Oil cutoff threatened as Canada provinces feud over pipeline

By Kevin Orland and Natalie Obiko Pearson on 4/17/2018

CALGARY and VANCOUVER (Bloomberg) -- Canada’s inter-provincial fight over Kinder Morgan’s Trans Mountain pipeline escalated as oil-producing Alberta threatened to cut off fuel shipments to neighboring British Columbia.

Alberta on Monday introduced legislation allowing it to halt exports of oil and gas to B.C., ramping up pressure on the coastal province to drop its opposition to the pipeline expansion. Alberta Premier Rachel Notley made clear she doesn’t expect to have to use the new powers, but wants to make sure the province has every available tool in its fight to ensure the Trans Mountain expansion gets built.

The legislation comes a day after she and Prime Minister Justin Trudeau failed to dissuade B.C. John Horgan from his battle against the C$7.4 billion ($5.9 billion) project.

“Investor confidence, not only in the energy sector, but frankly across our economy, is at stake,” Notley told reporters in Edmonton, Alberta, on Monday. “We are very committed to putting pressure on B.C. to come around and focus on what this pipeline actually means.”

Alberta on Tuesday received the support of neighboring Saskatchewan, Canada’s second-largest oil-producing province. Premier Scott Moe said his government will introduce legislation in the coming days to join Alberta in potentially restricting shipments to B.C.

“If fuel tanks in British Columbia start to run dry because Alberta has turned the taps off, it won’t be Saskatchewan filling them up,” Moe said on Twitter.

A halt to energy shipments would have ripple effects across both provinces. Drivers could face gasoline shortages and soaring prices in B.C., while Canada’s second-busiest airport in Vancouver would face higher jet fuel costs. Alberta’s energy producers would also suffer, losing a key market for their crude and refined products.

“The economies of B.C. and Alberta are arguably the most interdependent of any two provinces in Canada," said Ken Peacock, the chief economist at the Business Council of British Columbia, in a report last year.

Kinder Morgan halted work on the project a week ago and set a May 31 deadline for a resolution to B.C.’s opposition, which includes a court challenge and regulatory hurdles that the province has erected. The expansion’s cancellation would be a major blow to Alberta’s oil industry, which has suffered from lower relative prices for its crude, brought on by a lack of adequate pipeline space. The pipeline has already been approved by the federal government. Horgan is seeking ways to block it, concerned about oil spills along the Pacific Coast.

The existing Trans Mountain system is a major conduit for both crude oil and refined products heading to B.C. The pipeline can carry about 300,000 bpd, and the expansion at the heart of the inter-provincial dispute would nearly triple that figure to 890,000 bbl.

Export Permits

The legislation Alberta introduced would allow the province’s energy minister to require companies to obtain permits to export crude oil, natural gas and refined products such as gasoline. The minister would be able to approve or reject those applications based on pipeline capacity, the availability of supplies available to Alberta and “any other matters considered relevant,” according to a copy of the bill. The legislation would allow the province to cut off exports within days of making a decision to do so.

B.C. households spend an average of C$1,777 on gasoline/year. A ban by Alberta might raise the price at the pump by 30 cents a liter, which could increase the cost of driving a vehicle by about C$500 a year, according to Bryan Yu, deputy chief economist at Central 1 Credit Union in Vancouver.

Slowing Spending

“Households will eat these prices,” he said in an email. “Real consumer spending growth would slow, while businesses would also need to pass through higher costs. We would see this in higher inflationary pressure in B.C.”

Kinder Morgan’s existing Trans Mountain pipeline supplies Vancouver and the surrounding region with as much as 60% of its refined products, as well as the area’s only refinery, the 55,000 bpd facility owned by Parkland Fuel. The refinery accounts for a quarter of B.C.’s transportation fuel and "substantially all of the crude oil" it sources comes from Alberta via Trans Mountain. Parkland also supplies 40% of the jet fuel at the Vancouver airport.

B.C. officials have said that cutting off oil shipments would be illegal. Attorney General David Eby said last week that Canada’s constitution forbids provinces from discriminating in the distribution of energy and that B.C. would take the necessary actions to defend itself if Alberta followed through.

Kinder’s Canadian unit, Kinder Morgan Canada Ltd., declined to comment on the Alberta legislation.

Bit Nervous

Notley acknowledged that Alberta’s oil industry is “a bit nervous” about the legislation and said Energy Minister Marg McCuaig-Boyd has been speaking with companies leading up to its introduction. The government will listen to the industry and work with it to ensure that there are “no surprises,” she said.

Alberta also is receiving help from the federal government. Trudeau on Sunday repeated his pledges that the pipeline will get built and said he’d instructed Finance Minister Bill Morneau to start a “formal financial discussion” with Kinder Morgan to hedge the project’s risk. Alberta has previously floated the idea of taking a stake in the project or buying it outright, and Trudeau said on Sunday that he was preparing legislation to underscore federal jurisdiction over the line.

“This project is in the national interest and it must get built,” Notley said.

The Canadian Association of Petroleum Producers supports the efforts by Alberta and the federal government to get the Trans Mountain expansion built, President Tim McMillan said in an interview. While halting oil shipments to B.C. would present the industry with some short-term challenges, the legislation appears to be designed to minimize the impact to Alberta’s energy producers, he said.

“The time for discussion has concluded; it’s time to build the pipeline,” McMillan said in an interview. “The fact that people are moving earnestly and with direct action, we take as a real positive."

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