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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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The Oil Giant That Outsmarted Trudeau

Crude pipeline

In a desperate bid to keep its last remaining proposed oil pipeline alive, Canada has decided to buy Kinder Morgan’s Trans Mountain Pipeline system for an estimated C$4.5 billion.

Canada will pay Kinder Morgan for the money that the company has already spent on the expansion project as well as for the existing Trans Mountain pipeline, which has a capacity of about 300,000 bpd.

Trans Mountain runs from Alberta to British Columbia and the proposed expansion would be a twin line that would triple the system’s carrying capacity to 890,000 bpd. British Columbia has vowed to block the pipeline even though the federal government supports the project. BC’s opposition had nearly killed the project…and still might finish it off despite the gamble by the federal government to nationalize the pipeline system.

As Reuters discovered, it appears that Canada has been taken for a ride by Kinder Morgan. The Texas-based pipeline company structured deals in such a way that it couldn’t lose, even if the project stalled. “Kinder Morgan cut creative deals with lenders and oil producers to shield itself from massive write-downs like the ones taken recently by rivals TransCanada Corp and Enbridge Inc in canceling controversial pipeline projects,” Reuters wrote.

These deals included requiring oil producers to pay even if the project was blocked by regulatory holdups. Also, the 26 lenders that Kinder Morgan negotiated with agreed to exempt the pipeline company from penalties on loans if the project was delayed or obstructed because of political problems. Related: The Biggest Challenge For U.S. Oil Exports

All of that made Kinder Morgan more than willing to walk away, putting intense pressure on the Canadian government to resolve the dispute. Prime Minister Justin Trudeau first proposed to indemnify the project from risk, but ultimately decided to purchase it outright as the May 31 deadline neared.

“Kinder Morgan wins,” Brian Kessens, managing director investment firm Tortoise, which holds shares in Kinder Morgan Inc., told Reuters. “That’s a very fair price.”

Kinder Morgan agreed, hailing the payout from Canada. “This is a great day, not only for our company but for Canada,” CEO Steve Kean said. And as for who will manage the pipeline project while it’s under government ownership, Canada’s Finance Minister Bill Morneau said he hopes to hire people from…Kinder Morgan.

First Nations and environmental groups assailed Trudeau for buying out the project. “We are absolutely shocked and appalled that Canada is willingly investing taxpayers’ money in such a highly controversial fossil fuel expansion project,” Grand Chief Stewart Philip, president of the Union of B.C. Indian Chiefs, told the Toronto Star. “We will not stand down no matter who buys this ill-fated and exorbitantly priced pipeline.”

In a scathing article in The Guardian, environmentalist Bill McKibben called Justin Trudeau “the world’s newest oil executive,” and said that “the cutest, progressivest, boybandiest leader in the world” is going “fully in the tank for the oil industry.”

But it wasn’t just First Nations and environmentalists. Trudeau is coming under fire from all sides. Even the Conservatives criticized the government for leaving taxpayers on the hook for the project. Kinder Morgan only paid $550 million for the Trans Mountain pipeline back in 2007. Trudeau has decided to fork over $C3.4 billion for a system that is a now a decade older with no plan on how to get the expansion constructed. “Kinder Morgan wasn’t asking for the money. They were asking for certainty and a pathway to get the get the project built,” Conservative Leader Andrew Scheer said. “The prime minister is forcing Canadian taxpayers to pay for his failure.”

Obviously, not everyone is against the project. The oil industry welcomed the news, although cautioned that it shouldn’t become the norm. “We think that today’s announcement is based on extraordinary circumstances,” Tim McMillan, CEO of the Canadian Association of Petroleum Producers, said in a press conference Tuesday. “We don’t want to find ourselves in this situation again.”

Prime Minister Justin Trudeau was desperate to push the project forward, arguing that the lack of pipeline capacity – Alberta’s pipelines are just about full – are costing Canadian oil producers C$15 billion annually.

He’s right on that account. The cost of pipeline bottlenecks continues to weigh on Canada’s oil industry. Western Canada Select (WCS), a benchmark that tracks heavy oil in Canada, has traded at a significant discount to WTI (which, in turn, has seen its discount widen relative to Brent). Related: The Biggest Challenge For U.S. Oil Exports

WCS fell to the mid-$40s per barrel this week, more than $20 lower than WTI and nearly $30 lower than Brent. Although some of the discount is due to transportation costs and quality issues, the price differential has exploded over the past year as Alberta’s available takeaway capacity has all but vanished.

The problem for Trudeau, however, is that it isn’t at all clear that his takeover of Kinder Morgan’s pipeline will resolve outstanding issues. The plan consists of purchasing the pipeline system, clearing the political obstacles, and then selling off the project to a private company again.

But it remains to be seen if the federal government can bulldoze British Columbia into allowing the project to move forward. The government also does not have a buyer in mind to eventually take on the project.

In a less-than-optimistic sign, Finance Minister Bill Morneau said that the government does not want to own the pipeline for a long period of time, but he conceded that it could remain the owner for the “medium term.” While he didn’t elaborate on what that actually means, his comment suggests the Trans Mountain Expansion is not moving forward anytime soon.

By Nick Cunningham of Oilprice.com

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  • Gordon Pratt on May 31 2018 said:
    Once burned, investors are twice shy -- or more. If Canada's inability to get its oil to market continued much longer small Canuck oil companies would face difficulty raising capital for a generation.

    Bravo Trudeau !
  • Vlad on May 31 2018 said:
    Kuwait City/Kuwait – KNPC has selected Fluor’s local JV as the preferred bidder for two engineering, procurement and construction (EPC) packages worth US $ 2.6 billion for its new 615,000 barrels-per-day new Al-Zour OIL REFINARY.
    The same 690,000 barrels capacity:Trans Mountain Pipeline Expansion Project with 980 kilometres (610 mi) of pipe, would increase the system's capacity from 300,000 barrels a day to 890,000 is purchased by Canada for $4.5 billion.
    New state of the technology refinery near Calgary would bring Alberta jobs for 10-20 years and full gas prices independence from any US\ world changes. Kuwait is doing it, but Trudeau government is not.
  • Joe Blow on May 31 2018 said:
    1./ It appears there is still difficulty getting oil to market. Only difference here is that ownership changed hands. So in essence it seems impossible to get the job done without feds swooping in with dumping a pile of cash into the mix.
    2./ It's not difficult pulling a fast one on this P.M. He's not very known for his depth of reasoning.
  • Dan on May 31 2018 said:
    I'm surprised there isn't a 20% sanction on Canadian natural gas coming into the U.S.
  • MontanaOsprey on May 31 2018 said:
    Maybe you’re not all cucks after all!
  • moriyah on May 31 2018 said:
    Kinder Garden should be thrown out of Canada never to return.
    Canada should build 3 refineries, fulfill our outstanding oil contracts, produce our own gasoline and keep our oil for Canadians. In the meantime Canadians developing a refining infrastructure will resurrect our manufacturing base which was destroyed by P. E. Trudeau and Mulroney's actions.
    Justin Trudeau should be tried for gross incompetence and thrown out of office along with Wynn and a host of others.
  • Phillip Grimison on June 01 2018 said:
    One of the saddest aspects of this whole sorry mess is that CAPP thinks it is a good idea. When a private organization representing private entities thinks that government intervention is a good idea you just know that you have been had. Regardless, this pseudo nationalization of a Canadian energy producer has been in preparation since the 2015 election and it follows in the footsteps of Gerald Butts comments just prior to that election that a Trudeau government will wind down fossil fuel use to the point where wind and solar power generation will be the sole provider of electricity in Canada. Butts is the leader of the Liberal Party of Canada - Trudeau dances to his tune.
  • Danny Hangartner on June 05 2018 said:
    Our Prime Minister is a man of action. It's refreshing!
  • Danny Hangartner on June 05 2018 said:
    The following are interesting exerts from Canada Natives in BC.

    -When the Chiefs of Ontario, which represents 133 First Nations in the province, joined a cross-Canada network that has vowed to stop Kinder Morgan’s Trans Mountain pipeline project earlier this month, Ernie Crey gave the online version of an eye roll.
    -“Ontario First Nations are opposed to the Kinder Morgan expansion?” the Cheam First Nation Chief said on Twitter from 3,000 kilometres away in Chilliwack, B.C.
    -“A noble stance, but let’s not forget they don’t actually have any skin in the game. It’s the First Nations directly on the pipeline route who have much to lose if the new pipeline is not built,” he added.
    -“My advice to First Nations is be watchful of environmental groups who want to ‘red wash’ their agendas under an Indigenous flag,” Mr. Crey said in an April 13 Twitter post.
    -“Trust me, their goals & aspirations are far different than ours. Check out where they’ve trashed Indigenous economies to meet their ends.”
    -Kinder Morgan has signed Mutual Benefit Agreements with 43 Indigenous groups along the pipeline route, including 33 in B.C.

    Just how does Canada relate to environmental issues? Ask Shell. They're a good representation of the strict rules that must be followed.

    Oil companies in Canada are diverse. When you're making up news about Alberta, there's a likely chance that you're making up news that affects income in your own country.
  • Danny Hangartner on June 05 2018 said:
    It's always nice to hear from our Native friends in BC instead of the politicans and of the environmentalists that pretend to speak for them.

    -Ellis Ross, a former Haisla First Nation councillor and current Liberal MLA for B.C.’s Skeena Riding, says he was relieved to see Mr. Crey speak out.

    “Community leaders, especially the elected leaders, are the ones who have to deal with the suicides, poverty, poor housing,” says Mr. Ross, who has been an outspoken proponent for liquefied natural gas development in B.C.’s north.

    “They are accountable to the people who elected them … but provincial and national [Indigenous] leaders have no accountability to aboriginal members,” he adds.
  • A Polluter on June 09 2018 said:
    FUBAR
  • Bill Simpson on June 09 2018 said:
    The Chinese will buy it.
  • bob on September 04 2018 said:
    The First Nations Bands want more consultation. That is a code phrase for more money. The pipeline will go through, they will get more and the feds will make a profit. They will give BC a chunk of dough too.

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