For its next trick, Ottawa must unload the $34B Trans Mountain pipeline. It won't be easy

In her budget speech to the House of Commons on Tuesday, Finance Minister Chrystia Freeland took a moment to celebrate the finishing touch on expan‐ sion of the Trans Mountain oil pipeline.

The controversial project has been plagued by delays and massive cost overruns, but Freeland instead focused on its completion, highlight‐ ing the: "talented tradespeo‐ ple and the brilliant engi‐ neers who, last Thursday, made the final weld, known as the golden weld, on a great national project."

For all the difficulties with developing and building TMX, Freeland still faces another major hurdle that is sure to prove contentious - choosing when to sell it, who gets to buy it, and for how much.

An upcoming election and more than $34 billion in con‐ struction costs are raising the stakes.

Ottawa bought the project when it was on the verge of falling apart - before there was ever a shovel in the ground - in the face of legal, political and regulatory chal‐ lenges.

The federal government has long vowed to sell the project (including at least a partial ownership stake to In‐ digenous groups) once con‐ struction was complete. That milestone has now been reached.

But the move will no doubt open a Pandora's box, says Daniel Béland, the direc‐ tor of the McGill University Institute for the Study of Canada and a professor in the department of political science.

He says any potential deal will face intense scrutiny con‐ sidering the election is due before the fall of 2025 and, most notably, because the actual sale price is expected to be far lower than the cost to actually build the pipeline.

"They were in a hot spot when they bought it back in 2018. They are still in a hot spot," said Béland.

How the governing Liber‐ als handle Trans Mountain could impact how voters view the Liberal party's handling of financial, economic, In‐ digenous, and environmental issues.

"There's risk either way. If you sell it really fast, but you sell it at the price that is con‐ sidered to be quite low, then you might be accused of just getting rid of it for political reasons but not having the interest of taxpayers in mind," he said.

"But, if you wait and you don't sell it, then you might be accused of being basically permanently involved or try‐ ing to be permanently in‐ volved in that sector of the economy in a way that many people, even people who are more conservative, may find inappropriate."

Deep discount

There has always been in‐ terest in buying it, including from Stephen Mason, the managing director of Project Reconciliation, a Calgarybased

organization which aims to use a potential own‐ ership stake to benefit In‐ digenous communities.

Nearly five years ago, Ma‐ son walked into then-federal finance minister Bill Morneau's office in Ottawa and made an offer to pur‐ chase Trans Mountain before construction had even begun on its expansion, which will transport more oil from Al‐ berta to the British Columbia coast.

Morneau was interested, he says, but the project was‐ n't for sale until the new pipeline was built.

Much has changed since that meeting in July 2019, in‐ cluding the ballooning cost of Trans Mountain to more than $34 billion (compared to an original estimate of about $7.3 billion) and numerous delays in construction.

Mason is still pursuing ownership. He won't discuss numbers, but suspects Trans Mountain is worth far less than $34 billion.

"My intuition is telling me that it's going to be a fairly significant writedown," he said. "I'm not sure the Liberal government wants to get into a public recognition of what the writedown is ahead of the election, but that is just … my speculation."

New tolls

A critical factor in the tim‐ ing and price of a potential sale is a dispute over how much oil companies will have to pay to actually use the new pipeline.

Several large oil producers signed long-term contracts to use 80 per cent of the pipeline. However, as con‐ struction costs have soared, so too have the tolls that companies will have to pay.

Those companies have balked at the higher rates ar‐ guing they shouldn't have to bear the "extreme magni‐ tude" of construction over‐ runs. The Canada Energy Regulator has scheduled a hearing for September, at the earliest, to resolve the is‐ sue.

For now, the regulator has set an interim toll of $11.46 for every barrel of oil moved down the line. That price in‐ cludes a fixed amount of $10.88 and a variable portion

of $0.58. The fixed amount is nearly double what Trans Mountain estimated it would be in 2017.

"There's no way that you can have tolls high enough on TMX to cover a $34 billion budget," said Rory Johnston, an energy researcher and founder of the Commodity Context newsletter, who de‐ scribes the cost overruns on the project compared to the original estimates as "gigan‐ tic."

WATCH | The climbing costs of TMX:

He doesn't expect the fi‐ nal tolls to be much higher than the interim amount be‐ cause, otherwise, the pipeline could become too expensive for oil companies to want to use. Based on the interim tolls, Johnston expec‐ ts the federal government to likely only recover about half of the money it spent to buy and build Trans Mountain.

"There's no way anyone would pay the full cost of the pipeline because the tolls don't support it. You're going to need to discount it. You're going to need to take a hair‐ cut of at least 50 per cent of this pipeline," he said.

The federal government currently owns the original Trans Mountain pipeline, built in 1953, the now-com‐ pleted expansion and related facilities including storage tanks and an export terminal. Potential buyers

The federal government has looked at offering an eq‐ uity stake to the more than 120 Western Canadian In‐ digenous communities whose lands are located along the pipeline route, while finding a different buyer to be the majority owner.

Besides Project Reconcili‐ ation, other potential buyers include a partnership be‐ tween the Western Indige‐ nous Pipeline Group (WIPG) and Pembina Pipelines.

The group has the sup‐ port from about 40 Indige‐ nous communities and hopes to purchase the project within the next year, said Michael Lebourdais, an WIPG director and chief of Whispering Pines/Clinton In‐ dian Band, located near Kam‐ loops, B.C.

Those communities have to live with the environmen‐ tal risk of a spill, so they should benefit financially from the pipeline, he says.

Pension funds and other institutions could pursue ownership too.

"There will be buyers. I'm not sure that they'll be willing to pay the full cost of con‐ struction but I think there'll be buyers for sure," said Jack‐ ie Forrest, executive director of the ARC Energy Research

Institute.

The federal government will likely highlight the overall economic benefits of the new pipeline and the expected role of Indigenous communi‐ ties in ownership, experts say, as a way to defend against criticism if the even‐ tual sale price is low.

In her Tuesday speech, Freeland was already pro‐ moting the pipeline's ex‐ pected financial boost by highlighting the Bank of Canada's recent estimate that the new Trans Mountain expansion will add one-quar‐ ter of a percentage point to Canada's GDP in the second quarter.