Trudeau Checkmates Canadian Big Oil


What started as the most apparent pipeline approval in Canadian history, a mere twinning of a 65-year-old pipe, quickly evolved into a nation-dividing, constitutional crisis… how the nearly year-long fight ended just this past week may sum up the current state of the Canadian economy – an economy quickly evolving into a socialist state.

Oil tankers in Vancouver harbour
Oil tankers in Vancouver harbour

 

For those who have been living under a rock, this past week, the Canadian federal government announced it would buy the highly protested Trans Mountain pipeline (which was abandoned/sold – pending shareholder approval – by Kinder Morgan) for C$4.5 billion… however, that’s just to buy the old pipeline while shouldering the obligation to complete the new one, which is not yet built (and will never be if you ask the protesters, including the mayor of Vancouver and premier of British Columbia). Estimates on final costs to complete construction range from C$5B to $7B. When making the announcement this week, Finance Minister Bill Morneau would not elaborate on cost projections.

Rachel Notley, Alberta’s somewhat unpopular premier according to the polls, celebrated the Federal government’s decision by stating in a press conference “It’s time to pick those tools back up, folks…”

Not so fast, Premier Notley. What’s changed about this pipeline other than the owner? This is a matter of legality, not ownership. Protesters were opposing the pipeline when Kinder owned it; and they will do the same with the Feds holding it.

Calgary's oil executives are on edge after pipeline nationalization
After making the announcement Trans Mountain would be nationalized, the following day Finance Minister Bill Morneau traveled to Calgary to speak with oil executives and entrepreneurs. Fears of a so-called ‘National Energy Program 2.0’ have been prevalent in Alberta since Justin Trudeau was elected.

 

BC Government Stands Firm Against Trans Mountain Pipeline

BC’s NDP premier, John Horgan, told the CBC in response to the announcement that a change of ownership doesn’t alter his concerns about the risk of a spill that could harm the coastal environment and said he’ll proceed with a legal challenge.

“The good news is I think I have a better chance of progress with a Crown corporation and a government that is responsive to people rather than a company that is only responsive to its shareholders,” he told CBC in Vancouver.

Jason Kenney, who if the provincial election was held today in Alberta (vote is in 12 months) would win by a landslide, stated:

“While we continue to support the much-needed Trans Mountain project, it’s the catastrophic failure of the Alberta NDP and the Trudeau Liberals that caused Kinder-Morgan to pull out and forced today’s costly decision. Today’s announcement changes nothing in terms of certainty for this project. Everyone that was opposed is still opposed. The law and constitution still need to be enforced. And investor confidence in Canada will be further shaken.”

Trans Mountain to Potentially Cost Taxpayers Billions

Lastly, Bill Morneau, the federal Finance Minister who led the charge on the acquisition, stated, “Make no mistake, this is an investment in Canada’s future…” He refused to speculate on what this project will cost taxpayers but did mention the government intends to seek out a buyer for the pipeline, and that interest has come from pension funds and indigenous groups already. However, it is critical to note that the government of Canada just a couple weeks back promised to indemnify Kinder Morgan of any costs incurred due to the aggressive stall tactics from environmentalists and protesters in BC. So why wasn’t that good enough for Kinder Morgan? Perhaps they see things forming in Canada that we do not. Perhaps the guarantee from the Feds wasn’t adequate. More on this shortly.

The Trans Mountain pipeline is relevant for North American investors on many levels. Currently, Canada exports about 99% of its oil to the U.S. for refining and pricing. The Trans Mountain pipeline is the only domestic passage for Alberta’s vast oil reserves to be shipped overseas. Between 2010 and 2015, America built the equivalent of 10 keystone XL pipelines. Today, Trump’s American energy sector is booming, with new pipelines and nat gas terminals coming online. Meanwhile, Canada is waffling on the twinning of a single 65-year-old pipeline. The U.S. is the place to be, while Canada’s energy infrastructure has become nothing short of a laughing stock. America is happy to watch Canada’s inter-provincial squabbles over pipelines. They get Canadian oil on the cheap so long as the country remains divided on pipelines.

Trans Mountain Pipeline Bailout

At the end of it all, what happened in Canada this week? An oil pipeline became a taxpayer bailout. Now controlled by the Feds, this pipeline, which just a couple months back would have cost Canadians $0, will far likely exceed $10B when it is finally complete.

There are two critical components to the Trans Mountain pipeline that will shape Canada for decades to come.

First: Why Kinder Morgan likely walked.

This pipeline is going to be locked up in litigation for years. It will create a Confederation crisis as socially and economically impactful as the Quebec referendum in 1995. Instead of protesters camping out in Burnaby BC to fight Big Oil of Alberta, they’ll expand their efforts to Ottawa, because the Feds are their enemy now. Ironically, most of these protesters likely voted for Justin Trudeau.

Does Nothing for Investor Confidence in Canada – The Economy’s Biggest Challenge

The Liberal government intended for the pipeline acquisition to show the private sector, and foreign investment, that Canada is a bastion of economic opportunity, with a supportive government, and fertile lands. While it most certainly has that potential, the decision to nationalize this asset will hardly attract foreign money. Investors, be it you and us, global corporations, pension funds or even sovereign wealth funds, love predictability. Buying this pipeline is a drastic change in government policy not seen since Pierre Trudeau was in power.

Moreover, who would want to invest in a nation so divided? It’s bad for business. Predictability and the rule of law are what foreign investors seek. And the truth is, this one pipeline isn’t why foreign money is bailing. The writing has been on the wall for a while. We wrote about this back in October of 2017, stating, “Canada is arguably the most divided it has been since Confederation, or at least since Pierre Trudeau implemented the disastrous National Energy Program almost forty years ago.”

Shortly after we published that report, the 2017 foreign investment in Canada numbers came out…

Direct Investment Falls in Canada

The Financial Post reported in March of this year,

“Direct investment dropped 26 per cent in 2017 to $33.8 billion, Statistics Canada reported Thursday in Ottawa. Capital flows dropped for a second year, and are down by more than half since 2015. The investment that did take place was from reinvested earnings of existing operations. Net foreign purchases of Canadian businesses turned negative for the first time in a decade, which means that foreign companies sold more Canadian businesses than they bought.”

FDI in Canada Chart
It is estimated that Canada has lost roughly $35 billion in foreign investment over the last two years. You can add another $5B (minimum) to that loss thanks to Kinder Morgan walking.

However, that’s all cannon fodder for an apparent greater goal of Justin Trudeau’s Liberals, and his legacy. He stated last week when questioned by a reporter about Canada’s weakening competitiveness against the US that America has unsustainable debt. He assured the reporter he was playing the long game, and that companies, in ten years, would look at Canada as the place to be.

When viewing it from his vantage point, one has to credit the young Prime Minister. He’s playing 3D chess for one of his most ambitious policy/legacy goals…

Nationalizing the Trans Mountain pipeline can most certainly aid his agenda.

Trudeau Securing Carbon Tax, Forever

If you’ve been keeping up with Canadian provincial politics, you noticed there is a blue wave forming across the country, from Alberta to Ontario. Within less than twelve months, there is a good chance Trudeau will be dealing with a mostly provincially conservative nation (the exact opposite of his first two years in office). Jason Kenney (former defence minister for Stephen Harper) is likely going to win in historic fashion next year in Alberta – home to the world’s third-largest oil reserve. Saskatchewan is already led by a conservative party (has been for roughly a decade). Manitoba recently went conservative after nearly two decades of a socialist government. Also, shockingly, conservative Doug Ford has once again inched ahead in Ontario’s provincial polls (the election is on Thursday).

Here’s why this matters:

If you recall, almost immediately after being elected Prime Minister, Trudeau put a team together to prepare for COP 21, a conference for world elites (ran by the UN) to enact stricter climate rules (Click here to read our report on the historic event). Trudeau famously announced while there that “Canada is back!” – Insinuating that with his leadership the northern nation would be a leader in environmental protection.

Carbon Tax

Resulting from that conference was the *Paris Agreement, which included nearly 200 countries and a commitment of approximately $100 billion to fight greenhouse gas emissions. Essentially, it formed a global agreement on carbon taxing. And it kicks into gear in 2020.

* You’ll recall, under considerable scrutiny, Trump bailed on this agreement after Obama signed on. The president said it was unfair to America and would hurt its economy.

Carbon Taxes and COP21

In our report from 2015, we stated:

“As we discussed in our June overview of COP21, countries such as China and Canada have been apprehensive towards commitments to support new carbon taxes. However, Canada, unlike China who remains weary, appears to have made a rapid U-turn following the election of the Liberal Party on October 19th.

Bruce Cheadle of The Canadian Press featured a few of Prime Minister Justin Trudeau’s stronger comments in respect to how Canada will prepare for COP21:

“I will be engaging with the premiers in the coming weeks to establish a strong position for Canada so that people know that Canada’s years of being a less-than-enthusiastic actor on the climate change file are behind us.”

 

A national carbon tax is Trudeau’s primary goal for his first term as PM. He’s adamant it be pushed through, despite facing fierce opposition from conservative premiers. When Trudeau and all Canadian premiers last met on the issue (2016), the Prime Minister only had to deal with two which were conservative: Brad Wall (who stepped down) and Brian Pallister of Manitoba, who had only just been elected. He was mostly among allies (Liberals and Socialists), and Brad Wall was the only vocal opposition to the tax.

The meeting ended with Trudeau giving every province until 2018 to begin an escalating carbon tax starting at $10 per tonne, reaching $50 by 2022. Brad Wall famously said that the carbon tax mandate was a ‘ransom note,’ and that he would fight the Feds in courts to stop it. Not coincidentally, Brian Pallister has vowed to do the same, although he is willing to have a cap at $25 per tonne.

But those are just two provinces. Trudeau can handle them, right?

Canada Prepares to Turn to the Right with Key Elections Forthcoming

Therein lies the whole game of chess. You see, there is a chance, a very good one, nearly 60% of Canada’s population will be governed by conservative premiers within 12 months. Also, every one of these soon to be elected, or currently in power, conservative premiers have vowed to fight in court against this carbon tax of Trudeau’s.

Trudeau is looking at the political landscape right now and is hugely concerned about what he’s seeing. This is why nationalizing the Trans Mountain pipeline was such a smart move from his vantage point…

Justin Trudeau

If the wave of blue takes over provincially, Trudeau has one hell of a fight on his hands. His carbon tax will be challenged, and his international reputation among UN colleagues as well. So he’ll need leverage – leverage which comes directly from owning Canada’s most sought-after pipeline: the Trans Mountain, which once built will carry over 800,000 barrels of oil per day from Alberta to BC’s coast.

If Trudeau’s worst case scenario happens, and his government is tied up in court with conservative premiers over this carbon tax, he now has the Trump card… he can say to Jason Kenney, “enact my carbon tax or pay a massive toll to use the federal government’s Trans Mountain pipeline.” Checkmate.

With the Trans Mountain pipeline soon to be owned by the Feds, $50 per tonne carbon tax by 2022 is all but a guarantee.

 

Wrapping Up

Trudeau has solidified his carbon tax, but Canada is in trouble. Q1 GDP came in at a measly 1.3% (US was 2.2%), nearly $40 billion in foreign investment has left the country in two years, and Trumpenomics is crushing Canada’s competitiveness.

The Financial Post reported in April of this year about Dave McKay’s, CEO of Canada’s largest bank RBC, thoughts,

“McKay told The Canadian Press that a “significant” investment exodus to the U.S. is already underway, especially in the energy and clean-technology sectors.”

BNN Bloomberg reported last week “The head of Toronto-Dominion Bank said he worries uncertainty about trade, housing and competitiveness will weigh on Canada’s economic outlook.”

Adding to Trudeau’s economic challenges, Trump announced tariffs on Canadian steel and aluminium this past Thursday. It is a game changer in relations between the two countries and has started what could be a trade war. The Canadian federal government responded with retaliatory tariffs of its own. Rightly so, Trudeau held a press conference decrying the duties of the Trump administration, stating the American tariffs “are totally unacceptable. For one hundred fifty years, Canada has been the United States’ most steadfast ally.”

Just what this country needs: A trade war with its biggest customer. Don’t think Trump wouldn’t put tariffs on Canadian oil. The US is now the biggest producer of oil in the world; and as of two years ago, America is an exporter of black gold.

With the nationalization of the Trans Mountain pipeline, Trudeau secured the carbon tax, no doubt. However, he’s got a significant economic challenge on his hands now, both domestically and abroad.

 

All the best with your investments,

 

PINNACLEDIGEST.COM

 

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