Mar 20, 2023
Canada faces US$15B loss on oil pipeline, Morningstar says
Third-party financing secured for Trans Mountain pipeline construction
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.