In a simpler time, just two months ago, three of the world’s largest asset managers championed their proposed investment in Coastal GasLink’s pipeline as part of the solution to the climate crisis.
Then, protests kicked off, first in northern British Columbia, then across Canada. Now, governments are dithering with their response to the protests and pipeline construction is stalled. This all raises the question: Could this trio of investors walk away from the $6.6-billion project, dealing a high-profile setback to Canada’s strategy of using its resource wealth to build a lower-carbon economy?
Coastal GasLink’s current owner is TC Energy Corp., the Calgary-based utility that dropped the words “Trans Canada” from its name last year as part of a strategy to highlight North American ambitions. In December, TC Energy announced plans to sell a 65-per-cent stake in the pipeline. The buyers are A-list investors: New York-based KKR & Co. Inc. of Barbarians at the Gate fame, along with the National Pension Service of Korea (NPS), the world’s third-largest pension fund with US$620-billion of assets, and the Alberta Investment Management Corp.
The deal is scheduled to close by the summer. TC Energy plans to offer an additional 10-per-cent stake in Coastal GasLink to the 20 B.C. First Nations that support the pipeline, including the Wet’suwet’en, where elected leaders are in favour of the project, but a group of hereditary chiefs is opposed.
Fund managers are increasingly focused on making a positive environmental and social impact with their money. When KKR and friends announced plans to take a stake in Coastal GasLink, executives went out of their way to stress its green credentials.
The 670-kilometre pipeline will feed natural gas to an LNG terminal in Kitimat, B.C., that will in turn export fuel to power plants, displacing production from coal-fired stations. Once the pipeline and LNG facility are running, the project is expected to lower global greenhouse gas emissions by between 60 and 90 million tonnes a year, equivalent to shutting down between 20 and 40 coal plants.
Brandon Freiman, KKR’s head of North American infrastructure, said: “We believe the export of Canadian natural gas to global markets will deliver significant benefits for the Canadian economy and local communities in Western Canada, and enable meaningful progress toward reducing global emissions.”
Officially, everyone involved is still working toward closing the Coastal GasLink deal. Last week, TC Energy and the three prospective investors declined to comment on what continued protests might mean for their transaction. The pipeline contract is a confidential document. But it is safe to assume that the agreement includes what is known as a “material adverse change,” or MAC clause, that allows KKR and partners to exit if it becomes clear that the pipeline cannot be completed on a timely basis.
KKR’s lawyers on this investment come from Osler, Hoskin & Harcourt LLP, a firm that literally wrote the rules for getting out out deals gone bad. In report sent to clients 14 months ago, Osler head of mergers and acquisitions Jeremy Fraiberg spelled out how to best make use of MAC clauses. He added that where a specific risk exists – such as a construction shutdown – it should also be directly addressed in the purchase agreement.
Against this backdrop, KKR and its lawyers had every opportunity to see the potential for protests, and cut a deal that allows the fund managers to bail out of Coastal GasLink with minimal fuss.
It would be a dark day for Canada if deep-pocketed investors walk away from a signature national infrastructure project. Politicians of every stripe – Prime Minister Justin Trudeau, B.C.'s John Horgan and Alberta’s Jason Kenney – pitch the concept of using the money earned from selling fossil fuels to help pay for the transition to a low-carbon future.
The journey to green power is going to be expensive. It involves using natural gas to displace coal. It means building another pipeline through B.C. And it requires tapping investors around the world. That’s all at risk if KKR and its partners quit Coastal GasLink.