Related Articles
Backed into a corner: Faced with little option, prime minister Justin Trudeau chose to acquire the troubled TransMountain pipeline
Forward article link
Share PDF with colleagues

Trudeau picks up the pipeline dossier

The Canadian government is banking on its clout being sufficient to remove obstacles to a long-delayed oil export project

Faced with critical export constraints and a rising tide of oil sands crude, Canada's government has chosen an unusual and controversial step. It has decided to take over the troubled TransMountain pipeline to steer it through an increasingly complicated political and regulatory morass of its own making.

In May, the cabinet opted to purchase the entire project from Kinder Morgan Canada for C$3.7bn ($2.8bn). With it come obligations to spend another C$8bn to triple capacity to a much-needed 900,000 barrels a day and potentially open new offshore markets in Asia.

Overnight, Canadian taxpayers find themselves the proud owners of an ageing 1,150km (932-mile) mainline to the British Columbia coast. It also puts them on the hook for the TransMountain expansion (TMX), including the thorny political and legal issues that come with it. Then there's its multibillion-dollar price tag and a sizeable hit to the public purse at a time of rising budget deficits.

From a political and economic standpoint, there was little other choice.

It became increasingly obvious—and inevitable—that Kinder Morgan would pull the plug on TMX altogether. In April, Kinder Morgan chief executive Steve Sean said TransMountain had become "untenable for a private party to undertake", though he wasn't calling specifically for government involvement.

Faced with outright cancellation, prime minister Justin Trudeau and his finance minister Bill Morneau felt they had no choice but to act. They essentially assumed all the financial and legal risk—and future liabilities—for getting the expansion built and steering it through the Canadian legal system. It's almost certain to go to the Supreme Court, a process which will likely take a minimum of two years.

It also marks the largest and most direct government intrusion into the oil patch since former premier Pierre Trudeau's failed National Energy Programme (NEP) in the 1980s. Trudeau fils, unlike his father, is keen to repair ties with Canada's oil producing province Alberta, where memories of the NEP loom large to this day.

It's also a desperate last dash to save any hope of diversifying export markets away from the vagaries of a sole customer. A full 99% of Canada's oil exports, or a little more than 3.3m b/d, go exclusively to the US. According to the National Energy Board regulator, there was a 6.5% increase in 2017 despite rising US shale production.

The wisdom of such overwhelming dependence on a single buyer isn't lost amid a trade battle with the Trump administration over steel and aluminium tariffs, and threats to cancel the North American Free Trade Agreement. These make it all the more imperative to find new outlets.

The business case

Without tidewater access, Canada's oil sands production is landlocked. Before being funnelled through existing channels to a handful of Midwestern US refineries, heavier oil and bitumen is subject to product discounts against global benchmarks that reduce the selling price on world markets. Western Canadian Select often fetches less than half of the West Texas Intermediate and Brent prices. On 3 August, that differential stood at $31.

It amounts to a massive subsidy for American consumers at Canada's expense, or $100m a day in lost revenue for Canadian producers.

Understandably, Trudeau is keen to repatriate those dollars to Canada. He has staked support for TransMountain as a trade-off for his ambitious climate-change policies, which aim to impose taxes on carbon. Alberta—the fastest growing source of emissions in the country—is willing to play along, provided the pipeline actually goes in the ground.

The prime minister insists it will be built, even as Canada struggles to meet its Paris Accord climate change targets. Such rhetoric has put him at odds with environmentalists who accuse him of compromising to Big Oil interests. Nonetheless, Trudeau continues to defend the government's decision to buy TransMountain and, ultimately, operate it until a third-party buyer can be found (whether anyone wants it is a separate issue).

"There are people out there who think there's still a choice to be made between what's good for the environment and what's good for the economy. I don't," he said in Vancouver on 4 August.

The question is whether he can achieve both, as a politician as well as a pipeline owner.

Also in this section
Brazil finding the balance
1 November 2018
The country faces key downstream and infrastructure challenges
Continental storage divide
30 October 2018
European oil storage struggles as new facilities aid further growth in Asia
Liquidity fuels LNG storage growth
12 October 2018
Commercial storage of LNG is on the rise as the market evolves, and emissions controls loom larger on the horizon