Trans Mountain’s latest big cost increase catches watchers by surprise
Trans Mountain Corp. Wouldn’t have waited for an international banking crisis to release the latest cost analysis of the Trans Mountain Pipeline (TMX) expansion, but its executives probably didn’t mind the business pages being filled with stories about the second-largest bank failure in U.S. history in the last five days.
On the morning of March 10, authorities took control of Silicon Valley Bank, triggering a series of events that sent international financial markets into panic mode. Later that day, Trans Mountain announced that its new estimate of the cost to build TMX was $30.9 billion, a 44 percent increase from last year’s forecast.
The project was originally expected to cost $5.4 billion when it was first proposed by Kinder Morgan Inc. in 2013. The extent of the recent cost increase surprised even the most observant observers of the project.
“I was appalled,” said Paul Poscente, chief executive of Axxcelus Capital Advisory, whose firm advises indigenous groups hoping to acquire an interest in TMX.
Trans Mountain is the Crown Corporation that Prime Minister Justin Trudeau’s government created when it bought TMX – Canada’s only pipeline that carries crude oil from Alberta to the West Coast – in 2018 after Kinder Morgan threatened to scrap the expansion.
Poscente said that while he wasn’t expecting good news ahead of the Trans Mountain update, he was surprised by the sheer size of the climb. “Is it having a negative impact on the whole tribal property project? yes it sure does It’s absolutely disappointing on all fronts. I’m sure I’m also for the TMC team.”
Ottawa has tapped Canadian, the investing banking arms of Toronto-Dominion Bank and Bank of Montreal, to prepare a new valuation for the 1,150-kilometer pipeline and advise Trans Mountain on finding potential buyers, the federal government wants it to do exit the pipeline business.
The latest figures could complicate the sales process. Here’s what you need to know:
Why do the costs keep rising?
Recent cost increases are due to inflationary pressures and supply chain challenges, which have pushed up spending on labour, housing, food, fuel and materials, the company said. There were also significant cost increases associated with the project’s tunnel through Burnaby Mountain and higher costs as a result of construction in more populated parts of British Columbia.
Potential returns from the Trans Mountain expansion have already been pressured in recent years due to increases related to COVID-19 and catastrophic flooding in BC, which delayed construction schedules in 2021 and required significant project scope changes.
And the final bill could climb even further, as the company warned that the $30.9 billion price tag doesn’t include reserves for “extraordinary” risks. “As with all projects of this size, risk to ultimate cost and schedule remains with work completed by 2023,” Trans Mountain said.
Of course, Trans Mountain is not alone in its struggle with skyrocketing pipeline construction costs.
TC Energy Corp. reported last month that the projected cost of its Coastal GasLink pipeline, which will transport natural gas across the province of BC to the LNG Canada export facility in Kitimat, has risen to $14.5 billion — up from $11.2 billion last month last July — and could end up costing another $1.2 billion if construction extends into next year.
How are the costs reimbursed?
Exactly how TMX’s rising cost of capital will be recouped remains to be seen. Finance Minister Chrystia Freeland recently confirmed that no additional public money will be invested in the project.
It has also been clear for some time that the pipeline toll will not be sufficient to cover the increased costs. Trans Mountain’s current expectations are that oil companies operating on the line would recover between 20 and 30 percent of increased capital costs through higher tolls — although the company has said tolls will be adjusted based on the final cost of the project .
And while the government has said it will rely on banks and public debt markets to raise the money needed to complete the pipeline, independent analysts have cast doubt on the project’s economic viability, suggesting the Canadian government is privately held Should attract capital be on the table, it may need to protect potential investors and creditors by vouching for debt.
It’s an important project. Finding a commercial solution to the transfer of ownership is becoming increasingly impractical
Paul Poscente, Managing Director, Axxcelus Capital Advisory
According to a 2022 analysis by the Institute for Energy Economics and Financial Analysis, the Canadian government could have to write off most of TMX’s costs because the total investment required to build the pipeline may not be fully repaid, leaving it a stranded asset.
Why does it matter?
Federal and provincial officials in Alberta continue to defend TMX as a much-needed extension of a key infrastructure that gives Canadian producers access to global markets. The project is seen as insurance against the risk that without an increase in pipeline capacity, Canadian heavy oil could face significant price discounts in the future.
BMO Capital Markets and TD Securities have determined that third party financing is still a viable option to fund completion of the project. Banks estimate that the Trans Mountain Pipeline will generate more than $2.4 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) per year once completed, thanks to long-term supply agreements with 11 Canadian and international producers and refiners 80 percent of the available capacity.
Expanding the pipeline from 300,000 barrels per day (bpd) to 890,000 bpd will also support Canadian crude production growth and better access to global energy markets, according to a recent Ernst & Young project economic analysis.
“It’s a strong project backed by creditworthy carriers,” Poscente said. “It’s an important project. It is becoming increasingly impractical to find a commercial solution to the transfer of ownership.”
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