By David Ljunggren and Rod Nickel
OTTAWA/WINNIPEG (Reuters) – Canada will buy Kinder Morgan Canada Ltd’s (TO:) Trans Mountain pipeline for C$4.5 billion ($3.5 billion), the government said on Tuesday, in hopes of saving the project that faces formidable political and environmental opposition.
Finance Minister Bill Morneau said purchasing the pipeline was the only way to ensure that a planned expansion could go ahead. Ottawa backs plans to boost capacity of the line to a Vancouver-area port so Canadian crude gets greater access to foreign markets.
The pipeline’s nationalization opens Liberal Prime Minister Justin Trudeau to political risk.
Kinder Morgan Canada gave Ottawa until May 31 to come up with reassurances it could press ahead with plans to more than double the capacity of the existing pipeline amid efforts by the province of British Columbia to block construction.
“When we are faced with an exceptional situation that puts jobs at risk, that puts our international reputation on the line, our government is prepared to take action,” Morneau told reporters.
He said the pipeline purchase provided the federal jurisdiction needed to overcome British Columbia’s opposition, but did not say how it could force the province to allow construction.
Although the federal government has taken stakes in struggling energy projects, Tuesday’s announcement marked the first time Ottawa has bought an entire pipeline. It said it does not intend to own the project for the long term.
The move drew immediate criticism from both sides of the political spectrum, and could hurt Trudeau’s popularity in the key British Columbia battleground at a 2019 federal election.
“This decision represents both a colossal failure of the Trudeau government to enforce the law of the land, and a massive, unnecessary financial burden on Canadian taxpayers,” Canadian Taxpayers Federation Federal Director Aaron Wudrick said in a statement.
The government will also offer federal loan guarantees to ensure construction of the expansion continues through the 2018 season as part of the deal with the company, a unit of Houston-based Kinder Morgan Inc (N:).
Morneau sidestepped questions about how Ottawa will deal with opposition from environmentalists and aboriginal groups, who cite the risk of a catastrophic spill.
“It’s a mess out there,” said a Calgary industry source not authorized to speak publicly. “Given it will be stuck in court for a while, I don’t think we will see this pipe built anytime soon.”
Morneau said more investment would be needed to complete the expansion, and stressed he felt the project should be returned to the private sector.
Canada’s oil sector has been stung in the past year as foreign energy companies retreated amid concerns about the environmental toll, high production costs and a risky regulatory regime.
The pipeline would give Canadian crude greater access to foreign markets.
“We have agreed to a fair price for our shareholders,” said Steve Kean, chief executive officer of Kinder Morgan Canada and Kinder Morgan Inc (N:).
Kean did not say why he decided to sell rather than absorb the risk of further delays. Kinder Morgan Canada will continue to own the remaining assets, including crude storage, rail terminals and a condensate pipeline, and look to expand, he said.
“I think the transaction is a win-win. It’s actually better for Kinder Morgan than it is for Canada. They are getting a very good value,” said Paul Bloom at Bloom Investments Counsel Inc, which owns about 300,000 shares in Kinder Morgan Canada.
“British Columbia isn’t a part of the deal and while a government buy (out) makes it more likely that the project will go through, it still doesn’t guarantee there won’t be more protests,” he said in an interview.
(Additional reporting Leah Schnurr in Toronto and Nivedita Bhattacharjee in Bangalore; Writing by Andrea Hopkins and David Ljunggren; Editing by Jeffrey Benkoe)