From the outset, when Ottawa stepped in to salvage the Trans Mountain pipeline expansion project from being abandoned by Kinder Morgan in 2018, the Trudeau government assured Canadians it had no interest in owning a pipeline, and that they would sell it once the expansion project was completed.
That was when the expansion’s estimated capital cost was $7.4 billion. The final tally came in at nearly five times that—$34 billion—raising the spectre of taxpayers having to eat a multibillion-dollar write-down, unless a potential buyer is willing to pay the full cost of the expanded pipeline and marine export terminal.
So far, the only potential buyers that have publicly expressed interest in buying the pipeline are First Nations groups. The most serious contender may be the Western Indigenous Pipeline Group (WIPG), which has a 50-50 joint venture with Pembina Pipeline Corp. called Chinook Pathways.
Given that six of the 11 First Nations in WIPG are based in British Columbia, Chinook Pathways succeeding in its bid to acquire Trans Mountain would place more of the pipeline’s equity ownership in B.C.
WPIG confirmed in an email to BIV that it doesn’t expect any decisions on the sale until the issue of tolls are resolved.
The cost of expanding the Trans Mountain pipeline isn’t the only consideration for a potential buyer. Its value depends on the revenue it will generate from tolls, and there is now a delay in setting a final toll rate.
A decision on final toll rates had been expected this fall, but that decision is now being pushed into 2025—a federal election year—which could introduce some political uncertainty into the equation.
“If the federal government thinks it can put a good deal together, one that compensates them for a good chunk, or all, of the costs incurred, they may want to sell the line prior to the next election,” said Kent Fellows, an economist with the University of Calgary and a fellow-in-residence at the C.D. Howe Institute.
“That would help them avoid accusations of project mismanagement and guard against claims of overspending on the project,” he added. “If they can’t put a good deal together, then they may decide to wait and let the next parliament inherit the project. If the Liberals are re-elected, they could then deal with the situation early in their mandate. If not, it becomes a problem for the party that forms government after the next election.”
Trans Mountain increased its capacity by 590,000 barrels per day with the addition of a second line. After the newly twinned pipeline went into operation in May, monthly oil tanker shipments increased from an average of five or six shipments per month pre-expansion, to an average of 17 per month between May and the end of October.
So, what is the Trans Mountain pipeline actually worth now?
As of June 30, 2024, Trans Mountain reported the value of its assets at $37 billion, total debt at $26 billion and equity of $8 billion.
Canada’s Parliamentary Budget Officer (PBO) recently estimated Trans Mountain to be worth $33.4 billion if long-term contracts are renewed after 2040, and $29.6 billion if they are not.
There are10 shippers with 15- and 20-year take-or-pay contracts that account for 80 per cent of the pipelines’ capacity. The tolls they are now being asked to pay are higher than expected, as a result of massive construction cost overruns, and some shippers are not very happy about it.
The Canadian Energy Regulator (CER) was expected to make a final determination on tolling rates this fall, but that is now being delayed, with hearings on toll rates expected to start in May 2025 and run into the summer.
Some shippers are objecting to the proposed toll rates.
Burnaby refinery owner Parkland Corp. has warned that higher tolls will raise the price of gasoline and diesel. In a letter to the CER, Parkland said the proposed toll rates have “dramatically” increased from $5.76 per barrel to $10.88 per barrel.
“The resulting rate shock that the proposed interim tolls will cause does not serve the public interest,” Parkland wrote. “To protect the public interest, the commission should consider the reasonableness of costs in its decision in setting the interim tolls and their commencement date, especially given the magnitude of cost overruns claimed by Trans Mountain.”
In a recent report for the International Institute of Sustainable Development (IISD), Tom Gunton, a professor in Simon Fraser University’s resource and environmental planning program, argued the tolls should be more than twice the $11.37 per barrel that was proposed.
Full recovery of the cost of expanding Trans Mountain through marketplace tolls would require rates of $24.53 per barrel, he wrote, and a rate of $11.37 per barrel would constitute a subsidy to oil producers.
“The omission of the [$18.8 billion] in capital costs from the rate base represents the quantum of the subsidy benefit provided by the Government of Canada under the WTO subsidy definition,” Gunton wrote.
Trevor Tombe, an economist at the University of Calgary’s School of Public Policy, wrote that, despite the massive cost overruns of expanding the Trans Mountain pipeline project, it is “worth every penny,” and that its benefits “far surpass its cost.”
Writing in The Hub, Tombe said tolls of $11 per barrel would cover $9 billion of Trans Mountain’s cost.
“That’s high—more than double the project’s initial estimate—but far better than the alternative of hauling crude by rail,” Tombe wrote.
Based on Trans Mountain’s projected revenues and costs over two decades (the term of some of the contracts signed by shippers), Tombe estimates the pipeline’s earnings before depreciation and interest to be $26 billion to $38 billion.
“Some of that will go towards interest and debt repayment, but between $4.2 billion and $8.6 billion is left over,” Tombe wrote.
He said the benefit of the pipeline to oil producers in Alberta is “obvious” when compared to the cost of shipping by rail, and noted that it will have the effect of raising prices for Alberta oil producers. He points to a CER estimate that additional pipeline capacity for Alberta producers will add about $9 per barrel to the price of Alberta oil sands producers.
“It will mean lower-cost access to markets abroad, raising producer prices here,” he wrote.
He also noted that the Bank of Canada recently predicted the new pipeline capacity will add a 0.25-percentage-point increase in Canada’s second-quarter growth.
“Trans Mountain anticipates revenues will soon reach $3 billion and expenses of less than $500 million,” Tombe said. “Interest on the project’s large debt will exceed $1.6 billion, but this still leaves considerable cash available to start repaying debt. •
“Even better, interest costs will gradually fall while revenues and profits rise. The pipeline will be highly profitable for many years.”
(An earlier version of this story stated there are 11 shippers with long-term contracts. According to Trans Mountain,there are only 10 shippers now with long-term contracts)
