On Tuesday 31 March, Premier Jason Kenney announced the province was making a $1.5 billion investment to “kick-start” the Keystone X-L pipeline owned by TC Pipelines (formerly TransCanada Corporation-TRP-TSX). Calling Albertans “resilient,” this “bold move” was deemed necessary to “ensure a future for our largest industry.” The Premier, in his brief announcement, equated jobs and the economy with pipelines. Noting that the “world needs a reliable, democratic source of energy,” Kenney elaborated on a theme popularized by Stephen Harper and Ezra Levant known as “ethical oil.” Drawing a line between Alberta’s vast oilsands- the biggest resource play in any democracy- and the XL pipeline to get Alberta’s bitumen to market- this investment will immediately create 7,000 jobs, according to Alberta’s Premier.
The equity investment of $1.5 billion and loan guarantee of $6 billion, commencing in 2021, was necessary to allow the project to proceed. According to the Premier, the deal took six months of negotiations “to minimize risks for Alberta taxpayers.” He described the investment as a “bold move to retake control of our province’s economic destiny and put it firmly in the hands of the owners of our natural resources, the people of Alberta. “
“We cannot wait for the end of the pandemic and the global recession to act. There are steps we must make now to build our future focussed on jobs, the economy, and pipelines. Today we are moving forward with a project that is essential to our future prosperity. This investment in Keystone XL is a bold move to re-take control of our province’s economic destiny and put it firmly back in the hands of the owners of our natural resources, the people of Alberta. The Government of Alberta is confident that this is a wise investment. After construction is complete, we will be able to sell our shares at profit. In addition, the project will have a net return of over $30 billion to the Alberta taxpayer through royalties and higher prices for Alberta oil in the next 20 years.”
While Kenney’s instincts have always been against government intervention, he chose to ignore that gospel, characterizing the investment as the “last chance to get a project done” He observed that “the failure of politics and policy,” the existence of “foreign funded environmental opposition,” “predatory dumping” by Russia and Saudi Arabia, and the absence of other private investors, prompted the Alberta government to act. Other touted benefits include a reimbursement “from TC Energy to Alberta 12 months after the oil is flowing through the pipeline although details were scarce. Kenney also assured Albertans that the investment would be sold at a profit.
In concluding his announcement, Kenney channeled Peter Lougheed, who embraced state socialism when private investors were unwilling to act.
In TC Energy’s press release, more financial details were provided, all in U.S. dollars. The $1.1 billion U.S. equity investment will pay for planned construction costs to the end of this year. The remainder of construction costs will come from a $4.2 billion U.S. credit facility guaranteed by the Province and $2.7 billion U.S. from TC Energy generated by cash flow from other operations as well as a $1 billion sale of TC equity. The company stated that its project is expected to generate $1.3 billion in cash flow. The company expects to buy back the Province’s investment “under agreed terms and conditions and to refinance the US$4.2 billion credit facility in the debt capital markets.” However, the agreed terms and conditions are not public.
From the Alberta taxpayers’ perspective, several things were left unclear. First, was TC Energy paying the Alberta taxpayer for the loan guarantee provided by an AA Low, sub sovereign borrower? [Moody’s Investor Services immediately changed TC Energy ratings outlook from stable to negative.] Second, at what price exactly did Alberta obtain its shares from TC Energy? Normally, the purchase price would be negotiated and disclosed to the market, but that information was missing. Before the announcement TC shares were trading below $58 and when the announcement was made on Tuesday, they shot up to close above $62 per share. Usually such a large investment was bought at a discount to prevailing market conditions. By the close of trading today (Wednesday, 1 April) the shares had receded to just shy of $58 a share. With close to a billion shares outstanding, these changes represent about $4 billion in market capitalization.
More fundamental is the continuing bet that Alberta politicians are making on the oil sands. Will the gamble pay off and will $30 billion in royalties come Alberta’s way? Sadly, this is unlikely for numerous reasons. First, with collapsing demand, world businesses will learn how “essential” oil, and oil from Alberta, is. Second, the climate emergency will move investment into renewables, a reality Alberta politicians still refuse to acknowledge. And third, despite the rhetoric from politicians and the oil sands industry, Alberta production is uneconomic at present price levels.
According to Mitchell McGeorge writing in Oilprice:
With global oil demand curtailed by an estimated twenty million barrels per day due to the coronavirus led shutdown in the world’s economy, the oil war would turn an already dire economic outlook for global energy demand into a catastrophe that could change the energy landscape forever. An increasing number of producers are now losing money on production, wells are being shut-in and in certain areas (e.g. Canada) the oil industry may never recover – a generational destruction of personal livelihoods and the end of a reliable source of national wealth and revenue.
More fundamentally where is this $1.5 billion going to come from? Alberta taxpayers don’t know. Presumably Alberta can borrow the money at about 3 per cent and hopefully get paid out by TC, when it says it will. Or does the money come from the Heritage Fund, necessitating the liquidation of investments at a time which is less than optimal. Given Alberta’s spotty record with the NorthWest Upgrader and oil by rail, Mr. Kenney’s gamble seems more like a desperate poker player who is putting all his chips on one horse to win,