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Is This Pipeline Project in Jeopardy?

Last week, Canada’s National Energy Board said that it was delaying a decision on the Trans Mountain oil sands pipeline expansion project by seven months. The project, which is proposed by Kinder Morgan’s (NYSE: KMI) master limited partnership Kinder Morgan Energy Partners (NYSE: KMP), continues to face delays and opposition. Under the revised schedule, the pipeline won’t be in service until early 2018, and that is if the expansion project does finally get approved.

The latest delay

Kinder Morgan is literally down to the last few miles on the project. In fact, the current roadblock involves the final five kilometers of the line, which would be in a heavy urban area. Those last five kilometers would take the pipeline from Burnaby Mountain, which is where Kinder Morgan Energy Partners’ tank farm is located, down to the docks where the oil can then be transported by boat.

Kinder Morgan Energy Partners has explored multiple alternative routes for the pipeline to accommodate local concerns. While the company believes that its current proposed route is the optimal placement of the pipeline, the National Energy Board wants it to take the next six months to really evaluate all of its options.

Kinder Morgan’s concern is that this will continue to drag out. The company is facing intense opposition to the project on a local level and is having a tough time getting local co-operation. That’s why the company is now asking Canadian regulators to intervene so that it can expedite the completion of these feasibility studies. In a recent report by Bloomberg, the president of Kinder Morgan Canada, Ian Anderson, stated that the city of Burnaby has terminated “virtually all communication” so that the company can’t work with the city to address the issues and concerns it has with the project.

Tough mountain to climb

Kinder Morgan’s proposed expansion project was once viewed by the industry as an easy project to be approved. The current Trans Mountain pipeline system has been in operation since 1953 and is the only existing crude oil pipeline connecting the oil sands region to the west coast. It was thought that it would be easier to approve an expansion of this already-existing system than to have a new system built. However, delays in the project have now opened up the doors for a competing project.

Enbridge (TSX: ENB)(NYSE: ENB) is slowly making its own uphill climb to see its Northern Gateway project built. Earlier this year the federal government approved the $7.9 billion project. However, it must first satisfy 209 conditions. Enbridge faces much of the same opposition as Kinder Morgan has, as both environmentalists and Aboriginal groups are opposed to the currently proposed project. The concern is that an oil spill would have a massive impact on both the environment and the livelihood of those living along the pipeline’s path.

What’s next for Kinder Morgan?

Kinder Morgan’s Trans Mountain expansion and Enbridge’s Northern Gateway pipeline are critical projects for the companies, their customers, and Canada. If these projects don’t get built it will impact the growth of both companies, as well as the growth of production from the oil sands. Furthermore, it will impact Canada’s economy as the oil sands are a big economic engine.

That’s why I think Kinder Morgan will eventually build its $5.6 billion pipeline; however, it needs to ensure that it won’t cause environmental damage. To do that, it needs to take the time to make sure it does have the best possible pipeline route, as well as adequate safeguards in place to prevent a disaster. Hopefully, the extended deadline will do just that as all stakeholders can work together to put together a solution that will be acceptable to all parties.

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Fool contributor 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 owns shares of Kinder Morgan.

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