Sunday, June 17, 2018

Canada buys Trans Mountain pipeline system for $4.5 billion Canadian

(May 29) Fnance minister Bill Morneau announced that the Canadian government has bought the Trans Mountain pipeline system and expansion project (TMEP) for $4.5 billion CAD ($3.46 US), but could end up spending billions more to complete the project.

Announcement sparks a rise in the price of Kinder Morgan shares
Morneau's announcement sent the shares of Kinder Morgan Inc. up 2.9 percent in premarket trade today. The deal is expected to close late in the third quarter or early in the fourth. The company claims that despite losing any earnings from the system, the company hopes to meet or exceed its 2018 outlook for distributable cash flow per share.
The company said its approximately 70 percent share of proceeds after taxes will be about $2.0 billion US. The stock dropped 12.1 percent this year up to last Friday as there have been protests against the project by environmentalists and indigenous groups.
Kinder Morgan
Kinder Morgan is one of the largest energy infrastructure companies in North America. It owns and controls oil and gas pipelines and terminals. The company owns or operates about 85,000 miles of pipelines plus 152 terminals. They have pipelines that transport natural gas, crude oil, carbon dioxide. refined petroleum products and much more. They also store at the terminals a number of products and materials including jet fuel, gasoline, ethanol, and even coal, petroleum coke, and steel.
The company moves about 78 percent of the natural gas consumed in the U.S. It is the largest independent terminal operator and the largest independent transporter of petroleum products in North America. The company has headquarters in Houston Texas. As of 2017 the company had 10,897 employees.
Trans Mountain Pipeline system
The original Trans Mountain pipeline has been in use since 1953. It carries crude and refined oil from Alberta to the west coast of British Columbia. However, in 2013 Kinder Morgan filed an application with the Canadian National Energy Board to build a second pipeline the Trans Mountain expansion project. It was to run roughly parallel to the existing pipeline between Edmonton Alberta and Burnaby BC, and would be used to transport dilute bitumen. The extension requires 10 new pumping stations. It would increase the capacity of the system from 300,000 barrels a day to 890,000. It will take an investment of $7.4 billion to finish the project from Strathcona, Alberta to Burnaby BC.
The Trans Mountain project causes friction between Alberta and BC
Ironically, both the Alberta and British Columbia governments are New Democratic, the only two in Canada at present governed by the left-leaning NDP. However, Rachel Notley, the NDP leader in Alberta, seems quite conservative in comparison to the views of the federal party. The BC government is more in line with federal policy. On the two appended videos the radically different reactions of the BC government and that of Alberta to the Liberal purchase of the Trans Mountain system are shown.
On January 30, 2018, the B.C. government proposed a restriction on increases to the amount of diluted bitumen that can be imported into the province from Alberta. The restriction would stay in place until the completion of studies on whether potential spillage could be mitigated. John Horgan's government also announced that it intended to consult with local communities and First Nations among others before the restriction would be lifted.
Trudeau sheds his progressive image to support big corporate interests
The purchase of Trans Mountain also creates problems for Trudeau, who often represents himself as very much an environmentalist. He was somewhat of a star at the Paris climate change meetings in 2015. However, Trudeau's rhetoric is often not accompanied by action. He has yet to raise Canada's target for reducing emissions even though urged to do so by the UN.
Trudeau often claims to support the rights of indigenous people and environmentalists, but on this matter he appears to be pandering to the interests of a company dependent on big oil and gas producers.
The government intends to sell the project back to the private sector
Finance Minister Bill Morneau claimed the agreement was financially sound and necessary. Of course it is necessary because the private sector project was having troubles and investors were worried. Now they are being bailed out and the rise in shares shows how helpful it was in their opinion. Morneau said that it will preserve jobs, reassure investors and get resources to world markets.
Morneau said that the government does not intend to be a long-term owner, but at the appropriate time will work with investors to transfer the project and related assets to new owners. In effect, the Canadian taxpayer after investing billions to make the project profitable then privatizes it. Think of how much value the taxpayer dollars added to the company only to have this stake sold off no doubt at a low price to benefit the private sector. The Canadian taxpayer is in effect subsidizing the private sector.
The government had offered to, in effect, subsidize Kinder Morgan earlier by covering losses if the project was delayed as reported in a recent Digital Journal article. The purchase of Trans Mountain was not done because the government wants to create a profitable pipeline to provide revenue to pay for services for Canadians. Quite the opposite. It forces Canadian taxpayers to take all the risk of finishing the project with many costly delays perhaps, due to the opposition. Once the project is up and running and making money all that investment is turned back to the likes of Kinder Morgan.
The argument that pipelines are cheaper and safer than rail transportation of oil
This is a common argument in favor of pipeline projects. It could possibly be true. However, it could very well be argued that the oil we have left is becoming more expensive to produce, such as that in the oil sands, and the production process itself is a key contributor to environmental degradation. The preferable trend is towards developing energy in greener forms. Making more petroleum products available may not only be counter to good environmental policy, it may be unprofitable as it is serving an industry that soon will be in decline. As a recent article in Digital Journal points out revenue from oil and gas production is in decline in Canada.

Previously published in Digital Journal

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