Achi news desk-
In her budget speech to the House of Commons on Tuesday, Finance Minister Chrystia Freeland took a moment to celebrate the finishing touches on the Trans Mountain oil pipeline expansion.
The controversial project has been plagued by delays and massive cost overruns, but Freeland instead focused on its completion, pointing to the: “talented craftsmen and brilliant engineers who made the final weld, known as the golden weld , last Thursday. a national project.”
For all the difficulties with developing and building TMX, Freeland still faces another big and sure-to-be-controversial hurdle – choosing when to sell, who to buy, and for how much.
An upcoming election and more than $34 billion in construction costs raise the stakes.
Ottawa bought the project when it was about to fall apart—before a shovel was ever in the ground—in the face of legal, political and regulatory challenges.
The federal government has long promised to sell the project (including at least a partial ownership stake to Indigenous groups) once construction is complete. That milestone has now been reached.
But the move will undoubtedly open Pandora’s box, said Daniel Béland, director of McGill University’s Institute for the Study of Canada and a professor in the political science department.
He says any potential deal will face intense scrutiny given the election is due to take place before the fall of 2025 and, most notably, because the actual sale price is expected to be well below the cost to build’ the pipeline actually.
“They were in a hot spot when they bought it back in 2018. They’re still in a hot spot,” said Béland.
The way the governing Liberals handle Trans Mountain could affect how voters see the Liberal party’s handling of financial, economic, Indigenous and environmental issues.
“There is a risk either way. If you sell it very quickly, but you sell it at what is considered quite a low price, then you could be accused of getting rid of it purely for political reasons but without have taxpayers’ interest in mind,” he said.
“But if you wait and you don’t sell it, then you could be accused of basically being permanently involved or trying to be permanently part of that sector of the economy in a way that a lot of people , even people who are more conservative, may find it inappropriate.”
A deep discount
There has always been interest in buying it, including from Stephen Mason, managing director of Project Reconciliation, a Calgary-based organization that seeks to use a potential ownership stake to benefit Indigenous communities.
Almost five years ago, Mason walked into then federal finance minister Bill Morneau’s office in Ottawa and made an offer to buy Trans Mountain before construction had even begun on its expansion, which will transport more oil from Alberta to the coast of British Columbia.
Morneau was interested, he said, but the project was not for sale until the new pipeline was built.
Much has changed since that July 2019 meeting, including the cost of Trans Mountain ballooning to more than $34 billion (compared to an original estimate of about $7.3 billion) and numerous construction delays.
Mason is still pursuing ownership. He won’t discuss numbers, but he suspects that Trans Mountain is worth much less than $34 billion.
“My intuition tells me it’s going to be a pretty significant decline,” he said. “I’m not sure the Liberal government wants public recognition of what needs to be done before the election, but that’s just … my guess.”
New customs
A critical factor in the timing 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 major oil producers signed long-term contracts to use 80 percent of the pipeline. However, as construction costs increase, so do the tolls that companies will have to pay.
Those companies have balked at the higher rates arguing that they should not have to bear the “extreme amount” of construction overruns. The Canadian Energy Regulator has scheduled a hearing for September, at the earliest, to resolve the issue.
For now, the regulator has set an interim toll of $11.46 for each barrel of oil moved down the line. That price includes a fixed amount of $10.88 and a variable portion of $0.58. The fixed amount is almost double what Trans Mountain estimated it would be in 2017.
“There’s no way you can get tolls high enough on TMX to cover a $34 billion budget,” said Rory Johnston, energy researcher and founder of the Commodity Context newsletter, which describes the project’s cost overruns. to compare with the original estimates as “huge.”
Lessons could be learned from how the Trans Mountain expansion pipeline was developed and built, said company CFO Mark Maki.
He does not expect the final tolls to be much higher than the interim amount because, otherwise, the pipeline could become too expensive for oil companies to want to use it. Based on the interim tolls, Johnston expects the federal government to only recoup 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 will need to override it. You’ll need to cut at least 50 percent of this pipeline,” he said.
The federal government currently owns the original Trans Mountain pipeline, built in 1953, the now-completed extension and related facilities including storage tanks and an export terminal.
Potential buyers
The federal government has looked at offering an equity stake to more than 120 Western Canadian indigenous communities whose lands are located along the pipeline’s route, while finding a different buyer to be the majority owner.
Aside from Project Reconciliation, other potential buyers include a partnership between Western Indigenous Pipeline Group (WIPG) and Pembina Pipelines.
The group has support from about 40 indigenous communities and hopes to buy the project within the next year, said Michael Lebourdais, WIPG director and head of the Whispering Pines/Clinton Indian Band, based near Kamloops, B.C.
Those communities have to live with the environmental risk of loss, so they should benefit financially from the pipeline, he said.
Pension funds and other institutions could also pursue ownership.
“There will be buyers. I’m not sure if they’ll be willing to pay the full cost of the construction but I think there will be buyers for sure,” said Jackie 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 communities in ownership, experts say, as a way to defend against criticism if the eventual sale price is low.
In her speech on Tuesday, Freeland already promoted the pipeline’s expected financial boost by pointing to a recent Bank of Canada estimate that the new Cross Mountain expansion will add a quarter of a percentage point to Canada’s GDP in the second quarter.
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