Work to expand the oil pipeline is now forecast to cost more than $17 billion and likely won’t be done until sometime in 2023, sources say
CALGARY — After facing interruptions caused by volatile weather and the pandemic, the Trans Mountain expansion is expected to run over budget by several billion dollars — and the federally owned pipeline project won’t be completed this year as planned.
Work to expand the oil pipeline is now forecast to cost more than $17 billion and likely won’t be done until sometime in 2023, sources say.
Ottawa purchased the pipeline almost four years ago from Kinder Morgan Canada for $4.4 billion after it appeared the private owners were set to walk away from the expansion as it faced a series of hurdles to be built by late 2020.
At the time, the project’s price tag was pegged at $7.4 billion, but soon moved higher. It climbed to $12.6 billion in early 2020 and is headed up again.
“At the end of the day, it all needs to be approved by the government before it’s a real number, so who knows how it might tweak around,” said one person with knowledge of the increase.
“It’s more a combination of things over the past two years.”
Officials with the federal government and Trans Mountain Corp. declined to comment.
“At this time, we have no update to the cost or overall schedule of the project,” said a statement from the Crown corporation responsible for the development.
The long-awaited expansion of the pipeline, which moves oil and refined products from the Edmonton area to a terminal at Burnaby, B.C., is being closely watched by the Canadian oil industry.
Once built, the Trans Mountain Expansion (TMX) project will nearly triple the capacity of the 1,150-kilometre pipeline, shipping 890,000 barrels per day to the Pacific Coast for export.
Former TransCanada Corp. CEO Hal Kvisle said the budget is rising due to construction delays, regulatory obstacles, supply chain issues and difficulties working in tough terrain.
Higher capital costs will likely lead to increased tolls for producers to ship oil through the line, said Kvisle, who is also a board member of ARC Resources and Cenovus Energy.
“There have been many work stoppages and this is a major driver of cost overruns,” he said.
“I don’t know that the costs will exceed $20 billion, but it will be heading up towards that. And most people now are thinking it will be done by the end of 2023, or maybe a little bit into 2024.”
Tamarack Valley Energy CEO Brian Schmidt said the sector isn’t surprised by the timeline or costs, given the inflationary pressures facing major infrastructure developments.
“If it were delayed a bit, it would cause a little bit of pain, but not a lot,” Schmidt said.
“Whenever you have a delay, you know the costs are going up, too.”
Trans Mountain Corp. last updated the project’s price tag in February 2020, bumping it to $12.6 billion, but much has changed since, including routing work being finalized, the pandemic, extreme weather in B.C. and rising inflation.
The existing Trans Mountain pipeline shut down in November for three weeks after heavy rainfall and flooding in British Columbia. Expansion work in the Fraser Valley, Coquihalla and interior regions of B.C. was also affected.
In the fourth quarter of 2020, project-wide construction was voluntarily suspended for about two months after several safety incidents.
On Tuesday, the company issued a news release, noting pipeline construction in the Edmonton area has wrapped up. Total project construction was more than 45 per cent complete as of last month.
Analyst Phil Skolnick with Eight Capital said petroleum producers are also seeing their costs increase by about 10 per cent, rising to 20 per cent in some areas, and major energy projects face similar issues.
“The labour side of things, that would be a definite key risk,” he said.
Industry officials say it’s imperative to get the expansion finished. Oil output in Alberta increased by eight per cent in 2021, after falling by five per cent in 2020, ATB Economics said Wednesday.
“Trans Mountain remains key,” said Tristan Goodman, president of the Explorers and Producers Association of Canada.
“We recognize the frustration in costs and timelines, but we do live in a different period of time. I think that project is exceptionally well managed and it still remains going in the right direction.”
The expansion project has been years in the making. An initial application to expand the pipeline, which was built in 1953, was filed with regulators in 2013 and approved three years later.
After mounting opposition to the project from environmental groups, some First Nations and the B.C. government, Ottawa bought the pipeline.
Construction was delayed for nearly a year after a court decision in August 2018 quashed federal approval for the project, due to inadequate consultation with affected Indigenous communities and improper consideration of oil tanker traffic tied to the expansion.
Work restarted the following year.
Last August, officials with the Crown corporation reiterated they anticipated mechanical completion of the project by the end of this year.
From the project’s inception until the end of September, $8.9 billion in capital spending had been incurred and $1 billion in financial carrying costs capitalized, according to Trans Mountain’s third-quarter results.
Petroleum producers have faced pipeline bottlenecks for a decade, increasing the price discount facing oil moving out of Western Canada.
Projects such as Keystone XL, Energy East and Northern Gateway were stymied during that period, but the completion of Enbridge’s Line 3 Replacement Project last year has eased congestion.
Expanding Trans Mountain will add almost 600,000 barrels per day of pipeline capacity out of Western Canada, while allowing producers to transport oil to the B.C. coast for export to Asia and other markets.
“TMX will continue to be a very strategic and significant development for our industry, in terms of gaining access to new markets,” said Ben Brunnen, a vice-president with the Canadian Association of Petroleum Producers.
The West Coast Environmental Law Association noted in a report last year that officials with Trans Mountain said in regulatory filings that every month of delay in the project commencing operations would result in a loss of about $100 million.
“The delays along the route have become so numerous and are so regular they now delay the entire project,” report co-author Eugene Kung said in a news release last September.
The Trudeau government has said it will eventually sell the pipeline to the private sector, and several Indigenous groups have expressed interest.
Higher capital costs shouldn’t impede a sale as new pipelines are difficult to complete, making assets in the ground extremely valuable, said Chris Bloomer, former CEO of the Canadian Energy Pipeline Association.
“It will attract a lot of interest,” Bloomer said. “This is a situation where costs have gone up, but the shippers are still committed.”