Finance Minister Bill Morneau may have permanently shredded his government’s reputation on climate action, Indigenous rights and reconciliation, and the transition to green jobs with his extraordinary announcement Tuesday morning that Canada will spend C$4.5 billion/US$3.5 billion to nationalize the deeply troubled Kinder Morgan pipeline. But much of the reaction from investors suggests he’s getting little or nothing back for the political capital he’s spending.
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Morneau said Canada will buy out the existing Trans Mountain pipeline between Alberta and British Columbia, as well as the controversial expansion project and the various facilities in B.C. that are an integral (and potentially disastrous ) part of the system. He insisted the Crown corporation set up to take ownership of the pipeline would only keep it until it can find one or more private buyers to take it over.
The announcement means that “Kinder Morgan will go ahead with its original plan to twin the pipeline this summer while the sale is finalized, which likely won’t happen until August,” The Canadian Press reports . “Once the sale is complete, Canada will continue the construction on its own, with a view to eventually selling the whole thing down the road, once market conditions would allow it to get the best price. Morneau presented the options during an early-morning cabinet meeting today before ministers made a decision on how to proceed.”
CP adds that “Export Development Canada will finance the purchase, which includes the pipeline, pumping stations, and rights of way along the route between Edmonton and Vancouver, as well as the marine terminal in Burnaby, B.C., where oil is loaded onto tankers for export.”
“It must be built and it will be built,” Morneau told  media. “Our government believes the commercial agreement we have reached with Kinder Morgan is the best way to protect thousands of good, well-paying jobs while delivering a solid return on investment for Canadians. This is an investment in Canada’s future.”
He added that he foresaw no fiscal impact to Canada from backing the project, adding that “many investors have already expressed interest in the project, including Indigenous groups, Canadian pension funds, and others.”
“A senior government official, speaking on background, said the government hopes to get a new commercial buyer for the pipeline by August, but if that doesn’t happen, it will put up the $4.5 billion to purchase the assets,” CBC reports .
One writer on the Seeking Alpha investment blog foresaw Kinder Morgan Canada’s Houston-based parent company, Kinder Morgan Ltd., taking good advantage of the opportunity to offload what amounts to a stranded asset, while doling out much of the $4.5 billion to its shareholders.
“This eliminates essentially all of the risk associated with the project for the company, and allows it to recoup its sunk costs. It also eliminates its biggest driver of growth,” but will wipe out “all the company’s debt and leave it as a cash rich entity,” wrote  an anonymous blogger under the pseudonym Safety In Value. “I expect a significant cash distribution from KML, either as a dividend or [share] buyback.”
“Obviously, this is very constructive for Kinder and for Canada, and clearly for Canadian producers in particular, because it creates a lot of regulatory certainty over time that the Trans Mountain expansion can get done,” Height Securities LLC senior analyst Katie Bays told Bloomberg News. “For Kinder, this allows them to ameliorate some of the risk that they are carrying that the market doesn’t like.”
Alberta Premier Rachel Notley was predictably thrilled with Morneau’s announcement. “We said we would get the pipeline built and we are getting it built,” she told  media in Edmonton. “We will not stop until the job is done, and in the meantime, to all Albertans: Pick up those tools, folks, we have a pipeline to build. ”
Alberta is setting up a $2-billion “emergency fund” to cover any “unforeseen circumstances” affecting the project, Bloomberg reports. In return, Alberta “will receive value commensurate to their contribution, through equity or profit-sharing,” the Notley government said in a statement. Morneau said “any extraordinary costs will be covered together” by federal and Alberta taxpayers.
Crown-Indigenous Relations and Northern Affairs Minister Carolyn Bennett asserted that the project doesn’t violate Indigenous rights. “We have been very clear that (free, prior and informed consent) is not a veto, and consensus does not mean unanimity,” she told  a Parliamentary committee. “I think it’s very important that people listen to one another.”
“Getting it done, and keeping that promise, comes with a steep price tag,” writes  CBC News National Affairs Editor Chris Hall. “Taxpayers will foot the $4.5-billion purchase price. That sum doesn’t include what could be billions of dollars in construction costs, or the costs of cleaning up a spill—although Morneau said Alberta’s government will share the cost of any unexpected or emergency cost overruns.”
And “there are no guarantees the pipeline will return the investment when (and if) a buyer can be found sometime in the future—that selling the line will fetch an asking price that realizes the full value of the public money being invested,” Hall adds. “Morneau said many private sector investors expressed interest in the project, though he failed to explain why none of them were prepared to take the same risk with shareholders’ money he’s taking with taxpayers’ money, given the staunch public opposition and ongoing protests against the project at the pipeline’s terminus in Burnaby, B.C.”
The reaction from business media showed little or no change in analysts’ assessment of the multiple, mounting risks surrounding the project, suggesting investors have a more realistic sense of the pipeline’s prospects than the senior business executive  currently serving as finance minister.
“Analysts believe Ottawa will need to provide the same financial indemnity it offered to Kinder Morgan to any potential buyer for the pipeline before it can sell it,” the Financial Post reports . “The Canadian federal government will likely have a difficult time selling the Trans Mountain pipeline system,” reporter Geoffrey Morgan adds, “until it can show the risks to the project have been reduced.”
“Those guarantees are still going to be required in my opinion,” said Canaccord Genuity analyst David Galison. Until the multiple court challenges confronting the project are resolved, “I don’t believe it does increase certainty.”
“We do not believe this outcome will instill investor confidence in Canada,” added Canadian Energy Pipeline Association President and CEO Chris Bloomer. “CEPA is deeply concerned that the government needed to purchase the project for it to be built, and to assert federal jurisdiction.”
ARC Energy Research Institute senior director Jackie Forrest said the pipeline will eventually be a “marketable asset”, if it’s ever built. “They have 10 to 20 years of firm commitment for shipments, so from an investors’ perspective, there aren’t too many projects like this that can provide that type of certainty in terms of cash flow over that period,” she told the Post.
A reader poll accompanying Morgan’s story bears out the very mixed business reaction to the federal decision: despite wild rhetoric in the days leading up to the federal Cabinet decision and Morneau’s announcement, insisting the pipeline absolutely had to be built at any cost, the response from Post readers wavered back and forth in the 24 hours after the decision. As The Mix went to (virtual) press, 13,744 readers had voted, with only a slim majority of 52.32% supported the purchase decision. (You can help the numbers by clicking here .)
On Parliament Hill, Conservative Leader Andrew Scheer said the federal announcement did nothing to clear the legal questions or obstacles surrounding the project. “This is a very, very sad day for Canada’s energy sector. The message that is being sent to the world is that in order to get a big project build in this country, the federal government has to nationalize a huge aspect of it.” NDP Leader Jagmeet Singh called the Cabinet decision a “bad deal that will solve nothing,” adding that “climate change leaders don’t spend $4.5 billion on pipelines. We need a government with a vision that takes our future seriously.”
B.C. Member of Parliament Nathan Cullen (NDP, Skeena-Bulkley Valley) warned that the decision would amp up pipeline opposition and escalate tensions that are already running high. “Rather than make things the same or better, it’s made things worse,” he told  iPolitics [subs req’d]. “Trudeau is ramping up the tension and picking a fight that I don’t think he can win.” Conservative energy critic Shannon Stubbs said that reaction showed the government had made the wrong call, sounding unaccountably surprised that the community won’t just fall in line now that Morneau and his Cabinet colleagues have decided what to do.
“That clarifies without a shadow of a doubt the announcement today has done nothing to provide certainty for either Trans Mountain, or for pipelines and energy in Canada in general,” she said. “Trans Mountain opponents, they confirmed today they’ll keep right on trying to stop it.”
Kinder Morgan Canada was pleased with the announcement, particularly after its stock rose 2.5% in Tuesday morning trading. “We think this is a great day, not only for our company but also for Canada, and we’re happy to be participating in it,” said CEO Steve Kean.
But scattered news coverage through the day pointed to the formidable regulatory and political risks still facing the pipeline. The B.C. government issued an update on the pipeline approval process, showing that Kinder Morgan has only submitted requests for 748 of the 1,186 permits it needs to complete the project. Of those, only 212 have been issued, while another 536 are still under review.
“Many permits involve First Nations consultation, the ministries note, and must abide by the 37 conditions attached to the project’s provincial environmental certificate, and the 157 conditions attached to the National Energy Board’s approval,” Pipeline News North reports , in a post picked up by industry newsletter JWN Energy. “The permitting process involves the ministries of Forests, Lands, Natural Resource Operations and Rural Development, Environment and Climate Change Strategy (including B.C. Parks), Transportation and Infrastructure, as well as the Agricultural Land Commission and the B.C. Oil and Gas Commission.”
B.C. Premier John Horgan said  the project could have “catastrophic consequences”, regardless of its ownership, but added that federal ownership now gave him a clearer path to make that case. “The good news, though, is that I now know the owner and have his phone number, and I can call him with my concerns.”