Trans Mountain’s pipeline expansion was never commercially viable.
It was subsidized from the get-go when, in 2011, the National Energy Board approved a $286-million subsidy fought by Canadian oil producers. Chevron described it 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 pipeline serving B.C. and Washington state to help fund one for offshore markets — a subsidy of more than $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 that Prime Minister Justin Trudeau confirmed as 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 Alison Redford rebuffed the company’s request: “We are not moving forward with any financial arrangements with Kinder Morgan.”
While meeting Alberta for financing, the company told the NEB the project would be fully funded by its Texas-based parent, Kinder Morgan Inc. By late 2014, KMI, in financial trouble, 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 board stuck with a $5.4-billion cost, citing this 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 above the initial estimate. By this time, U.S. private capital markets had 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 its search for financial support from the Canada Pension Plan and the 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 Ottawa was 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 available if the cost exceeds $7.4 billion. Canadian banks are aware the capital estimate is too low.
Kinder Morgan then raised $550 million in preferred shares through the same Canadian banks. Current project costs and carrying charges mean at least $2 billion in unfunded equity remains.
But that’s not all — before construction, even more equity will be required. Kinder Morgan is not up-front with escalating project cost. Instead, the recent ultimatum 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 cost of tearing the country apart, it is 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.
Negotiations behind closed doors with desperate politicians whose behaviour suggests they lack the business acumen to know project costs before they commit to them puts all Canadians at serious financial risk. Either that, or Trudeau’s government is complicit in hiding project overruns to rationalize a taxpayer-funded bailout for a project that sank long ago.
Robyn Allan is an independent economist and was a qualified expert intervener at the Trans Mountain Expansion Project review.