Oil Cutoff Threatened as Canada Provinces Feud Over Pipeline

(Bloomberg) -- Canada’s internal fight over Kinder Morgan Inc.’s Trans Mountain pipeline escalated as the nation’s top two oil-producing provinces threatened to cut off fuel shipments to British Columbia.

Alberta on Monday introduced legislation allowing it to halt exports of oil and gas to B.C., and neighboring Saskatchewan said it planned to follow suit, ramping up pressure on coastal British Columbia to drop its opposition to the pipeline expansion. Alberta Premier Rachel Notley said she doesn’t expect to have to use the new powers, but wants the province to have every available tool in its fight.

“Investor confidence, not only in the energy sector, but frankly across our economy, is at stake,” Notley told reporters in Edmonton, Alberta, on Monday. “We are very committed to putting pressure on B.C. to come around and focus on what this pipeline actually means.”

Saskatchewan Premier Scott Moe said his government will introduce legislation in the coming days to join Alberta in potentially restricting shipments to B.C.

“If fuel tanks in British Columbia start to run dry because Alberta has turned the taps off, it won’t be Saskatchewan filling them up,” Moe said on Twitter.

A halt to energy shipments would have ripple effects across western North America. Drivers in B.C. could face gasoline shortages and soaring prices, while Canada’s second-busiest airport in Vancouver would suffer from higher jet fuel costs. Alberta’s energy producers would also feel the pain, losing a key market for their crude and refined products.

“The economies of B.C. and Alberta are arguably the most interdependent of any two provinces in Canada," said Ken Peacock, the chief economist at the Business Council of British Columbia, in a report last year.

Kinder Morgan halted work on the project a week ago and set a May 31 deadline for a resolution to B.C.’s opposition, which includes a court challenge and regulatory hurdles. The expansion’s cancellation would be a major blow to Alberta’s oil industry, which has been dogged by lower relative prices for its crude, brought on by a lack of adequate pipeline space.

The existing Trans Mountain system is a major conduit for both crude oil and refined products heading to B.C. The pipeline can carry about 300,000 barrels of oil a day, and the expansion at the heart of the dispute would nearly triple that figure to 890,000 barrels.

B.C. households spend an average of C$1,777 on gasoline per year. A ban by Alberta might raise the price at the pump by 30 cents a liter, which could increase the cost of driving a vehicle by about C$500 a year, according to Bryan Yu, deputy chief economist at Central 1 Credit Union in Vancouver.

Slowing Spending

“Households will eat these prices,” he said in an email. “Real consumer spending growth would slow, while businesses would also need to pass through higher costs.”

Kinder Morgan’s existing Trans Mountain pipeline supplies Vancouver and the surrounding region with as much as 60 percent of its refined products, as well as the area’s only refinery, the 55,000 barrel-per-day facility owned by Parkland Fuel. The refinery accounts for a quarter of B.C.’s transportation fuel and "substantially all of the crude oil" it sources comes from Alberta via Trans Mountain. Parkland also supplies 40 percent of the jet fuel at the Vancouver airport.

B.C. struck back at Alberta on Tuesday, saying that cutting off oil shipments would be illegal. Attorney General David Eby threatened to sue the government of Alberta and challenge the bill in court as unconstitutional.

“We think that they’re very unlikely to use this, given the analysis, and we think they know it,” Eby said. “It is a bill for political purposes only.”

Kinder’s Canadian unit, Kinder Morgan Canada Ltd., declined to comment on the Alberta legislation. The stock rose for a second day, adding 1.7 percent to C$17.66 in Toronto.

‘Bit Nervous’

Notley acknowledged that Alberta’s oil industry is “a bit nervous” about the legislation and said Energy Minister Marg McCuaig-Boyd has been speaking with companies leading up to its introduction. The government will listen to the industry and work with it to ensure that there are “no surprises,” she said.

Alberta also is receiving help from the federal government. Prime Minister Justin Trudeau on Sunday repeated his pledges that the pipeline will get built and said he’d instructed Finance Minister Bill Morneau to start a “formal financial discussion” with Kinder Morgan to hedge the project’s risk. Alberta has previously floated the idea of taking a stake in the project or buying it outright, and Trudeau said on Sunday that he was preparing legislation to underscore federal jurisdiction over the line.

The Canadian Association of Petroleum Producers supports the efforts by Alberta and the federal government, President Tim McMillan said in an interview. While halting oil shipments to B.C. would present the industry with some short-term challenges, the legislation appears to be designed to minimize the impact to Alberta’s energy producers, he said.

“The time for discussion has concluded; it’s time to build the pipeline,” McMillan said in an interview. “The fact that people are moving earnestly and with direct action, we take as a real positive.”

--With assistance from Robert Tuttle and Greg Quinn

To contact the reporters on this story: Kevin Orland in Calgary at korland@bloomberg.net, Natalie Obiko Pearson in Vancouver at npearson7@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, David Scanlan

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