Why Kenney is having a rougher ride than Trudeau with his pipeline purchase

Alberta Premier Jason Kenney and Prime Minister Justin Trudeau rarely see eye to eye, often sparring over a variety of issues from financial and economic policy to health care and the environment.

Two peas in a pod, they are not.

Still, the two share a unique historyin that their respective governments both tookownership stakesinmultibillion-dollar oil export pipelines. The deals are similar in nature and intent, but so far, it's a tale of two pipelines with very different prospects.

For Trudeau, the project was the Trans Mountain expansion, which would carry crude from Edmonton to the Vancouver area. Developer Kinder Morgan halted development in April 2018 in the face of legal and regulatory challenges, in addition to political opposition in B.C.

One month later, a deal was struck for the federal government to become the sole ownerin an attempt to keep the project from flatlining.

The cost? $4.5 billion.

Alberta's ownership stake in the Keystone XL pipelinethat would stretch south to Nebraskacame together last yearas Calgary-based developer TC Energy also faced considerable uncertainty. Not only were court challenges south of the border holding upthe project, the U.S. presidential election posed a significant risk. President Donald Trump was a key ally of the project, but Democratic challenger Joe Biden was a vocal critic.

The Alberta government became an investor to spur TC Energy to move ahead with construction of the pipeline.

The cost? $1.5 billion and another $6 billion in loan guarantees.

This week, the future of Keystone XL is murky, at best. Biden, who will be inaugurated on Wednesday,plans to pull the presidential permit for the pipeline during his first day in officeas part of a slew of executive orders to reverse Trump policies.

Meanwhile, construction continues on the Trans Mountain expansion. Since Ottawa took ownership, there have been many hurdles, but the project is progressing.

Trudeau and Kenney both set out to achieve the same thing. For several years, there has been a need for more oil export capacity out of Alberta, a situation causing oil producers to take a discount on their product, which also results in fewer royalties and tax revenue for the provincial and federal governments.

Oil production has continued to increase almost every year, outpacing growth in export pipeline capacity.

It's the same export constraint dilemma that prompted Alberta Premier Rachel Notley in 2019 to commit $3.7 billion to lease thousands of rail tank cars from CN Rail andCanadian Pacific Railway, another investment with considerable financial exposure.

Both pipeline projects may have been shelved or outright cancelled if not for the two governments stepping up, since the private investment community wasn't willing to accept the risk both projects presented.

The key difference between Trans Mountain and Keystone XLwas in how much control each government had to manage that uncertainty. Benjamin Thibault, an environmental consultant in Alberta, describes it as the indemnification of political risk.

In the case of the Trans Mountain expansion, the project faced legal and regulatoryhurdles resulting from a lack of proper consultation with Indigenous groupsand an inadequate environmental assessment. After purchasing the pipeline, Ottawa had tobridge thosegaps or take the financial loss.

WATCH | Kenney's message for Biden:

Alberta Premier Jason Kenney urges incoming U.S. president to avoid 'rash decisions' about Keystone XL

4 years ago

Duration 1:30

Plan to cancel Keystone Xl pipeline will impact Canada-U.S. relations, the Canadian economy and tens of thousands of jobs, says Alberta Premier Jason Kenney.

However, theissues with Keystone XL remain out of the hands of the Alberta government. There is little to nothing Kenney can do to influence the ongoing legal issues south of the border. More importantly, trying to change the mindof the incoming administration, at this point, seems almost futile.

Not onlyis Trans Mountain in the federal government's jurisdiction, but Ottawa has more regulatory power than a provincial government.

If a project is valuablebut stalled because of investor risk,governments "can clear that hurdle by just taking the equity stake to move the project right away," said Thibault.

"But the question is,how risky is that to the public investment itself? In the federal government's [Trans Mountain] case, not especially risky because they have a lot of control over the outcome. In the provincial government's [Keystone] situation, very risky because you have very little control over the outcome."

Aside from the issue of control, there are few differences between the projects. The Keystone XL pipeline would be longer, but the Trans Mountain expansion must navigate complicated terrain through the Rocky Mountains.

Both face similar environmental opposition based onthe risk of a spill contaminating waterways, and concern that such projects will encourage and prolongNorth America's dependence on fossil fuels that contribute to climate change.

Change at the top

Kenney was aware of the political risk and he had a plan.

He appealed to pro-pipeline American governors and unions for help, tried to get as much of the pipeline constructed as possible before the Nov. 3 presidential election, and vowed to use every legal means to protect the investment.

Alberta's government also recently approved more than$1 millionto hire influentialCapitol Hilllobbyists and communicationexperts to help win support in Washington for the pipeline and other trade interests south of the border.

Biden and his team have repeatedly said they'll scrap the project, a move welcomed by environmentalists who say Keystone is a threat to the fight against climate change

Last weekend, TC Energy announced the project wouldachieve net-zero emissions across its operations "when it is placed into service in 2023."

Kenney brought the money to the table to help Keystone XL, but there was little else he could provide. Trudeau, on the other hand, had many levers to pull with the Trans Mountain expansion, especially considering his government's control over the CanadaEnergy Regulator, includingthe ability to change how such infrastructure projects are assessed.

If Biden pulls the Keystone XL permit this week, as expected, the Alberta government will likely have to take a loss on the pipeline and write-down the investment.

"I don't really understand how people could be surprisedconsidering Biden has been promising this since May," said James Coleman, an associate professor of energy law at Southern Methodist University in Texas.

Whether this is the end of the road depends on whether investors "stick by" the project until the next shift in political leadership, he said.

The next move

An analysis by RBC Capital Markets on Sunday said if Biden rescinds the presidential permit,thebest outcome for TC Energy's stock would be for the company to walk away from the project.

Kenney is urging the Biden team to be open-minded and respectful to Canada, but he hasalso said this might end up being a legal battle.

With its ownership stake in Keystone XL, Alberta would at least have a seat at the table for that courtroom bout.

There arealso contingency plans in place to begin liquidating Keystone XL inventory to recoup some costs.

"If the project ends, there would be assets that could be sold, like, for example, enormous quantities of pipes," Kenneysaid on Monday.

Meanwhile, Trudeau still has buyers lined up to purchaseTrans Mountainwhenever he chooses to cash in theinvestment.