Last week gasoline prices soared in southern B.C., with the price at the pump in Vancouver hitting over $1.55 per litre. This was not due to a restriction of supply, although Alberta Premier Rachel Notley jumped on the opportunity to once again misrepresent reality in order to draw erroneous conclusions supporting the need for Kinder Morgan’s Trans Mountain expansion.

“There are a lot of ways in which the province of B.C. can assure an adequate supply of gasoline in order to combat the ridiculous prices that they pay,” Notley said in Calgary last week.

If B.C. wanted to keep gasoline prices low, she said, it should stop opposing the Kinder Morgan oil pipeline expansion as it would increase “the ability of Alberta to ship more product to the West.”

Notley assumes B.C. needs more crude oil to supply the Parkland refinery in Burnaby and more refined petroleum product to supply the retail outlets that Parkland’s refinery does not. She also assumes that building Trans Mountain’s expansion means Alberta’s oil producers and refiners will ship more product to B.C. Neither assumption is correct.

Let’s review the facts.

High gas prices are not due to a shortage of supply.

Gas prices are not high because of a lack of supply. There is plenty of supply to serve the B.C. market.

High gas prices are the result of a decades old strategy in Alberta to charge what the market will bear, not charge based on the costs of production and delivery (including a reasonable return on investment) as would be the case in a well-functioning market. This unfair or predatory pricing is sometimes referred to as price gouging. This reality exists to varying degrees all across Canada, although it is more prevalent in Lower Mainland and Vancouver Island markets.

Every time the pain at the pumps from this inappropriate pricing practice becomes obvious, it appears industry apologists are standing at the ready to trot out phoney “reasons” for the increase in gas prices.

The facts show B.C. exports more gasoline than it imports. Port of Vancouver statistics reveal that during 2017, exports to the U.S. exceeded imports by almost 70 per cent, giving rise to net gasoline exports of 6,000 barrels a day. There is no supply shortage in B.C. — chronic or otherwise.

Kinder Morgan’s new pipeline will not increase the shipment of product to B.C.

Trans Mountain’s expansion is intended to ship 540,000 barrels a day of diluted bitumen — heavy oil — to the Westridge dock for offshore export. None of this crude is destined for B.C.

The Parkland refinery already receives all the light crude oil it can refine from the existing pipeline so there is no shortage there. Further, the refinery is not configured to use heavy oil like diluted bitumen from the oilsands. This is why a heavy oil pipeline through B.C. is of no benefit to B.C.

As far as refined product is concerned, Kinder Morgan’s business case for the Trans Mountain pipeline is explicitly based on no increase in crude oil or refined product supply to B.C.

Kinder Morgan told the National Energy Board (NEB) that “refined product shipments will not increase as a result of [the Trans Mountain Expansion Project].”

Unfair pricing at the pump will not change no matter what happens with the Trans Mountain expansion because it is not due to a scarcity of supply. Addressing the failure of the market to fairly determine gasoline prices requires policy direction from government and meaningful regulation.

If the Trans Mountain pipeline expansion is built, B.C.’s gas prices will increase. https://t.co/htqlwYcGeC

— DeSmog Canada (@DeSmogCanada) March 28, 2018

If the Trans Mountain expansion is built, B.C.’s gas prices will increase.

We know regional gas prices will rise if Trans Mountain’s expansion proceeds because the NEB approved an increase in toll rates on the existing pipeline that guarantees it. The board gave Kinder Morgan permission to more than double the cost of delivering a barrel of gasoline or diesel to B.C. motorists on the existing pipeline in order to help pay for the new one.

Higher transportation costs on the existing line will ratchet up pump prices. Producers and refiners consider increased transportation costs a cost of doing business and they get passed onto end-users.

Trans Mountain’s expansion — a heavy oil pipeline Notley maintains is for the benefit of offshore markets in Asia — is not commercially viable unless B.C. consumers and businesses subsidize it through higher gas prices here at home.

Big Oil needs B.C.’s market demand more than B.C. needs Alberta’s refined product.

Notley has threatened B.C. with an ultimatum — stop resisting the expansion or face serious supply restriction. But her threat to “turn off the taps” is idle.

Kinder Morgan and Alberta’s oil producers and refiners will not allow this kind of behaviour. It would send shock waves through the international business community and will fundamentally cost Alberta’s oil sector more than it will cost B.C.

B.C. is an important market for Alberta’s refiners and light oil producers.

If supply from Trans Mountain is shut off, the Parkland refinery can turn to offshore crude while other retail distribution systems can seek imported refined product — likely at lower prices if existing supply agreements are rendered invalid through Alberta legislated restrictions. A marine terminal to deliver jet fuel to the Vancouver International Airport is in the process of being constructed with the expressed purpose of being able to access jet fuel supply at lower cost from numerous markets.

Turning off the taps in B.C. would flood the Prairies and end up costing Alberta’s refinery sector.

Since the Trans Mountain pipeline delivers gas from Edmonton refineries to B.C., if supply were to be curtailed, downward pressure on retail prices in Prairie markets would mount because of a corresponding over-supply there.

That would mean every barrel supplied in Alberta would take some hit — not just the barrels diverted from B.C.

In order to limit supply in one market without a corresponding loss, there needs to be demand in another. The demand is not there.

Which companies are poised to take the hit in Alberta? Suncor, Imperial and Shell.

Suncor is poised for a double whammy. Suncor is the major shipper of refined gasoline and diesel product to B.C. along Trans Mountain for sale in Petro-Canada stations, but also under agreement with other retail outlets.

There is little likelihood Suncor will break contracts and destroy long-term business relationships with others in B.C. undermining not only its short-term, but long-term profitability in order to support Notley’s political posturing.

Kinder Morgan has too much to lose if shipments along its pipeline are curtailed — including the ability to finance its project.

Notley has not connected the dots between Kinder Morgan Canada Limited’s (KML) revenue stream and the company’s ability to proceed with the Trans Mountain expansion, either.

Current toll rates charged on the existing pipeline provide a significant portion of the company’s cash flow. It is not trivial.

Interrupting Kinder Morgan Canada’s revenue stream by limiting supply impedes the company’s ability to pay dividends to its shareholders. This not only hurts Canadian investors, it particularly hurts Kinder Morgan’s ’s Texas-based parent Kinder Morgan Inc. (KMI) in Houston.

Kinder Morgan senior still owns 70 per cent of the Canadian company. KMI needs dividends from the Canadian operations to support its ongoing financial challenges. An interruption of Trans Mountain’s existing revenue stream would get in the way of KMI’s cash flow needs .

Interruption of Trans Mountain’s existing revenue stream, by limiting pipeline shipments, would also impede Kinder Morgan Canada’s ability to pay dividends on its $550 million in outstanding preferred shares.

As well, Kinder Morgan Canada still needs to raise more than $2 billion in equity capital to help finance its expansion. Try going to financial markets to raise risk capital while revenues are impaired because of a legislated election ploy.

Finally, if reduced cash flow from “turning off the taps” — even just a little bit — causes a credit rating downgrade for the Canadian operations, Canada’s big banks could pull their $5.5 billion construction loan facility. Without the credit facility keeping the expansion afloat, the Trans Mountain expansion sinks.

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When Prime Minister Trudeau announced approval of the Trans Mountain project he said the expansion “will create 15,000 new,

middle class

jobs — the majority of them in the trades.”

Natural Resources Minister, Jim Carr, repeatedly points to this figure to justify Ottawa’s approval. He says, “the project is expected to create 15,000 new jobs during construction.”

Alberta Premier Notley relies on it too. “Initially we’re looking at about 15,000 jobs…” Former Premier Christy Clark said, “And then there’s Kinder Morgan, 15,000 new jobs…”

When the figure of “15,000” for new construction jobs emerged, I was confused. Kinder Morgan told the National Energy Board (NEB) that construction employment for the project was an average of 2,500 workers a year, for two years. It was laid out in detail in Volume 5B of the proponent’s application.

Why would elected officials promote a construction jobs figure six times Kinder Morgan’s actual number?

I contacted the Prime Minister’s office. I asked his staff to explain how the figure their boss relies on was developed. They did not do so. I even wrote the Prime Minister directly. I received no reply. Natural Resources Canada said, “The numbers are from the proponent” and “believed” they were based on Conference Board of Canada estimates, while Premier Notley’s office said it came from the industry and directed me to Trans Mountain’s website.

There it was. “During construction, the anticipated workforce will reach the equivalent of 15,000 jobs per year…” Kinder Morgan provided no insight as to how that figure was derived.

ICYMI: Robyn Allan Q&A: Trudeau Government ‘Dangerously Misled’ on Kinder Morgan Pipeline

I inquired directly and was told, “the figures come from two Conference Board of Canada reports.” Links to those reports were provided.

I read both reports. Neither included reference to 15,000 construction jobs as Kinder Morgan said they would. What they did provide was a figure of 58,037 person years of project development employment—over seven years beginning in 2012.

I knew the 58,037 figure to be the same as that provided in a Conference Board of Canada report authored in 2013 and filed by Kinder Morgan as part of the discredited NEB hearing. The Conference Board based its estimate on an Input Output model which — because of its many design flaws — delivers highly exaggerated results.

I was still at a loss as to how the 15,000 construction workforce figure was derived.

I wrote Kinder Morgan again. The company responded: “…person years of employment during Project development is 58,037. This figure has been divided by 3 years and 10 months resulting in an equivalent of 15,000 jobs.”

I asked Kinder Morgan why almost four years was chosen as the time horizon for construction, when the project will take two. This is when the company stopped answering my questions on construction employment.

The Conference Board did not estimate construction jobs; Kinder Morgan did. Kinder Morgan divided 48 months into the Conference Board project development figure, then multiplied it by 12 months to arrive at 15,000 jobs a year.

Inappropriately, the figure was renamed as construction workforce.

It is unbelievable. It is a misuse of Input Output model results and a deceptive relabelling.

The Search for #KinderMorgan #TransMountain’s 15,000 Construction Jobs https://t.co/ZuFLKF3dss #bcpoli #cdnpoli #factcheck via @robynallan

— DeSmog Canada (@DeSmogCanada) August 28, 2017

Even if the Conference Board’s figure of 58,037 person years of development employment was reliable—which it is not—that number cannot arbitrarily be divided by 48 months of a longer project time table and then the result annualized so the proponent can claim there are 15,000 construction jobs to be created.

Kinder Morgan had no business altering the time horizon or renaming the nature of the employment to characterize it as something it is not. Kinder Morgan’s 15,000 construction workforce figure is meaningless.

The absurdity of Kinder Morgan’s 15,000 construction jobs claim is readily illustrated. Kinder Morgan’s says its construction schedule will begin in September 2017 with completion slated for December 2019 — 28 months.

Using Kinder Morgan’s formula, and the Conference Board figure it abused — (58,037 divided by 28 times 12) — Trans Mountain’s construction workforce catapults from 15,000 a year to 25,000 a year — a figure larger than the entire Heavy and Civil Engineering Construction workforce in B.C. That’s how outrageous Kinder Morgan’s logic is.

Why would Kinder Morgan pay the Conference Board for an employment estimate derived from an expensive modelling approach and inappropriately turn it into a construction workforce estimate when it has its own, more reliable one of an average of 2,500 workers over two years?

ICYMI: 4 Reasons the ‘Oil to Tidewater’ Argument is Bunk

Trans Mountain’s 15,000 construction workforce jobs are a scam. The more realistic figure is less than 20 per cent that size.

It is a betrayal of the public trust that Trudeau, Carr, and Notley, so eagerly got behind Kinder Morgan’s manipulated jobs figure without checking to make sure it made any sense.

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Access to world markets for Canadian oil has been available since 1956 when the Westridge dock was constructed in Burnaby, B.C., and linked to the Trans Mountain pipeline.

The dock’s export capacity has rarely been used to its full potential in more than 60 years — yet the oil industry and politicians continue to make the argument that Canada needs new pipelines to get oil to world markets.

Here are four reasons that argument doesn’t fly.

1) Existing Export Capacity Isn’t Being Used

In 2011, the National Energy Board (NEB) provided Kinder Morgan with a favourable and unprecedented ruling when it allocated guaranteed access to the dock under 10-year take-or-pay contracts with five crude oil shippers.

Kinder Morgan promised that 79,000 barrels a day of tidewater access would lead to the development of international markets for Alberta’s crude.

It didn’t.

Guaranteed access means the dock can service 60 crude oil tankers a year. But according to statistics compiled by Port Metro Vancouver, not even a third of that number were loaded during 2016 — and most of those tankers went to U.S. ports. The equivalent of one tanker was loaded with Alberta’s heavy oil and destined for a non-U.S. port during the entire year. Seventeen went to U.S. destinations.

If Canadian oil needs to get to world markets as desperately as some claim, why isn’t existing access being used? It’s because there is no demand for it.

2) Energy East Won’t Reduce Reliance on Foreign Oil

“The lamentable state of crude oil pipeline infrastructure makes parts of this country reliant on foreign oil and our petroleum exporters dependent on the United States, which buys Canadian product at a deep discount,” wrote Conservative Senator Michael MacDonald in the Hill Times.

Eastern Canada has a dependency on imported oil because the refineries located there are configured to process primarily light oil. Energy East is intended to facilitate the transport of diluted bitumen from Alberta’s oilsands so will not reduce eastern Canada’s reliance on imported crude to any significant degree.

But there is another source of dependency on imported oil that is rarely acknowledged. Oilsands producers are dependent on imported condensate as a diluent for bitumen blending purposes. This is because oilsands heavy does not flow down a pipeline unassisted — it’s too dense.

Canada does not produce enough condensate to meet oilsands producers’ demand. Since 2005, condensate imports from the U.S. have increased significantly. For every three barrels of increased oilsands production, a barrel of condensate is imported. Thus, as oilsands production expands, Canada’s import dependency expands with it.

So if we want to see a reduction in Canada’s reliance on foreign oil imports we must advocate for a reduction in oilsands production or an increase in upgrading and refinery capacity in Alberta. Otherwise, the minute bitumen is shipped along a pipeline, it generates a growing dependency on crude imports.

3) Canadian Oil Producers Are Not Truly Dependent on U.S. Markets

Some suggest that Canadian producers are somehow dependent on U.S. markets. The majority of Canadian producers are not “dependent” on the US. They have integrated refinery operations there. To a significant extent Canadian producers supply their own crude to themselves or their joint-venture partners as U.S. refiners.

When Suncor sells into its Commerce City, Colorado, refinery, or Cenovus supplies its facilities in Wood River, Illinois, and Borger, Texas, owned in a joint venture with Phillips 66, or Husky supplies its refinery in Toledo, Ohio, it owns in partnership with BP, or Imperial and its parent, ExxonMobile, deliver crude from their joint venture to ExxonMobile’s U.S. facilities, it is hardly accurate to suggest that they are “dependent” on the U.S. market.

4) Canadian Oil Is Not Selling at a ‘Discount’

Many argue that the U.S. “buys Canadian product at a deep discount,” but that’s incorrect. There is a natural price discount between U.S. oil and Canadian heavy oil that will always exist because of quality and transportation cost differences.

Oil is traded in U.S. currency. Canadian crude is priced against a benchmark to U.S. produced light oil; West Texas Intermediate (WTI). To examine the differential and whether there is a discount that is outside the expected natural range requires that we compare WTI to Canadian crude prices. To do this for oilsands crude is to look at the price for WTI as compared to the price for Western Canadian Select (WCS)—the highest grade of Canadian heavy.

The natural discount for WCS compared to WTI, according to the National Energy Board is about 30 per cent — or roughly $20 US per barrel. A price differential of WCS to WTI of less than $20 U.S. would therefore be considered a “premium” price for WCS. WCS has been trading at “premium” since 2014. Currently, the differential is only $14 U.S. a barrel.

Robyn Allan is an independent economist and was an expert intervenor at the National Energy Board Trans Mountain Expansion hearing.

Photo: Jon Olav Eikenes via Flickr

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This article originally appeared on the Vancouver Observer.

Industry Minister James Moore who represents the Port Moody-Westwood-Port Coquitlam riding engaged in blatantly false fear mongering last week. He threatened a Lac Mégantic disaster if we don’t accept Kinder Morgan’s Trans Mountain pipeline expansion. In order to springboard from a disgusting reliance on a horrific tragedy to reach his ridiculous conclusion, he had to make stuff up.

These are desperate tactics from someone who as an elected Member of Parliament and Minister of the Crown should know better. He said, “The people of Lac Mégantic wished they had pipelines instead of rail.” If Mr. Moore and his Tory government colleagues had done their job, Lac Mégantic would not have happened. 

Instead of acting responsibly, Mr. Moore follows up his toxic logic with a distasteful chaser. “It’s very dangerous for the Lower Mainland … to have the massive spike in rail transfer of dangerous goods,” he said. Moore is reported to have pointed to the huge rail yard in the heart of Port Coquitlam claiming an increasing number of trains are arriving there carrying diluted bitumen crude that has no other way to get to foreign markets.

That’s just not true. There are no facilities on the west coast to transfer crude oil from tank cars to marine shipping vessels. CP spokesperson Jeremy Berry confirmed, “CP does not ship oil along its line to Vancouver for export.”

Mark Hallman, CN’s director of communications and public affairs explained by email that, “CN has never transported crude oil or diluted bitumen to any British Columbia port or terminal for export via ocean-going vessel, and has no plans to do so.”

As for the so-called “massive spike in rail transfer of dangerous goods” there is neither a massive transfer nor a spike. Transport Canada figures of about 5,000 barrels a day relied on by Mr. Moore date back to 2013. CP confirms that, “2014 numbers are lower than 2013.” It is interesting that Mr. Moore would not use recent figures—maybe because they don’t support his false narrative.

Both the Vancouver Sun and Financial Post printed the grossly misleading story (same article different title). 

Mr. Moore is quoted as following up his falsehood about a massive spike in rail transfer with “The people of Port Coquitlam and Burnaby and New Westminster, with dangerous goods going on those rail lines, should be concerned about that.”

If Mr. Moore is concerned about rail transport, he should do everything he can to stop crude transport until its safe, not blackmail Canadians with incineration if we don’t accept pipeline projects.

The truth is it is the Harper government’s unrelenting willingness to cheerlead on behalf of Alberta’s tar sands that is putting us at risk and failing the Canadian economy—including the economic health of our fossil fuel industry.

The Chevron refinery in Burnaby imports a small amount of crude by rail. Chevron began rail-to-truck-to-refinery deliveries in May 2012 and rail-to-refinery deliveries in April 2013 because Chevron couldn’t get enough space on the existing Trans Mountain pipeline—exports took priority over domestic needs.

Crowding out domestic demand is why the relatively small volumes of crude by rail to B.C. have increased since 2011, not because diluted bitumen is seeking foreign markets. But even if Chevron could export all the crude oil it can now receive by rail, it would take more than two months for them to fill an oil tanker. Mr. Moore’s “heavy oil exports to foreign markets” spin doesn’t even make business sense.

Our safety is not threatened by rail transport of heavy oil. Our safety is threatened by the Federal Government’s de-regulation of transport safety. Since 2010 marine safety budgets have been slashed 28 per cent and rail and aviation by more than 20 per cent. Had Transport Canada done its job regulating the rail industry Lac Mégantic would not have happened. 

Our safety is also threatened by the Harper government’s unwillingness to ensure Canadian energy self sufficiency. The oil transported to Lac Mégantic on that fateful night in July 2013 was Bakken crude—a highly flammable light oil imported from New Town, North Dakota destined for the Irving refinery in New Brunswick. More than 40 per cent of the crude oil used in eastern Canada is imported. The public policy answer is to ensure more bitumen is upgraded in Alberta—what Harper promised would happen in 2008 before foreign multinational interests made him change his mind—not build more pipelines.

Oil sands bitumen is dense like tar or wet cement. It requires imported condensate as diluent to move it through a pipeline. If more bitumen were upgraded in Alberta instead of transported as diluted bitumen for upgrading in other countries we would have plenty of pipeline space. 

Barrel for barrel, diluted bitumen requires twice as much pipeline capacity as upgraded bitumen. You need dedicated condensate import pipelines, like Enbridge’s Southern Lights and Kinder Morgan’s Cochin, to bring condensate in, and then you need 30 per cent of the heavy oil pipeline export capacity to re-export condensate as diluent in bitumen. What’s more, diluted bitumen moves 20 per cent slower than light or synthetic crude oil.

Transporting diluted bitumen, even by pipeline, unnecessarily exposes Canadians to a condensate spill. Condensate becomes airborne when released. It’s highly toxic and causes severe respiratory damage. Rail transport of heavy oil requires little or no condensate because oil in rail cars is stationary—the cars move, not the heavy oil.

Mr. Moore was elected to protect his constituent’s interests, not mislead them with erroneous statements and distastefully false arguments. Instead of busying himself inventing boogie men as a front for big oil he should protect the safety and business interests of Canadians—while he still has time.

Robyn Allan is an economist, former president and CEO of the Insurance Corporation of British Columbia and qualified expert intervenor in the NEB Trans Mountain Expansion Project Hearings.

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Kinder Morgan, the Texas-based multinational that owns and operates the Trans Mountain Pipeline System, claims Trans Mountain is a significant contributor to federal and provincial income tax revenues. The company is relying on this as proof it deserves public licence to triple its pipeline capacity in Western Canada.

Pouring tax revenues into Canada is not the story Kinder Morgan tells its U.S.-based shareholders. Promoting Trans Mountain south of the border, Kinder Morgan boasts of tax refunds — two in the past five years. From 2009 to 2013, Trans Mountain's combined federal and provincial Canadian corporate tax contribution averaged just $1.5 million per year.

How could this be? The answer lies in complexities of U.S. corporate tax regulation which I will do my best to explain here.

First, a bit of history about how Kinder Morgan came into being.

Kinder Morgan began as a publicly traded Enron tax shelter in 1992 called Enron Liquids Pipeline, L.P. (see page 62). Publicly traded limited partnerships in the U.S. are called Master Limited Partnerships (MLPs). Ownership shares are units. MLPs are treated as a partnership for tax purposes and none of the income is subject to federal income tax. They combine the tax advantages of a partnership with the liquidity benefits of publicly traded stocks.

The Enron MLP held the energy giant's liquid pipeline assets as well as some gas processing and coal transfer and storage facilities. The general partner, Enron Liquids Pipeline Co., was the operator.

Richard Kinder, Kinder Morgan's current chair and CEO, was instrumental in setting up the arrangement. When Enron Liquids Pipeline was established, he was a member of the Enron board of directors, its president and chief operating officer (COO), and became the general partner's first chair. Kinder was the person responsible for setting the company's course years before he left Enron.

The Enron-Kinder Morgan History of Tax Avoidance

Beginning in 1995, Enron began to engage in a series of transactions that, according to the U.S. Joint Staff Committee on Taxation (page 109) were designed to "satisfy the literal requirements of the corporate tax laws, yet produce results that were not contemplated by Congress and not warranted from a tax policy perspective. Several of the projects were structured to duplicate and accelerate tax deductions."

The first of these transactions was called Project Tanya. It was based on duplicating deductions between Enron companies — effectively claiming the same loss twice. Project Tanya resulted in federal tax savings of $66 million. The U.S. Joint Committee on Taxation report (page 119) explained that as director, president and COO, Richard Kinder was instrumental in delivering this strategy for Enron board approval.

On February 14, 1997, Kinder and William Morgan acquired Enron Liquids Pipeline, L.P. from Enron Corp. by buying the wholly owned general partner, Enron Liquids Pipeline Co. Acquiring the MLP and the general partner was hardly an arms-length deal — Kinder continued to receive a paycheque from Enron until the day after he took over the company. Morgan, also a former employee of Enron, had been on the board of the general partner since 1994.

With assets from Enron acquired to establish Kinder Morgan Energy Partners L.P., Kinder and Morgan created their own board of directors and executive team for the general partner. The roster was heavily weighted with Enron insiders. Out of the nine original directors and officers, six were Enron employees and a seventh member of the team, Michael Morgan, was William Morgan's son. The treasurer and secretary of Kinder Morgan's company was an independent tax and accounting consultant underscoring the entity's continued emphasis on tax planning. Enron Liquids Pipeline Co.'s 141 employees came with the deal at their existing salaries.

Within months of acquiring the corporate entities, Kinder Morgan Energy Partners filed a prospectus with the U.S. Securities and Exchange Commission (SEC) issuing three million units of the MLP to the public. Kinder Morgan's 1997 prospectus — similar to its initial public offering in 1992 — promoted the tax-related properties available to maximize unit holder returns over what they would be if the limited partnership were treated as a corporation for tax purposes.

U.S. Offers Special Subsidy for Resource Companies

The prospectus explained that the U.S. tax code requires publicly traded partnerships be taxed as corporations. However, a "Natural Resource Exception" exists (page 9) if the partnership earns 90 per cent or more of its income from the exploration, development, mining or transportation of any mineral or natural resource, including oil.

The natural resource exclusion means that Kinder Morgan Energy Partners does not face corporate tax at the partnership level. This increases cash flow available for distribution to unit holders, including major unit holders like Kinder, and the general partner, wholly owned by Kinder Morgan Inc. (KMI), again with Kinder a major beneficiary.

Typically, distributable cash flow is paid quarterly and can wind up being treated in the hands of the unit holder as a considerable non-taxable return of capital. Thus Kinder Morgan Energy Partners not only avoids corporate taxes as a "pass through" entity, taxes payable by unit holders are deferred or reduced over what they would be if the unit holder were a shareholder in a publicly traded corporation.

The special tax treatment — the government subsidy — the U.S. affords energy companies that are structured as MLPs is what has enabled Kinder Morgan to grow into the third largest energy company in North America.

A Corporate Makeover To Save $20 billion in Taxes

After 22 years of benefitting from this advantageous tax structure, Kinder Morgan's MLP has matured. Because of a feature called Incentive Distribution Rights, as KMP grows the money available to distribute to its unit holders – its cash distributions — grows, but an increasing share flows through to the general partner. Kinder Morgan Inc. owns the general partner, and as a corporation is required to pay corporate tax on that growing income.

Thus, it's sensible to argue that the successful growth of the MLP means Kinder Morgan should now face an increasing income tax burden. Think of it as reasonable payback to a system that afforded stellar growth because taxes in its formative years were avoided. But instead of treating income taxes as a price for living in a civilized society, Kinder Morgan is relying on its sophisticated corporate structure, a reorganization and accounting savvy to keep its tax payments as low as possible.

Kinder announced last August that his energy empire would undergo a makeover. The restructuring will see Kinder Morgan Inc. purchase the other three publicly traded entities.

The reorganization, by its leader's own reckoning, reduces Kinder Morgan's taxes payable by more than $20 billion over 14 years.

Kinder explained this to investor analysts in a conference call shortly after the announced restructuring. He characterized the deal as a "tax shelter" because the purchase price sets a higher value for the assets than keeping them on the books at their historical depreciated cost. He said, "From the purchase price alone, including the step up, we will realize over 20 billion dollars in cash tax savings over the next 14 years."

Effectively Kinder Morgan Inc. gets to work the intricacies of the accounting system. It will buy assets from its subsidiaries at a premium price and then depreciate these assets as if they were brand new. The deal creates a hefty $1.4 billion in tax savings each year for at least two decades. The market's reaction to the reshuffling of Kinder Morgan's corporate structure is likely why Rich Kinder, Kinder Morgan Inc's largest shareholder, pocketed an extra $800 million the day after the announcement.

None of this is illegal under U.S. law. However, it's fair to conclude what makes a doubling of the growth rate in Kinder Morgan Inc's dividend to its shareholders possible — it's a paper-based consolidation designed to inflate the value of assets and redirect tax revenue that could flow to governments into the pockets of U.S. shareholders instead.

And given the history I've outlined here, it is also fair to say that sophisticated use of corporate structures to minimize tax, maximize distributable cash flow and minimize disclosure and transparency, is key to Kinder Morgan's corporate culture.

Canada is Harder on Tax Avoidance — But Kinder Morgan Found a Way Around That

MLPs do not exist in Canada. Their close cousins — Canadian Income Trusts — lost their special corporate tax privileges with legislative changes brought in by Finance Minister Jim Flaherty in 2006. The changes ensured that all special tax benefits of publicly traded non-real estate related trusts would be removed. Flaherty was concerned about significant tax revenue lost as established businesses in Canada rapidly converted from corporate to trust structures. He called the behaviour a "growing trend to corporate tax avoidance." He said "it's not right and it's not fair."

But Kinder Morgan has shown it knows how to acquire a Canadian firm and absorb it into its U.S. operations, converting it, effectively, into a U.S. MLP.

Remember a company called Terasen? In late 2005, Investment Canada approved the purchase by Kinder Morgan Inc. of the shares of Terasen Inc. — a publicly traded Canadian corporation with its head office in Vancouver — at a steep premium. Terasen held natural gas and oil pipeline assets, including the Trans Mountain Pipeline System.

Kinder Morgan delisted Terasen from the Toronto Stock Exchange. Despite what the company says in its promotional literature that Trans Mountain's expansion means "as Canadians we will have an asset that unlocks access to world markets and continues to support our economy," Trans Mountain is not a Canadian asset benefitting Canadians. Canadians own less than two per cent of Kinder Morgan Energy Partners.

After the purchase of Terasen, Kinder Morgan INc. engaged in a number of inter-company transfers involving many sophisticated entities including an Unlimited Liability Corporation (ULC) registered in Nova Scotia. The Trans Mountain Pipeline assets were eventually sold to Kinder Morgan Energy Partners. In Kinder Morgan's words, they were "dropped down" to the MLP. This is how Trans Mountain came to be under Kinder Morgan Energy Partner's indirect full ownership control by 2007. The Terasen share purchase and related inter-company paperwork effectively turned Trans Mountain into a U.S.-based MLP.

This is but one example of how Kinder Morgan has made an art form out of minimizing taxes in Canada and the U.S. The company has, in Kinder's own words, a "convoluted complicated structure" with more than 250 separate corporate entities. Upwards of 20 are registered in Canada with at least six of them registered as ULCs (page 186).

The ULC is not a very familiar form of incorporation. Only Nova Scotia, Alberta and B.C. allow them. U.S.-based energy sector investors who are expanding into Canada increasingly rely on ULCs. Their unique features enable them to elude a 25 per cent withholding tax rate that would otherwise be applicable under the Canada-U.S. Tax Treaty. In 2009, the Treaty introduced anti-hybrid rules in Art. 4, Sec. 7, which were intended to deny the special treatment, but some companies have developed sophisticated repatriation strategies, so are able to work around the rules.

What Does Kinder Morgan Really Pay in Canadian Taxes? Not Much

I have gone into such detail here to show that fully understanding from a Canadian perspective Kinder Morgan's structure, and tax implications, would demand an expert analyst with all the facts.

However, there is a paucity of publicly available financial information related to Trans Mountain because Kinder Morgan reports on its Canadian operations to the U.S. SEC on a consolidated basis as part of Kinder Morgan Energy Partners. This means there are no separate financial statements filed related to its Canadian activities. This makes evaluation of the company's Canadian operations difficult.

This we do know: Kinder Morgan Canada president Ian Anderson informed analysts in Houston, Texas, last January that the Trans Mountain system received a cash tax refund of $4.2 million in 2013. This even though Trans Mountain generated $167 million in distributable cash flow — net earnings plus non-cash items such as depreciation — available to its U.S. parent.

Anderson's figures also tell us Trans Mountain has contributed combined federal and provincial corporate taxes that averaged a meager $1.5 million over the past five years. Trans Mountain received a tax refund in two of them.

Source: Kinder Morgan Analysts Conference 2013 (page 4) and 2014 (page 3). U.S. dollar figures translated to Canadian using Bank of Canada annual exchange rate.

Trans Mountain files accounting information with the National Energy Board on its regulated assets, which are a subset of its overall activity in Canada. These files reveal that although Trans Mountain earlier told the regulator it would pay $7 million in taxes in 2013, instead its regulated pipeline assets realized a tax refund of more than half a million dollars.

I asked Kinder Morgan to explain the discrepancy between its filing with the NEB, what it tells the Canadian public about its contribution to fiscal revenues and what it tells U.S. investors and analysts. These questions were filed (see pages 30-44) in an information request as part of my right as a qualified intervener in the current hearing. Kinder Morgan refused to answer.

I then asked the NEB to compel answers. Siding with Kinder Morgan, the board denied my request (beginning on page 105).

I believe Canadians are owed an explanation why this U.S. multinational pays so little in Canadian corporate income taxes related to Trans Mountain. The NEB seems content to buy Kinder Morgan's story that it will pay a tax rate of 25 per cent on its net income and that its expanded operation will lead to about $100 million a year in federal and provincial corporate income tax revenue.

Indeed, in arguing for the Trans Mountain expansion Kinder Morgan presents itself to Canadians as a significant tax contributor. Yet Kinder Morgan now repatriates an average of $172 million per year from the Trans Mountain system for distribution to its U.S. based owners, but faces an average cash tax obligation of only $1.5 million in Canada.

Tripling the Financial Drain on Canada's Economy

Bear in mind, too, that Kinder Morgan is Trans Mountain's sole source banker. Without taking you through more arcane financial details, this means the U.S.-based parent company receives high returns on investment locked into toll rates that are approved by the NEB (paragraph 4, page 2).

Kinder Morgan's restructuring will, as a result, mean huge windfall gain for the U.S. multinational on its regulated Canadian pipeline operations, guaranteed by the NEB (paragraph 890-1408).

But that's just for the existing pipeline. Trans Mountain wants to triple its pipeline capacity, and because of economies of scale, will more than triple its financial drain from the Canadian economy. The NEB recently approved much higher tolls charged to Canadian shippers on both the existing pipeline and the proposed twin if the expansion goes through. These tolls reflect a cost of capital well above 12 per cent on $5.4 billion.

Today it costs about $2.75 to ship a barrel of oil to Chevron's Burnaby refinery on the existing Trans Mountain Pipeline. If the expansion goes through, the price to ship that same barrel to Burnaby will be more than $5. Pretty much the same transportation price lift exists for imported refined petroleum products.

Since 90 per cent of the gasoline supplied to the interior and south coast of B.C. comes via Trans Mountain as either crude or refined products, those higher transportation costs are passed onto us. Every time a B.C. resident fills up, it lines Rich Kinder's pockets. If Trans Mountain's expansion is approved, that amount increases substantially.

Kinder Morgan told the NEB during the toll hearings it wouldn't bring the Trans Mountain expansion project forward if it didn't exceed a 12 to 15 per cent rate of return. Meanwhile as Trans Mountain's sole-source banker, it's going to cost Kinder Morgan less than 4.5 per cent to deliver project financing.

If Kinder Morgan's high return on equity in relation to its almost non-existent Canadian tax obligation does not concern the NEB, what remains, I would suggest, is for the federal government to step in and undertake a Canada Revenue Agency audit of all Kinder Morgan activities in Canada, particularly the transactions related to the purchase of Trans Mountain and the complex inter-company transactions that followed.

The CRA would be well advised to include a full examination of the company's complex corporate structure, including its reliance on ULCs. It should include an examination of transfer pricing, particularly of debt and equity sourced by Kinder Morgan's Canadian subsidiaries through their U.S. parent. Canadians deserve the bottom line facts about what benefits flow here, rather than south of the border, as Kinder Morgan proposes expanding its pipeline operations on our soil.

Robyn Allan is an economist and former CEO of ICBC. She is a qualified expert intervener in finance, economics, insurance and public policy at the Trans Mountain Expansion project public hearings. Read more at RobynAllan.com

Photo: Mark Klotz via Flickr

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