Canada's indigenous tribes consider pipeline stake
Canada's native population, long marginalised from the oil and gas boom, is proposing to buy the Trans Mountain pipeline
It has been said that if you cannot beat them, then join them. Canada’s aboriginal communities, which have traditionally opposed oil and gas development on tribal lands, have made a major shift in strategy with a surprise proposal to buy the embattled Trans Mountain pipeline expansion (TMX) to the west coast of British Columbia.
After years of opposition, in January the Indian Resources Council (IRC)—a coalition of 134 Canadian First Nations—proposed to assume ownership of the controversial project from the federal government, which in turn purchased the line from US midstreamer Kinder Morgan’s Canadian subsidiary last summer.
The 1,150km (750-mile) TMX would twin the existing Trans Mountain system from Edmonton to Burnaby in British Columbia and triple existing capacity to 890,000bl/d, at a cost of C$7.4bn ($5.58bn). More importantly, it would grant land-locked Canadian oil producers a much-needed outlet to new markets in Asia and lessen the country’s reliance on the US as the sole customer for its crude exports.
The expansion has been delayed by opposition since it was first proposed in 2013, primarily from First Nations themselves. In August 2018—on the day the sale was approved by Kinder Morgan shareholders—a federal appeals court quashed approvals from the country’s regulator, the National Energy Board (NEB), on the grounds that it failed to properly consult aboriginal groups along the route. The NEB has since relaunched a series of public hearings with the aim of restoring its certificates of approval. It will be an uphill task to complete the process before the end of this year.
More than two-thirds of the line passes through ancestral native reserves, most of which are subject to contentious land claims negotiations with federal and provincial governments. Of Canada’s 11 provinces, only British Columbia has yet to reach comprehensive settlements with its indigenous communities—despite being in negotiations for more than two decades.
It is a huge stumbling block for the oil industry, which must reach so-called benefits agreements with each individual community along the route. For their part, native Canadians are concerned about the environmental impacts on traditional hunting and fishing grounds. Many remote communities still rely on trapping and hunting for food.
Backed by environmental groups and outside funding from high-profile organisations such as the New York-based Environmental Defence Fund, and moral support from Hollywood celebrities including Leonardo DiCaprio, they have managed to stall construction in the courts.
The delays became so interminable that in early 2018 Kinder Morgan was on the verge of cancelling the project altogether, after spending more than C$1bn to secure regulatory approvals.
That was when Justin Trudeau’s Liberal government stepped in to buy the existing pipeline outright for C$4.5bn, not including the estimated C$7.4bn investment required for the expansion.
Trudeau justified the intervention on the grounds that opening new markets for Canadian crude is a vital national interest. At the time, the government said it had no intention of being a long-term owner and promptly offered it up to third parties. There were no takers, leaving taxpayers on the hook for the full cost of the expansion.
Ottawa now finds itself as the owner and regulator of the pipeline, and arbiter of the project’s merits. Analysts and observers agree that regulatory risk is the biggest obstacle to finding a buyer, which is why the IRC’s expression of interest is compelling. Ensuring aboriginal participation would remove the main obstacle to TMX.
Canada has a long and troubled relationship with its indigenous peoples that goes back more than two centuries, when it first became a British colony. Today, Canadian natives have been marginalised and segregated into reserves, enduring poverty and abject living conditions.
Much of the blame has lain with the federal government. Since Confederation in 1867, it has subjected aboriginal peoples to overtly racist policies aimed at forcibly assimilating them into mainstream society at the expense of their traditional culture. In 2008, the government formally apologised for the injustices stemming from a system of residential schools, which separated children from their families. Nonetheless, many of those old grievances linger. Efforts to raise living standards have been slow.
Indeed, this is now the very rationale for owning a pipeline in the first place—to improve the economic fortunes of native peoples, whilst providing educational opportunities and high-paying jobs. Ownership would also provide a degree of autonomy over resource development on their lands.
Or as Stephen Buffalo, the CEO of the IRC, told an investment conference in Calgary in January, "Our end game is not to own a pipeline, it's indigenous ownership.”
Toward a new business model
The idea of native Canadians participating in infrastructure projects is not new. Oil companies have long held out the prospect of equity stakes in major developments, including pipelines, in exchange for political support. In late 2017, the Fort Mackay and Mikisew First Nations successfully raised C$545mn to purchase a 49pc interest in US refiner Suncor’s East Tank Farm in northern Alberta. The development was particularly significant because the Mikisew had previously been bitter opponents of oil sands development.
The Trans Mountain proposal, meanwhile, is being spearheaded by Fort Mackay, which owns a conglomeration of oil field services and consulting companies, which it started in 1986 with a single janitorial contract to clean oil sands facilities. Today it is an ISO 9000 certified company with over 1,300 employees.
In that sense, Trans Mountain would represent a logical extension of its present business model, which is to move up the value chain and assume full control of its resources. But it would still be an enormous undertaking, given the scale and scope of building and then operating the expansion.
That is why analysts are urging the IRC to wait until the pipeline is actually built before making a formal a bid. One proposal being floated is for Ottawa to gift the pipeline on behalf of the IRC, while maintaining its operations and administering the revenues. This would effectively sidestep the need for aboriginals to come up with the C$12bn it would need to buy the existing Trans Mountain line and complete the expansion.
Then there is the trickier question of what it is actually worth. According to a Parliamentary Budget Office (PBO) report released in January, the existing pipeline generated C$33mn in gross revenues in September 2018—the first full month it was owned by the federal government—before C$17mn in operating costs. The PBO estimated that each year delay in construction of the expansion reduces the value of the system as a whole by C$700mn and increases the overall project cost by an additional C$450mn.