Canadian Taxpayers Held Hostage by Kinder Morgan

The Trudeau federal government has made itself a pathetic hostage to a Texas-based pipeline company known for its cheapness and debt.

The economic sleeziness of the drama, which should upset most Canadians, has been largely ignored by the financial mainstream press.

But here’s the rub: Kinder Morgan doesn’t have the money it needs to twin a high-risk $7.4 billion pipeline, and has been looking for a way out for some time.

Meanwhile, it has blamed entirely predictable and expected project delays on the B.C. government as well as First Nations and municipal resistance to the pipeline.

But then Prime Minister Justin Trudeau, a smiling hostage, walked into the room and declared the construction of the megaproject a matter of “national interest” — without so much as an independent cost-benefit analysis.

On April 8, Kinder Morgan grabbed Trudeau by his bituminous lapels and delivered a Texas-sized ransom note: bail us out or we’ll walk away from your stinking national interest on May 31.

In closed-door negotiations between the federal government and Kinder Morgan, the Texas firm presented the final bill for taxpayers: $7.4 billion for an unbuilt high-risk venture plus billions more for the existing pipeline, tanker farm and port facility.

At that point Finance Minister Bill Morneau probably blanched.

Last week he temporarily emerged from negotiations and tried to outflank the Texans by promising that the government would compensate Kinder Morgan, or any other interested pipeline builder, for any losses incurred for political reasons while twinning the unnecessary Trans Mountain line to Vancouver.

Steven Kean, CEO of Kinder Morgan Canada, replied that wasn’t good enough: “We are not yet in alignment and will not negotiate in public.”

It is instructive that the Kinder Morgan executive delivering the big bill for taxpayers is none other than Enron’s former senior vice president of government affairs.

But money and not political uncertainty — a reliable companion of the project from the first day of public hearings — is the central issue here.

Faced with the iron law of megaprojects (“over schedule and over budget and over and over again”), Kinder Morgan simply wants to walk away from an unviable project whose costs have ballooned from $5.4 billion to more than $7.4 billion.

The con game has been unfolding for several years now.

In 2011 Kinder Morgan, whose early business mantra was “Cheap, Cheap, Cheap,” finagled with the National Energy Board to get a special fee — paid by oil producers no less — to help cover the costs for regulatory filings on a carbon risky pipeline expansion.

With other people’s money — about $286 million according to economist Robyn Allan — it then proposed to twin an existing 65-year-old pipeline across the Rocky Mountains to move 500,000 barrels of heavy oil to the coast.

In 2013 the U.S. company promised the National Energy Board that it would happily finance the project with 100 per cent of its own money.

Shortly afterwards it changed its mind and asked the government of Alberta for a bail-out, but then-Conservative Premier Alison Redford rebuffed the idea: “We are not moving forward with any financial arrangements with Kinder Morgan.”

At the time the company estimated that the project would cost a modest $5.4 billion.

Today that figure has now ballooned to $7.4 billion, and economists such as Robyn Allan predict the project can’t be completed for less than $9 billion.

To make matters worse there is no economic need for the expansion: other pipelines and rail cars can move heavy oil to market.

Of if the federal government really wanted to act in the national interest it could insist that companies upgrade bitumen into a higher value petroleum product that doesn’t require imported diluent (costly natural gas liquids) to transport it through a pipeline.

Such a move would create high-paying refining jobs and free up pipeline capacity monopolized by the transport of 600,000 barrels of diluent now needed to move 1.6 million barrels of raw bitumen a day.

But the National Energy Board, a captured regulator, never looked at these alternatives and never questioned Kinder Morgan’s ability to finance the project, even though a sharp Wall Street analyst aptly described the firm in 2013 as “a house of cards.”

Nor did Canada’s pathetic energy regulator challenge bogus claims made by Kinder Morgan that heavy oil would fetch higher prices in Asian markets — a complete falsehood.

The federal government, however, did appoint a Kinder Morgan consultant to the NEB board during the scandal-plagued regulatory hearings to highlight their bias.

Next, Kinder Morgan’s financial house of cards collapsed. Crushed by debt and punished by the stock market, the U.S. energy firm reneged on its promise to finance the pipeline as soon as the Canadian government approved the project in 2016.

After failing to raise money in U.S. markets — a clear signal that North American investors didn’t regard the project as a smart idea — the Houston firm used its Canadian subsidiary to raise a skimpy $1.7 billion in 2017.

But those monies didn’t go to the pipeline expansion project. Instead Kinder Morgan used it to pay off more U.S. debt.

Although Kinder Morgan Canada arranged $5.5 billion in construction facility loans from Canadian banks, that still left the subsidiary with a $2 billion equity hole to fill.

Rather than admit that it can’t raise the money and face a financial drubbing, Kinder Morgan shrewdly blamed long-standing and predictable public opposition from First Nations, the City of Burnaby and the government of British Columbia as a project stopper.

But it cleverly waited for the Canadian government, a modern shill for oil lobbyists, to first promise a $1.5 billion ocean spill response subsidy and then declare the project a matter of “national interest.”

The Trudeau government, which promised the Chinese Communists an energy pipeline to the coast as part of any free trade deal, has now signalled to investors that if the marketplace won’t fund a foolhardy project then Canadian taxpayers will be sacrificed instead.

Robyn Allan, an independent economist who has worked in both the private and public sector, warned that Kinder Morgan was playing a poker game years ago.

In 2014 she pointed out to the Canadian government that the company could no longer raise the money and the commercial viability of the project was compromised. A cost-benefit analysis she did during the time clearly showed there wasn’t any benefit for Canada.

“If the NEB and the federal government had done their due diligence, it would have been obvious what Kinder Morgan was up to,” says Allan. “Trans Mountain’s expansion was never commercially viable and Kinder Morgan never put any meaningful shareholder resources at risk.”

Whenever you scratch a megaproject, says the Oxford business professor Bent Flyvbjerg, you’ll likely find a toxic brew of underestimated costs, inflated revenues, discounted environmental impacts and overvalued benefits.

That description fits Kinder Morgan’s pipeline proposal better than a speedy downhill weld.

And now a brain-dead federal government with unhealthy commitments to China wants to rescue a truly bad megaproject championed by the bastard child of Enron and a bunch of climate-denying Texans.

The result will be an unprecedented disaster for Canadian taxpayers.