Construction costs for the pipeline have risen to US$30.9 billion
The Canadian Press
Published Mar 17, 2023 •
Article content
CALGARY — An Indigenous-led initiative says it is still pursuing ownership of the Trans Mountain pipeline, in spite of the project’s ballooning price tag.
Project Reconciliation managing director Stephen Mason says his group isn’t going away just because Trans Mountain Corp. announced last week that construction costs for the project have risen to US$30.9 billion.
The Trans Mountain pipeline was bought by the federal government for US$4.5 billion in 2018 after previous owner Kinder Morgan Canada Inc. threatened to scrap the pipeline’s planned expansion project in the face of environmentalist opposition.
Construction on the pipeline is still ongoing, and is expected to be completed later this year.
The federal government has indicated it does not wish to be the long-term owner of the pipeline, and has said it is open to the idea of Indigenous ownership.
But due to existing contractual agreements with oil shippers, only 20 to 25 per cent of the rising capital costs of the project can be passed on to oil companies in the form of increased tolls.
Indigenous-led prospective buyer 'not going away' even as Trans Mountain costs spiral
Project Reconciliation in Calgary working to facilitate
purchase for 129 First Nations
An Indigenous-led initiative is still pursuing ownership of the Trans Mountain pipeline, in spite of the project's ballooning price tag.
"We are not going away, just because it's $30.9 billion. We are entering into the early stages of negotiations," said Stephen Mason, managing director of Project Reconciliation, a Calgary-based group that is working to facilitate the purchase of a major equity stake in the pipeline for the 129 First Nations along the route.
"Yes, there are a couple of other proponents out there, but I think the federal government has recognized our readiness."
The Trans Mountain pipeline — Canada's only pipeline system transporting oil from Alberta to the West Coast — was bought by the federal government for $4.5 billion in 2018 after previous owner Kinder Morgan Canada Inc. threatened to scrap the pipeline's planned expansion project in the face of environmentalist opposition.
Construction on the expansion is still ongoing, and it's expected to be completed later this year.
However, capital costs of the project have been steadily spiralling. Last week, Trans Mountain Corp. announced its estimated price tag for the project has increased once again, this time to $30.9 billion — a 44 per cent increase from the $21.4-billion cost projection placed on the pipeline expansion project a year ago, and more than double an earlier estimate of $12.6 billion.
The federal government has indicated it does not wish to be the long-term owner of the pipeline, and has said it is open to the idea of Indigenous ownership.
But due to existing contractual agreements with oil shippers, only 20 to 25 per cent of the rising capital costs of the project can be passed on to oil companies in the form of increased tolls. (Tolls are the rates oil companies pay to ship product on a pipeline).
A report from the Parliamentary Budget Officer last June found the federal government stands to lose money from its investment in the pipeline, and suggested that if the project were cancelled at that time, the government would need to write off more than $14 billion in assets.
Mason did not say what his group is prepared to bid for a stake in the pipeline, but he said the ultimate selling price will only be what a buyer is willing to pay and will therefore reflect the anticipated return on investment.
"It's commercial value. It doesn't matter (who the buyer is), they will only pay what the commercial value is and what the tolls will support," he said.
Trans Mountain Pipeline project 80% done
Arthur Williams
a day ago
Trans Mountain's 600-bed work camp, located just outside Valemount,
The $30.9 billion project to expand the capacity of the Trans Mountain Pipeline is close to 80 per cent complete, and on track to be done by the end of the year.
The expanded oil pipeline is expected to be mechanically complete this year and in operation in the first quarter of 2024, according to information released by the company. The project employed an average of 2,409 people in the Valemount/North Thompson section of the project between October and December last year.
“Canada has among the world’s highest standards for the protection of people, the environment, and Indigenous participation when building major infrastructure projects. By including these commitments into the project design and development from the beginning, we have ensured the project will provide economic benefits to Canadians well into the future,” Trans Mountain Corp. president and CEO Dawn Farrell said.
Once the expansion project is completed, the pipeline’s capacity will nearly triple from 300,000 barrels per day to 890,000 barrels per day. The 1,150-kilometre pipeline between Strathcona County, Alta. and Burnaby was first built in 1953.
An independent economic impact assessment on the project conducted by Ernst & Young LLP (EY) in March estimated that during construction the project will contribute a total of $52.8 billion in gross output, including $11 billion in wages. Once complete, the project is expected to contribute to $17.3 billion to the economy, including $2.8 billion in wages, over the next 20 years.
OPINION
The Trans Mountain pipeline purchase has been a (necessary) failure
In the spring of 2018, the American pipeline company Kinder Morgan gave up on the Trans Mountain oil pipeline, despite having government approval to triple its capacity between Edmonton and Vancouver.
It was a fraught time in the oil business. Prices for Canada’s No. 1 export were low for a fourth consecutive year, yet rising output in the oil sands stoked worries about adequate pipeline capacity.
The federal Liberals were about to pass major climate legislation, including a carbon tax. They had also approved two large export pipelines – TMX and Line 3 to the U.S. Midwest – but rejected a third, Northern Gateway in British Columbia. A fourth project, the Alberta-to-Texas Keystone XL, was mired in the U.S. courts.
The spectre of TMX’s demise spooked Ottawa. Alberta wanted pipelines, especially to the West Coast to reach Asia, but no one in industry stepped up. Ottawa paid Kinder Morgan $4.5-billion for the existing pipeline and the expansion, whose budget was $7.4-billion. The deal was billed as a “sound investment opportunity.” Ottawa suggested it would sell before construction was complete.
Five years later, Canadians still own the pipeline and TMX’s budget is, as of last week, $30.9-billion, up more than 40 per cent from a $21.4-billion estimate a year ago and four times greater than in 2018. It is supposed to be moving oil by this time next year.
The cost escalation – and the consistent understating of costs by Trans Mountain Corp., the company Ottawa bought – is a financial disaster. But the project is a political necessity: the landlocking of Alberta oil would have had disastrous consequences for national unity.
Several independent analyses last year, including one by the Parliamentary Budget Officer, showed Ottawa will lose money on Trans Mountain – and that’s when TMX’s cost was $9-billion lower. TMX now looks like the biggest industry bailout in the country’s history, coming as the oil industry is enriched by windfall profits.
Trans Mountain casts the blame, of course, on inflation and supply chains. It also blames mountainous terrain in B.C., where the old pipeline runs alongside a major highway. It even blames the challenge of building a new pipeline through urban areas of B.C.’s Lower Mainland. One wonders why pipeline executives and engineers were surprised to discover mountains and cities during construction.
A year ago, Finance Minister Chrystia Freeland declared no more public money for TMX. So Trans Mountain got a $10-billion loan from the banks – guaranteed by Ottawa. Trans Mountain is again looking for loans. Presumably, Ottawa will again guarantee the debt. It’s not public money, but Canadians will be on the hook for it.
Bankers have told Ottawa the expanded pipeline will make an EBITDA operating profit of $2.4-billion a year. This appears ambitious. Capacity will triple to about 900,000 barrels a day – but annual EBITDA profit at 300,000 b/d is about $200-million, less than 10 per cent of the expected profit.
Ottawa still wants to sell the pipeline. It has shielded Trans Mountain from some debt, holding it instead in several public entities: Canada Development Investment Corp.’s TMP Finance Ltd., and the “Canada Account” at Export Development Canada. Companies that will ship oil are also shielded, responsible for only a small portion of the new costs.
But once oil flows, and if it garners a higher price per barrel as Ottawa and industry promise, oil company profits will be bolstered. Alberta’s treasury could see several extra billion per year. The only losers are Canadian taxpayers.
TMX, however, could be pragmatically cast as a necessary evil. In 2018, the prospect of no new pipeline at all seemed grim. TMX solves the capacity question – Canada will never need another new oil pipeline again. And when it opens, it will lessen Canada’s dependence on U.S. buyers.
Of the pipelines planned in the 2010s – TMX, Northern Gateway, Keystone XL and Energy East – it was always TMX that made the most strategic sense. Still, when Canadians look back in 2050, spending more than $30-billion on a fossil fuel pipeline, all of the cash either public money or backed by the public, will not seem like the savviest investment.
It’s clear that TMX has not turned out to be a sound investment opportunity, as Ottawa first said. To the contrary, it’s a failure, financially speaking. But given Canadian political realities, TMX is a necessary failure.
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