The Trans Mountain pipeline expansion: Who wins, who loses and how did we get here?

The Trans Mountain pipeline expansion: Who wins, who loses and how did we get here?

More than a decade in the making, the $30-billion project could be a game-changer for Canadian oil

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The Trans Mountain pipeline expansion project may still be months away from completion, but industry insiders have already started speculating on how it will impact the oil sector, from a potential increase in the price of Canadian oil to the opening of new export markets.

The expansion project will twin the existing 1,150-kilometre Trans Mountain pipeline between Alberta and British Columbia and enhance the system’s export facilities. The original pipeline was built in 1953 and has the capacity to transfer about 300,000 barrels per day. The new pipeline will be able to deliver an additional 590,000 barrels per day.

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But as we near the end of construction on the government-owned project that has been more than a decade in the making, plenty of questions remain about what lies ahead.

How we got here

Houston-based Kinder Morgan Inc. first proposed expanding the Trans Mountain pipeline in 2012. Its goal was to begin construction in 2017 and start a new flow of oil in 2019.

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But the move was opposed by environmentalists who pointed out the existing pipeline had a history of spills. There have been 84 spills reported since 1961. While 70 per cent of them occurred at pump stations or terminals, 30 per cent occurred along the pipeline, with 20 incidents linked to the release of crude oil from the pipeline.

Kinder Morgan in 2017 threatened to cancel the project due to opposition from the British Columbia’s NDP government. Shortly after, the company sold the pipeline and the expansion project to the Government of Canada for $4.5 billion. The cost of the project has since increased to about $30.9 billion.

It is ridiculous to have this pipeline costing $31 billion — that is obscene

Tristan Goodman, chief executive of the Explorers and Producers Association of Canada

Trans Mountain Corp., the government-owned company that’s expanding the pipeline, attributed the rise in price to several reasons, including inflationary pressures, the catastrophic floods in British Columbia, agreements with Indigenous communities, route changes to avoid environmentally sensitive areas, wildfires and labour shortages.

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The company also had to spend additional money on cultural protection as it discovered 83,000 artifacts, which have been returned to First Nations groups, during the construction process.

Tristan Goodman, chief executive of the Explorers and Producers Association of Canada, a national lobby group representing oil and gas entrepreneurs, said the rising cost of the pipeline is due to the government’s “failed” regulatory framework for environment, energy and natural resources projects. He said the entire system needs to be looked at.

“The government’s intentions are right to have good oversight, but they haven’t figured out how to get that oversight to be efficient and cost effective,” he said. “It is ridiculous to have this pipeline costing $31 billion — that is obscene.

The expansion project is now more than 98 per cent complete and is expected to begin operating in the second quarter.

Benefits of another pipeline

The main goal of the pipeline is to ensure Canadian oil producers get better prices for their product. The price of crude oil depends upon its quality, transportation costs and market forces. Heavy crudes are sold at a lower price because they are harder to refine and yield a lower amount of gasoline and diesel. Canada mostly produces heavy crude oil from Alberta and Saskatchewan.

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The price also depends upon the distance between the producer and consumers. The greater the distance, the less producers receive for their products. It’s also cheaper to deliver oil through pipelines than trains.

It would cost about US$9 to US$10 to transport oil from Alberta to the U.S. Gulf Coast through pipelines, according to BMO Capital Markets analyst Randy Ollenberger, and about US$17 by rail. He expects the price differential between Canadian and U.S. oil to more or less reflect the transportation cost between the two markets and drop to around US$10 to US$12 per barrel from US$19 after the pipeline starts.

The new pipeline is also expected to allow Canadian producers to deliver oil to new markets, including the U.S. West Coast and Asia since the system will have better export facilities, such as ports.

For example, Ollenberger said that if a Canadian producer wanted to export oil to California, it would have to move the barrels by rail since there are no connecting pipelines. California imports heavy oil from other countries further away through tankers. Because of the new facilities being built to accommodate the Trans Mountain pipeline, Canada will be able to export barrels from the west coast using tankers, which will lower the transportation cost.

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It’s a similar situation with China. Canada exports about 150,000 barrels a day to China, he said, but they depart from the U.S. Gulf Coast via tankers.

“When the pipeline comes into service, we can send it directly from the west coast,” Ollenberger said.

The additional pipeline is also expected to give Canadian oil producers more options for refiners at the other end of the pipeline.

“If refiners know you are trapped into one pipeline, they can discount because they have other options to go to at the bottom of that line,” Goodman said. “Whereas if the producer is given another access point, they can pick up the product and say, ‘I am not going to put it through this line, I am going to put it in this new line.’ That forces competition.”

Likely winners and losers?

Enough producers have already committed to use the new pipeline to take up about 80 per cent of the planned capacity. These companies include Cenovus Energy Inc., Imperial Oil Ltd. and Canadian Natural Resources Ltd., according to Trans Mountain. The remaining capacity can be used on a spot basis.

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Imperial Oil is a minor player in terms of the pipeline reservations it has made, chief executive Brad Corson said on a conference call in February. But, overall, he said the pipeline will have a positive impact on the industry and reduce the discount in the oil prices Canadian producers receive.

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He said Imperial Oil will continue to ship crude to its usual destinations, but the new pipeline could provide it with options to ship west or south.

Cenovus has a larger capacity on the pipeline. The company on a conference call last year said the pipeline would be a “great tool” to enter new markets globally, but it expects the start-up process to be a “little bumpy” out of the gate.

There have also been talks about how the Trans Mountain pipeline might negatively affect Enbridge Inc. since it runs its own pipeline — the biggest in Canada — to transport petroleum products. However, the company in February rejected those claims, saying that oil production has been on the rise and will continue to increase.

“This notion that the Mainline is going to lose a bunch of volume when TMX (Trans Mountain pipeline expansion) comes in is a bit of a stale concept,” Colin Gruending, the company’s head of liquids pipelines, said. “It might have been valid a few years ago, but it’s been delayed materially. And in that multiyear period of delay, supply has structurally and permanently grown.”

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Ollenberger said companies don’t necessarily have to be a contractual partner of the Trans Mountain pipeline to benefit from its expansion since they may be able to sell their oil at a higher price to other markets through other pipelines, such as the one run by Enbridge.

“The benefit really is for the industry overall,” he said. “It allows the industry to receive a better price for its product and to grow.”

In anticipation of those better prices, the industry has already started to pump more oil. So much so that Goodman expects the new pipeline to be saturated within a year or two instead of five or six years as initially assumed.

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