Tight British Columbia Election Puts Energy Projects at Risk

British Columbia Premier Christy Clark’s push to expand oil pipelines and develop a liquefied natural gas industry on Canada’s Pacific Coast is at risk as she faces a tight election battle Tuesday with a rival who vows to turn back the clock on energy projects.

Clark, a former radio host who has led the province for six years, seeks to extend the rule of the Liberal Party, in power since 2001. The latest polls indicate a tight race with John Horgan and the New Democratic Party, which has pledged to impose a 2 percent tax on real estate “speculators” and thwart Kinder Morgan Inc.’s Trans Mountain oil pipeline. Horgan also wants Malaysia’s Petroliam Nasional Bhd to find a new site for a proposed $27 billion liquefied natural gas export terminal.

“We don’t think the risks are priced into the financial markets,” said Ben Homsy, a fixed-income portfolio manager at Vancouver-based Leith Wheeler Investment Counsel Ltd., which has sold most of its British Columbia bonds over the last year due to concerns about a housing correction. If the Liberal Party wins, provincial bonds may rally two to three basis points. If the NDP does, they may plunge by as much as 20 basis points, Homsy estimates.

Clark, 51, is deeply unpopular among a section of the electorate for presiding over a housing affordability crisis, as the price of a typical detached home in Vancouver soared to C$1.5 million ($1.1 million). She’s also drawn fire for backing energy projects that rile voters in the birthplace of Greenpeace, and for raking in campaign contributions in what’s been dubbed the “Wild West” of Canadian political cash. Her snub of a grocery-store shopper that went viral in the final days of the campaign didn’t help.

Horgan, 57, a former mill worker and cancer survivor, has closed the gap on Clark, who earlier in the year was expected to win comfortably. An Ipsos-Reid poll shows the Liberals and the NDP are in a statistical tie, with the Liberals at 43 percent and the NDP at 41 percent support. Another by Forum Research shows the NDP with an 8 percentage point lead. Then there’s the Green Party, a wild card that could potentially split votes. Its leader Andrew Weaver polls more favorably than either Clark or Horgan. The Liberals currently hold a majority of the 85 seats in the Victoria legislature.

Growth Leader

The outcome of the B.C. election takes on particular significance given the province’s lead role in Canadian job and economic growth — and its exposure to real estate.

The Pacific Coast province has driven the nation’s recovery from the collapse in oil and commodity prices to make Canada the world’s fastest-growing Group of Seven economy, based on 2017 forecasts compiled by Bloomberg. Yet there are doubts about the sustainability of that rebound amid indications that it’s been inordinately fueled by real estate and household debt. The downward spiral in recent weeks of alternative mortgage lender Home Capital Group Inc. has exacerbated such concerns.

B.C., home to Canada’s third-most populous city and its most expensive property market, led Canadian growth for the second consecutive year in 2016, with an expansion of 3.7 percent. That was the fastest pace in a decade — fueled by a 17 percent jump in residential home construction. In Vancouver, it’s biggest city, the cost of a typical home has surged to about 12 times median household income, prompting public outrage.

Homsy says there’s unlikely to be much difference between a Liberal or NDP win for the province’s finances. B.C. has posted a budget surplus for five consecutive years and is Canada’s only AAA rated province. But the perception that the NDP is less friendly to business could have an impact.

Consumer Confidence

British Columbia bonds have returned 3.2 percent this year, trailing gains of 3.4 percent for Ontario and 3.6 percent for Quebec, based on an index of provincial debt tracked by Bank of America Merrill Lynch.

“The more important aspect when it comes to housing is confidence,” said Homsy. “In that context, I’d say an NDP win would probably be a dent to both consumer and business confidence. And consumer spending arguably being the most significant component of economic growth — not just in B.C. but across Canada– it’s also the thing that needs to be maintained.”

B.C., home to Canada’s biggest port and its gateway to Asia, is crucial to getting energy exports to new markets. An NDP victory would do little to lift such prospects.

“The B.C. NDP’s platform is clearly not friendly to oil and gas,” said Laurentian Bank Securities analyst Todd Kepler in an April 24 note.

Kinder Morgan

The party has pledged to review oil and gas subsidies, and the environmental risks of natural gas fracking. It’s also gone up against the NDP party in neighboring Alberta by staunchly opposing Kinder Morgan’s Trans Mountain pipeline expansion that would allow Canada to ship crude to Asian markets through B.C. for the first time.

“We will use every tool in our toolbox to stop the project from going ahead,” says the NDP’s election platform, citing a seven-fold increase in tanker traffic and environmental risks that outweigh the benefits to the province.

An NDP win isn’t fully reflected in the share prices of B.C.-dependent energy companies, including Storm Resources Ltd., Leucrotta Exploration Inc., Crew Energy Inc., and ARC Resources Ltd., according to Aaron Bilkoski, an analyst with Toronto-Dominion Bank’s TD Securities unit. “Investors in Canadian energy equities should be watching, and appropriately positioning portfolios.”

Provincial election polls in Canada have been wildly inaccurate in the past. Clark won in 2013 after an Ipsos-Reid poll showed the NDP leading by 8 percentage points the day before the election. And in Alberta’s 2012 election, the Progressive Conservative party won 44 percent of the vote after every major poll had predicted a Wildrose party victory.

Rafi Tahmazian, who manages about C$1 billion of energy investments at Canoe Financial in Calgary, has cut his Canadian energy holdings in recent years and plans to trim them further as NDP policies weigh on the sector. An NDP victory in B.C. could bring even more delays to projects like Trans Mountain and Petronas’ LNG terminal, stricter environmental policies, and more restrictions on deep gas drilling, he said.

“The most powerful signal it sends to the global community is we’re still on the path of creating a more controversial jurisdiction of risk,” Tahmazian said.

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