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A federal court’s decision to quash approval of the Trans Mountain pipeline expansion deals a severe blow to major oil sands producers and could snuff out hopes of increased exports to big Asian markets.

Oil industry officials and analysts expressed dismay after the Federal Court of Appeal said Thursday that further environmental assessment of the $7.4-billion project is required, citing a failure by the Liberal government to adequately consult First Nations whose rights would be affected by the project. The court also said the National Energy Board erred in not considering increased tanker traffic that would result from the project.

The ruling all but ensures a planned 2021 start date won’t be met for the expansion, which is designed to nearly triple capacity on the Edmonton to Burnaby, B.C., pipeline to 890,000 barrels a day.

A lengthy delay would mean no immediate relief to the steep price discounts that have plagued major producers, and is likely to further stoke unease in a sector that has already fallen out of favour with global investors.

Shares of oil sands producers that had signed up to ship crude on the expanded pipeline tumbled in Thursday’s session on the Toronto Stock Exchange. Big losers were MEG Energy Corp. (down 3.8 per cent to $8.10), Cenovus Energy Inc. (down 1.98 per cent to $12.35) and Athabasca Oil Corp. (down 5.77 per cent to $1.47).

“This is just another example to international investors of why Canada is not looked upon as a friendly jurisdiction,” said Jim Davidson, deputy chairman of investment bank GMP FirstEnergy in Calgary.

The boutique dealer this month cut its local staff, in part because of sluggish equity raising by energy companies. He said the court decision does little to inspire confidence, despite a broader recovery in global commodity prices. “No one is raising money,” he said.

Kinder Morgan Canada Ltd. president Ian Anderson said in a statement Thursday the company was taking steps to suspend construction activities on the expansion. The company offered no timeline for a possible restart.

Ottawa said it would acquire the existing 300,000-barrel-a-day pipeline and the expansion project earlier this year in a $4.5-billion deal after Houston-based Kinder Morgan Inc. threatened to scrap the expansion. On Thursday, shareholders of its Canadian unit overwhelmingly endorsed the sale at a meeting in Calgary.

The pipeline expansion is billed by the industry as key to diversifying export markets and easing price discounts on oil sands crude that have swelled north of US$30 a barrel at times this year, sapping corporate and government revenues.

Large energy companies said they were disappointed with the ruling and warned that further delays and export restrictions would harm the Canadian economy.

“We’re concerned about the potential consequences of this decision,” Suncor Energy Inc. spokeswoman Sneh Seetal said by phone. “However, we remain hopeful that the federal government will take the necessary steps to ensure the project can proceed in a timely manner.” She declined to say what those next steps should be.

Several analysts said any setbacks for Trans Mountain would benefit competing pipeline proposals. However, neither TransCanada Corp.'s Keystone XL nor Enbridge Inc.'s Line 3 project would greatly expand the industry’s access to global markets.

And each faces resistance from environmental groups and others who contend the projects pose too many risks and would exacerbate climate change.

Michael Tran, commodity strategist at Royal Bank of Canada, said global supply disruptions in OPEC countries Iran and Venezuela create room for Canadian crude to compete globally, particularly in high-growth Asian markets.

But he cautioned that the opportunity is finite.

“The dearth of alternate options to move barrels off of the continent means that Canadian barrels will remain shut out of the prized oil-demand growth regions,” he said Thursday.

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