The Canada Energy Regulator has given an 11th-hour green light to the over-budget, federally-owned Trans Mountain pipeline, currently under construction in Western Canada.
In a ruling posted to its website late Friday, the regulator gave its blessing to the pipeline giant to change its routing methodology in a 2.3-kilometre stretch of construction in B.C.’s Fraser Valley.
Trans Mountain’s engineers had initially applied to the regulator to dig a 36-inch pipe through a stretch of mountainous terrain near Hope, B.C. However, the company later discovered that hard rock formations would make boring through a pipe that wide very challenging.
Last fall, the company applied to the regulator to reduce the pipe size to 30 inches, a move its engineers said would not impede the flow of oil gushing through the pipeline.
The regulator, for its part, initially rejected that application, citing unconvincing evidence from the company that the alteration would ensure the integrity of the pipe and the oil flowing through it.
“The Commission of the Canada Energy Regulator has determined that Trans Mountain did not adequately address concerns about pipeline integrity and related environmental protection impacts,” the regulator cited in its reasons for rejecting the application.
This prompted Trans Mountain to issue a particularly stern warning – that refusing to grant it permission to drill a smaller pipe would lead to a “catastrophic” two-year delay and billions of losses as a result.
On Friday, Trans Mountain’s lawyer, Sander Duncanson, appeared at a hearing before the Canadian Energy Regulator in Calgary to argue that the company had taken all the necessary steps to ensure that the pipe size variance would be safe and built to stringent standards.
“The commission must be mindful that every day counts now,” Duncanson told the commissioners.
Upon hearing reassurances from Trans Mountain, the regulator agreed with the company’s second, updated application.
Growing debt, and delays
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The pipeline, purchased for $4.7 billion from a Texas energy giant by Justin Trudeau’s Liberal government in 2018, has incurred an additional $31 billion in construction costs. This puts the current overall cost of the project’s acquisition and construction at $35 billion.
Last month, on the Friday before Christmas, an additional $2 billion in commercial loan guarantees was announced on Export Development Canada’s website. This loan guarantee pushes the total amount of government-backed loans provided to Trans Mountain by a group of Canadian banks up to $18 billion.
This is on top of an additional $16.5 billion in debt charged to the federal government’s “Canada Account.”
Robyn Allan, an independent economist whose decade-long costing calculations have demonstrated remarkable accuracy, told Global News the additional $2 billion in loan guarantees was because Trans Mountain knew it needed more money, beyond the $35 billion already incurred to acquire and build the project, to get the job done.
“They know they’re not going to have enough to get them through now, they went out and borrowed another $2 billion,” she said.
The feds have backstopped other major infrastructure projects in Canada to the tune of billions. For example, Ottawa gave the massively over-budget Lower Churchill Hydroelectric project in Labrador loan guarantees on $9.2 billion in bond debt borrowed from 2013 to 2017, debt which is still owing.
But Trans Mountain’s case is precarious, Allan and other experts Global News spoke with say, because the company will only be able to pay off the debts with tolls, or fees, it charges shippers to pump oil through the line. And, as it stands, the fees currently approved to be charged to those oil companies will only cover about half the cost of the pipeline.
Pipeline Prospects
Not all analysts are sour on the pipeline’s prospects.
Last June, Bank of Nova Scotia analyst Robert Hope published a report estimating that Trans Mountain might generate a profit (before interest and taxes) of $2.4 billion in 2025 and $2.6 billion in 2026 as oil starts gushing from Alberta to an ocean port in Burnaby, B.C.
The analyst suggested Trans Mountain was worth $26 to $29 billion.
Stephen Ellis, a strategist with Morningstar, a financial services firm, believes the line is “very much needed” to move Canadian crude to tidewater. But, he estimates the pipeline’s maximum value at no more than $15 billion.
This, Ellis says, means a massive write-off from the federal government is in the cards — which, ultimately, would be borne by Canadian taxpayers.
“If this were a private firm,” he told Global News, “we […] would not necessarily be in the situation that we are now because I doubt that a private firm would have underwritten this level of valuation and this level of financial spending.”
Circuitous, costly road for Trans Mountain
Trans Mountain has cited a number of reasons, from supply chain challenges and soaring inflation to less productive rookie, “green-hand” labourers and unforeseen weather events, as reasons behind the massive cost overruns.
On Friday, the energy regulator’s commissioners alluded to the fact that it’s taken a decade, and billions in unforeseen construction costs, to get the job done.
But the pipeline company’s lawyer, Duncanson, cited the complexity of building an 1,100-kilometre pipeline as a reason for the “unforeseen” events.
Nonetheless, the expansion project’s final price tag will almost certainly be more than $35 billion — once the final construction bill, and debt servicing costs, which Allan estimates in the range of $2 billion a year once oil starts following, are taken into account.
In April 2022, Ottawa agreed to defer the interest payments on Trans Mountain’s debt so that the company could stay solvent and finish the job. In accounting terms, this is known as “interest in kind.”
But once the loan terms are up in August 2025, incidentally, just weeks before an anticipated federal election, that interest debt will need to be paid back, in addition to the $31 billion in construction loans.
“As soon as that project’s operating, they can no longer [defer the interest],” Allan says.
“So that $2 billion in interest [costs] we’re talking about will have to become an expense.”
