The Canadian government’s deal to buy Kinder Morgan’s Trans Mountain crude
pipeline is far from over, with industry executives anticipating a six-month
delay in the planned startup, keeping Alberta heavy oil prices at steep
discounts to global benchmarks.

Canada said in late May it will buy the 300,000 b/d pipeline and 590,000 b/d
expansion project for $3.5 billion.

Alberta producers are keen on expanding the pipeline to access Asian customers
via the Westridge export terminal in Burnaby, British Columbia. The expansion
was originally scheduled to start up in December 2020, but that is looking
unlikely unless construction resumes soon.

“Pipeline construction is a seasonal activity during summer to the fall [June
to August] in Western Canada and failure to start work on the main
infrastructure works will also drive up expansion costs,” Chris Bloomer,
president of the Canadian Energy Pipeline Association, said in an interview.

“There are a few regulations that will be issued during the bird-nesting
season [as ownership changes hands],” said Keith Chiasson, senior vice
president for downstream with oil sands producer Cenovus Energy, noting a
closer look will also be taken at the construction schedule.

Kinder Morgan is now in talks with contractors on a new cost estimate and time
schedule to restart work on the pipeline expansion that was stopped April 8.
The expectation is the construction contracts will be revalidated, Bloomer
said.

Kinder could not be reached for comment on what their next steps would be in
the transition process. The deal is expected to be ratified by its board by
the fourth quarter.

Kinder Morgan has estimated an expansion of the Trans Mountain pipeline will
cost C$7.5 billion.

CROWN CORPORATION

June to August will also be a targeted timeline for the federal government to
set up a crown corporation, or state-owned entity, to take over the project
and pay Kinder for carrying out the expansion work, said Greg Stringham,
president of GS3 Strategies.

The federal government has underwritten political and legal risks associated
with the planned expansion,” Stringham said. “But is doesn’t include the risks
associated with the cost of labor, steel and delays in completion.”

Legal issues may also stand in the way of the expansion, RBN Energy said in a
research note early June.

“There are a handful of outstanding legal challenges in the British Columbia
Court of Appeal and Canada?s federal Court of Appeal that must be resolved,
and while Kinder has prevailed in a number of recent court rulings, you never
know what a court might say,” the note said.

Unprecedented step

Kinder’s setting of a May 31 deadline to pull out of Trans Mountain Expansion,
unless it received certainty regulatory and legal certainties, was a
“near-death” experience for the federal government as it would result in
Canadian crude being discounted to global prices for a long time, Dennis
McConaghy, a former Trans Canada executive, said late Tuesday at the Global
Petroleum Show in Calgary.

Western Canadian Select crude has averaged a $17.84/b discount to WTI so far
in June, out from a $10.29/b discount in June 2017, S&P Global Platts data
shows.

With two proposed export projects — the 525,000 b/d Northern Gateway and the
1.1 million b/d Energy East — taken off the radar in the past two years, the
federal government was left with only one option, Tim McMillan, president of
the Canadian Association of Petroleum Producers, said at the show.

“We have always said that the government shouldn’t find itself in a position
of no choice,” McMillan said.

Yet, nationalizing the project was a “terrible” precedent that the Canadian
government has set with the Kinder deal, McConaghy said.

“For future growth of oil sands, confidence of the private sector to invest in
Alberta has to be restored. This will be critical going forward,” McConaghy
said.

The Canadian Association of Petroleum Producers said Tuesday oil sands
investments have dwindled for four consecutive years, with just C$12 billion
expected to be spent in 2018.

Deadline next month

Kinder has until July 22 to help Ottawa find a buyer for Trans Mountain and
its expansion. Six weeks is an awfully short time to put through a deal with
the current investment climate in Alberta, Bloomer said.

First Nations bands along the pipeline route and Canadian pension funds are
being touted as probable buyers, but there is “still lots of capital exposure”
and risks associated with such a deal, Bloomer said.

The Alberta government has offered to contribute up to C$2 billion for the
expansion that will be converted into equity, Premier Rachel Notley said at
the Calgary event Tuesday, noting such spending will only happen after first
oil flows through the expanded pipeline.

“We are getting a new pipeline built from Alberta and we are going about it
differently than it has been traditionally done,” she said.

The Alberta government in the 1970s invested in oil sands projects to
kick-start the development process.

“That subsequently opened up the gates for future investment,” Notley said.

–Ashok Dutta, ashok.dutta@spglobal.com

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