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Kinder Morgan Suspends Spending on Trans Mountain Expansion Project

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Kinder Morgan Canada Ltd. (KML) announced April 8 that it was suspending all non-essential activities and related spending on the Trans Mountain Expansion Project. In the announcement, KML leaders noted that under current circumstances, specifically including the continued actions in opposition to the project by the Province of British Columbia, it will not commit additional shareholder resources to the project.

From the time of the announcement through May, KML is meeting with key stakeholders in an effort to reach agreements by May 31 that may allow the pipeline to proceed. The focus in those consultations will be on two principles: clarity on the path forward, particularly with respect to the ability to construct through BC; and, adequate protection of KML shareholders.

“As KML has repeatedly stated, we will be judicious in our use of shareholder funds. In keeping with that commitment, we have determined that in the current environment, we will not put KML shareholders at risk on the remaining project spend,” said Steve Kean, KML chairman and CEO. The Project has
the support of the Federal Government and the Provinces of Alberta and Saskatchewan but faces continued active opposition from the government of British Columbia. “A company cannot resolve differences between governments. While we have succeeded in all legal challenges to date, a company cannot litigate its way to an in-service pipeline amidst jurisdictional differences between governments.”

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“Today, KML is a very good midstream energy company, with limited debt. The uncertainty as to whether we will be able to finish what we start leads us to the conclusion that we should protect the value that KML has, rather than risking billions of dollars on an outcome that is outside of our control,” Kean said. “To date, we have spent considerable resources bringing the project to this point and recognize the vital economic importance of the project to Canada. Therefore, in the coming weeks we will work with stakeholders on potential ways to continue advancing the project consistent with the two principles previously stated.”

KML had previously announced a “primarily permitting” strategy for the first half of 2018, focused on advancing the permitting process, rather than spending at full construction levels, until it obtained greater clarity on outstanding permits, approvals and judicial reviews. Rather than achieving greater clarity, the project is now facing unquantifiable risk. Previously, opposition by the Province of British Columbia was manifesting itself largely through BC’s participation in an ongoing judicial review.

Unfortunately, BC has now been asserting broad jurisdiction and reiterating its intention to use that jurisdiction to stop the Project. BC’s intention in that regard has been neither validated nor quashed, and the province has continued to threaten unspecified additional actions to prevent project success. Those actions have created even greater, and growing, uncertainty with respect to the regulatory landscape facing the project. In addition, the parties still await judicial decisions on challenges to the original Order in Council and the BC Environmental Assessment Certificate approving the project. These items, combined with the impending approach of critical construction windows, the lead-time required to ramp up spending, and the imperative that the company avoid incurring significant debt while lacking the necessary clarity, have brought KML to a decision point.

Trans Mountain has spent C$1.1 billion (approximately half of which has been spent since the KML IPO) and made unprecedented efforts to develop the Project since its initial filing with the National Energy Board in 2013. As a result of extensive engagement, a comprehensive regulatory process and detailed engineering and design, the project has changed in several, substantive ways during the intervening five years, including: thicker wall pipe in environmentally sensitive areas such as watercourses and aquifers; avoidance of several fish bearing streams; changes to the detailed route of the pipeline in consideration of community needs and concerns and environmental impacts; Burnaby tunnel construction, to avoid neighbourhoods and minimize impacts; changes to Burnaby Terminal tank design in response to risk assessments; and, enhancements to marine safety that will benefit all marine users.

In addition, in an unprecedented negotiated commitment, Trans Mountain agreed to provide financial benefits from the project, if completed, to British Columbia for a newly-formed BC Clean Communities program to be accessed by communities for local projects that protect, sustain and restore BC’s natural and coastal environments.

“Given the importance of the project to Canada and Alberta, to Indigenous communities, our shippers, our contractors and working Canadians, we are committed to trying to find a way forward, working with stakeholders between now and the end of May on measures that may allow us to advance this critical project, but only if it does not subject KML shareholders to undue risk,” Kean said. “If we cannot reach agreement by May 31st, it is difficult to conceive of any scenario in which we would proceed with the project.”

The announcement prompted response from both opponents and proponents alike. The Montreal Economic Institute (MEI), Canadian Federation of Independent Business (Toronto) (CFIB) and Canadian Building Trades Unions (CBTU) all called on Prime Minister Justin Trudeau and the federal government to intervene.

“The provincial government in BC is disregarding the rule of law and putting politics above the national interest. It can’t be allowed to continue,” said Dan Kelly, CFIB president and CEO. “There is a lot at stake here beyond this one project, including Canada’s reputation as a reasonable place to do business.”
CFIB joined four other associations last month in a letter calling on the government of British
Columbia to create the certainty for the project to proceed. “Our letter seemed to fall on deaf ears and Premier Horgan’s reaction to yesterday’s announcement suggests that hasn’t changed,” Kelly added.

“The last several months has seen unfortunate statements and behavior by certain individuals and this project is too important to our country and our economy to see this happen,” said Robert Blakely, COO of the CBTU. “That is why, it is far time, that Prime Minister Justin Trudeau calls on Premier of British Columbia, the Premier of Alberta, CEO of Kinder Morgan Canada, and all other relevant stakeholder, at the same table and move this project forward in a positive way for Canada, once and for all.”

The MEI showed in a publication last October that the fall in oil and gas investment and the abandonment of projects may get worse in Canada, due to the erosion of our competitiveness with the United States in terms of regulation and taxation. The new regulatory obstacles — including the new rules to evaluate industrial projects unveiled by Ottawa in February — add uncertainty.

“This is very worrisome news, especially after the suspension and then the abandonment of the Energy East project. The government must absolutely get things back on track, and soon. Because right now, the message that investors are receiving is: We’re not open for business,” says Germain Belzile, senior associate researcher at the MEI. “From this perspective, abandoning the Trans Mountain project would be catastrophic.”

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