Ottawa’s Pipeline Gamble Poses Major Political Risk

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The federal government is investing more than just political capital - and taking on significant risk - as Finance Minister Bill Morneau announced that Ottawa will be putting billions of dollars of public money towards building the Trans Mountain Pipeline. The news comes just days before Kinder Morgan’s self-imposed deadline to pull out if it didn’t receive assurances the project wouldn’t be obstructed.

Tuesday’s announcement also comes after months of political wrangling that saw the governments of British Columbia and Alberta squared off in bitter public battle over the pipeline’s construction. Alberta’s Premier Rachel Notley has long been a champion of the pipeline that would move Alberta crude and refined oil to the BC coast for international export. BC Premier John Horgan, a fellow New Democrat, stalled the pipeline’s approval citing environmental concerns. Given Horgan’s minority government is propped up by the Green Party, the first-term Premier had virtually no political room to maneuver. Despite intervention from Prime Minister Justin Trudeau, who tried to broker a deal between the two western provinces, no agreement could be reached, putting the project in jeopardy.

Ottawa’s decision to take over the pipeline project is unprecedented in Canadian history, and is likely the result of failure to reach political consensus between Victoria and Edmonton. For the federal Liberals, who face re-election next year, getting construction underway was absolutely critical. If the project had died under their watch, it would have been a major embarrassment for the Prime Minister who has long championed its development, despite coming at odds with many in his supporters who were against it. While polls indicate that the majority of Canadians support the project, many didn’t want to see their tax dollars paying for it, which could become a ballot box question in the next election. The Liberals are taking a big gamble on this project and are assuming significant political risk.

The total bill of the project is expected to be $4.5 billion, which the government says it will recoup once it sells its stake at a later date, stressing Ottawa has no intention to be the long-term owner of the pipeline. Many in oil sector were pleased with the announcement, including Kinder Morgan, who saw its stock jump slightly this morning. However, there are still questions as to whether or not the federal government will be able to find a suitable buyer given the high level of risk associated with the controversial project.

Provident will be following this project closely and will be offering our insights. Our team has extensive experience in the energy sector, along capital markets, particularly M&A transactions, which will be a key component of this pipeline’s success.