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GEORGE: Playing pipeline politics and getting played

April 17, 2018 - 12:00 PM

OPINION


The Kinder Morgan drama continues. Pipeline politics have dominated the week in the national media. The consensus position seems to be that the major obstacle to getting the pipeline expansion built is still John Horgan. I think the major obstacle to building this pipeline is the economics of the project itself.

Kinder Morgan certainly knows this and the politicians involved must know it too. Which makes their recent actions concerning this pipeline somewhat inexplicable. I think the taxpayers are being played though and we will end up socializing a bunch of risks that properly belong with the private company who has been making the decisions on this project to date.

In a well-researched paper, David Hughes explores all aspects of the economics behind the markets for Alberta heavy oil and their relationship to pipelines. At 42 pages, it should be required reading for politicians and any journalists willing to look behind the veil of press releases and the nonsense speeches coming from Ottawa and Edmonton on this issue.

The bottom line is that when the original proposal for the Kinder Morgan expansion was initiated, the oil price was almost double what it is today. The proposal was also based on the idea that the large spread between Brent (Europe) and WTI (Oklahoma) would persist into the future. It turns out that once the pipeline bottleneck between Oklahoma and Houston was solved a couple of years ago, the price spread immediately snapped back to its historical range which is close to zero.

Now it may be that making 20-year projections based on a two-year aberration is perfectly normal in some industries. I am betting it isn't, but we'll cut Kinder Morgan some slack on this. I don't think we can afford to let the politicians off so lightly though. It was this spread that accounted for the mythical "tidewater advantage", the premium that Asian customers would pay over and above what the Americans were paying. For Notley to continue using the idea of this advantage to get "top dollar" for Alberta's heavy oil is political prevarication at its finest.

The world has changed since Kinder Morgan first started this particular ball rolling. The world tends to do that. It is unfortunate that the financial underpinnings of this project have all turned to mush, I get that. Investors, suppliers, workers; a lot of people were looking forward to having this project go forward. The future looked bright five years ago. Today is a very different environment and it is difficult to see how this project can remain financially viable, even if Ottawa and Edmonton get together and "invest" to make it happen.

An excellent indicator of the economic hole in the plan is what is happening over at TransCanada and their Keystone XL project. A long and winding road sees it now sitting with approvals from both Ottawa and Washington. One would think that with these approvals in place, construction would be underway. Turns out that TransCanada thought it might make sense to scope out the market and get enough committed customers onboard before they go spending a bunch of their shareholder's money on the pipe.

Even the Alberta government got onboard with a 20-year guarantee of 50,000 barrels a day of their own bitumen. This put TransCanada at the 500,000 barrels that it required for moving forward with the pipeline, but is far short of the 830,000 barrels per day capacity of the pipeline itself. The extra capacity will absorb much of the growth in the tar sands over the next decade as Alberta pursues their own emissions ceiling.

So given that more heavy oil than Alberta can currently supply will be moving south to the Houston refinery complex, where does Kinder Morgan hope to get the product to ship to tidewater? After all, between Keystone XL and the Line 3 rebuild, pipeline capacity a number of years out will exceed the Alberta government's own production targets for the tar sands by 13 per cent, without Kinder Morgan.

So here we are. The Kinder Morgan expansion project will not be profitable for a private company to build. It will not be profitable for taxpayers to back. There will be no market for the product they want to ship, simply because the price in Houston is currently the same price as in Shanghai once the expense of transportation is taken into account, making Houston the more profitable destination for Alberta producers for decades to come.

Now there may be a way for Kinder-Morgan to find enough product to at least make the project viable, but that would require assurances from Ottawa and Edmonton that the emission cap on the tar sands will never be implemented. Since such an admission would be political suicide, Kinder Morgan is likely fishing for compensation for the estimated $1.1 billion they have already spent on a non-viable business idea.

If the decision to kill the project is based on business conditions and profitability, no compensation will be forthcoming. They should have done a better job of looking at the market before spending dime one. But if the project dies because of environmental protections implemented by a government, the odds of Kinder Morgan getting that compensation become a lot better. If they can get the different levels of government to cut the company's required investment by getting their hands on some taxpayer cash, viability also improves, perhaps even enough to keep the project moving forward.

We, the people of Canada, are being played by Kinder Morgan.

— Chris George believes one measure of a just society is found in how well it balances fiscally conservative economics with social responsibility and environmental soundness in all of its living arrangements.


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