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Kinder Morgan Faces a Mountain of Issues in Canada

By Matthew DiLallo - Dec 30, 2014 at 8:10AM

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Kinder Morgan, Inc. faces an uphill battle to build the Trans Mountain Pipeline in Canada.

Source: Kinder Morgan.

Recently, Kinder Morgan (KMI 0.54%) won court approval to resume its preliminary work on the Trans Mountain pipeline expansion project in Canada. The company had been blocked by protesters that made it impossible for the company to work on the project. However, while the company won that battle it still faces a mounting number of issues as it seeks to triple the capacity of its oil sands pipeline, calling into question the future viability of this major project.

Opposition continues to mount
Kinder Morgan continues to face strong opposition to the Trans Mountain Pipeline expansion project. Not only is the company being opposed by environmental groups that don't want to see an expansion of oil production from the oil sands, but aboriginal groups and the mayors of both Vancouver and Burnaby are vocally opposed to the project. On that more local level, the issue that many residents of the Vancouver suburb of Burnaby have with the project is that it would run through the Burnaby Mountain conservation area as the line would go under the mountain.

Because of this opposition protesters are pulling out all the stops in order to halt progress on the project. This included protesters actually blocking crews from drilling two bore holes for preliminary work on a planned tunnel under the mountain. This was after protesters lost a previous court battle to block site work. While this road block has been removed, the company still must overcome its opposition in order to move forward and build Trans Mountain.

However, the local efforts to stop the project aren't the only battle the company is facing.

Questions on the economic impact
Another mountain Kinder Morgan must climb is the mounting doubt that the project will deliver on its economic promises. A new report by the Simon Fraser University's Centre for Public Policy Research and California-based consulting firm, The Goldman Team, is now disputing Kinder Morgan's claims of the project's economic benefits.

Source: Kinder Morgan.

The report suggests that Kinder Morgan's claim of 36,000 person-years of employment created during the pipeline's development is a vast overstatement. It sees that number coming in at just 12,000. Further, the report also disputes Kinder Morgan's claims of long-term job creation once the project is operational. Kinder Morgan projects that the project would result in 50 direct full-time jobs along with 2,000 indirect jobs from the spinoff benefits of the pipeline. However, the new report claims that those spinoff jobs are overstated as well as it sees just 800 spinoff jobs resulting from the pipeline.

In addition to that, the report forecasts much higher costs resulting from a pipeline spill than Kinder Morgan estimates. The company sees a worst case spill costing $100 million to $300 million, however, the report foresees that a spill in a heavily populated area could come with a multibillion-dollar price tag.

All that being said, the report isn't exactly independent research as the Goldman Group's client list is loaded with environmental and aboriginal groups. Further, its previous research has taken shots at the economic benefits of other oil sands pipeline projects like the Line 9 reversal and the Keystone XL pipeline. So, it's possible that the economic reality of the project will turn out to be somewhere between the numbers in this report and Kinder Morgan's numbers. Still, Kinder Morgan needs to prove the economic benefits if it wants to see the pipeline gain approval. 

Investor takeaway
Kinder Morgan's future isn't predicated upon the Trans Mountain pipeline expansion. The company's current project backlog stands at $17.9 billion, so it has plenty of growth opportunities should the $5.4 billion Trans Mountain project never see the light of day. It will be interesting to see if the company can indeed overcome the concerns and build the pipeline. If it does, the Trans Mountain expansion project certainly would provide strong future returns for the company's investors. 

Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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