Recently various media outlets have painted a very grim picture for the Trans Mountain Extension Project. CBC in Canada reported that "Vancouver asks court to halt Trans Mountain Pipeline expansion." Sounds scary. As we shall discuss later, this is nothing more than political posturing. The cost to Kinder Morgan (NYSE:KMI) may increase, but the project will unlikely be rejected.
I've highlighted Kinder Morgan's many problems in previous articles (read Will Kinder Morgan Be A Laggard Forever). If you agree with my opinion, then if the project does get cancelled, it would actually be a step forward for the company. The management could then put $7 billion of capital towards something much more productive, such as returning them to shareholders or paying down debt.
Of course, considering that many investors do agree with the management's growth strategy, this project is of paramount importance, as it will more than double the current throughput of 300 Mbbl/day to 890 Mbbl/day, which will translate into more cash for shareholders.
At the heart of the problem are the First Nations (i.e. aboriginals). First Nations have the right to be compensated any time a project is being built on their land. However, because compensation is not determined by court but by arbitration or negotiation, compensation seldom surfaces as the underlying issue. In most cases, the argument is that a proposed project will cause destruction to the environment and will interfere with the First Nations' way of life. Whether that is truly the case or not I cannot say, but it's not a stretch to think that the constant resistance has much to do with the amount of compensation, as history has shown.
But why does Vancouver's mayor object to the project as well? No matter the reason, it would be political suicide for the mayor of Vancouver to say "we support Kinder Morgan 100%." Not only is Vancouver known for being environmentally friendly, such a statement would go against the mayor's very own political platform, of which a key pillar is a "Greener City."
In summary, resistance from First Nations is nothing new, and the mayor essentially has no choice but to support their cause.
Play The Waiting Game
CBC reported that Vancouver was asking the court to halt the expansion. That's not exactly correct. The wording is extremely important here. Because no one can directly veto federal projects, Vancouver seeks to "Prohibit… the National Energy Board (NEB) from making any decisions, issuing any orders or taking any other actions to enable the Trans Mountain Expansion Project." The filing then goes on to list the various supporting arguments, such as failing to conduct lawful assessment.
Note that Vancouver did not directly address the project itself; instead, it disputed the process that got the project approved. Note that NEB is the governing body for such matters in Canada. Asking for their removal from the process would be akin to requesting the Fed to stop "meddling with interest rates." While nothing is impossible, I believe that the chance of success is miniscule.
While the detractors are unlikely to succeed, they could continuously appeal various decisions made by the court, effectively stalling the project. This is not a minor nuisance, as Kinder Morgan has to anticipate the timing of capital spending. Uncertainty regarding when the project will be completed could cost the company a lot of money, as the management would have to delay time-sensitive decisions (e.g. hiring). While things can get a bit expensive, in the end, I firmly believe that the project will go through.
The challenges posed by the First Nations and the City of Vancouver can be overcome. If anything, it would just be a monetary issue if the company decides to settle with the First Nations. If Kinder Morgan is reluctant to settle, one may have to wait quite a while before the project gets going, as the court battle can be dragged on for quite some time.
To conclude, I would like to offer my observation of another major pipeline project that got cancelled: Keystone XL. The First Nations overwhelmingly opposed the construction of the project, yet Prime Minister Justin Trudeau said the following after Obama rejected the plan:
"The Canada-U.S. relationship is much bigger than any one project and I look forward to a fresh start with President Obama to strengthen our remarkable ties in a spirit of friendship and co-operation."
It sure sounds like the only thing that prevented the project from going through was Obama, not any objections from First Nations. Why would the Trans Mountain Extension Project be any different?
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