PIPELINE AT ANY COST?
Alberta may pay as tab rises
The Trans Mountain pipeline expansion could cost up to $9.3 billion to build, nearly $2-billion more than current projections, according to reports this week.
For Albertans, that would come with financial ramifications. It might open the door for the province to pick up some of the tab on cost overruns facing the project.
It could also mean the Notley government becomes an investor in the existing 1,150-kilometre oil pipeline, joining the Trudeau government as co-owners.
Over budget, behind schedule — it all sounds ominous, if it comes to pass.
But the ground hasn’t really shifted. Both governments have already made their commitments.
They need to keep pushing to increase pipeline capacity out of Alberta, while trying to keep capital costs in check.
“I absolutely believe it’s in Alberta’s interest to get it built, even if it costs more,” said Richard Masson, former CEO of the Alberta Petroleum Marketing Commission.
“It’s sad that the process means it costs more, but we still need it.”
The Trans Mountain expansion will nearly triple the amount of oil moving from the province to the B.C. coast, potentially accessing new export markets and unlocking higher crude prices.
The development is currently projected to cost $7.4 billion and be operating by December 2020.
Regulatory documents filed this week by the current owner, Kinder Morgan Canada, examine the financial fortunes of different scenarios for the project, including the expansion being scrapped, the price tag jumping to $8.4 billion, or capital expenses ballooning to $9.3 billion.
Under the biggest budget, the project would not be in service until December 2021, a full year behind schedule. If the expansion is completed, however, it would remain profitable.
The examination comes after the Trudeau government agreed in May to purchase the project from Kinder Morgan for $4.5 billion.
As part of the arrangement, the Notley government will provide up to $2 billion if the project encounters unforeseen circumstances, acting as “an emergency fund.”
At this point, it might be tempting to start pulling out your hair and wondering what exactly Alberta has gotten itself into through this deal.
However, it’s important to note the price scenarios were simply part of a normal fairness opinion conducted by TD Securities for Kinder Morgan investors, who vote on the project’s sale on Aug. 30. The report concluded the sale agreement was fair to the company and its shareholders.
But is it fair to Albertans and other Canadians who are about to buy themselves a shiny new and expanded pipeline?
“The longer it’s held up, the more the price will go up,” cautioned federal Alberta Conservative MP Shannon Stubbs.
“It’s totally reasonable for Canadians to suspect it may be laying the ground for a higher price tag and further delays.”
Federal and provincial officials downplayed the document, saying the analysts were only looking at a range of hypothetical situations on which to evaluate the pending sale.
“There’s a great deal of room for cost increases before the (project’s) value for money ever became an issue — and we are not going to get anywhere close to that,” Notley told reporters Thursday.
In an interview, Federal Natural Resources Minister Amarjeet Sohi said the final price tag won’t be known until construction contracts are finalized. Focusing on the potential costs — and not the ultimate return to Alberta and Canada — is short-sighted, he stressed.
“This is a project where the benefits definitely outnumber some of the issues we’re facing with it,” he said.
“There are contractors on site who are actually doing the work and that’s the most important part. We are on schedule as was envisioned by Kinder Morgan in July.”
The words are soothing, although it seems clear the timelines are under pressure.
After all, Kinder Morgan announced April 8 it was halting non-essential spending on the initiative, putting the expansion in suspension mode for months.
What is uncertain is how these developments will ultimately affect Alberta taxpayers.
Alberta’s agreement would see the province provide money if the expansion experiences cost overruns from an unforeseen event, but exact details won’t be released until after the shareholder vote.
One federal official confirmed Alberta’s indemnity agreement doesn’t kick in at just any amount above $7.4 billion, but wouldn’t talk about the matter in detail.
“All I can say is the trigger is quite extreme, so it’s very, very unlikely to happen,” said the official.
However, Notley indicated last month she expects Alberta’s offer will be tapped at some point, saying there’s a “good possibility” the province will end up with a small equity stake.
Masson pointed out shippers using the expanded Trans Mountain pipeline would be stuck with 25 per cent of any cost increase, leaving the incoming owners facing the rest.
Based on the current $7.4-billion price, he estimates a oneyear delay would add about $400 million in additional interest expenses. Trying to meet the current timeline could also boost overtime expenses.
But all these factors don’t mean the project is a bad investment.
Existing pipelines moving oil out of Alberta are full. More oilsands production is coming. Record amounts of crude are being exported out of Canada by rail.
The price discount facing western Canadian heavy crude stood at US$30.62 a barrel on Wednesday — its widest point since December 2013 — costing producers and the governments billions of dollars annually if the situation doesn’t improve.
In the big picture, a lack of pipeline capacity is costing us a fortune.
Yes, the project costs may be rising. The timelines could slip.
But as long as both don’t spiral out of control, the deal makes sense for the new owners of the Trans Mountain pipeline.
There are contractors on site who are actually doing the work and that’s the most important part.