Jack Mintz: Ottawa’s Trans Mountain ‘backstop’ could make B.C. even more rebellious
Desperate times require desperate measures. In the standoff between British Columbia and Alberta over the Trans Mountain pipeline expansion, the federal government is caught in the middle, trying to salvage its approved project that is about to collapse and avoid a major regional conflict. The federal Liberals are so desperate to save this pipeline from being scuttled by B.C. politics that they’re offering to financially backstop the project. Unfortunately, that might not be the solution they think it is.
Their desperation escalated after Kinder Morgan leveled an ultimatum earlier this month: It would need, by May 31, political certainty that its project can go ahead or it will pull out. Some have called that blackmail, but that’s not fair: endless regulatory red tape has already driven Trans Mountain’s costs up to $7.4 billion from $6.8 billion. Further delays and costs would only further compromise the economic viability of the project, while making it harder to sign up shippers. Kinder Morgan has already spent over $1 billion to prepare its application, negotiate agreements with multiple First Nations and clear land. The next step is buying and installing the pipe, which will cost billions of dollars. The company can’t make that commitment while Canada plays its Mickey Mouse politics.
After neglecting the issues for too long, the federal government now promises to assert its constitutional power over the project. As legal scholar Dwight Newman notes, the federal government could pass legislation that clearly asserts the paramountcy of its constitutional power, rendering any provincial laws inoperable when a conflict arises. Using this strategy will prove even more important now that B.C. is threatening to also limit the transport of Alberta’s bitumen by rail, which also challenges federal powers.
Ottawa’s idea to backstop the project by compensating Kinder Morgan for any losses is considerably more controversial. That would ostensibly provide insurance to Kinder Morgan for costs it had incurred in constructing the pipeline should it be unable to proceed due to legal or political obstacles. But if the federal government can succeed in establishing its paramountcy, the backstop will not be necessary. And there are significant risks if Kinder Morgan decides to pull out and triggers a compensation deal.
The first is developing the conditions for a compensation payout. A fall in Asian demand for oil could be enough to render the project no longer profitable if it means shippers think it’s more profitable to send their oil to the Gulf Coast by pipeline and rail. Kinder Morgan could still argue that political and regulatory delays were its main rationale for cancelling, but the federal government might disagree.
Even if compensation conditions were well laid out, what costs would be eligible? What direct costs would be included that Kinder Morgan couldn’t just pile on at will? What about indirect costs such as general administrative and financing expenses incurred by the parent company? Will the tax effects be included, since such costs would have been deductible as an expense (and compensation would not be taxable)?
Second, providing the backstop means that Kinder Morgan’s incentive to pull out of the expansion project at every new challenge only increases. And since Ottawa’s guarantee means the B.C. government would not face a lawsuit by playing unfairly with Kinder Morgan, the backstop means Premier John Horgan will have an incentive to be even more obstructionist if it benefits him politically. That is, unless the federal government says it will claw back payments to B.C. — such as for infrastructure or immigration transfers — to recover costs, something it should be clear about from the start to make sure the risks don’t all rest with federal taxpayers.
With luck, all this brinkmanship will convince Horgan to sacrifice his power-sharing deal with Andrew Weaver’s Green Party and operate as a minority government — or call an election. But even if Alberta gets this pipeline, what about the future? Will the federal government be offering backstops for any interprovincial energy transport project that runs into provincial opposition — whether pipelines, electrical wires, rail shipments, or ocean tankers?
Of course, that question assumes that energy project proponents would still consider investing in Canada. New federal rules have made this country a far less certain investment climate for building projects. Rising taxes have pushed up production costs, sending investment dollars south to the U.S. And regional conflict is more intense than it has been since the heights of Quebec separatism. Even if the Trans Mountain expansion proceeds, we remain a sad, conflicted country, still holding ourselves back from achieving our great potential.
Jack Mintz is the president’s fellow at the University of Calgary’s School of Public Policy. He sits on the board of Imperial Oil.