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Kinder Morgan set to pull the plug on Canadian crude export pipeline

Ever since Canada’s Liberal government came to power in late 2015, the 525,000 b/d Northern Gateway and the 1.1 million b/d Energy East pipeline projects fell off the radar, while a final investment decision remains due on the 870,000 b/d Keystone XL pipeline, which received a fresh lease of life after US President Donald Trump resurrected it last year.

The clock is now ticking fast for the 590,000 b/d Trans Mountain Pipeline Expansion, for which developer Kinder Morgan has a set a self-imposed deadline of May 31 on whether to proceed with the estimated $5.6 billion investment.

The expectation is that Kinder will likely pull the plug, as all other options start thinning out.

The Houston-based midstream company has been pursuing the expansion project since 2012 and has also received full shipper commitment from nearly a dozen oil sands producers in Alberta and refiners in the US. But last month Kinder decided to stop further spending unless it had clarity on the way forward.

Its stance came after relentless opposition from stakeholders in British Columbia, particularly the provincial government, which has not spared any efforts to come in the way of shovels being put in the ground thus summer.

Be it court cases or the announcement of an 18-month study to determine the environmental impact of a likely spill from the existing Trans Mountain pipeline, the ostensible plan of the British Columbia government was to delay start of construction, which in turn would drive up project costs and deliver its desired goal of Kinder abandoning the project.

Such actions irked neighbor Alberta, where the provincial government has been banking on the Trans Mountain Expansion to ensure uninterrupted growth of its multibillion-dollar oil sands industry.

Dwindling pipeline takeaway capacity from Alberta has resulted in producer’s dealing with deep price discounts for its Western Canadian Select (WCS) grade for the past six months.

For its part, Alberta reacted by enacting a bill in the provincial legislature in mid-May giving it the right to stop the flow of crude and refined products on the 300,000 b/d Trans Mountain line.

It is still not clear when and to what extent Alberta will turn off the taps on that line, but a prime aim of that legislation is to use it as a carrot and stick to ensure the British Columbia government either withdraws or at least considerably tapers down opposition to Kinder’s pipeline expansion plans.

IMPACT ON GASOLINE PRICES

Stopping crude flows on the line will cause a steep hike in gasoline prices in Lower Midland and Metro Vancouver – British Columbia’s two prime urban areas – that could result in street protests during the summer driving season.

The ongoing feud between Alberta and British Columbia will not in any way help Kinder to take a decision by its May 31 deadline.

Rather the scenario has taken a new turn with the federal government announcing May 16 that it will underwrite ‘political risks’ associated with the planned investment by Kinder Morgan.

“As a government we need to ensure the rule of law is respected and investors have the certainty needed to complete the Trans Mountain Expansion Project,” Canadian Finance Minister Bill Morneau told reporters May 16 in Ottawa.

Instead of taking a hard stance, like introducing a bill in Parliament making it mandatory for the British Columbia government to adhere to the Constitutional rights of a the federal government, Ottawa’s offer failed to have the desired impact.

“We are not yet in alignment and will not negotiate in public,” Kinder CEO Steve Kean reiterated in just a few hours in an apparent overture to Finance Minister Morneau’s offer.

In the world of insurance, intangible elements like political risks are often left open to interpretation and as a midstream player that has the expertise to create value with shareholder’s money, Kinder will exercise extreme caution and not be swayed by any government assurances.

Labeling the project as one that continues to face “exceptional political risk,” Kean said a private company cannot “resolve differences between governments.”

Ever since 2013 when it first filed an application with the Canadian regulator, National Energy Board, Kinder has spent about $900 million going through the regulatory process and also acquiring long-lead equipment like line pipe, valves and pump stations to guard against inflation and keep costs under control.

The Canadian parliament will have another week before its goes into summer recess and along with it any chances on a bill that will make it mandatory for British Columbia to adhere to any federal decisions.

Kinder has done more than its fair share to expand the pipeline that’s still underpinned by shipper interest. But looking ahead, it will turn attention to its shareholders and guard their interest first.