How a Houston Pipeliner Out-Maneuvered the Canadian Government

In an exclusive after-action analysis of the negotiations leading up to Canada’s purchase of Kinder Morgan’s C$7.4-billion pipeline, the Reuters news agency recounts the hardball business deals that enabled the Texas-based pipeliner to offload a failing project and avoid the financial losses that hit Enbridge Inc. and TransCanada Corporation when their own pipeline plans went awry.

Reuters notes that one of the architects of the company’s big win, Kinder Morgan Canada finance chief Dax Sanders, has already received a “battlefield promotion” to head of strategy for the parent company in Houston.

Bank financing and oil shipping contracts reviewed by Reuters “show Kinder Morgan cut creative deals with lenders and oil producers to shield itself from massive write-downs,” the news agency reports. “The arrangements, which have not been previously reported, gave Kinder Morgan unique leverage in threatening last month to walk away from the project.” Ultimately, “the company’s cautious financial planning and hardball politicking combined to create a no-lose bet on what might have been one of the oil industry’s riskiest plays, given the volatility of Canadian pipeline politics.”

Now, Canadian taxpayers will reimburse Kinder Morgan for the $1.1 billion it has already spent on the project, plus another $3.4 billion for potential profits foregone, on a project whose rising costs had cut profit potential to “just a little north of their cost of capital,” according to Brian Kessens, managing director at Leawood, Kansas-based investment firm Tortoise, which holds shares in Kinder Morgan Inc.

“Kinder Morgan wins,” Kessens said, largely by transferring all its project risk to other parties.

In its review of Kinder’s contracts with 13 Alberta fossils that had reserved capacity on the expanded pipeline, Reuters found the companies had agreed to cover 80% of the cost of building the project—even if the twinned, expanded pipeline was never completed. The payments were to be made over time through access charges on the existing Trans Mountain pipeline. Then Kinder drove a bargain with 26 lenders led by the Royal and TD banks, winning an exemption from up to $100 million in penalties on construction loans if political problems stopped the project.

About $220 million in additional financing came from assessments on oil shipped through the company’s Westridge export terminal in Burnaby, B.C., Kinder Morgan Canada CEO Steve Kean told analysts last month.

With that mix of safety factors in place, Kinder Morgan’s April 8 ultimatum aimed at governments in Ottawa, Alberta, and B.C. was a “genius move on Kinder Morgan’s part to move this project along and put a date to it,” said Bob Prasad, senior director of Allnorth, a Vancouver-based energy engineering and consulting firm involved with the project.

Economist and fierce Kinder Morgan critic Robyn Allan told Reuters that Kinder Morgan guaranteed itself a bailout for both the existing and new Trans Mountain pipelines by using assets from one to finance the other. “Now Kinder Morgan’s U.S. shareholders will be made whole,” she said. “They have offloaded all of these costs onto Prime Minister Justin Trudeau.”

In her own post Wednesday on National Observer, Allan said those costs could exceed $15 to $20 billion.

“When asked about the cost to build the expansion during his press conference, [Finance Minister Bill] Morneau was cagey. He refused to explain that $4.5 billion simply buys Ottawa the rights to what exists today—a 65-year-old pipeline serving B.C. and Washington State, storage facilities, and a one-berth marine terminal that sends modest volumes of diluted bitumen to California markets.”

But on top of Canada’s compensation to Kinder Morgan, “the $7.4 billion capital cost for the project estimated in February 2017 will likely exceed $9 billion by the time an up-to-date budget is prepared,” Allan writes. “Then there is $2.1 billion in financial assurances required for the land-based spill risk, and the $1.5-billion Oceans Protection Plan for marine spill risk that Ottawa has already agreed to.”

By the time the ultimatum was issued, “Trans Mountain’s expansion was never commercially viable and Kinder Morgan knew it,” Allan asserts. “The Texas based company—forged from the executive offices of Enron—plowed ahead anyway. It relied on the National Energy Board (NEB) as an industry-captured regulator to help in the cover-up of the project’s commercial challenges.”

After that, “the company played the huge egos of desperate politicians who based project approval on backroom deals rather than proper due diligence,” she adds. “Ottawa never did the job it should have to protect the public interest. It never understood the project’s compromised financial case, or how it was cobbled together.”

In a post republished by the Institute for Energy Economics and Financial Analysis (IEEFA), the Seattle-based Sightline Institute concludes that the “big winner in all this is Houston’s richest billionaire, Richard Kinder—the executive chairman of Kinder Morgan, a multinational pipeline giant that rose from the ashes of Enron and succeeded in playing the Canadian government like a fiddle throughout the years-long Trans Mountain saga. The losers? Well, just about everyone else, especially the First Nations whose homelands and waters will be threatened by an unwanted pipeline.”

In a letter to the editor in yesterday’s Toronto Star, Greenpeace Canada’s Keith Stewart points to the “fine print of Kinder Morgan’s security filings”, indicating that “Ottawa has bought itself a pipeline that only succeeds economically if the Paris agreement fails. Quite the Faustian bargain.”

Stewart notes that, “according to the filing, serious progress on achieving the Paris climate agreement’s decarbonization goals would reduce oil demand, and thus oil companies might not be able to honour their contracts with Kinder Morgan or sign new ones.”

Meanwhile, Reuters points out that Prime Minister Justin Trudeau’s political project with the project he’s just bought are only beginning.

“Though Trudeau asserts federal authority to approve the project, British Columbia officials could effectively bog it down for years in environmental studies, lawsuits, and regulations that undercut its profit potential,” the news agency notes. While Trudeau could rely on federal legislation from the 1940s to neutralize provincial opposition, “that’s unlikely given that his Liberal party relies far more on electoral support from British Columbia than from conservative Alberta.”