Sometime in the first quarter of 2024, oil and refined fuels from Alberta are expected to begin flowing on the expanded Trans Mountain pipeline – provided, of course, it doesn’t suffer the “catastrophic” two-year delay that the company recently warned about.
The twinning project – now expected to cost a staggering $31 billion – triples the pipeline’s capacity from 300,000 to 890,000 barrels per day, and expands the Westridge Marine Terminal in Burnaby, which will facilitate increased exports by oil tanker.
Last month, Trans Mountain Corp. – a federal Crown corporation – warned the Canadian Energy Regulator (CER) that the project could face another costly delay if the CER doesn’t approve a minor variance to the pipeline’s size in one 2.3-kilometre section of its route.
Trans Mountain’s reclusive CEO Dawn Farrell declined an interview request from BIV and to answer questions about massive cost overruns and the project’s potential delay.
Farrell was named CEO in August 2022, but has remained largely out of the public eye. In early October 2023, in what was described as the first media interview that she had granted in the 13 months since being named CEO, The Globe and Mail described her as “ÎÚÑ»´«Ã½’s most elusive chief executive.”
She offered no explanation for how the expansion project’s estimated cost could have increased by nearly $10 billion in the time since she took the helm as CEO, except to say that all major energy infrastructure projects have experienced cost inflation. (In March, Trans Mountain revealed that the estimated capital cost to finish the project had jumped from $21.4 billion to $30.9 billion.)
Should Trans Mountain get its variance and finish on time, the latest expected commercial operations date is the end of March 2024.
The biggest beneficiary of the expanded pipeline will be Alberta, though University of Calgary economist Kent Fellows says British Columbians may also benefit from lower gasoline prices, and ÎÚÑ»´«Ã½ as a whole will benefit economically, says Kevin Birn, Canadian oil markets analyst for S&P Global.
“The reality is that ÎÚÑ»´«Ã½ benefits from the value of the exports,” Birn said. “Certainly Alberta – as the royalty owner – you could argue benefits the most, but the federal government captures a significant amount of revenue through tax and associated income tax so I think there is a broader economic benefit to the country.”
The expanded pipeline – which runs 1,150 kilometres from Edmonton to Burnaby – gives oil producers in Alberta more access to tidewater and, therefore, global markets and higher prices.
“The biggest benefit to a Canadian producer is, once they get that barrel on tidewater, it can move to the highest price globally,” Birn said. “So it opens up so many potential markets for Canadian operators.”
In 2019, the Justin Trudeau government estimated the project would generate additional revenues of $73 billion over 20 years for Canadian oil producers, and $46 billion for government:
- $5.7 billion for ÎÚÑ»´«Ã½
- $19.4 billion for Alberta; and
- $21.6 billion for the rest of ÎÚÑ»´«Ã½.
ÎÚÑ»´«Ã½ has benefited from thousands of construction jobs and billions in procurement spending on the project, and Fellows said British Columbians may also benefit from slightly lower gasoline prices.
“On the retail gasoline side, I actually think there is a pretty strong argument to be made that this will provide some price relief for drivers, both in the interior and in the Lower Mainland and on the island,” he said.
Trans Mountain is a batched pipeline, meaning it can carry different types of fuels – from heavy crude to light oil and refined fuels like gasoline.
But Fellows notes that, in 2015, the National Energy Board (replaced by the CER) introduced rule changes that increased the amount of oil allowed on the pipeline at the expense of refined fuels from Alberta refineries.
Also, the Parkland Corp. (TSX:PKI) refinery in Burnaby has been limited in the amount of crude it can get, since much of the crude that flows on Trans Mountain goes to Washington state refineries. The Parkland refinery provides 25 to 30 per cent of the refined fuels for the southwest region.
Since the balance of refined fuels used in the Lower Mainland region have to move by rail, truck and barge – including from Washington state – that has contributed to higher wholesale prices in ÎÚÑ»´«Ã½ Add to that a whole suite of taxes that other cities, like Calgary, don’t pay, and Vancouver has ended up with the dubious distinction of having some of the highest gasoline prices, not just in ÎÚÑ»´«Ã½, but in North America.
“I would expect that what we’ll see, with new capacity on that line, is we’ll see those (wholesale) prices come back into line so that the Vancouver price will start to move with the Edmonton price a little bit more closely,” Fellows said. “It will still be a little higher, to reflect the pipeline toll, but I would not at all be surprised to see price relief on that with new refined product shipments. And you’ll get more consistent shipments to the Burnaby refinery, which has been quite an issue for them for quite a long time.”
Relief at the pumps could be short-lived, however, if tolls are significantly increased to pay for the massive capital cost overruns on TMX. Over a 10-year period, the Trans Mountain pipeline expansion’s estimated capital cost increased 354 per cent – from $6.8 billion in 2013 to $30.9 billion today.
The Trudeau government – which owns the pipeline – hopes to sell it, once the expansion is complete, and a number of First Nations groups, like the Western Indigenous Pipeline Group, want to buy it.
But the massive cost escalation means that the Trudeau government may either need to take a big write-down on the pipeline, or the tolls that shippers pay will need to be increased substantially.
For investors, the key number isn’t the cost of acquiring the pipeline, but the revenue they might expect to get from tolls, Fellows said.
“We think about the pipeline in terms of the cost, and you try to sell it to recoup the cost,” Fellows said. “But if I’m just a private investor and I’m looking at whether this is a good investment or not, I need to know what the tolls are going to be, because I need to know what my revenue’s going to be on the line.”
And if the tolls are increased significantly, that could erase the savings at the pumps.
“I would still expect, right after the pipeline opens, that first year or two, to have a pretty significant price effect,” Fellows said. “That may be reversed, if tolls end up egregiously high.”
