Ottawa’s offer to financially backstop the $7.4 billion Trans Mountain pipeline expansion project may not be enough to prevent Kinder Morgan Canada (TSX:KML) from pulling the plug on the project, and even if it were, the message it would send to the wider investment community doesn’t exactly instil confidence, business leaders say.
And though the upstream petroleum industry appreciates the Alberta government’s support, downstream producers – refiners – are a little uneasy about Alberta’s new Bill 12, which could dictate who their customers can be.
Last week, the Trudeau government essentially conceded it’s not fully in charge of infrastructure projects in Canada.
Despite deeming the Trans Mountain pipeline expansion to be in the national interest, Ottawa is so unsure of its ability to see the project completed that it announced it will consider providing a financial backstop to reduce risk for the beleaguered project.
On April 15 – one week after Kinder Morgan gave the government an ultimatum – Prime Minister Justin Trudeau convened an emergency meeting with B.C. Premier John Horgan and Alberta Premier Rachel Notley.
He then announced his government would provide some kind of financial assurance to Kinder Morgan to address shareholder concerns over endless delays.
“While we commend the prime minister for his commitment to assert leadership and convene this meeting, which was called for by business and community associations across the country, the situation has worsened,” said BC Chamber of Commerce CEO Val Litwin.
“The combined federal and provincial reviews in Canada today require the federal government to acknowledge we are too costly, too complex and take too much time to get things done, driving ongoing uncertainty.”
In a quarterly earnings call last week, Kinder Morgan CEO Steve Kean said Ottawa’s offer does not address the central problem of B.C.’s opposition to the project and that it remains “untenable.”
“Most of the project and most of the investment is in British Columbia, where the government is in opposition to the project and has looked for and found ways to incrementally regulate it,” Kean said. “And that is an issue that in our view needs to be resolved or addressed in order to be able to successfully construct in the province.”
The day after Trudeau’s emergency summit, Alberta introduced Bill 12, which will give the provincial government there the power to control the export of oil, natural gas and refined fuel products (gasoline and diesel) through licensing.
The bill is clearly aimed at B.C., which has been trying to halt the pipeline expansion, though it could be used in the future against other provinces, such as Quebec, which put up roadblocks against the now-cancelled Energy East pipeline.
The day after Alberta introduced Bill 12, Saskatchewan Premier Scott Moe announced his government would also introduce legislation to restrict energy exports to B.C.
While the amount of petroleum products B.C. gets from Saskatchewan is small, Moe said the legislation was intended to prevent Saskatchewan producers from making up any supply losses from Alberta to B.C.
The Canadian Constitution allows provinces to enact laws with respect to their resources. But as a number of legal and public policy experts have pointed out, Section 92A(2) states that “such laws may not authorize or provide for discrimination in prices or in supplies exported to another part of Canada.”
B.C. Attorney General David Eby cited that section when announcing last week that the B.C. government would take Alberta to court over its threats to restrict energy exports to B.C.
Dwight Newman, a constitutional law expert at the University of Saskatchewan, said B.C. would not necessarily have to wait for Alberta to exercise Bill 12 but could launch a pre-emptive court challenge seeking a declaration from the court that the bill is unconstitutional.
But he said Alberta has written Bill 12 in such a way that Alberta may be able to enact it without running afoul of the Constitution.
“There are lots of ways of using it that wouldn’t violate 92A(2), though,” he said.
Notley has hinted that Alberta has already anticipated such a challenge. Giving an example of how the bill might work, she said exports of diluted bitumen might actually increase on the existing Trans Mountain pipeline, which could displace the refined petroleum products that flow to B.C., forcing them onto rail and truck.
That way, Alberta would not actually be restricting exports to B.C. Gasoline and diesel could still be sold into B.C. – they would just have to move by rail or truck.
Since that is a more expensive mode of transportation, it would almost certainly increase the price at the pump.
If enacted, Bill 12 could affect the bottom line for oil producers and refineries in Alberta.
But Tim McMillan, CEO of the Canadian Association of Petroleum Producers, said oil producers in Alberta generally support Bill 12 and may be willing to endure some short-term pain, if it means breaking the pipeline bottleneck that results in Canadian oil being so heavily discounted.
Last week, oil prices hit a three-year high, with West Texas Intermediate rising above US$68 per barrel, while Western Canadian Select lingered at US$52 per barrel.
“We’re supporting governments that are trying to get this project done,” McMillan said. “This looks like a short-term measure to get a long-term objective for the benefit of Canada.”
Peter Boag, CEO of the Canadian Fuels Association, said refinery owners are uneasy about Bill 12.
“We certainly acknowledge and appreciate the commitment Alberta has shown to pipeline expansion project and the importance overall to the energy sector,” he said. “That said, we do have some concerns that the measures proposed in Bill 12 could have some long-term unintended consequences.”
Roughly 50% to 60% of the gasoline and diesel consumed in B.C. comes from Alberta refineries, primarily via the existing Trans Mountain pipeline, although some moves by rail and truck.
The Parkland Fuel Corp. (TSX:PKI) refinery in Burnaby, using crude oil from Alberta, supplies most of the rest, with a small amount – including jet fuel – coming from Washington state.
Boag said moving gasoline and diesel onto rail may not be as easy as it sounds. Because pipelines are maxed out, more and more fuels have been moving by rail, which is also strained for capacity.
“We know we’ve been going through a time right now where there’s been severe challenges around rail freight service in Western Canada,” Boag said.
“It’s not unlimited capacity in the rail system. You’re also looking at loading facilities – logistics issues. So there are additional challenges to an abrupt or significant change in what is a stable transportation dynamic.”
Despite B.C.’s opposition and massive protests against the Trans Mountain pipeline expansion, support for the project among ordinary Canadians appears to have increased.
In a poll released last week, the Angus Reid Institute found 54% of British Columbians now support the project – up from 48% since a poll in February. Opposition dropped two percentage points to 38% from 40%. Canada-wide, support grew to 55% from 49%.
The project also got something of a boost on the First Nations front when the Musqueam Indian Band hinted it was in negotiations that might see the nation supporting the project.
The Musqueam is not among the 33 B.C. First Nations that have signed benefits agreements with the project, but it is now in talks with Ottawa.
“We support the prime minister’s efforts to find a positive resolution, which would be in the vital strategic interest of Canada: including the Musqueam First Nation,” wrote Musqueam Chief Wayne Sparrow.