One of the most contested project proposals in the history of Western Canada has been the expansion of the Trans Mountain Pipeline from Edmonton to Burnaby in the Port of Vancouver.
The Trans Mountain Pipeline capacity expansion has survived the failure to progress two other major projects to bring Alberta crude oil to tidewater, namely:
Northern Gateway Pipeline: A C$8 billion project to build a twin pipeline from Alberta to the Port of Kitimat BC. The export pipeline would have carried diluted bitumen while the import pipeline was to have carried natural gas condensate. Despite receiving cabinet approval in 2014, the project was rejected by the following federal government and permanently terminated by a 2019 moratorium on tankers carrying more than 12,500 tonnes on the coast of Northern BC.
The Energy East Project: A C$12 billion project to construct a pipeline from Alberta to the Port of St. John NB. Included in the project was a proposal to convert an existing natural gas pipeline to carry oil.
The project was announced in 2013 but cancelled in 2017 in the face of opposition from the provinces of Ontario and Quebec, along with a number of environmental and First Nations groups.
In December 2020, Trans Mountain published the following information paper on its project history, current status and prospects:
Construction of the $12.6-billion Trans Mountain Expansion Project is well underway and is planned to be in-service in December 2022. The Expansion Project is a twinning of the existing pipeline between Edmonton, Alberta and Burnaby, British Columbia. It will create a pipeline system with capacity of 890,000 barrels per day (bpd), a significant increase from the 300,000-bpd existing capacity. Trans Mountain is the only pipeline in Western Canada with direct access to tidewater. Today, the majority of the product transported through the pipeline is destined for refineries in the Lower Mainland of British Columbia, Washington state and California. The expansion of the Trans Mountain facilities and pipeline provides increased capacity and vessel access to allow shippers expanded access for Canadian oil to world markets including China, India and South East Asia.
Today, on the ground in BC and Alberta, construction activity is generating jobs, economic benefits and environmental and safety enhancements to communities along the pipeline and marine shipping routes. With more than seven years of consultation, study, planning and regulatory processes, the Expansion Project has been the most scrutinized and reviewed energy project in Canadian history and is setting a new standard for the delivery of major infrastructure projects in our country.
Aspects of the expansion, such as why it’s needed and how it will provide long-term value, were well considered in the seven-year commercial and regulatory process. The rationales supporting the expansion are as compelling today as they were when the expansion was proposed, commercially supported and subsequently approved.
Today’s Trans Mountain Pipeline
The story of the Expansion Project really begins with the completion of the existing Trans Mountain Pipeline on October 17, 1953. A great deal has changed since the 1950s, including the role of the pipeline system itself. Originally designed to transport just crude oil, it was later modified to allow customers to move refined products as well as crude oil. It is one of the few pipeline systems in the world capable of this type of operation.
Trans Mountain provides the critical transportation link between Western Canadian supply and the Canadian West Coast and Pacific Rim demand. Trans Mountain is the only Canadian pipeline that serves those markets directly and has done so for many decades. The last major expansion of the pipeline was completed in 2008 and the pipeline has been operating at its maximum capacity ever since while in apportionment – meaning shippers have more demand for the pipeline than it can provide.
With shipper demand outstripping pipeline capacity to the West Coast, the Expansion Project will provide our customers with the certainty of more long-term capacity to fundamentally different markets than any of the existing Canadian export pipelines. The Expansion Project will provide Canadian producers a significantly expanded opportunity to access those markets for decades to come. World and regional oil and gas forecasts that assume implementation of actions addressing climate change demonstrate the continued importance of Canadian energy in the global marketplace.
In terms of oil production, numerous third-party studies, including the Canada Energy Regulator, Canada’s Energy Future 2020 Report, indicate consistent oil production from the Western Canadian basin of around 5.8 million barrels per day in the year 2039, compared to 4.9 million barrels per day in 2019. Even more aggressive climate change policy scenarios show the exportable surplus of oil production from North America will grow. This possible outcome highlights one of the important aspects of why the expansion is necessary in more rapid adoption of climate change policies – oil produced in North America, and Canada specifically, will be needed in still growing markets elsewhere around the world. Demand is expected to rise most notably in the Pacific Rim, the very markets expected to access products flowing through an expanded Trans Mountain Pipeline.
Is there still a need for the Expansion Project?
The size and complexity of the global crude oil market has expanded significantly since the Trans Mountain Pipeline entered service in the 1950s. Canada is the fourth-largest oil producing country globally, behind the United States, Russia and Saudi Arabia and approximately equivalent to Iraq in terms of daily oil production. Canada’s oil consumption is comparatively small, so our nation is a net exporter of petroleum products and crude oil. Canada has the third-largest proven crude oil reserves globally behind Saudi Arabia and Venezuela as a result of the approximate 170-billion-barrel oilsands. Export of crude oil and refined products has been, and will continue to be, a significant economic impact for Canada.
In 2019, global crude oil and liquid hydrocarbon production and related demand was nearly 100 million barrels per day. The COVID-19 pandemic decreased global demand for oil roughly 30 per cent by May 2020. Implicit in studies such as the Internal Energy Agency (IEA) on Global Demand see support for an expected recovery in demand, however, the pace of recovery is unclear given the uncertainty associated with the course of the COVID-19 virus. Even in this difficult year of 2020 with reduced global demand resulting from COVID-19 and lower oil prices, the Trans Mountain Pipeline has continued to be full, with demand exceeding the current capacity.
Competition between pipelines and other modes of transportation is based primarily on the cost of transportation, the crude delivery quality and reliability of service and connectivity to markets. Constraints on pipeline capacity have led to volatile crude oil prices as destination refinery markets cannot be reliably accessed. This results in Western Canadian crude oil producers being forced to discount their barrels to move oil to market. Expansions by Trans Mountain and other carriers will provide greater capacity and more diverse access to US and global markets. Pipeline capacity has been chronically short in the Western Canadian Sedimentary Basin (WCSB) for decades. For that reason, WCSB crude oil producers have backed multiple pipeline projects to enhance market access. With a shortage of pipeline capacity, crude oil producers have resorted to shipping crude on rail at a much higher cost per barrel in the interim. The pipeline system overall must be built to an excess capacity state. The ability for the shippers to respond to market changes, temporary disruptions and local demands requires a flexibly built and maintained system.
Taking these factors into consideration along with third-party external studies including those prepared by the Canadian Association of Petroleum Producers (CAPP), the Canada Energy Regulator (CER) and the IEA, our expectation is that the expanded pipeline system will be highly used during the 20-year period following the Expansion Project’s in-service date.
Longer-term, past the initial terms of our contracts, the Trans Mountain system will remain an attractive and unique conduit for export. Consistent with forecasts, Canadian production is expected to remain steady given the very slow decline of Canadian oilsands based crude oil production and that Canada will be a net exporter of crude oil to the global markets for the foreseeable future. Even if the lower long-term crude oil demand forecasts come to fruition, an export option such as the one an expanded Trans Mountain Pipeline will provide will continue to have high value to our customers, as the markets accessed in the Pacific Rim are likely to be areas experiencing the largest increases in crude oil demand. Access to global markets must remain a focused objective.
Trans Mountain’s contracts provide certainty.
The Expansion Project contracted shippers include a mix of Canadian producers and refiners connected to our pipeline. They support the Expansion Project and have collectively committed to 80 per cent of the available capacity under long-term take-or-pay transportation contracts for 15 and 20 years. Those contracts are binding and take effect when the Expansion Project comes into service.
A take-or-pay contract means the shipper is contracted for a certain amount of capacity per day for the life of the contract, if they have capacity that is paid for but not used by the shipper, they can sell that capacity to someone else.
Once the final costs of the Expansion Project are known, the tolls shippers pay will be adjusted and filed with the CER shortly before service on the expanded pipeline begins.
The tolling principles agreed to by Trans Mountain, its shippers and approved by the CER in the Transportation Service Agreement (TSA), will allow for the recovery of the vast majority of the cost of construction. Tolls are made up of fixed and variable components, which include the sharing of capital costs in the fixed toll component and the provision for cost recovery of defined costs in the variable toll component.
The remaining 20 per cent of the capacity on the expanded pipeline will be sold on a monthly basis on the spot market. Spot shipments will depend on market circumstances at the time the expanded pipeline is placed into service and throughout the contracted period. Having options to multiple markets for spot barrels is important. For decades much of the Canadian crude has been exported to the United States. A lack of alternative markets, such as those that will be provided by the Expansion Project make Canadian crude oil producers captive to one market, the US. Over the decades, this has resulted in Canadian crude largely being unable to achieve world pricing and a resulting transfer of wealth out of Canada, as the Canadian barrel is undervalued and sold at a discount.
Our expansion will also benefit from the expanded movement of spot barrels; however, it is important to note that project economics are not dependent upon them. The guaranteed, long-term revenue stream of the take-or-pay contracts provide Trans Mountain a high degree of certainty around the collection of revenues needed to ensure that the investment in the expansion Project is sound and reasonable and provides returns well within those of similarly regulated projects of this size. Any additional spot revenue over the term of the contracts will enhance project returns.
Project Return on Investment
Today, net cash generated annually by the Trans Mountain Pipeline system is approximately $185 million per year. After expansion, that net cash will increase to at least $1.3 billion and up to $1.5 billion per year by 2023, up to an eight times increase in net cash generation. The corresponding value of the Government of Canada’s investment will also increase substantially.
As of August 2019, the Trans Mountain Pipeline system and the Trans Mountain Expansion Project were indirectly acquired by the Government of Canada, through Trans Mountain Corporation, a subsidiary of the Canada Development Investment Corporation (CDEV) for cash consideration of $4.5 billion. The purchase price included the existing assets of Trans Mountain as well as the cost of development to that date for the Expansion Project.
Significant Indigenous participation in Trans Mountain is a stated objective of the Government of Canada and it is actively and systematically engaging with Indigenous groups along the Trans Mountain pipeline route. Trans Mountain is anticipated to return to the private sector once the Project has been de-risked or completed. While market valuations change daily, over the long-run valuation of infrastructure assets with long-term contracts and competitive positions should attract a reasonable valuation from investors motivated by cash-generating assets. Market valuation ranges for a business like Trans Mountain, with its significant long-term cash-generating assets, will be in excess of the government’s investment.
Indigenous ownership of a significant portion of the Trans Mountain system is a stated objective of the Government of Canada. Indigenous groups are actively pursuing investment in Trans Mountain to advance the economic opportunity of their Indigenous nations.
In the more immediate term, construction-generated benefits are being realized by Indigenous communities across BC and Alberta. These benefits are being realized through Indigenous-owned or joint-venture businesses participating in the construction of the expansion, through marine safety and spill response enhancements for the West Coast, and for all Canadians as a result of increased revenues to the energy sector and taxes to all three levels of government.
The expansion will generate significant benefits to Canadian crude oil producers and, in turn, Canadians, by providing enhanced access to alternative markets accessible by tanker from Westridge Marine Terminal providing expanded access from Western Canada.
A Conference Board of Canada report has determined the combined government revenue impact for construction and the first 20 years of expanded operations is $46.7 billion, including federal and provincial taxes that can be used for public services such as health care and education. BC will receive $5.7 billion, Alberta $19.4 billion, the rest of Canada shares $21.6 billion, and municipal tax payments will total $922 million to BC and $124 million to Alberta over the first 20 years of expanded pipeline operations.
Once completed, the construction of the Expansion Project will be a significant nation-building feat. Through its construction period, there are significant opportunities for employment of local and regional workers, economic opportunities for both small and large communities, and training and legacy benefits for Indigenous peoples and communities. The Expansion Project will expand world market access for Canadian commodities that are known to have the highest standards for safety and environmental protection in the world. Trans Mountain continues to set new standards for working in partnership with Indigenous communities and will provide an appropriate return on investment for the Government of Canada. Trans Mountain is a key investment in the economic future of Canada that will benefit all Canadians for decades to come.