Deal by Kinder Morgan Canada to sell Trans Mountain welcomed with misgivings
Reaction from the Canadian oil and gas sector to news of the feds' $4.5 billion acquisition has been mixed
CALGARY—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 the project for $4.5 billion in order to achieve that goal.
Canada needs infrastructure like that designed to triple Trans Mountain’s capacity 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 18 politically fraught months after it had been approved.
“Something had to happen,” Bloomer said of 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. argues in a court challenge that it has the right to restrict diluted bitumen shipments within its boundaries.
The situation has created a “confused” marketplace in which different pipeline projects are treated unequally and no one knows the rules future proposals are expected to follow, Bloomer said.
Prime Minister Justin Trudeau said at a conference Tuesday that federal control over the pipeline could simplify development of at least this project.
“When you shift the ownership of the pipeline from a private corporation to … a federal government that has explicit control over resource projects that go between provinces, a lot of the legal barriers and a lot of the challenge points actually disappear,” he 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.”
“I think these are extraordinary circumstances and we should work very hard never to find ourselves in this position again.”
Trans Mountain owner Kinder Morgan Canada Ltd.’s shares lurched higher, then fell, as investors digested the fallout from the federal government purchase deal announced early Tuesday.
The stock rose to $18 in early trading on the Toronto Stock Exchange but closed about three per cent lower at $16.10 on the Toronto Stock Exchange.
The shares likely fell because investors were disappointed that they would no longer be eligible to share in the financial upside of the expansion project, said analyst Robert Fitzmartyn of GMP FirstEnergy Capital.
The 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.
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.
The company will 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 by a deadline of this Thursday unless it received assurances it can proceed without delays and without undue risk to shareholders.
After the federal government’s announcement, Kean said the work would be restarted soon, with the government funding construction. The sale, which must still 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 for construction sites 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 effect on tight pipeline takeaway capacity until at least 2021. Transport limitations have been blamed for higher price discounts on western Canadian oilsands bitumen blend crude in the first quarter.
Pipeline customers Suncor Energy Inc. and Cenovus Energy Inc. welcomed the move as a sign Ottawa recognizes the importance of getting more Alberta crude from the oilsands to more markets.
However, GMP FirstEnergy 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.
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.”