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Pipeline nightmares

Industry Spotlight
|Written By Scott Neilson
Pipeline nightmares

Can Kinder Morgan sway the political day?

A range of looming legal, political and economic risks threaten to delay and possibly derail Kinder Morgan Canada’s increasingly controversial interprovincial pipeline expansion project.

The company’s $7.4-billion Trans Mountain Pipeline ULC expansion hit the headlines yet again in early April when it announced it was suspending “non-essential activities” and related spending for the project, citing ongoing opposition from the British Columbia government. The company said it would consult with stakeholders in an effort to reach agreements before the end of May that would allow the project to proceed, according to media reports.

Counsel to KML, Osler Hoskin & Harcourt LLP, declined comment, advising the firm had “checked in with the client and unfortunately is not in a position to comment.” Several other firms declined comment, mostly due to conflicts.

Alarm bells

Other lawyers, however, have plenty to say — particularly when it comes to the impact the conflict will be having on how KML executives are thinking and acting with regard to delays and other risks. Tony Cioni, an oil and gas lawyer and co-founder of Calgary boutique firm Cito Energy Law LLP, is blunt. 

“What would I be thinking if I were leading KML? I’d probably [be getting ready to] pull the project. The U.S had a wildcat discovery two years ago, adding billions of barrels. Plus, wouldn’t you rather put your money into Venezuela — a country with reserves the size of Iran’s — that’s soon going to be welcoming your industry, because its government is broke?

“For all industry players, the alarm bells have been ringing for a long time already. This conflict is just another piece of BS on the pile. Kinder is owned by a very wealthy person, who may well get tired of this . . . Pipeline companies can go to China tomorrow and get a 22-per-cent return,” says Cioni. 

Peter Bryan, a partner in Borden Ladner Gervais LLP’s Calgary office, expects KML’s “extremely frustrated” executives are re-evaluating the project.

“They’re likely considering risk, economics and their actual appetite to continue . . . What the project looks like in terms of how it’s ultimately built — that will certainly [currently] be in play.”

Adds Bryan’s Calgary office colleague Randy Block: “Right now, there will be a battle within KML as to capital allocation . . . I’d be rather shocked if KML isn’t becoming increasingly frustrated with the entire Canadian system. They can be commended for sticking to it. But as to what the future holds?”

Chidinma Thompson, another Calgary BLG partner, warns investors will be shaking their heads and looking at Canada, saying “they’re not serious yet.” 

In the pipeline

The expansion is essentially a twinning of KML’s existing 1,150-kilometre pipeline between Edmonton and Burnaby, B.C., in use since 1953. The expansion, involving almost 1,000 km of new and mostly underground pipeline, will triple capacity to 890,000 barrels per day — and significantly increase tanker traffic through the shallows of the Georgia Straight, off southern B.C. 

In 2016, following a 29-month review, the NEB concluded that the expansion project was in the Canadian public interest. That year, the government of Canada subsequently approved the project subject to 157 conditions. In addition, the British Columbia Environmental Assessment Office issued an environmental assessment certificate in 2017, allowing the expansion to move forward. Alberta approved the project that year.

From the start, the project has faced strong opposition from municipal governments including the cities of Burnaby and Vancouver, First Nations and environmental groups and B.C.’s year-old coalition NDP government.

All the right moves — so far

So far, KML is playing a near-perfect legal game, says Al Lucas, an energy expert at the University of Calgary. Its legal team has identified issues “before they crystalize,” he says, while “proactively developing the necessary arguments, along with effective strategies to move them forward.”

Stikeman Elliott LLP partner Dennis Langen says KML is winning by also continuing to act respectfully toward its opponents — “key in this type of conflict.”

Meanwhile, Evan Dixon, partner at Burnet Duckworth & Palmer LLP, highlights KML’s ability to continue to engage strongly and relentlessly with all levels of government, “to see what if anything can be done to move things forward.”

Bumpy legal road ahead

So far so good. But plenty of risk remains — enough, some say, to even send the project the way of the cancelled Northern Gateway and Energy East projects. Principally, KML risks being pulled into protracted and fast-multiplying lawsuits.

Says Bryan, “Kinder’s legal team will have to stay alert for the mythological many-headed Hydra, where as soon as one regulatory proceeding is resolved, two others will arise in its place.

“In addition,” he says, “there’s the risk of the project becoming a lightning rod for political and social issues outside of it. Then there’s the chance of the actual commercial and competitive opportunity expiring.”

Block agrees. “Those legal challenges don’t need merit [to actually hurt]. Each one leads to delay, headache, cost and more frustration. Challenges, hearings, appeals. That’s the real end game [for pipeline
opponents].”

Lucas says that, legally, B.C. can review and attach conditions to the project, but, “ultimately, [it] can’t stop it.”

“B.C. can do some things. Until it can’t. KML is licensed and approved and has satisfied nearly all of the NEB conditions — and, actually, most of the B.C. ones, too.”

Cioni says KML will sway also the political day, as Canada is fundamentally a “petro state in denial.”

“Pipelines are gonna have to get built. . . . We’re going to run out of money if we don’t support this.”

Dixon says B.C. may back down, “especially if other litigation favours KML.

“[Overall], there’s a good chance KML will win — if it has the stomach to weather the storm as well as the cost of ongoing delays.”

However, University of Calgary energy expert Nigel Bankes says the biggest risk for KML will come from the Federal Court of Appeal cases brought by B.C. and First Nation groups against the project.

“On the division of powers issue, I don’t think B.C. or Burnaby can succeed. The law is strongly in favour of KML and the federal permitting process. However, it’s much harder to call the First Nation consultation issue . . . It will be some months before we know what the questions are. There’ll be a period when all sorts of parties will prepare their legal positions. Then it will undoubtedly go to the Supreme Court of Canada. . . . My gut tells me it’ll be several years before we get all this clarified.”

KML has warned that oil deliveries may be delayed nine months, to 2020’s fourth quarter. The company has also told the NEB that the conflict could cost it between $30 million and $35 million in salaries, corporate support and other expenses — and also more than $90 million in revenue — for each month of delay.

Laura Estep, a partner in Dentons’ Calgary office, points out that KML is “extremely well resourced . . . and has everything it needs to make the expansion a reality.”

She predicts, “It’s going to come down to what happens in the next six to 12 months, when they’re constructing. They’re going to need a lot of support from government, as the opposition mounts — including entrenched encampments. That will be where the test comes in.”

A Calgary partner who has advised KML on pipelines told Canadian Lawyer InHouse that it will all simply come down to continued federal support. “Where there’s the will at the federal level, that’s what matters. Even if the project is overturned by the courts, the feds can correct what deficiencies there are.”

Cioni says Canada need only “follow the Constitution. . . . The NEB was serviceable in its representation of Canadian interests for 60 years. It had social licence, because of the government on top of it,” he says.

“I don’t understand how social licence is getting lost in the wash.”