The federal Crown corporation building the Trans Mountain pipeline expansion now says the project’s final cost will come in at about C$34 billion, 10% higher than its May, 2023 estimate of $30.9 billion, and more than six times above the original project price of $5.4 billion in 2013.
That’s according to a regulatory filing Trans Mountain Corporation provided to the Canada Energy Regulator on Monday. The tally is still subject to final costs and expenses once the pipeline project is complete.
The company said it will need about three months after construction concludes before it can provide a final cost estimate, The Canadian Press reports.
“The latest cost increase—this time due to construction challenges that are delaying the new line’s startup into the second quarter—marks another setback for a project that Prime Minister Justin Trudeau has expended significant political capital on,” Bloomberg News writes. “Trudeau’s government bought the line to save the expansion project from cancellation,” following an extraordinary ultimatum from its previous owner, Texas-based Kinder Morgan Inc. The government’s goal at the time was to “give Canada’s oil producers a way to sell their crude to markets in Asia, boosting prices and lessening their dependence on the U.S.”
TMX said it expected firm service contracts with those producers to go into effect May 1, CP writes. In a note to client, RBC Capital Markets analyst Greg Pardy said that date represents a one-month delay from Trans Mountain’s previous commitment. The company has indicated that every month lost costs it $200 million in revenue.
The expansion project, for which construction is more than 98% complete, has been under way for more than three years. Fossil fuel producers have already begun ramping up production in expectation of the additional export capacity, and they’re hoping it will increase the price they can charge for their product.
But Canadian oil sands companies will still have to pitch their product at a considerable discount, and the coveted price relief they’ve been seeking for so long “may be short-lived,” Reuters reported last week, citing industry analysts.
“Once TMX is operating, Canadian heavy crude differentials should narrow to around US$10 to $12 a barrel under U.S. benchmark crude from more than US$19 a barrel currently,” the news agency wrote. But “oil sands production is rising so rapidly that some market players think Canada could again run out of pipeline space in less than two years,” not the four or five years the industry had hoped for.
“The prospect for more bottlenecks would likely widen the discount again, and could deter companies from longer-term investments in growing Canada’s production,” Reuters added. Meanwhile, multiple independent assessments point toward a looming drop in global oil demand as renewable energy, energy efficiency, and electric vehicles gain momentum, with more investors beginning to pivot toward lower-carbon options that can offer them steadier financial returns.
Meanwhile, CP says, Trans Mountain has been racing against the clock as it deals with difficulties drilling through hard rock in British Columbia’s Fraser Valley between Hope and Chilliwack.
A company spokesperson said earlier this month that the latest problems are related to an obstruction discovered while attempting to pull the pipe into the hole drilled for it.
The ballooning costs of the project are expected to reduce the sale price the federal government can hope to receive when it sells the pipeline. The government has already launched talks with more than 120 western Canadian Indigenous communities whose lands are located along the pipeline route, to find out if any of them are interested in acquiring an equity stake.
But there, too, Bloomberg News points to a “daunting path” for Trudeau to keep his longtime promise to sell the pipeline off, rather than making taxpayers its long-term owner.
“The prime minister has pledged to use the pipeline to generate wealth for Canada’s Indigenous people, and the government plans to essentially give a stake in it to more than 100 groups,” Bloomberg writes. But that discussion “appears to have stalled in recent months”—and beyond that, for nearly a year.
“It’s really disappointing. It’s unacceptable,” Chief Tony Alexis, head of the Alexis Nakota Sioux Nation, told Bloomberg, adding that his community had had “radio silence” from Ottawa since a meeting last September. “In the next few months, oil’s going to be flowing through that, and every day that there’s no deal in place, every First Nation is losing money,” he said.
But with that potential gain comes mounting business risk.
“Commercial ownership, whether Indigenous or other third party, was never a realistic prospect for Trans Mountain,” independent economist Robyn Allan, a former president and CEO of the Insurance Corporation of B.C., told The Energy Mix in an email last spring. “Once the project cost exceeded $7.4 billion, the government began facing a significant loss because of the preferential toll rates baked into the 20-year contracts with Alberta’s oil shippers. With each cost increase, the burden on taxpayers mounts.”
At the time, Allan placed the “cumulative taxpayer-funded loss” at about $25 billion.
The picture is scarcely better for a potential buyer, the Globe and Mail explained at the time. “Because of existing contractual agreements with oil shippers, only 20 to 25% of the rising capital costs of the project can be passed on to oil companies in the form of increased tolls,” the rates fossils would pay to use the pipeline.
So if an Indigenous consortium or some other buyer did take over the project, Allan said, it wouldn’t end well for them. “With Trans Mountain’s huge debt burden, coupled with the need to reduce the use of fossil fuels, any owner of Trans Mountain faces the likely prospect of being saddled with a stranded asset.”
All of those factors add up to “massive” political stakes for Trudeau, Bloomberg wrote last week.
The decision to buy Canadians a pipeline in 2018 “was one of the most consequential and controversial moves of his eight years in power. To this day, he’s criticized by environmentalists for going ahead with plans to nearly triple its capacity to almost 900,000 barrels a day,” the news agency recalls.
“Divesting the pipeline soon would allow Trudeau to go into the next election saying that he kept his word to the western Canadian energy sector as well as Indigenous groups.” But federal officials told Bloomberg they couldn’t commit to a specific date to sell off the pipeline.
The main body of this report was first published by The Canadian Press on February 27, 2024.
