August 30, 2018 / 2:58 PM / in 3 months

UPDATE 5-Court quashes Canadian approval of Trans Mountain oil pipeline

(Adds comments by Canada finance minister, Kinder Morgan Canada president)

By Rod Nickel

WINNIPEG, Manitoba, Aug 30 (Reuters) - A Canadian court on Thursday overturned approval of the Trans Mountain oil pipeline expansion, ruling that Ottawa failed to adequately consider aboriginal concerns, in a blow to Prime Minister Justin Trudeau’s efforts to balance environmental and economic issues.

Trudeau’s government agreed in May to buy the pipeline from Kinder Morgan Canada Ltd for C$4.5 billion ($3.46 billion), betting it would win the court battle and expand Trans Mountain despite fierce political and environmental opposition.

The decision also hurts Canada’s oil producers, who say the expanded pipeline is needed to address bottlenecks that have sharply reduced prices for their crude. Shares fell on the decision.

The Federal Court of Appeal ruled that the National Energy Board (NEB) regulator wrongly narrowed its review of the project to exclude related tanker traffic. Additionally, the federal government failed to adequately consult First Nations, as required by law, it ruled.

“The big takeaway is the duty to consult (indigenous people) is still the most important step in any major project,” said Andrew Leach, associate professor of business economics at the University of Alberta.

Trudeau has portrayed himself as a friend to aboriginal people and tried to build national support for a carbon emissions reduction plan, even while backing Trans Mountain to support the oil industry.

“It’s quite a slap to the government by the court on the grounds of reconciliation with First Nations,” said Kathryn Harrison, a professor of political science at the University of British Columbia. “They’ve committed billions of dollars in taxpayers’ funds, doubling down on a project that the courts have just quashed.”

Trudeau’s finance minister, Bill Morneau, said the government remains “absolutely committed” to building the project, adding the sale could close as early as Friday.

“We know that we must diversify our economy and our markets for resources, and that’s why it was important” to buy the pipeline, Morneau told reporters in Toronto.

In a statement, Kinder Morgan Canada President Ian Anderson said the court ruling was not a condition of the pipeline’s sale to Ottawa. He said the project is suspending construction.

Kinder Morgan Canada shareholders voted on Thursday to approve the pipeline’s sale to Ottawa.

Canada has the option to appeal the ruling to the Supreme Court but Morneau said the government had made no decisions and needs time to study the ruling.

An appeal to the higher court would drag out the project at least another couple of years, Harrison said.

“Thankfully, the court has stepped in where Canada has failed to protect and respect our rights and our water,” Coldwater Indian Band Chief Lee Spahan said in a statement. “Our members will be hugely relieved.”

The Trans Mountain expansion would nearly triple capacity on an existing line from Edmonton, Alberta, to a port in the Vancouver area for export. It was approved by the federal government in 2016.

The court’s ruling is likely to amplify sentiments expressed by oil producers, such as Suncor Energy Inc, that they would hold off on further major investments in Canada’s oil patch until regulatory challenges abated.

Shares of Canadian oil producers fell in Toronto, led lower by heavy oil producers MEG Energy Corp and Athabasca Oil Corp, which are especially hurt by price discounts connected to clogged pipelines.

Further delays will harm Canada’s economy by limiting access to global markets, said Al Reid, executive vice-president of oil producer Cenovus Energy Inc.

Renewed doubts about Trans Mountain place greater importance for Canada’s oil industry on two other pipeline projects. Enbridge Inc is rebuilding Line 3 from Alberta to a hub in Wisconsin, while TransCanada Corp is considering construction of Keystone XL from Alberta to Nebraska. ($1 = 1.2987 Canadian dollars)

Reporting by Rod Nickel in Winnipeg, Manitoba Additional reporting by Julie Gordon in Washington Editing by Bill Berkrot and Matthew Lewis

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