How Kinder Morgan Played Trudeau Like a Harp

Reuters has done a little digging into how Kinder Morgan manipulated a naive prime minister, panicking him into buying out the slick Texas pipeline company.

Even before the bailout, the company had little to lose - despite the C$1.1 billion it has spent so far on a plan to add a second pipeline from Alberta’s oil sands to British Columbia’s coast, according to a Reuters review of the project’s bank financing and oil-shipping contracts with producers reserving space on the proposed line. 

The documents show Kinder Morgan cut creative deals with lenders and oil producers to shield itself from massive write-downs like the ones taken recently by rivals TransCanada Corp and Enbridge Inc in canceling controversial pipeline projects. 

The arrangements, which have not been previously reported, gave Kinder Morgan unique leverage in threatening last month to walk away from the project by May 31 unless Prime Minister Justin Trudeau’s government guaranteed a path to construction over the objections of British Columbia officials, environmentalists and some aboriginal bands. 

The company’s cautious financial planning and hard-ball politicking combined to create a no-lose bet on what might have been one of the oil industry’s riskiest plays, given the volatility of Canadian pipeline politics. 

...Kinder Morgan’s leverage in the deal stemmed in part from careful risk management in earlier negotiations with the 13 oil producers who reserved capacity in the proposed line. The shippers agreed to cover about 80 percent of Kinder Morgan’s capital costs – even if the second pipeline never gets built, the contracts show. 

The shippers promised to pay those costs over time through tolls on shipments through the existing pipeline, and the contracts included an “early termination” clause to ensure the producers paid even if regulatory problems blocked the project. 

The firm also negotiated with 26 lenders led by Royal Bank of Canada and TD Bank for a clause exempting the firm from paying a 2 percent penalty on funds drawn from up to C$5 billion in construction loans if it halted the project because of political problems, the documents show. 

Another roughly C$220 million in financing, CEO Kean told analysts last month, came from assessments on oil producers shipping through Kinder Morgan’s Westridge export terminal in Burnaby, British Columbia, which is targeted for expansion to accommodate the second pipeline. 

Twelve of the 13 oil producers - including BP Canada, Teck Energy Sales, Andeavor and Canadian Natural Resources - did not respond to Reuters inquiries or declined to comment on their contracts with Kinder Morgan. Canadian oil producer Cenovus Energy did not comment directly on the contracts but issued a statement saying Canada’s oil industry would continue to suffer from low prices and exports without new pipelines. 

...Robyn Allen - a vocal pipeline opponent and retired chief executive of an auto insurance firm - has long predicted the expansion would end in a government bailout. She opposed it specifically for that reason, unlike most other opponents who have cited fear of oil spills. 

The Trudeau administration, she said, is paying C$4.5 billion “for a pipeline that is more than 65 years old” and assuming expansion costs she estimated could run as much as C$12 billion - far more than the firm’s latest estimate of C$7.4 billion. 

By using assets of the existing Trans Mountain pipeline to finance its expansion, Kinder Morgan made the two inseparable in the bailout, Allen said. 

“Now Kinder Morgan’s U.S. shareholders will be made whole,” she said. “They have offloaded all of these costs onto Prime Minister Justin Trudeau.” 

...The government hopes to quickly resell the project to energy firms, a task made much harder by its tortured political history. 

Though Trudeau asserts federal authority to approve the project, British Columbia officials could effectively bog it down for years in environmental studies, lawsuits and regulations that undercut its profit potential. 

Trudeau could theoretically nullify any provincial law that effectively kills a federally approved project under a constitutional provision that hasn’t been used since the 1940s. But that’s unlikely given that his Liberal party relies far more on electoral support from British Columbia than from conservative Alberta. 

The prime minister is already paying the political price. 

“Those of us who knocked on doors for him will not forget that he took billions of dollars from Canadian families to buy out an oil pipeline,” said Tzeporah Berman, deputy director of Stand.earth, an environmental advocacy organization with offices in Vancouver.

We knew from the get go, when Trudeau pushed through the Saudi Death Wagon deal, dismissively calling the heavily armed and armoured combat vehicles mere "jeeps," that when principle clashed with opportunity, Trudeau would go with the money side. We saw that again when his government cut sweetheart deals for KPMG's Isle of Man tax scammers. He's the pretty face of some pretty ugly politics.

There's no reason anyone should have been surprised to see Trudeau outplayed by the sketchy Texans and forced to ride to the rescue of the Athabasca Tar Sands giants and Canadian banks. It's entirely in keeping with the policy of socializing the risks and privatizing profits.

It's Justin's Razor Wire Now

And my old friends, you Stepford Wife Liberals, seem to have fallen mute when your team - Trudeau, Carr and McKenna - have succeeded where Harper, Oliver and Kent tried but failed. Go Liberals, Go.

And not only that but, as Trudeau said on the floor of the Paris climate summit in 2015, "Canada's Back." We are indeed. We're back alright, back to where Harper had Canada. We're a climate change pariah again.

What Does This Say for Canada's Economy?

Back in February, I did an item about the largest corporations in the US and Canada respectively:

Here are the current standings 

 1. Apple - $849 billion

2. Google - $746 billion

3. Amazon - $ 702 billion 

4. Microsoft - $699 billion 

5. Facebook - $521 billion. 

Boeing, which chose to leave Washington for Chicago, comes in at a paltry $205 billion. 

By contrast, Canada's top 3 are banks: RBC, TD and Bank of Nova Scotia, at $113, $102 and $74 billion (Canadian) respectively. Pretty small potatoes and not an innovator or tech giant among them. Hewers of wood, drawers of water and bank tellers. Great.

That post came to mind as I re-read James Galbraith's book, "The End of Normal," and his discussion about banks. I'm not a banker nor an economist but I put Galbraith's assessment out there for you to decide the role of banks in Canada.

In Canada, chartered banks are creatures of statute, given certain very advantageous rights. Every year, it seems, they announce record profits while ordinary Canadians complain they're getting the shaft. This is how Galbraith sees banks in the 21st century:

Banks are intermediaries. They provide nothing that contributes directly to current consumption or business investment. They are useful only insofar as they support either household consumption or business investment - and then only so long as they do so in an effective, responsible, low-cost way. Business underwriting was once such a function, but it entered a deep decline during the mortgage boom, if not before. Otherwise banks serve mainly to consolidate control and power, and they support this by exacting tribute, in the form of interest, from their borrowers. ...From a social standpoint, this is predation: no net benefit to anyone outside the banking sector comes from it.

Perhaps the country would be better off without its big banks. The basic functions of banking for most of the public - deposits, payments, credit and debit cards - could be handled by a low-cost public facility, perhaps run by cities or states at municipal pay scale or by the postal service. Smaller and regional and cooperative banks could grow into the work of business lending and of sorting good from weak household risks. Since executives of small banks are paid on a less lavish scale, the reduced cost of the financial plutocracy would be a social savings. There is no guarantee that these changes would bring financial stability: small banks can run in herds, and given the experience that bankers have acquired in distributing and hiding risk and fraud, there may be no solutions in the computer age to the dysfunctions of finance. But a decentralized system with smaller top-level units, less powerful bankers, and stronger controls could not be a worse bet than the system that exists now.

Galbraith, of course, writes of banking in the United States. Thanks to people such as Paul Martin, Canadian banks were reined in, held in check, when they lobbied for permission to leap into American style Casino Capitalism that ruined so many banks in the US and Europe during the sub-prime mortgage bubble.

Canada escaped the American contagion - barely - because the crash came before Stephen Harper could remove Martin's prudent constraints. However, unlike the States, our big banks have become the largest corporations in Canada and they've grown immensely profitable while generating very little no no economic activity to benefit the country.

And banks may now be playing a detrimental role in Canada. Some speculate that behind Trudeau's pipeline fetish is concern that Canada's banks are so heavily invested in the soon to be stranded asset, bitumen, that not pushing the bitumen trade could have a devastating impact on the Canadian economy.

It's like riding a tiger. Great fun until you fall off. The bitumen barons have Canada in a real jam and, the recent Kinder Morgan ultimatum that sent Morneau scrambling to Texas, hat in hand, suggests they know it and won't hesitate to play hardball with the Liberal government.

Canada's chartered banks are supposed to serve the country, not the other way around, and yet, by their very size, they may now be dictating government policy. They've grown too big for our own good. Perhaps it is time to put them to pasture.

How sound can a nation's economy be when it is dominated by corporations that produce nothing?

National Observer Slams Canada's Business Writers for Media Malpractice

...it is not the media’s job to assume that opinions without evidence are equal in worth to opinions which are fact-based. Or to assume that the scale and decibel level coming from oilsands advocates is proof of their cause. A noise meter is not evidence. Or to assume that the voices of opposition should be discounted as, at best, merely emotional and at worst, severely irrational.

Paul McKay, writing in the National Observer, takes Canada's business journalists and a lot of their fellow journos to the woodshed, accusing them of "media malpractice."

He begins with the story of an American school teacher, Ida Tarbell, who, in 1902, broke into journalism with a 19-part investigative series that set fire to the industrial barons and their monopolies.

Tarbell’s target was America’s biggest petroleum conglomerate, Standard Oil. She exposed, installment by installment, the brutally ruthless tactics (including serial Congressional bribery) the corporate colossus used to gain and maintain monopolies for shareholders and its galvanic founder, John D. Rockefeller. It enlightened the public, humbled the high and mighty, and ushered in a ‘trust-busting’ progressive U.S. President who ramrodded federal anti-monopoly laws through a simultaneously amazed, apoplectic Congress. Standard Oil and the Rockefellers never saw Tarbell, a former schoolteacher, coming. No one had dared to ask the questions she did, let alone print them.

Soon, fellow ‘muckraker’ reports exposed corruption and monopoly abuses in Chicago meatpacking plants, rapacious railroad barons, municipal graft, laboursafety violations and union-busting, and appalling conditions in public insane asylums. One investigative report revealed that the owner of the worst slum tenements in New York City was the richest church in America.

The best of these journalists used an alloy of evidence and audacity. They dared to ask questions others were too lazy, inept or timid to ask. Our profession has its heroes – like Emile Zola accurately accusing the French government and military of knowingly convicting an innocent officer of treason. Or Woodward and Bernstein daring to ask if a troupe of third-rate, bungling burglars might be henchmen for President Richard Nixon. Or, more recently, Michael Lewis exposing breath-taking ‘big shorts’, rogue hedge funds and algorithm flash trading. 

But a history of business journalism proves these figures are an exception. It is notorious for failing to detect bubbles before they burst with calamitous consequences.

...In Canada, our business press only belatedly dug up the real dirt on companies like Henry Pellatt’s Home Bank after its 1923 collapse, Viola Macmillan’s 1964Windfall mining scam, the fatal coal methane levels at Clifford Frame’s Westraymine, the $6 billion Bre-X swindle (which was exposed after the chief prospector jumped from a helicoptor with false, salted samples) and the collapse of apparently venerable Nortel Networks in 2009. 

In fact, the leading figures behind these spectacular failures were often lauded by the business press right up to the moment they became disgraced. The evidence of imminent demise was lurking, but nobody went looking for it. None dared ask tough questions. They did not do their job.

And now their failure turns to bitumen and pipelines and the alchemy of trying to conjure convenient facts out of thin air.

Which brings us to Canada’s bitumen bubble, and missing-in-action media coverage, which amounts to malpractice. 

In the days following Kinder Morgan’s ultimatum that it would jettison its planned Trans Mountain oil pipeline and forsake Canada unless it gains a clear and certain path to final approvals by May 31, a collective wail of lamentations ensued from oil companies, the pipeline manufacturers, the Alberta premier and Opposition leader, the Prime Minister and his senior cabinet members, the Canadian Association of Petroleum Producers, and major banks. This is natural and fitting, and so is media coverage of their collective fury and resolve to avert that ultimatum. It is a big story. It needs to be covered.

The questions that go unasked.

In my view, Canada’s mainstream business news platforms (with a few stellar exceptions) have failed in their responsibility to make facts and evidence the cornerstone of their oilsands coverage. I routinely read the business sections of the Globe, Toronto Star, Edmonton Journal, Calgary Herald, Vancouver Sun,National Post and Financial Post. I scan BNN daily and the political panel shows of CBC and CTV.

To my knowledge, no one has asked these four key questions: 

What proof is there that Asian refiners have signed contracts to purchase vast volumes of Alberta raw bitumen for decades to come? If these do not exist, there is no demand.

What proof is there that Asian refiners are willing to contractually commit to a much higher price than U.S. refiners will pay for raw Alberta bitumen? If such contracts do not exist, there is no price certainty to support oilsands expansion. 

What proof is there that Alberta bitumen ranks high in global comparisons of oil quality, price, and ocean supertanker access, shipping costs and speed? 

Which private Big Oil players have recently placed big bets buying new, undeveloped oil sand properties, which would underpin Alberta’s expansion plans? 

Tellingly, the working assumption seems to be that such business case certainty must exist, even though there is no evidence of it. That there isn’t a bitumen bubble, because no reporters have dared to ask if Alberta’s oilsands ambitions really amount to a bright and shining lie. Just as generations of children don’t press their parents very hard about that pony they expect to get for Christmas and how it will get down the chimney. The answer might be unthinkable. 

But this media malpractice is not just a sin of omission, of failing to ask tough questions. It is a sin of commission when business journalists or media personalities lob only softball questions to oilsands advocates. They print or broadcast assumptions masking as facts, and confuse what many Albertans would like to happen with what is likely to happen because of inconvenient facts.

Negating science. Science, what science? Never heard of it.

In a month of media coverage about the escalating battle about the Kinder Morgan pipeline, not once have I seen a climate scientist interviewed about the risk greatly expanded bitumen exports might pose to people and the biosphere. In effect, science (the most reliable source of facts) has been banished from the debate stage, leaving provincial economics and national politics to dominate every discussion. How convenient. 

This has partitioned the parameters of debate, and the very vocabulary used. The fate of Alberta future oilsands and pipeline projects gets confronted not by respected climate or marine scientists, but video clips of Left-Coast environmentalists with a placard in one hand and a latte in the other. Bitumen with a demonstrably deadly chemical signature becomes a benign ‘product’ or ‘resource,’ barely different from wheat, lumber or potash. 

Yet the world’s top climate scientists have explicitly warned that Alberta’s oilsands amount to a delayed-fuse ‘carbon bomb’ our biosphere cannot tolerate. Top international economists, led by the esteemed and astute Lord Nicholas Stern, have identified those same bitumen deposits as ‘unburnable’ stranded assets. To date, these scientists and economists have not issued warnings about the perils of Canadian potash exports. 

Once adopted, these unchallenged oilsands euphemisms take on a force of their own and foster new imperatives. Of course, Albertans should be outraged if they can’t get their ‘resource’ to market. Of course the federal government should step in to protect the sanctity of equitable, inter-provincial trade. Ergo, the Kinder Morgan pipeline expansion becomes a matter of national interest, where supporters are patriots, opponents are almost treasonous and any province which defers approvals until more science is completed is worthy only of being ‘nation-shamed.'

A Press that goes along to get along asks few questions.

...the business press readily reported alarming forecasts that western Canada would lose untold billions in future wealth should the two new pipelines not get built. Those forecasts of forfeited wealth came from major Canadian banks which assumed, without providing evidence, that exported bitumen could fetch much higher prices from Asian refiners than U.S. counterparts now pay. The banks did not disclose that they also have billions in outstanding loans to oilsands and pipeline projects. I saw no media reports or commentators that called out this brazen conflict of interest. 

In an equally glaring case, former Bank of Canada chief Mark Carney (who now heads the Bank of England and is a perennial newsmaker), warned on behalf of a consortium of central banks that global corporations involved in fossil fuel financing or production must assess and explicitly warn their shareholders about ‘stranded asset’ risks in a climate-constrained world. It fell on deaf ears at business news desks in Canada. 

But last week, Europe’s largest bank, HSBC, joined other global banks, insurance pools and pension funds in declaring it would no longer risk loans to new oilsands projects, or planned pipelines like the Trans Mountain expansion and Keystone XL. That may amount to a final, fatal bullet aimed squarely at Alberta’s bitumen bubble.

What's that blur? Oh, that's Notley and Trudeau and McKenna spinning like Dervishes.

For failures to unravel Looney Tunes logic, candidates abound. Alberta premier Rachel Notley, Prime Minister Justin Trudeau and federal environment minister Catherine McKenna blithely claimed that ramping up carbon-laced bitumen exports would garner new cash to help pay for low-carbon investments in Alberta and B.C. marine safety upgrades. And that Canada could meet its solemn Paris pledge to reduce national carbon emissions while two oilsands provinces go totally rogue. Alberta touted its vaunted carbon tax on large emitters as a sign of climate leadership, but all future raw bitumen exports are exempt. Justin Trudeau’s Liberals promised a reform of national environmental assessment laws, then exempted oilsands and pipelines in the draft regulations.

...But what if this red-hot rhetoric, and a potentially ruinous breakdown in the bonds of Confederation, are actually warning signs that a bitumen bubble is beginning to crack open? Last year, Big Oil players dumped $22.5 billion in oilsands assets. If that is accurate, it is perhaps too much to expect politicians from Alberta and Ottawa to question the future their reputations and political fortunes rest on. 

But when the stakes are so high, and when there are whiffs of panic, extortion and even all-out political warfare in the air, it is precisely the time business journalists should be asking tough questions and demanding answers. Where are the Asian contracts to buy vastly more raw bitumen for decades? What price have they promised to pay? How does that square up with competing, global oil supply rivals? Who has prepared a serious global oil market analysis? 

That is our job. It is our professional, perhaps even patriotic, duty to do it well.

It seems odd that this story begins with an American schoolteacher, Ida Tarbell, and ends with a Canadian schoolteacher, Justin Trudeau. I guess they just don't make them like they used to.