CRUDE AWAKENING

This article was written by Jeffrey Jones, Emma Graney, Wendy Stueck, and Brent Jang, and was published in the Globe & Mail on April 27, 2024.

Years of delays. Billions in cost overruns. A changed energy world. Now comes the hard part for Canada’s Trans Mountain pipeline – how to sell it

Oil sands crude is now flowing to the Pacific through the new Trans Mountain pipeline expansion, opening up huge new markets for Alberta producers

The most expensive infrastructure project in Canadian history began as an attempt to provide a simple transport route to the West Coast for growing oil production. A dozen years on, the government-owned operator of the $34-billion Trans Mountain expansion (TMX) is poised to crank open the taps, and it’s proven to be anything but simple.

From the start, the benefit to the energy industry seemed clear: Open up lucrative overseas markets for Canadian oil and remove a price discount that had existed for years because of overreliance on exports to the United States.

Kinder Morgan Inc., the U.S.-based company that owned the Trans Mountain oil pipeline, said in 2012 the project would be easier to complete than building a new line from scratch. The company had the benefit of a right-of-way between Alberta and Burnaby, B.C., in which the initial pipeline had been buried since 1953. It pegged the cost of the expansion at $5.4-billion.

TMX, however, became a victim of timing – environmental and Indigenous opposition to new oil pipelines reached a fever pitch as rival TC Energy Corp. fought a battle to gain support for its ill-fated Keystone XL project in the U.S. Canadian courts took a tough stance on companies, regulators and governments to ensure First Nations rights were respected and protected.

Canada’s $34-billion Trans Mountain pipeline expansion is about to go into service. Now comes the hard part – choosing when to sell it, who gets to buy it, and for how much

Construction timelines slipped. Inflation for materials and labour surged.

In 2018, Kinder Morgan, frustrated with delays and deepening regulatory scrutiny, said it wanted to walk away from the project, prompting the federal government to step in with a $4.5-billion deal to buy the existing 300,000-barrels-a-day pipeline and a pledge to complete the expansion that would nearly triple the capacity.

Then, more problems: Construction was hit by the COVID-19 pandemic as well as wildfires and floods. Now, several years and tens of billions in cost overruns beyond the initial target, the project is finally about to start up in energy and environmental conditions that are vastly different than when it was first proposed.

Ottawa owns Trans Mountain, so every Canadian has a stake in its future. With the first oil already flowing along the newly expanded 1,150-kilometre route, due to arrive in Burnaby in mid-May, tough questions linger.

The world is at the beginning of a shift to cleaner energy sources, so the long-term economics are in question. There is still opposition from some Indigenous groups in British Columbia, even as others eye equity stakes when Ottawa eventually opens up bidding for equity ownership. Would First Nations and Métis owners change the calculus for how the pipeline is viewed by governments, environmentalists and the public? Can all of the money that’s poured into the project be recouped in a sale?

Also, there is heightened focus on safety and the impact on wildlife from vastly increased numbers of oil tankers steaming past Vancouver’s busy harbour into the Georgia Strait and the Pacific Ocean.

TMX economics and in a carbon constrained world

Oil markets have changed since 2012. The International Energy Agency predicts that global demand will peak as early as 2030 at more than 103 million barrels a day, then gradually ease off as the energy transition gathers momentum in the two decades after

Not every analyst sees the IEA forecast as gospel – and, indeed, the Organization of Petroleum Exporting Countries predicts a much oilier future. Either way, the additional nearly 600,000 barrels of diluted bitumen a day the pipeline will deliver to U.S. West Coast and Asian markets will have a minimal impact on global supply, said Kevin Birn, S&P Global’s chief analyst, Canadian oil markets.

It’s a big deal for Canada though – its first major terminal for overseas oil exports. “In the global oil market context, it will add incremental supply to the world of a different quality that, everywhere else, has been traditionally in decline,” Mr. Birn said. “But in the scale of the global market, it’s not transformational.”

The pipeline will allow Alberta producers to reroute their supply to more lucrative markets. Some analysts predict it will also lead companies to plow cash into boosting output. Until now, exports have been sent almost exclusively to 10 refineries in the U.S. – mainly on aging pipelines that offer low tolls for shippers.

Oil sands producers have the benefit of long-term supply and zero exploration risk. They see their entrance into world markets afforded by the Trans Mountain expansion as an opportunity to wrest market share in the Pacific Rim from other suppliers that face production declines, Mr. Birn said.

Canadian crude that reaches Burnaby through TMX will find welcome markets in Asia and refineries in California, which are able to handle the heavier oil produced in Alberta’s oil sands, said Susan Bell, an analyst at Rystad Energy.

In California, Alberta oil will likely displace a similar grade of crude called Basrah Heavy, produced in Iraq. Californian refineries currently run about 150,000 barrels per day of the stuff, and Canadian oil will make a ready substitute, because it’s closer, cheaper and has similar yields from distillation, Ms. Bell said.

Six of the committed TMX shippers are major oil sands producers and members of the Pathways Alliance. That industry group is seeking taxpayer support for a $16.5-.billion carbon-capture project, with the aim of cutting 22 megatonnes of greenhouse gas from their operations by 2030. Officials have said their hope is to eventually charge a premium price for the barrels as the emissions are abated.

Global finance experts have warned high-carbon assets risk losing their economic value as cleaner energy and transport take over, though so far that has yet to happen. Russia’s invasion of Ukraine showed how renewable energy was not ready to step into the void left by Russia’s decision to shut off the flow of its oil and gas to Europe.

With the cost overrun, an important equation is the long-term impact on TMX’s economics if demand for Canada’s crude tails off. The extra costs will have to be borne by the shippers in the form of higher tolls and, possibly, by taxpayers, said Bentley Allan, principal at Transition Accelerator, a think tank that advises government and business on aligning industrial policy with net zero targets.

Mr. Allan has called for industrial policy to make Canada a global force in the energy transition as it was after the buildup of its oil sands sector in the 1990s and 2000s.

“There is a pretty high chance that it’ll be a stranded asset. It’s going to add a tonne of cost to the oil that’s produced in the oil sands to get out to the West Coast,” Mr. Allan said. There is little doubt the world will still use oil by 2050, but the preferred barrels will be those with the lowest production cost and smallest carbon emissions, he said.

If no buyer steps up to pay the full amount that has already been sunk into the pipeline and Canadian taxpayers are on the hook for some of the cost overruns, they will be subsidizing higher domestic emissions through increasing output as well as Canada’s contribution to global emissions, he said.

However, if the industry succeeds in decarbonizing the output, it will be a more desirable product, Mr. Birn said. “We think over time as buyers begin to scrutinize their value chains more, this will become more valuable to them,” he said. “Presently the market isn’t pricing that in, but we think that’s been impaired by a lack of comprehensive, consistent data for comparative analysis between different supply chains.”

Clearly, carbon policy remains a wild card. Ottawa has proposed an emissions cap on the industry of 35 to 38 per cent below 2019 levels by 2030. The Alberta government is staunchly opposed to meeting that target, and the Calgary Chamber of Commerce warned those CO2 restrictions will limit Trans Mountain’s sale price.

Equity ownership: An opportunity for Indigenous communities?

On its way from Edmonton to the saltwater of Burrard Inlet, TMX travels through areas spanned by Treaty 6 and Treaty 8 and the traditional territories of more than 130 Indigenous groups, crossing 15 First Nations reserves in B.C. on the way.

That dynamic – of a pipeline that intersects with not just the lands, but the cultures, histories and ambitions of Indigenous peoples along the route – has proved one of the project’s most complex and challenging aspects. Indigenous communities are weighing the prospect of taking an ownership stake – even as questions over long-term returns and environmental risks remain.

Canada’s duty to consult First Nations, Inuit and Métis people before taking actions that could affect them is established under law, reinforced by a string of Supreme Court of Canada decisions. The first consultation process for TMX began in 2013 and wound up in 2016, when Ottawa approved the project.

The Federal Court of Appeal in 2018 quashed that approval, finding the National Energy Board, now the Canada Energy Regulator (CER), had erred by not considering the environmental impacts of project-related marine shipping, and the gov