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Deal by Kinder Morgan Canada to sell Trans Mountain welcomed with misgivings

A photo of Trans Mountain provided by Kinder Morgan Canada and EVRAZ, May 2, 2017.
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CALGARY, A.B. — Canada’s energy industry welcomed news Tuesday that the Trans Mountain expansion pipeline is more likely to be built, but expressed grave misgivings over Ottawa’s decision to buy both the expansion and the existing line for $4.5 billion in order to achieve that goal.

Canada needs projects like the one designed to triple Trans Mountain’s capacity in order to move crude oil and refined products from the Alberta oilsands and Edmonton refining complex to the West Coast, said Chris Bloomer, CEO of the Canadian Energy Pipeline Association.

But he said the association is “deeply concerned” that the government felt it had to purchase the project to get it built. Ottawa’s move comes some 18 months after it had been approved.

“Something had to happen,” Bloomer said of project delays blamed on opposition by British Columbia’s provincial government, municipalities, Indigenous groups and individual protesters.

“It’s a little confusing that the government felt it needed to nationalize this asset and own it in order to assert what we all thought along the way was its jurisdiction.”

Pipelines that cross provincial borders are federally regulated but B.C. continues to persist with a court challenge that it has the right to restrict diluted bitumen shipments within its boundaries.

The situation has created a “confused” marketplace where different pipeline projects are treated unequally and no one knows the rules future proposals are expected to follow, Bloomer said.

The federal move is welcome to get the stalled project going, said Tim McMillan, CEO of the Canadian Association of Petroleum Producers, adding he also is pleased that Ottawa has committed to put the project back in private hands “where it belongs.”

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“I think these are extraordinary circumstances and we should work very hard never to find ourselves in this position again,” he said at a news conference in Calgary.

Trans Mountain owner Kinder Morgan Canada Ltd.’s shares lurched higher, then fell, after the federal government announced the purchase deal early Tuesday.

The stock rose to $18 in early trading on the Toronto Stock Exchange but fell back to $16.29, down 30 cents or two per cent, by mid afternoon. The company’s stock had been halted prior to the announcement.

The Canadian subsidiary of Houston-based Kinder Morgan, Inc. estimated the deal is worth about $12 per restricted voting share, after capital gains tax – about three-quarters of its total share price.

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Kinder Morgan Canada will continue to hold an integrated network of crude tank storage and rail terminals in Alberta. It will also own a terminal in Vancouver and the Cochin Pipeline system which transports light condensate from the United States to Fort Saskatchewan, just northeast of Edmonton.

It expects its approximately 30 per cent share of after-tax proceeds to be about $1.25 billion. It didn’t specify how it would spend the proceeds of the sale but did say it plans to continue to invest in Canada.

“We’ve agreed to a fair price for our shareholders and found a way forward for this national interest project,” Steve Kean, CEO of both Kinder Morgan Canada and its parent company, said on a morning conference call.

He said he would work with the government to try to find a third party to buy the assets by July 22. Separately, Finance Minister Bill Morneau said there is no absolute deadline to find a buyer.

Kinder Morgan Canada had ceased all non-essential spending on the Trans Mountain expansion in April, vowing to cancel it unless it received assurances it can proceed without delays and without undue risk to shareholders by a deadline of this Thursday.

After the federal government’s announcement, Kean said the work would be restarted soon, with the government funding construction. The sale, which must be approved by Kinder Morgan Canada shareholders, is expected to close in the second half of the year.

Analysts were less than enthusiastic about the sale.

In a research note, Desjardins Capital Markets analysts questioned whether construction of the controversial pipeline would proceed any smoother under government ownership.

The transaction could further “galvanize opposition” from special interest groups while complicating the government’s ability to provide protection over construction in the Lower Mainland of B.C., including its willingness to call in the RCMP if needed, they said.

“We maintain our previous concern that the federal Liberal government will likely be highly reluctant to exercise force approaching the window of the next election cycle, expected next fall,” they wrote.

They said the news is otherwise positive for the oil and gas sector, though it will have no immediate effect on tight pipeline takeaway capacity until at least 2021. Transport limitations have been blamed for price discounts on western Canadian oilsands bitumen in the first quarter.

Pipeline customer Suncor Energy Inc. welcomed the move as a sign Ottawa recognizes the importance of getting bitumen to more markets.

However, Calgary-based GMP FirstEnergy Capital said the buyout was negative for future Canadian investment prospects.

“The federal government has set a precedent that it will nationalize projects of significant importance rather using the rule of law and prior regulatory approvals to push a project forward under private ownership,” its analysts said in a report.

The failure of Enbridge Inc.’s proposed Northern Gateway pipeline to the West Coast and TransCanada Corp.’s Energy East pipeline project to the East Coast means Canada remains highly dependent on the U.S. market for exports, said Martin Tallett, president of Massachusetts-based oil market research firm EnSys Energy.

The Trans Mountain expansion is needed for increased access to other markets, however, the government’s move to nationalize the project was surprising, he added.

“If you think about the dozens of pipelines that exist for crude oil, natural gas liquids, natural gas itself, petroleum products, all throughout the U.S. and Canada – and we track this stuff – I’m not aware of a single one that’s owned by any government entity … not on this scale,” he said.

Paul de Jong, president of the Progressive Contractors Association of Canada, whose members are expected to help build the pipeline, said he is pleased it is more likely to proceed but also hopes that government intervention “not become the norm.”

“Ultimately it will take far more than this to restore investors’ faith in Canada’s project approval process.”

By Dan Healing

THE CANADIAN PRESS

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