Trans Mountain expansion's pipe dream marred as overruns drive up cost of exporting oil to Asia

A Canadian pipeline hailed as a cheap and speedy way to send oil to Asia is set to become a $20-billion taxpayers’ headache and an expensive option for exporters thanks to cost overruns.

The expanded Trans Mountain Pipeline will enter service early next year after nearly tripling its capacity, delivering an extra 590,000 barrels of Alberta oil each day to Vancouver. Its route cuts the time to ship Canadian crude to Asia by roughly two-thirds compared to sending via the U.S. Gulf, but it won’t necessarily be more cost effective.

Trans Mountain was touted as a way to broaden buyers of Canadian oil and break energy dependence on the U.S. when Prime Minister Justin Trudeau’s government bought the system from Kinder Morgan Inc. five years ago for $4.5 billion. Since then, repeated delays and construction setbacks have seen project costs more than quadruple to $30.9 billion, challenging the economics of the pipeline and undercutting Canada’s push to diversify oil exports.

“The economics of this project don’t make sense because the financial benefit is not there,” said Robyn Allan, an independent economist who has published reports critical of the project.

Trans Mountain announced interim tolls for its expanded pipeline in June and is seeking approval from Canada’s energy regulator so the line can start operating as early as January. Only part of the cost increases for the expansion can be passed on through higher tolls, with proposed fees already too high for oil producers to make a sufficient profit, Allan said.

That means taxpayers may be left to bear a roughly $20-billion writedown, according to Morningstar Inc. analyst Stephen Ellis. A government spokesperson didn’t immediately respond to a request for comment.

The pipeline operator is also offering 80 per cent of its expanded capacity to companies with contracts lasting decades.

Fees of as much as $11.46 a barrel have already drawn rebuke from some that signed contracts, with Canadian Natural Resources Ltd. saying in a June 22 letter it may “impact the overall competitiveness of Canada’s oil industry.”

A company with a 20-year contract would pay about 30 U.S. cents more per barrel to ship crude to China using Trans Mountain than via the alternative Enbridge Inc. pipeline systems to the U.S. Gulf Coast, based on proposed tolls and term contract tanker rates, according to Skip York, chief energy strategist at Turner Mason & Co.

Most Canadian oil exports to East Asia are shipped to the Gulf on Enbridge pipelines, TC Energy Corp.’s Keystone system or by rail. From there, the crude is loaded into tankers for journeys of as many as 49 days across three oceans.

Trans Mountain refuted claims the line won’t be competitive. The expansion will have a cost advantage of US$2.50 a barrel for shipping to China versus shipping through the Gulf Coast and a bigger advantage to Japan or South Korea, the company said in an email, without specifying how it calculated that cost. “While marine costs fluctuate around the world as conditions change, in the long run, we expect the cost advantage for Trans Mountain to be maintained.”

In certain circumstances, York said the Vancouver route could be cheaper. A company with long-term contracts on Trans Mountain stands to save 40 U.S. cents a barrel to reach China over using Keystone. Spot suppliers could save US$1.60 a barrel over Enbridge.

Still, crude shipments from Vancouver to East Asia are relatively rare, which makes tanker rates more expensive.

And a major setback for Trans Mountain users relates to capacity limits of Aframax tankers, the largest that can access Vancouver’s marine terminal. The vessels carry less than half the volume of the so-called Very Large Crude Carriers that serve the Gulf Coast. The volume difference means that even though the journey is much shorter, shipping out of Vancouver could be pricier.

The high costs of using Trans Mountain could result in much of the Canadian oil being sent to U.S. West Coast refineries instead of getting shipped to Asia, though there are limits to how much Canada’s southern neighbour can process.

Tanker rates from Vancouver could fall once the route becomes more common. But Trans Mountain won’t be the cheap route to Asia as originally billed.

“The project has failed in that respect for sure,” Allan said.