(Bloomberg) -- Canada’s precarious relationship with its vast oil riches flared up again Thursday after a federal court struck down Prime Minister Justin Trudeau’s regulatory approval of a key pipeline, reviving fears about the country’s ability to get its resources to market.
Indigenous groups and the City of Vancouver mounted the legal challenge to the Trans Mountain pipeline, and while the government pledged to press ahead the ruling highlights the extraordinary political, legal and social battles that a divided Canada has faced for years in developing the world’s third largest crude reserves.
Trudeau’s Liberals have staked much of their legacy on forging a grand bargain on resources. The prime minister’s Conservative predecessor, Stephen Harper, was seen as overly deferential to the oil industry and dismissive of opponents. Trudeau, however, has sought to win backing for resource development by being more pro-environment and supportive of indigenous concerns -- seeking what he calls a “social license” -- while also purchasing the troubled C$4.5 billion ($3.5 billion) project from Kinder Morgan Inc (NYSE:KMI). to make sure it gets built.
“Some of our reputation as a place to invest has been quashed” by the court ruling, former Saskatchewan Premier Brad Wall told BNN Bloomberg television. The decision raises questions of “what is enough” and “what is the process” for project approvals.
Growing Frustration
Finance Minister Bill Morneau was defiant. Speaking on BNN Bloomberg television after the ruling, he said the government remains committed to the pipeline. “We are going to be here as long as it takes to make sure the project gets done,” Morneau said. He declined to comment on how much of a delay the court ruling would cause.
Frustration with the political and regulatory process around pipeline approvals is beginning to boil over. The price for Western Canada Select crude fell to a $31 a barrel discount to West Texas Intermediate futures this year, the biggest gap since 2013. Three projects that could support prices aren’t scheduled to be fully operational until the next decade, including Trans Mountain, Enbridge Inc.’s Line 3 and TransCanada Corp.’s Keystone XL.
And for Canadian oil sands producers that are already weary of setbacks for massive projects like Keystone XL, deciding when to bank on a pipeline actually getting built is getting trickier, said Tudor Pickering Holt & Co. analyst Matt Murphy.
“Certainly everyone was pretty hopeful that these projects would come sooner than later, but they’ve all been approaching it with caution,” he said. “I think what they were waiting for was not approval, not shovels in the ground, but getting steel in the ground.”
The Federal Court of Appeal ruled Thursday the regulatory review of the Trans Mountain expansion was “impermissibly flawed” because it excluded project-related tanker traffic. In addition, the court also found the government failed to fulfill its legal duty to consult indigenous people.
A redo of consultations could mean the restart of at least an 18-month process, analysts say. The government has discretion to impose a timeline on the revised approval process.
“What’s likely to come next are significant timing delays and cost overrun, that will no doubt increase uncertainty around the ultimate fate of TMX,” Danilo Juvane, an analyst at BMO Capital Markets, wrote in a research note. He added the decision is a “decided negative” for the oil sands industry.
On top of the legal challenge the federal court ruled on Thursday, British Columbia is seeking a provincial Court of Appeal opinion on whether it can restrict the transportation of crude oil within its borders. Trudeau’s government argues the Pacific coast province is overstepping its powers.
Oil-Sands Exodus
As a result, confidence is waning in an energy sector that has faced a slew of headwinds -- including an easing of regulatory restrictions and lower taxes in the U.S. -- in addition to pipeline bottlenecks. The pinch has contributed to an exodus of foreign capital from the sector in recent years as international majors like Royal Dutch Shell (LON:RDSa) Plc and ConocoPhillips (NYSE:COP) sold Canadian assets.
The numbers show an industry that was once a magnet for capital is losing its appeal. Foreign companies withdrew a net C$8.2 billion from Canadian energy and mining assets over the past five quarters after piling in about C$130 billion during the previous decade.
Thursday’s ruling threatens to exacerbate those issues and rekindle fears that regulations have killed the sector’s ability to compete, according to Tim McMillan, president of the Canadian Association of Petroleum Producers. “It reinforces a negative impression that the world has of us, when even the government and the regulator aren’t able to understand our complex regulatory system,” he said.
