Updated 25 January 2021 to reflect Kenney-Trudeau letter
It was perhaps a foregone conclusion that Joseph R. Biden Jr. would sign an executive order soon after his inauguration rescinding the permit allowing TC Energy to build the Keystone XL pipeline. But hope springs eternal in some locales in Alberta. And yet, the heavily signalled order sat on the newly -minted President’s desk. Executive Order on “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” a lengthy discourse of executive actions, revoked the March 2019 Permit for the Keystone XL Pipeline. According to the Order
The Keystone XL pipeline disserves the U.S. national interest. The United States and the world face a climate crisis. That crisis must be met with action on a scale and at a speed commensurate with the need to avoid setting the world on a dangerous, potentially catastrophic, climate trajectory. At home, we will combat the crisis with an ambitious plan to build back better, designed to both reduce harmful emissions and create good clean-energy jobs. Our domestic efforts must go hand in hand with U.S. diplomatic engagement. Because most greenhouse gas emissions originate beyond our borders, such engagement is more necessary and urgent than ever. The United States must be in a position to exercise vigorous climate leadership in order to achieve a significant increase in global climate action and put the world on a sustainable climate pathway. Leaving the Keystone XL pipeline permit in place would not be consistent with my Administration’s economic and climate imperatives.
Despite the optimism in some quarters in Alberta, with the stroke of a pen Keystone XL was buried. Is this the final coup de gras? Ottawa certainly seemed to feel that it has done its part. So apparently had TC Energy thrown in the towel for the last time. In the morning, before the inevitable was to pass, it issued a statement halting construction spending.
TC Energy will review the decision, assess its implications, and consider its options. However, as a result of the expected revocation of the Presidential Permit, advancement of the project will be suspended. The company will cease capitalizing costs, including interest during construction, effective January 20, 2021, being the date of the decision, and will evaluate the carrying value of its investment in the pipeline, net of project recoveries. Absent intervening actions, these steps could result in a substantative (sic) predominantly non-cash after-tax charge to earnings in first quarter 2021. TC Energy will also modify its previously announced financing plans as it would no longer expect to issue hybrid securities or common shares under its dividend reinvestment plan to partially fund the project.
However for Premier Kenney, the war has not be lost, apparently. He labelled the decision an “insult” to Alberta and urged further representations by Ottawa to Biden and senior administration officials. In his new release, the Premier highlighted his sympathies for 2,000 workers who had lost their jobs, opining in a hopeful tone that “
Alberta, Canada, and the Keystone XL pipeline are part of the solution in the energy transition.” He restated his pleas that Trudeau engage with Biden and “failing that” follow up with “consequences for this attack on Canada’s largest industry.” He added Alberta was not seeking “special treatment” but the same order of response taken by Ottawa on the smaller aluminum, steel industries in other provinces. He also threatened consideration of legal action against the U.S. government.
Initial Investment
Last March, the government announced its blockbuster investment of $1.5 billion of equity and $6 billion (both in Canadian dollars) in loan guarantees to bring Keystone XL to the finish line. The details were rather sketchy from both the company’s and government’s perspective. The key was the purported 7,000 jobs in Alberta and 13,000 in Canada. Kenney reiterated his well-worn claim about democratically controlled, environmentally rigourous resource development standards, and a boost to continental energy security. The rationale for this huge investment by a free enterprise government, according to Alberta’s premier, was a failure of governments, not markets. According to Kenney, this action was a “wise and prudent” investment expected to be sold at a profit, producing revenue flows to government of $30 billion over its lifetime.
According to TC Energy the project “highlights” included:
• Thousands of well-paying jobs during construction
• Advances continental energy security
• Tens of millions in property and income taxes through every year of operation
• Six comprehensive scientific reviews by the U.S. Department of State over the past decade concluding that the project can be built and operated in an environmentally sustainable and responsible way
• Safer and less-GHG intensive than alternative methods of transporting crude oil to market
• Thousands of stakeholders engaged, including landowners, community members and Indigenous communities
Notably absence from the release was the recent additional claim of using renewable power to the pump stations by 2030. TC Energy confirmed it was their intent last March to buy back the interest. Nothing was mentioned at the time about the political risks entailed in committing this huge amount of borrowed taxpayers’ dollars. Subsequent promotion of the investment included the possibility of a First Nations’ investment partner.
The Keystone investment also became a cornerstone in the Alberta Economic Recovery Plan released at the end of June.
Write-down
While TC Energy has announced a “substantive predominantly non-cash after-tax charge to earnings in first quarter 2021,” Alberta taxpayers may expect a substantial addition to the provincial deficit in the upcoming provincial budget, likely in late February. By then, the province’s accountants ought to know how much has been expended in funding the Province’s equity stake and loan guarantees. At this stage, it should be a straightforward matter to derive these numbers, subject to final adjustments. The addition to the deficit will be a loss reported through the Alberta Petroleum Marketing Commission, the vehicle through which the government has made this ill-fated decision.
Most analysts expect that the Premier’s threat to litigate under the provisions of the USMCA will result in little, if any, returns back to Alberta taxpayers. Thus a writedown of between $750 million and over $1 billion will probably be taken by the government in fiscal 2020-21.
Fallout
In fairness to the provincial government, at the time of the decision, it was not clear who of the many democratic presidential candidates would win the right to run against Donald Trump. At the end of March it was unclear who might win and still generally unknown how feckless Trump’s management of COVID-19 would be. And yet, one wonders how well Alberta’s intergovernmental relations folks (and consultants) had investigated the political risks entailed in this massive bet. Indeed, maybe the experts within the Alberta government weren’t listened or ordered not to go against the party line. At that time, TC Energy’s board had decided it would not spend any more of its shareholder equity to cross the final line. This might have raised some red flags within the Province’s Finance Department. With discussions proceeding in the first quarter of 2020 between the company and government, the plan was, presumably, to push project the project to the point that even an unfriendly Democratic president would not challenge the “pipeline in the ground.” What advice Alberta’s representative in Washington gave over the summer and into the fall as Biden’s lead grew, is anyone’s guess.
The outcome – a writedown of significant taxpayers’ dollars- will further undermine public confidence in the government’s management of taxpayers’ funds. Although 2,000 or 7,000, or 13,000 jobs or 59,000 jobs are nothing to sneeze at, UCP fiscal conservatives are probably wondering what could go wrong next. Added to this imbroglio is the recent fiasco with the payroll system in the Alberta government.
One billion dollars is still a very large number, not a rounding error, and invites commentary from critics about how many nurses, doctors, teachers etc. could be hired with that money leaking from government coffers. The Premier will be eating his words rationalizing the investment as necessary and prudent for some time.
22 January letter Premier Kenney to Prime Minister Trudeau
On 22 January 2021 Premier Kenney released on Twitter a letter to Prime Minister Trudeau. The full letter is reproduced below.
Premier Kenney’s tone seems to be laced with desperation as he deplored “the lack of a federal response to our repeated requests for your personal intervention.” Furthermore “the fact that it (Keystone permit revocation) was a campaign promise makes it no less offensive.” In making the case, he used union labour jobs, “the first pipeline of its kind to operate at net-zero emissions on its first day of operations and will purchase 100 per cent of its energy from non-renewable sources,” and the “historic ownership agreement” with First Nations, as reasons to persist in the fight. Underneath it all must be a sinking feeling that his government had basically taken more than $1 billion in taxpayers’ money and gambled on a venture that had always been dogged by political and legal setbacks.
As a fallback position, Kenney urged the Canadian government to press the U.S. Administration to compensate TC Energy and the Government of Alberta “for billions of dollars of costs incurred” on the project to date. Mr. Kenney went on to say that he and TC Energy assumed “the United States has a predictable regulatory framework.” How anyone, let alone the Premier of Alberta could assume such a thing is risible given the 13- year battles in courts, election campaigns and on the ground. This claim comes from a politician who for 2 years has been reversing legislative and regulatory provisions. Kenney argued was “a clear violation of the investor-protection provisions of the North American Free Trade Agreement” extended as a result of “your government’s successful negotiation” of the new USMCA.
This enthusiasm for remedies under the trade agreement have been questioned by various analysts. A January 2019 article from Borden Ladner Gervais partners Matti Lemmens and Tiffany Bennett surveyed the existing (NAFTA) investor protection arrangements and contrasted those with the USMCA, with special attention to the energy sector. The articles focus was on the elimination of the Chapter 11 investor-state dispute settlement mechanism.
According to this article, there have been a number of claims against the governments including the $15- billion claim by TransCanada Corporation brought after President Obama’s 2016 rejection of Keystone. Other cases included a successful case brought by ExxonMobil and Murphy Oil against the governments of Newfoundland and Labrador and Canada with respect to the requirement of placing a portion of offshore revenue towards research and training. In another case, Ontario was required to pay U.S.-based Windstream Energy more than $25 million because the province imposed a moratorium on offshore wind development after Windstream had secured a contract with the province under its feed-in-tariff program.
The authors noted Canadian investors will no longer be able to bring investor claims against the governments of the United States or Mexico. However, there is a three-year phase-out “for claims in respect of investments made while NAFTA has been in force, investors can bring their claims for three years after the USMCA comes into force, after which investors’ protection will be limited to only causes of action available in domestic law, if any, such as indirect expropriation.”
It would appear therefore that TC Energy has the right to bring forward an action. So a lawsuit being successful is greater than zero. As with the earlier case, TC Energy would make a case the decision was politically motivated. However, arguing that the U.S. regulatory system is predictable, with many points of intervention given to political actors, is perhaps a stretch.
Letter-Kenney-to-Trudeau-1 Kenney-to-Trudeau-2
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