Challenging times ahead but pipeline should be built: Masson

Energy project development and governance, marketing and finance veteran believes the Trans Mountain deal can benefit all parties

Richard Masson has over 30 years of leadership experience in energy project development and governance, energy marketing, and finance. He has a consulting practice at Planning Solutions and was formerly CEO of the Alberta Petroleum Marketing Commission, as well as an executive with Nexen and Shell, and director of oil sands policy and development with Alberta Energy. He is vice-chair of the board of governors of the University of Lethbridge, a first vice-chair of the World Petroleum Council-Canada and was recently appointed an executive fellow of the University of Calgary School of Public Policy.

Richard Masson

Calgary’s Business: While the federal government has jumped in and is taking the Trans Mountain pipeline project off Kinder Morgan Canada’s hands for $4.5 billion, how likely is it that it will be able to sell the project to other investors in the future?

Masson: Kinder Morgan decided the risk of building the project was too great for the return it expected to get because of the risk of court challenges from governments, environmental groups and aboriginal groups, as well as the risks of project delays and cost escalations from the protesters who vow to stop the pipeline. The federal government offered that it would pay for any costs due to politically-motivated delays but that was not enough to satisfy Kinder Morgan.

As part of Canada’s purchase, Alberta said it would provide up to $2 billion for extraordinary costs but it hasn’t said publicly what costs would qualify. So at this point it is unlikely any buyer would be comfortable enough to buy the project from the federal government. However, if the federal government can get the project built without cost increases or schedule delays, it becomes much more likely that a buyer can be found at a good price.

CB: Was $4.5 billion a reasonable price to pay by the government for Trans Mountain?

Masson: The $4.5-billion purchase price can be split into $1.2 billion already spent on the expansion project of its $7.4-billion budget, and $3.3 billion for the existing 300,000-barrel-per-day Trans Mountain pipeline that has been operating successfully between Edmonton and Vancouver for over 60 years. Based on the reaction of Kinder Morgan’s stock price, it appears that investors think that the federal government paid about the right amount. But whether Canada got a good deal will depend in large part on if the project can be completed on time and on budget over the next couple of years.

CB: Some people wonder if this pipeline expansion will ever go through. What do you think?

Masson: The pipeline is very necessary for Canada to receive the best price for its oil production, since it provides access to world markets for 600,000 barrels per day of additional production. So there is a strong commercial motivation to get it built. Higher prices for our oil also increases federal and provincial income tax revenues and provincial royalties, so there is a strong government incentive to get it built. Canada’s ownership of the pipeline demonstrates how serious the federal government is to see this pipeline completed and operating. So I believe that it will be completed, but I expect there will be challenging times through the construction phase as protesters attempt to block construction.

CB: How important is the Trans Mountain project to Alberta’s economy going forward?

Masson: Alberta produces over three million barrels per day of oil, of which about 90 per cent comes from the oil sands. When we sell the heavy oil, it should get a price that is about $12 per barrel below the West Texas Intermediate (WTI) oil price to account for transportation and quality differences – that would be a ‘fair’ price reflecting world prices. This summer, the discount will be in the range of $20 per barrel, and last winter it was $25 to $30 per barrel. This means we are selling our oil to U.S. refiners at a low price, and it has been calculated these discounts cost the Canadian oil industry $10 billion a year in lost revenues.

Since the federal income tax rate is 15 per cent, this results in missed federal revenues of $1.5 billion per year, and for Alberta between its corporate income taxes and royalties, these losses could be in the range of $2 billion per year.

Lower revenues mean less cash flow is available to companies to reinvest in new projects that create jobs and support businesses, and this weakens our overall economy

So Trans Mountain is very important as it will help to ensure that Canada gets world prices for its oil production, helps improve economic activity, and helps provide government revenues to support the services we count on.

CB: Pipelines are a controversial subject and face tough opposition from environmentalists. What’s your response to people who say they are not safe?

Masson: Pipelines have been moving oil, natural gas and refined products for well over 100 years all around the world. In Canada, there are tens of thousands of miles of existing pipelines. The Trans Mountain pipeline was built more than 60 years ago and has operated safely since then. The only significant spill occurred when a backhoe doing work in the City of Burnaby accidentally punctured the pipeline, resulting in oil flowing on homes that had been constructed near the pipeline.

While any spill can have a big local impact, there are many ways to clean up and remediate the spill.

Canada’s pipeline industry strives to be the best in the world at safety and environmental performance, and employs the latest technologies. It is vigorously regulated by the National Energy Board – in fact, there were 157 conditions imposed on the Trans Mountain expansion by the NEB as part of its regulatory approval process.

So while it is impossible to say a spill will never happen, the track record is very strong and there are continuous efforts to improve safety by the industry.

– Mario Toneguzzi

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