Pipeline’s profitability questioned
High costs mean expansion ‘not profitable as a stand-alone project,’ says U.S. think tank report
The ballooning cost of the Trans Mountain pipeline expansion could make the government-owned project a money-losing enterprise for the Canadian public, according to a new report from a sustainable energy think tank.
Deputy Prime Minister and Finance Minister Chrystia Freeland announced on Feb. 18 that the expected cost of the controversial project had skyrocketed 70 per cent from $12.6 billion to $21.4 billion. At the same time, Freeland vowed the government would stop putting public money into the expansion, and that the Crown corporation that is building it would raise the extra funds from the private market.
But a new report published Wednesday casts doubt on whether the completed project can be profitable enough to attract investors without more money from federal coffers.
The Institute for Energy Economics and Financial Analysis, a sustainable energy think tank based in the U.S. state of Ohio, analyzed a range of financial reports from Trans Mountain and other agencies, as well as data from Canada’s federal pipeline regulator. Its conclusion is that the Trans Mountain expansion “is not profitable as a stand-alone project.”
The institute predicts Trans Mountain — the Crown corporation that owns the existing pipeline from near Edmonton to the B.C. coast, and is building the expansion beside it — will need to double the fees it charges oil companies to use its pipeline, a move that would undercut the project’s purpose of selling more Canadian fossil fuels overseas.
“A 100-per-cent increase in shipping costs, coupled with Canada’s already high production costs, would result in a price that would prevent Canadian oil from breaking into Asian markets,” the report says.
The institute also questions Freeland’s claim the government won’t need to put more public money into the project. This is because Trans Mountain got a “low” interest rate by borrowing $4.7 billion to buy the project and another $9.1 billion for construction from a federal development agency. To get a similar low rate for the additional $8.8 billion in construction costs from the private market, the federal government will need to guarantee the debt, the report says.
That will put billions more public dollars at risk, since the total the government is spending on the project “may not be fully paid back by the time the asset becomes stranded and unusable” as the global energy market shifts away from fossil fuels in coming decades, the report says.
Its authors compare the situation to Alberta’s $1 billion investment in the Keystone XL project, which the province lost after U.S. President Joe Biden cancelled the project last year.
“Any dreams of positive returns for investors have been dashed,” the report says on the Trans Mountain expansion.
The Crown corporation building the expansion insists the “business case” for the project “remains sound.” In a statement last month, Trans Mountain said the project will reap billions in taxes and royalties over the next 20 years.
The federal government has also said it conducted analyses of the project with two major banks, BMO and TD, which concluded it was possible to raise the extra funds for constructing the expansion from private investors.
The price of oil is also surging at the moment, after Russia — the world’s third-largest oil producer — invaded Ukraine.
The federal government purchased the Trans Mountain pipeline system from Kinder Morgan, a Texas-based oil company, for $4.7 billion in 2018. At the time, the future of the project to build another pipeline alongside the existing system was in doubt, and the Liberal government said it wanted to ensure the expansion was ultimately built.
But even before then, the project was controversial. Indigenous nations along the project pathway oppose the project.
The Trans Mountain expansion is currently slated for completion in the second half of 2023.