Trans Mountain bailout a bad sign for international investors: think tanks

Yahoo Finance Canada
Steel pipe to be used in the oil pipeline construction of Kinder Morgan Canada’s Trans Mountain Expansion Project sit on rail cars at a stockpile site in Kamloops, British Columbia, Canada May 29, 2018. (REUTERS/Dennis Owen/File Photo)
Steel pipe to be used in the oil pipeline construction of Kinder Morgan Canada’s Trans Mountain Expansion Project sit on rail cars at a stockpile site in Kamloops, British Columbia, Canada May 29, 2018. (REUTERS/Dennis Owen/File Photo)

On Tuesday morning Finance Minister Bill Morneau announced that the federal government will buy the Trans Mountain pipeline project from Kinder Morgan for $4.5 billion, doing exactly the opposite of what many business leaders and resource experts believe is best for promoting investment in this country.

Following the announcement of the decision, resource and economics experts at the Montreal Economics Institute and Fraser Institute claimed that by taking the pipeline away from Kinder Morgan, the Liberal government is discouraging investors from putting money and energy into Canadian ventures.

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The pipeline expansion project was approved 18 months ago, following a five-year process that included environmental assessment and Indigenous support. Despite Kinder Morgan following the regulations and getting every approval necessary for the project, the project was forced to a halt by protests and legal challenges while the federal government continued to promise that the project would somehow get done.

“The message being conveyed to investors is: ‘Don’t come here to do business. Even if you fulfill all regulatory requirements, you’ll still face many obstacles’,” Alexandre Moreau of the Montreal Economic Institute said in a statement Monday afternoon. In other words, Moreau suggests the Trudeau administration puts way too much red tape around investing in this country.

Moreau’s sentiments echo the claim by the Fraser Institute that “Canada is closed for business” when it comes to energy. “The Trudeau government repeatedly promised that the project would be built, yet failed to take concrete and timely action while sending mixed signals regarding its support,” the think-tank wrote on its website.

The experts at both organizations claim that the federal government should have stepped in to solve the conflict between B.C. and Alberta as the pipeline crosses provincial borders and falls under its responsibility. Instead, they say the government is wasting taxpayer money to keep the project on life support instead of offering the support it should have to get the project finished with Kinder Morgan.

Over 800 business leaders from across the country have also come together to voice their disapproval of the deal, which could end up costing taxpayers a hefty $17 billion before all is said and done.

“Not a single private investor wanted to buy the pipeline, which shows that this is a terrible investment,” said Wantoo CEO Michael Tippett in a press release. “Now as taxpayers we get to be on the hook for the environmental and economic cost of this boondoggle.”

Better options

There’s some doubt regarding the necessity of this expansion given the expected decline in fossil fuel consumption over the next decade, according to some experts. Dr. Tom Gunton at Simon Fraser University says that only two out of the four proposed pipeline expansions are necessary for meeting Canada’s needs and the Trans Mountain pipeline is the worst choice. “One important question is, why did the government do this when there are other options that would have met Alberta’s objective of getting oil to world markets without any taxpayer subsidy and without any risk to B.C.’s coast?”

According to him, this decision does nothing but harm Canada in the long run, especially with investors.

“First, a government takeover of a private sector company sends a bad signal to the international business community,” explains Gunton. “Second, pushing this project through will continue to generate protests and discord that will harm Canada’s international reputation. Third, the government is supporting Trans Mountain at the expense of its Canadian competitors —Enbridge and Trans Canada— and this intervention in favor of one project to the detriment of other projects is unprecedented and damaging to the investment climate.”

The consensus among experts seems clear: the government needs to do a better job of facilitating investment in order to keep investors coming to Canada.

Following their announcement, Kinder Morgan’s (KMI) stock price dipped slightly, less than a day later it had already recovered and rose higher. Analysts don’t expect that to last however, as future growth prospects for the company are much lower without the massive project.

If investors really do turn away Canada’s energy sector, the government will have a hard time finding a new buyer.

“It is unlikely that the government will be able to sell the project to someone else if and until the new pipeline is complete, which will be years from now,” Gunton says. “Kinder Morgan wanted out because of rising costs, increased competition from other pipelines and public opposition. Other private investors will have the same concerns.”

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