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Government aid key to Trans Mountain pipeline expansion
10/05/18
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Trans Mountain’s expansion was never commercially viable. It has needed unprecedented support from the get-go when in 2011 the National Energy Board (NEB) approved a $286-million special fee fought by Canadian oil producers. Chevron described it at the time as an “extraordinary precedent … If they (Kinder Morgan) need financing, then they should go to the market” and get it.
The NEB later approved a more than doubling of tolls on the existing pipeline serving B.C. and Washington state to help fund a new one intended for offshore markets — a subsidization of over $350 million a year from a 65-year old line. When the legacy line fails — increasingly likely the older it gets — Kinder Morgan will be back for more handouts.
Then there is the $1.5-billion Oceans Protection Plan Prime Minister Trudeau confirmed is also a subsidy when he threatened to cancel it if the project fails.
Kinder Morgan’s search for government funding is not new either. The company has pursued this scheme for the past five years. After meetings in 2013, the Alberta government under Premier Redford rebuffed the firm’s request explaining, ”We are not moving forward with any financial arrangements with Kinder Morgan.”
While meeting with Alberta for financial support, the company told the NEB that the project would be fully funded by its Texas-based parent, Kinder Morgan Inc. (KMI). By late 2014, KMI was in financial trouble and could no longer deliver.
As an expert intervener, I advised the NEB that project financing was compromised. The NEB ignored the warning. It even reviewed a stale-dated project. The NEB stuck with a $5.4 billion cost for the project, citing this budget in its May 2016 report, even though Kinder Morgan announced in October 2015 costs had increased to $6.8 billion.
In March 2017, costs rose again to $7.4 billion — 40 per cent from the initial estimate. By this time U.S. private capital markets summarily rejected the expansion. Kinder Morgan was unable to raise debt or equity and no joint-venture partner could be found — U.S. investors saw the writing on the wall.
Kinder Morgan turned its attention to the Canadian government and capital markets. The company acknowledged that its search included financial support from the Canada Pension Plan and the federal government’s Infrastructure Fund.
In May 2017, Kinder Morgan sold 30 per cent of its Canadian assets in a public offering. None of the proceeds were for the expansion. The $1.7 billion raised was siphoned from the Canadian economy to pay off debt the Texas parent owed.
KMI then announced the Canadian entity would be responsible for raising all required project financing, although the U.S. parent still held 70-per-cent ownership. No update on negotiations with government sources in Ottawa were forthcoming. The foreign parent had effectively washed its hands of all financing responsibility while retaining the majority of any benefits for KMI’s U.S. shareholders.
In June, Canadian banks entered into a $4-billion construction debt facility with $1 billion more in a contingent facility available if costs exceed $7.4 billion. Canadian banks are aware the capital estimate for the expansion is very likely much too low.
Kinder Morgan then raised $550 million in preferred shares through the same Canadian banks. Current project costs and carrying charges mean that at least $2 billion in unfunded equity remains.
But that’s not all — before construction even more equity will be required. Kinder Morgan isn’t upfront with escalating project costs. Instead, its recent ultimatum with the May 31 deadline states, “KML is not updating its cost and schedule estimate at this time.”
Why not? If there were any time the Canadian public has a right to know the likely cost of the expansion it’s now. Especially since taxpayers are being set up to pay for it.
Given Kinder Morgan’s clever cost-obfuscation strategy and the contracts that are yet to be finalized, direct project costs could exceed $9 billion.
Private talks with politicians whose desperate behaviour suggests they lack the business acumen to ensure they’re aware of likely project costs before they commit to them puts all Canadians at serious financial risk. That, or Trudeau’s government is intent on hiding project overruns to rationalize a bailout for a project that sunk long ago.
Robyn Allan is an independent economist who has held executive positions in the private and public sectors, including president and CEO of the Insurance Corp. of B.C. and senior economist for the B.C. Central Credit Union.
[Top photo: A May 2013 handout photo of Kinder Morgan's Anchor Loop Project in Jasper, part of the Trans Mountain pipeline. SUNMEDIA]
