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Why Canada’s Kinder Morgan Pipeline Purchase Works for Canada

by John Brian Shannon

Let’s get one thing out of the way, right now. Much earlier in Canadian Prime Minister Justin Trudeau’s tenure he should’ve solved the entire Kinder Morgan pipeline situation — and the same is true for former Prime Minister Stephen Harper.

Allowing the situation to drag on for so long that two western premiers got into a trade spat, and Canada looked to foreign investors like a country that doesn’t have its act together, hasn’t served the country well.

It’s likely that billions of dollars of foreign investment simply bypassed Canada since 2000 due to the way the Trans Mountain Pipeline Expansion (TMX Expansion) proposed by Kinder Morgan has been mishandled by the various levels of government in Canada. That missed foreign direct investment (FDI) is gone, never to return.

PM Justin Trudeau scores a win for Canada by nationalizing the Kinder Morgan pipeline project that will run from the Alberta oil sands to Burnaby, British Columbia.

PM Justin Trudeau scores a win for Canada by nationalizing the Kinder Morgan pipeline project that will run from Edmonton, Alberta to Burnaby, British Columbia. Image courtesy of the Natural Resources Canada website.


The Government of Canada Buys a Pipeline Project…

To solve the entire problem (which will likely usher in an entirely new set of problems) PM Justin Trudeau announced on May 29 that the government of Canada will purchase Kinder Morgan’s TMX Expansion project which is one way to change the conversation around this entirely needless, Canadian own-goal fiasco.

Nevertheless, let’s give credit where credit is due! It’s much better that Trudeau (better late than never) decided to take a leadership role on the energy file. Congrats!


…and Plans to Sell it

Which is a great idea! Buy the project with intent to eventually sell it to a pipeline company, an investor group (pension plans love pipelines and other critical infrastructure) or to another level of government. “Hey Alberta! Wanna buy a pipeline?”

Even Kinder Morgan, conceivably, could decide to purchase the TMX pipeline once it is up and running.

Or, (best-case scenario, IMHO) it could be sold off in an IPO where the entire pipeline is sold as a going concern — and although that probably represents the longest-term plan — it’s probably the plan that would net the highest return on Canada’s investment.


Other Options that Should Have Been Considered

Oil and dilbit (dilbit is tar sand material that is mixed with a light petroleum liquid called ‘diluent’ to make it easier to move) can also be moved by rail instead of by pipeline.

Moving oil and dilbit via rail has some significant advantages.

One, in the case of an oil spill, pipeline spills average around 1 million barrels (yes, barrels) while rail tanker oil spills tend to range around 264,000 gallons (yes, gallons) of oil. It’s a huge difference, to put it mildly.

Each DOT-111 rail tanker carries up to 220,000 gallons of oil, and in the case of accident with a resultant spill, typically it is one or two rail tankers that spill onto the railbed and immediate area (usually a service road that is accessible by emergency vehicles) making a quick response easier by orders of magnitude.

Note: DOT-111 rail tankers are being retired later in 2018 and replaced by the much higher safety standard TC-117 tankers.

Also, the rail lines travel directly from Edmonton to the Burnaby oil refinery that is presently the terminus for the TMX pipeline. It doesn’t get any more convenient than that!

The one advantage that pipelines have over rail tankers is the price. Shipping oil by rail is slightly more expensive.

Finally, both pipeline operators and rail companies can suffer labour disruptions (workers go on strike in both segments of the economy) which can result in late deliveries of oil to the refinery. Although, when a refinery has both pipeline and rail access, if one goes on strike the other simply ramps-up their deliveries.


How Justin Trudeau Could Score a Win with Environmentalists

The federal government should take this opportunity to implement a new tax of 6-cents per barrel on all liquids that move through pipelines to cover future oil spill cleanup and land remediation.

Six cents per barrel is practically nothing. But over many years and with that pool of money invested in the stock market, a sizeable fund would accrue that could be used to ensure that future oil spills would be 100% fully cleaned-up and adjacent land remediated to its pre-oil spill state.

Rail companies don’t need such a tax as rail oil spills are infinitesimally smaller and easier to clean-up than pipeline spills.


How Justin Trudeau Could Score an Even Better Win

Every federal regulator in North America should create legislation to streamline new energy infrastructure approvals in exchange for higher environmental standards.

Any pipeline company (for example) that wants to build a new pipeline (of say, 1000 kilometres in length) should submit with their application to the relevant energy regulator, a plan to decommission and remediate 1000 kilometres of land where their obsolete pipelines (some with ‘abandoned oil’ still in them) are leaking or pose a risk to leak with only a few more years of rust eating away at the steel pipe or the gaskets and seals at junctions along the length of the pipeline.

A new ‘Mile for Mile New Build/Old Pipeline Decommissioning Programme’ would solve at least half of all the small oil spills in Canada when measured over the next 22-years.

Background:

Everyone in the oil business knows that the best years in a pipeline’s life are the first 15-years. New pipelines are hundreds of times safer than the pipelines of old and are built with sophisticated technology to monitor oil pressure and to detect spills that may be in progress.

North America’s hundreds of thousands of miles of oil and gas pipelines are more than 40-years old on average! That’s a stat that should terrify environmentalists, yet because it isn’t a ‘sexy’ topic for them those abandoned pipelines don’t get the negative attention they deserve. Which is a shame.

If legislation requiring dismantlement of unused or abandoned pipelines and land remediation on a ‘mile for mile’ basis were created, pipeline companies would become ‘part of the solution instead of part of the problem’ and would be perceived more positively by environmentalists and non-environmentalists alike.

According to the National Resources Canada website, at present there are 840,000 kilometres of oil pipeline in use in Canada, not including branch or service lines. (This number does not include ‘abandoned’ pipelines, nor pipelines that aren’t in active use)


Let’s Look at the Score

Prime Minister Justin Trudeau +.5 (for solving a problem inherited from a previous government)
Premier Rachel Notley +1.0 (for successfully fighting for one of Alberta’s main industries)
Premier John Horgan +.5 (for standing up for BC’ers interests as he sees it)
Kinder Morgan +1.0 (for not overreacting during the entire fiasco)
Canadian media +2.0 (for staying on top of it)
Rail companies +1.0 (for staying out of it — but they lost a point for not enthusiastically offering their better solution to the media)
Environmentalists +.5 (for fighting for what they think is right — but points-off for not recognizing that new pipelines are infinitely safer than old pipelines and for not shining more light on the dismantlement of, and land remediation around, leaky old abandoned pipelines)

Prime Minister Justin Trudeau has the ability to dramatically improve his score by regulating a 6-cents per barrel tax on pipelines, and a separate regulation requiring new pipeline applications to offer a ‘Mile for Mile New Build/Old Pipeline Decommissioning Programme’.

Environmentalists could eventually score a +1.0 by supporting a 6-cents per barrel tax on pipelines, and a separate regulation requiring new pipeline applications to offer a ‘Mile for Mile New Build/Old Pipeline Decommissioning Programme’.


Is Canada’s TMX Pipeline Purchase a Winner?

Canada should have no problem selling-off the TMX acquisition once it is completed and moving oil. Practically every pension fund and every other institutional investor will buy shares in the pipeline as they tend to be rock-solid investments with a low-ish, but predictable rate of return.

Within reasonable limits, the longer Canada holds the asset the better the potential return, and as oil prices rise Canada’s return on its investment is likely to improve.

Out of all the bad choices presented to Canadian Prime Minister Justin Trudeau he has made the least-bad choice.

Sometimes, that’s all you can do.


For more information on the TMX Expansion project, please visit the government’s informative National Resources Canada webpage here.