KMI Kinder Morgan Inc

Court ruling delivers blow to government as it seeks to bolster country's oil exports

By Kim Mackrael and Paul Vieira 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 31, 2018).

OTTAWA -- A Canadian appeals court on Thursday annulled regulatory approval of the Trans Mountain pipeline expansion project, dealing a stinging blow to the country's Liberal government after it agreed to purchase the corridor from Kinder Morgan Inc. in a multibillion-dollar deal.

The court ruling is the latest impediment in a yearslong, politically fraught effort to expand the amount of landlocked crude oil that can be moved from the province of Alberta to the Pacific Coast, where it can be loaded on tankers and transported to faster-growing economies in Asia. The bulk of Canadian crude is shipped to the U.S.

Canadian Finance Minister Bill Morneau said Thursday the court ruling doesn't change the government's plan to buy the Trans Mountain project for 4.5 billion Canadian dollars (US$3.5 billion). He said the deal, which was first announced in May, could close as early as Friday.

"As a government, we can manage risks that, in these particular circumstances, would have been difficult for any private-sector company to bear," Mr. Morneau said. He added that the government intends to sell the project to a private-sector buyer in the future.

The Trans Mountain project, which envisages nearly tripling the amount of western Canadian crude moved along the corridor, has faced stiff opposition in Canada's westernmost province of British Columbia, where environmentalists, indigenous groups and lawmakers say it puts the country's pristine Pacific coastline at risk.

The government has argued the project is vital for the country's economic future because it would alleviate a bottleneck in oil transportation that has made it difficult to get Canadian crude to offshore markets.

The unanimous decision, from three judges on Canada's Federal Court of Appeal, found an approval order issued by Prime Minister Justin Trudeau in November 2016 was flawed and must be reviewed. Kinder Morgan said Thursday that, because of the ruling, it is taking steps to suspend construction on the 710-mile pipeline expansion, less than a week after the project began.

In its decision, the court said Canada failed to adequately consult with indigenous groups on the pipeline project and relied on a study that didn't fully consider the impact of increased oil-tanker traffic on the environment. Canadian law requires the government to consult and accommodate indigenous groups on developments that might adversely affect them. The court said Canada needs to do additional consultations with indigenous groups.

The court decision was in response to lawsuits filed by indigenous groups, environmental advocates and local British Columbia governments looking to overturn Canada's regulatory approval.

Canada failed "to engage, dialogue meaningfully, and grapple with the real concerns of the indigenous applicants so as to explore possible accommodation of those concerns," the appeals court said.

Chief Maureen Thomas of the Tsleil-Waututh Nation, one of the applicants in the court case, said the decision justifies their yearslong fight. "We have made it clear that this project represented a risk too great to accept, and the rejection of these permits today is a big win for everyone who loves this coast and this inlet."

Greenpeace campaigner Rachel Rye Butler said the court decision was a "major win" for indigenous groups and the environment. "It's time to pull the plug on this project once and for all," she said.

The decision is a blow to Mr. Trudeau, who has made stronger environmental protections and reconciliation with indigenous groups central tenets of his government's mandate.

As it happens, the court decision emerged on the same day Kinder Morgan shareholders approved the sale of the pipeline to Canada's government during a vote at a special meeting Thursday.

Share prices of Canadian oil producers declined Thursday as investors considered the implications of the appeals-court decision. "Any further delays to this important project will only serve to harm the Canadian economy by limiting access to global markets for the country's oil exports and depriving governments of additional tax and royalty revenues, " said Al Reid, general counsel for Calgary-based oil producer Cenovus Energy Inc. Cenovus shares fell 2% in Toronto on Thursday.

The court's decision "is a material negative, if not a death blow" for the pipeline project's success, GMP FirstEnergy analyst Ian Gillies said. The federal government will have a harder time selling the project as a result of the court's ruling, he said, and any timeline for construction that was previously established is now obsolete.

The court's decision indicated Canada's energy regulator, the National Energy Board, has to review its earlier recommendation to cabinet that Trans Mountain should proceed. Cabinet could specify the terms and conditions, and time frame, for a new review.

--Vipal Monga in Toronto contributed to this article.

Write to Kim Mackrael at kim.mackrael@wsj.com and Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

August 31, 2018 02:47 ET (06:47 GMT)

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