstream business model that we have there," Kean said. "We haven't made any specific plans, but a lot has come together to make M&A work."

Financial markets gave Kinder Morgan a mixed response for the deal, which values the Trans Mountain assets at about C$13 per share. Kinder Morgan Canada stock, which had surged to C$18 per share after the deal was announced, was down 29 Canadian cents, to C$16.30, in early afternoon trading May 29 on the Toronto Stock Exchange.

Moody's said the transaction was positive for parent Kinder Morgan Inc. "The sale removes the significant risk attached to the [Trans Mountain] expansion, eliminating at least C$6.4 billion — before potential cost overruns — of additional capital to complete the project and the uncertainty of construction scheduling and completion, given the opposition to the project from various stakeholders," Moody's Senior Vice President Terry Marshall said in an emailed statement. Kinder Morgan shares were up 25 cents, or 1.57%, in early afternoon trading in New York.