Justin Trudeau’s Kinder surprise

This morning Minister of Finance Bill Morneau, alongside Minister of Natural Resources Jim Carr, announced that the Government of Canada would be buying the Trans Mountain Pipeline from Kinder Morgan for $4.5 billion in a deal to be finalized by August 2018. The Government of Canada will operate the existing pipeline while financing and managing the construction of the pipeline expansion project. Kinder Morgan previously estimated that the cost of the expansion would be over $7 billion, bringing the total potential government spending on this project to approximately $12 billion.

Minister Morneau made it clear, however, that the Government of Canada would not be a long-term owner of the project, but would seek to transfer the asset to other potential owners once it is completed. He argued that the project continues to be in the national interest and must move forward on schedule so that workers who depend on the project for their income can get to work.

The risk

This solution is not without peril for the government. First, and perhaps most important, it is rare that a government decides to nationalize an energy project in Canada because of continuous opposition and foot dragging from a provincial government in addition to environmental and First Nations’ opposition. There is a danger that this sends a message to foreign investors that major resource projects can only be built in Canada if they are owned by the feds. This could exacerbate the drop in investment in Canada’s oil patch that has occurred over the last few years.

The government also faces criticism from across the political spectrum. The Conservatives reacted by arguing that taxpayer money has only been required because the Liberals created political uncertainty and “chased away investment.” Moreover, pipeline opponents, including environmental groups and the B.C. government continue to oppose the pipeline. This morning B.C. Premier John Horgan said his government will continue their reference case against the Kinder Morgan pipeline expansion.

It will be difficult for the Liberals to continue to position themselves as a “green” government while managing and financing the construction of an oil pipeline. The government therefore faces great political pressure on both sides, from the left in B.C. and Quebec and from the right in Alberta and Saskatchewan.

Potential upside

However, the government may not have had much in the way of options. We have long believed that this pipeline represented the toughest political issue for Prime Minister Trudeau to face in this mandate. The Liberals promised to be a government that would tighten environmental regulations but would also get pipelines built. This has raised conflicting (and sometimes mutually exclusive) expectations on both sides of the pipeline debate. Through it all, the government has been adamant that this pipeline would be built, and they appear to have run out of other options.

The flip side to all this is that with high risk comes reward. The move to nationalize the project is bold and fraught with risk, but Prime Minister Trudeau is demonstrating that he is willing to make tough decisions in order to keep his promises. If the government succeeds in getting the pipeline built, he can say to Canadians that he got the job done and delivered for the economy and the environment. This would allow the Liberals to position themselves as the moderates between those who only care about the oil industry and those who would shut it down completely, positioning that could pay off politically.

Keys to success

In order to pull this off, however, the government will have to do two big things. First, and foremost, it will have to show progress on the pipeline while avoiding ugly scenes of protesters being pushed aside. Second, the government will now face immense pressure to repair its environmental bona fides by delivering more on the environmental file in order to shore up support, particularly in B.C. and Quebec.

Only time will tell if the risk the government is taking in nationalizing the Trans Mountain Expansion is worth the potential reward, but no one can say that the Prime Minister and his government aren’t taking bold action.