Will Private Investors Be Willing To Pay To Expand the Trans Mountain Pipeline?

The Canadian Government has stopped funding the Trans Mountain Pipeline, whose future will depend on private investors.

The Trans Mountain Pipeline System under construction.
Source: Trans Mountain.

Future growth in Canadian oil sands now depends on private investors stepping up to pay to nearly triple the capacity of the Trans Mountain Pipeline.

The outlook changed recently when the Canadian government said it would no longer fund construction after the expected cost of the project rose 70% due to a series of challenges that pushed the expected completion back 9 months to late 2023.

Investors will be evaluating a project whose budget has risen from CAD $7.4 billion in 2017 to CAD $12.6 billion and then CAD $21.4 billion (USD 17 billion). The long list of reasons include the cost of working out agreements with opponents, design changes, COVID-19, and natural disasters ranging from wildfires to severe flooding last November at three points along the route.

When Finance Minister Chrystia Freeland held a news conference “to assure Canadians that there will be no additional public money invested in TMC,” she said they expected to complete the government-owned line by raising money from investors and lenders.

The government’s financial advisors, BMO Capital Markets and TD Securities, have said the project remains commercially viable and that financing can be arranged, Reuters reported.

For oil sands producers who have long suffered from lack of pipeline capacity to access world markets, expanding the line’s capacity from Alberta to the Pacific Coast from 300,000 to 590,000 B/D could create new demand by opening Asian markets.

The importance of Trans Mountain rose last year when construction of the Keystone XL Pipeline to the US Gulf Coast was stopped when US President Joe Biden revoked a key permit.

There is no pressing need for more capacity now because last year’s startup of the Enbridge Line 3 replacement from Alberta to Superior, Wisconsin, doubled the capacity of that line by adding about 370,000 B/D.

“As for the current pipeline capacity outlook, we expect Canada to be long pipe in the near term,” said Scott Norlin, a research analyst for Wood Mackenzie.

They expect the growth rate for oil sands output to slow compared to what it was over the past 2 decades.

“In our view Keystone was not necessarily needed given the Line 3 replacement, which began flowing volumes in October 2021, and the expectation of Trans Mountain adding capacity in Q3 2023,” Norlin said.

The funding cutoff by the Canadian government is one more obstacle among many that has dogged the expansion. Back in 2018, faced with opposition on many fronts, Kinder Morgan sold the stalled project for $4.5 billion to the Canadian government. It has since managed to settle disputes with Indigenous Peoples, British Columbia, and has worked through a massive number of permit requests.

Continued government involvement is a big plus for the future of the project whose connection to oil sands production growth makes it a prime target for environmental groups.

“Our government acquired TMC and the Trans Mountain Expansion project in 2018 because we knew that it was a serious and necessary investment. This project is in the national interest and will make Canada and the Canadian economy more sovereign and more resilient,” Freeland said, according to the Financial Post.

While the government is not putting up more money to build Trans Mountain, it still holds a multibillion stake in an investment whose value will depend on whether it is completed.

All things considered, the pipeline project has been going well, according to outgoing Trans Mountain Chief Executive Ian Anderson, who said, “The progress we have made over the past 2 years is remarkable when you consider the unforeseen challenges we have faced, including the global pandemic, wildfires, and flooding.”

Finishing that job will require support from investors and lenders. Its key asset to secure those loans is long-term contracts committing shippers and oil companies to take 80% of the capacity on the line. The Trans Mountain’s corporate website said the cost of shipping in those agreements—which require payment even if they do not choose to ship on the line—will be pegged to the final cost of the project.

The tolling agreements between Trans Mountain and its shippers “will allow for the recovery of the vast majority of the cost of construction,” the company’s website said.

With the benchmark price for the heavy crude, Western Canadian Select, at about $75/bbl recently, oil sands producers have an incentive to invest in additional production.

Long-term opposition from environmentalists to oil production growth also remains a given. After the announcement, the environmental group 350.org tweeted that the expansion should be stopped because the project “never made any sense to build during the climate crisis” and blamed the cost overruns on “climate-fueled fires, floods, and landslides.”

This year, investment in the Canadian oil and gas sector is expected to rise to CAD $32.8 billion from $26.9 billion in 2021, with nearly all the growth in Alberta, according to the Canadian Association of Petroleum Producers (CAPP).

Oil sands spending is expected to rise this year to CAD $11.6 billion from CAD $8.7 billion comprising about half the added investment for the year with the rest going into other oil and gas categories. It is a nice gain, but back in 2014 Canada attracted $81 billion in oil and gas investment, CAPP said.