On Wednesday morning, Justin Trudeau’s government announced a new round of financial supports for the proposed Trans Mountain pipeline expansion, which would ship massive volumes of oil from Canada’s tar sands region to the British Columbia coast. This time, the government has promised to reimburse the Canadian subsidiary of Houston-based pipeline giant Kinder Morgan for any financial losses caused by the BC government’s opposition to the pipeline. Trudeau’s finance minister promised to reimburse the company for “unnecessary delays that are politically motivated”—suggesting, preposterously, that BC’s efforts to protect its coastline are nothing more than pointless posturing.
Clearly, Justin Trudeau’s government is hoping to reduce the financial risks that Kinder Morgan faces from the pipeline. But ironically, completing the Trans Mountain pipeline could also put Kinder Morgan’s shareholders at risk.
Clearly, the Trudeau government is hoping to reduce the financial risks that Kinder Morgan faces from the pipeline. And those risks are real: Trans Mountain faces a host of legal, political, and public relations challenges. In fact, Kinder Morgan Canada suspended all non-essential Trans Mountain spending in April, saying that it refused to put “put shareholders at risk” by moving forward with a pipeline that might later be canceled due to political clashes or legal setbacks.
But ironically, completing the Trans Mountain pipeline could also put Kinder Morgan’s shareholders at risk. In fact, Kinder Morgan’s shareholders may face even more financial risk from moving forward with the pipeline than from backing out now.
Much of that risk stems from the sky-high liability the company faces in the event of a serious oil spill.
The Trans Mountain expansion would nearly triple shipments of heavy oil to the BC coast, while roughly quadrupling oil tanker traffic through Vancouver’s busy Burrard Inlet. As a result, pipeline transportation would substantially boost the risk of oil spills—and, in the view of some, could make a serious spill inevitable.
A major oil spill would be an economic and ecological disaster for the lower mainland—threatening port operations, endangering the local marine ecosystem, and undermining Vancouver’s claim to being one of the world’s most livable cities. But under Canadian law, a pipeline spill could also spell financial Armageddon for Kinder Morgan.
Kinder Morgan faces $1 billion in liability, even if a spill is someone else’s fault.
Canada’s Pipeline Safety Act, which came into force in 2016, enshrined the principle of “absolute liability” for oil pipelines: the company that operates the pipeline is on the hook for up to one billion dollars in oil spill cleanup costs, even if the company itself is not at fault. There’s no need to prove that the pipeline operator erred or was negligent—if a spill occurs, the pipeline company has to pay. Period. No exceptions, no defenses. Earthquakes, vandalism, a numbskull with a backhoe—under Canadian law, these sorts of threats pose a major financial hazard to Kinder Morgan.
Lawmakers reserve absolute liability for inherently dangerous activities, such as keeping a rattlesnake as a pet: is the snake bites someone, the owner has no defense. So, in essence, Canadian law now recognizes that a pipeline is like a rattlesnake: at some point, it’s going to bite—or, rather, spill—posing serious health, safety, and economic hazards. And when it does, Kinder Morgan will be on the hook for up to a billion dollars of outlays for cleanup, no matter who or what caused the spill.
Kinder Morgan faces unlimited liability if a spill is their fault.
Canadian law also stipulates that pipeline companies face unlimited liability if they are found to be at fault, or if a spill results from the company’s negligence. The language of the law can’t be any clearer:
This enactment…confirms that the liability of companies that operate pipelines is unlimited if an unintended or uncontrolled release of oil, gas or any other commodity from a pipeline that they operate is the result of their fault or negligence
Unlimited liability means that there is literally no cap on the amount of money the pipeline company would have to pay in the case of a serious spill. If the courts find that the company was at fault or negligent, they could be on the hook for the full cost of cleanup, plus economic damages caused, plus any fines.
Oil spills aren’t cheap. Consider the Kalamazoo River oil spill in 2010, when a pipeline carrying heavy tar sands oil burst, releasing about 25,000 barrels of tarry petroleum sludge into a tributary of the Kalamazoo River in Michigan. Enbridge, the company that operates the pipeline, was found liable for the spill, and ultimately paid out US$1.2 billion, or roughly Can$1.5 billion, in fines and cleanup costs. That total included including a US$177 million legal settlement with the Department of Justice and EPA, along with an additional US$1.8 million in new fines just a few days ago for failing to inspect its pipelines, as required under that settlement.
But 25,000 barrels is a fairly modest volume of oil. By comparison, the Trans Mountain system, if completed as planned, would carry an average of 37,000 barrels of oil every hour. Also, remember that the Kalamazoo spill took place in a relatively unpopulated area; the river flows through Battle Creek, Michigan, with a population just north of 50,000. Metro Vancouver, in contrast, has nearly 2.5 million residents, and a much larger economy than greater Battle Creek—so a spill in Metro Vancouver might cause much more economic harm, and require a more complicated and expensive cleanup. Given real-world experience with cleanup costs, a major spill could easily cause billions of dollars of damage.
Canada’s regulations tie up Kinder Morgan’s liquidity to pay for oil spills
Canadian law allows the country’s National Energy Board to order pipeline companies to keep a lot of ready cash to deal with spills. Or, in legalese…
…to maintain the amount of financial resources that the Board specifies, including types that shall be readily accessible to the company and, if the Board specifies types of financial resources, it may specify the amount that the company is required to maintain under each type.
Based on that authority, the NEB ordered the Trans Mountain pipeline to maintain a Can$500 million line of credit with its parent company, Kinder Morgan, Inc., to pay for short-term cleanup expenses.
Kinder Morgan, Inc. didn’t like this arrangement. The company reported only US$264 million in cash and cash equivalents at the end of December. So to meet the NEB-mandated liquidity requirements, the company must tie up its own credit line. So the pipeline project petitioned NEB to let it meet the oil spill cash-on-hand requirement by using a separate credit facility arranged for Kinder Morgan’s Canadian subsidiary. But in April NEB denied this request, holding that the terms of the credit facility didn’t meet the Board’s standards. (We cover this issue at greater length here.) So for the time being, NEB has ordered the company to keep the original line of credit in place.
But the credit facility Kinder Morgan was intended to replace the inter-company guarantee was put in place well before NEB denied the switchover. Moreover, that guarantee carries an annual “standby fee” of 0.35% for any undrawn amounts. So Kinder Morgan Canada will still be paying a good chunk of money for a credit facility that it can’t even use to cover its NEB oil spill cash requirements.
Kinder Morgan is under-insured for a major spill
Not only did the NEB require Kinder Morgan to have Can$500 million in cash available at a moment’s notice, it also required the pipeline to carry an insurance policy of Can$500 million to cover the remainder of its billion-dollar absolute liability.
When the NEB posed some rather pointed requests for information about the nature of this insurance, the company said that it didn’t plan to purchase dedicated spill insurance for the Trans Mountain pipeline, admitting later that a dedicated policy would cost more than the company wanted to pay. Instead of dedicated insurance, the company would rely on a Can$150 million general liability policy for its Canadian and Puget Sound assets, along with a $600 million general liability insurance policy held by its parent company, Kinder Morgan, Inc. That latter policy covers the entirety of Kinder Morgan’s massive pipeline system—a system that spans the US, extends into Canada and Mexico, and includes more than 70,000 miles of pipelines. In short, the Trans Mountain pipeline would be covered by insurance, but that same insurance policy covers the entire company’s massive international operations. If the company faces more than one serious spill at a time, there’s no telling whether there will be enough insurance coverage for Trans Mountain.
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And if you’re crossing your fingers that the company will buy more insurance coverage if it completes the Trans Mountain expansion, don’t get your hopes up. According to the company:
The current $750 million coverage limit for the current Kinder Morgan insurance program reflects the amount available to Kinder Morgan as a whole based on the current market conditions…Kinder Morgan does not expect the coverage limit currently in place will change.
You also shouldn’t hold out hope that Kinder Morgan will boost its general liability coverage: insurance companies simply don’t want to cover oil spills. A 2010 report by the Congressional Research Service, the public policy research arm of the US Congress, found that there was likely less than US$1.5 billion in offshore oil spill insurance available worldwide. Just so, in a 2017 filing the company admitted that it “would not be able to secure liability coverage at $2 billion or $5 billion as the insurance market simply does not have the capacity to provide coverage at these levels.”
So in the case of a major spill, cleanup costs could quickly overwhelm Kinder Morgan’s limited insurance coverage. This means that Canada’s policy of unlimited liability for pipeline companies may turn Trans Mountain into a financial sword of Damocles hanging over the heads of Kinder Morgan shareholders. If the sword falls, the company will be saddled with massive cleanup costs, along with fines and legal fees. The pipeline backers have tried to argue that a “credible worst-case spill” for the Trans Mountain pipeline would cost only about Can$300 million, but the real world cleanup costs for the Kalamazoo River spill easily topped US$1 billion—suggesting that the company is badly underestimating the scope of the financial hazard that a serious spill poses to its shareholders.
By twinning Trans Mountain, Kinder Morgan may double its trouble
NEB has actually imposed two sets of financial requirements that apply to the Trans Mountain system. The first set, described above, applies to the existing 300,000 barrel-per-day pipeline, and requires Trans Mountain to maintain Can$1 billion in financial assurances for a spill: Can$500 million as a line of credit, and an additional Can$500 million in insurance.
But a second set of financial requirements applies to the Trans Mountain Expansion Project, which would add a new 590,000 barrel-per-day pipeline near the route of the existing one. When granting preliminary approval for this expansion, the NEB delineated 157 separate conditions, including even more stringent financial requirement for the expansion, including $1.1 billion in financial assurances for oil spill cleanup. (For details, see the National Energy Board Recommendation Report: Condition 121, Appendix 3, p. 476.)
As economist Robyn Allan, the former CEO of the Insurance Corporation of British Columbia, has exhaustively detailed, the NEB conditions specifically refer to the new pipeline, not the legacy pipeline. This means that the two pipelines together must carry financial reserve requirements totaling Can$2.1 billion: $1 billion for the existing pipeline, and an additional $1.1 billion for the new one.
Kinder Morgan will no doubt try to argue that the two sets of requirements should be merged into a single $1.1 billion financial setaside. But if the NEB sticks to its promises, it will require Trans Mountain to secure a total of $2.1 billion in cash and insurance for spills on the twinned pipeline system. That will require additional financial resources from Kinder Morgan, to go along with the increased liability that stems from the massive increase in oil volumes the company would move into BC’s Lower Mainland.
Make no mistake: if the Trans Mountain pipeline system suffers a major spill, Kinder Morgan, Inc. will do everything in its power to avoid paying for cleanup. By all appearances, the company has tried to structure its business to let its Canadian subsidiaries take the fall for a spill, while hoping that Canadian courts will find that the Houston-based parent company bears no financial responsibility for its subsidiaries’ messes. The Trans Mountain website, for example, singles out Kinder Morgan Canada as the “Responsible Party” for any spill along the pipeline right-of-way or at the Westridge terminal, where oil from the pipeline would be loaded into seagoing vessels.
But it also seems clear that Canada’s National Energy Board is in no mood to let Kinder Morgan shirk its financial duties. The Board has its hooks deeply into the parent corporation, both by requiring Kinder Morgan, Inc. to maintain its Can$500 million line of credit to pay for cleanup costs, and through the parent company’s general liability insurance policy for additional costs and damages. This clearly suggests that Canadian regulators—not to mention the province, municipalities, and businesses harmed by a spill—will go straight to the top of the corporate structure to collect for any additional spill damages that the credit line and insurance policies don’t cover.
This all should make Kinder Morgan shareholders nervous. A bad spill could carry cleanup costs in the billions, spelling bad news for a company with only US$600 million in general liability insurance and US$264 million in cash on hand. It’s no exaggeration to say that a major Trans Mountain spill—even if the company isn’t at fault—could turn into a financial crisis for Kinder Morgan. So for a company with a safety record as tarnished as Kinder Morgan’s, shareholders might well breathe a sigh of relief if the company were to pull out of the project entirely, glad to have those risks off the company’s books.
Thanks to Ahren Stroming, who contributed invaluable research for this article.