Canada faces US$15B loss on oil pipeline, Morningstar says

Robert Tuttle, Bloomberg News

Canadian taxpayers may end up taking a loss of $20 billion (nearly US$15 billion) on the government-owned Trans Mountain Pipeline after costs to expand it skyrocketed, according to Morningstar Inc. 

Prime Minister Justin Trudeau’s government will probably get no more than $15 billion when it goes to sell Trans Mountain — and possibly much less, Morningstar analyst Stephen Ellis said in an interview. 

The government paid Kinder Morgan Inc. $4.5 billion for the system in 2018 after the midstream company threatened to cancel plans to nearly triple its capacity to 890,000 barrels a day. The cost of that project has soared to about $31 billion because of a range of factors including supply-chain challenges. 

“At a $31 billion investment cost, no way the pipeline is going to recover costs,” Ellis said. 

Trans Mountain is Canada’s only oil pipeline to tidewater, moving crude from Alberta to the British Columbia coast near Vancouver. The government bought it because it considers the expansion to be economically important, giving oil shippers the option to export their product to markets other than the U.S. 

“When complete, the Trans Mountain expansion will ensure Canada receives fair market value for our resources as we work to achieve net-zero by 2050,” Adrienne Vaupshas, a spokesperson for Finance Minister Chrystia Freeland, said by email. 

But Trans Mountain has to compete with Enbridge Inc.’s much-larger system that carries Canadian crude into the US as far as the Gulf Coast. That will limit the tolls Trans Mountain can charge the 20 per cent of oil shippers without contracts, keeping the returns for the pipeline “very low,” Ellis said. 

The government’s best option would to try to sell Trans Mountain to a consortium of companies that could absorb lower returns on the conduit by expanding their existing oil facilities, such as storage tanks and other pipelines that connect to it. 

A number of Indigenous groups have formed to seek an ownership stake in Trans Mountain but, so far, Pembina Pipeline Corp. is the only established pipeline company to openly express interest in buying it. The expansion is 80 per cent complete and scheduled to go into operation by the first quarter of next year.

The government says Trans Mountain is in the “national interest,” providing a route to Asian markets. Without it, Canada is beholden to one buyer — the U.S. — for its oil exports. 

“TD Securities and BMO Capital Markets have provided a public value analysis of the project, which confirms that third-party financing is a feasible option to fund the completion of the project and believe that both strategic and financial investors would participate in a divestment process” once the project is complete, Vaupshas said. 

 

Indigenous-led prospective buyer 'not going away' even as Trans Mountain costs spiral

Amanda Stephenson, The Canadian PresS

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 is 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 per cent 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 shift product on a pipeline, and they are how the pipeline company makes money).

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.

Project Reconciliation is pursuing a "minimum of a 30 per cent equity stake" in Trans Mountain, Mason said, which would mean not just economic benefits for Indigenous communities but Indigenous governance leadership through the Trans Mountain Corp. board of directors.

An equity stake that large in a major piece of energy infrastructure in this country would be precedent-setting for Indigenous communities. By contrast, the Coastal GasLink pipeline, which is also currently under construction, has option agreements in place with 16 Indigenous communities for a 10 per cent equity stake.

Some environmentalists have suggested that as the world begins to move away from fossil fuels in the coming decades, the Trans Mountain pipeline could become a stranded asset and a liability to whoever owns it.

But Mason said Friday that access to revenue streams from today’s fossil fuel industry will give Indigenous communities the ability to invest in tomorrow’s energy innovations.

 "That corridor is a valuable corridor to move what will be the next generation of energy, whether it be in the form of ammonia or pure hydrogen. That corridor is very expensive real estate," Mason said. 

"As I’ve had conversations with chiefs, you want to own this now. Because as soon as that switch flips that we’re now moving hydrogen ... the cost to get in will be way too high."

Other groups — including a partnership formed by Western Indigenous Pipeline Group and its industry partner, Pembina Pipeline Corp. — have previously expressed interest in pursuing an Indigenous-led stake in the pipeline.

Mason said while the construction of the Trans Mountain expansion is "getting close to the last spike," the negotiation of a sale is extremely complex and will take a significant amount of time. 

The federal government itself has not yet announced any type of formal divestment process.

"As we get closer to summer, I think that’s going to be more where the serious discussions start," Mason said.

“This is one of the biggest transactions in Canadian history. I’d be very surprised if it could be closed within a year."

This report by The Canadian Press was first published March 17, 2023.