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Trans Mountain wants to charge oil shippers more to use the Trans Mountain expansion pipeline (TMX), but those increased tolls wouldn’t cover even half of the project’s $30.9-billion price tag.

“There has never been an instance in any western country — that I'm aware of — where tolls have been set below the level required to cover the cost of the operation of a pipeline,” said Thomas Gunton, professor and director of the Resource and Environmental Planning Program at Simon Fraser University in B.C.

Certainly in Canada, the National Energy Board and Canada Energy Regulator (CER) have never set tolls below that threshold for a pipeline, he said, “so this will be an unprecedented first if they approve these tolls.”

Trans Mountain applied to raise the base tolls on June 1, and CER accepted comments from interested parties in mid-June. Oil shippers including Suncor, Cenovus, BP PetroChina Canada and more submitted comments, saying the proposed tolls are too high and requesting a hearing.

The Tsleil-Waututh Nation also requested a hearing but argued the tolls weren’t high enough. In a letter to the CER, the nation — whose territory is at the epicentre of the project — argues the regulator should reject Trans Mountain’s application and set tolls that account for and cover the project’s ballooning construction costs. The current toll settlement was based on Kinder Morgan’s 2013 construction cost estimate of $5.4 billion, but since the federal government purchased TMX in 2018, the financial situation has gotten progressively worse. Trans Mountain is a Crown corporation, meaning Canadian taxpayers are the true owners of the pipeline and expansion project.

“Trans Mountain’s inability to recover even half of the project cost means that their capacity to adequately fund maintenance, safety, integrity, and spill response is compromised,” reads the letter, adding the Tsleil-Waututh Nation’s territory and rights would be “significantly impacted by an oil spill of any kind.”

“Tolls that cover less than half of a project’s costs cannot be found to be just nor reasonable,” it added, pointing out that insufficient tolls could also result in higher rates for customers down the line.

Trans Mountain’s proposed tolls would leave the Crown corporation $16.2 billion in the hole, and in all likelihood, the cost will end up borne by Canadian taxpayers, the letter states. The private sector appears unwilling to put any more money into TMX so, to keep the project afloat, the federal government has approved a total of $13 billion in loan guarantees to convince Canada’s six biggest banks to finance it.

Trans Mountain wants to charge oil shippers more to use TMX, but those increased tolls wouldn’t cover even half of the project’s $30.9-billion price tag, the @tsleilwaututh Nation point out in a letter to the @CER_REC. #TMX #cdnpoli

The Tsleil-Waututh Nation and multiple analysts say there are only two ways out of this situation: debt forgiveness or toll increases.

Finance Canada has repeatedly refused to confirm whether it will consider forgiving Trans Mountain’s debt, despite Finance Minister Chrystia Freeland putting $13 billion in taxpayer dollars on the line with loan guarantees in a little over a year. If the federal government forgives Trans Mountain’s debt, it will go against Freeland’s 2022 promise that no more public funds will flow to TMX.

Debt forgiveness would amount to a roughly $17-billion fossil fuel subsidy, according to an analysis by independent economist Robyn Allan.

“The Trans Mountain Expansion Project will ensure Canada receives fair market value for our resources while maintaining the highest environmental standards,” a Department of Finance official said in an emailed statement to Canada’s National Observer. “This is in addition to being an important investment in Canada’s economy, generating significant operating revenues and creating well-paying, middle-class jobs.” The statement added that the federal government doesn’t plan to be the long-term owner of the project and “will launch a divestment process in due course.”

The Crown corporation applied to charge a base toll of between $10 and $11 per barrel in most instances, roughly $5 more than what it is currently set at. The exact toll varies depending on the type and volume of oil and how far it’s travelling, and companies with longer contracts receive a small discount.

If tolls were set to fully cover the $30.9-billion cost of TMX, shippers would be charged roughly $22.20 per barrel, according to the Tsleil-Waututh Nation’s calculations.

“All of these forecasts for the viability of the pipeline are based on an assumption that the pipeline continues to operate and ship oil beyond the 15- to 20-year contracts,” said Gunton. When those contracts expire, Trans Mountain will have to lower the tolls so shippers don’t leave en masse, said Gunton.

“The question the Canadian taxpayers should ask is, ‘Why should I pay a subsidy of $13, $14 a barrel to the oil industry when the oil industry is making record profits?’” said Gunton.

Shippers, naturally, are balking at Trans Mountain’s proposed cost increase and have said as much in letters submitted to the CER.

Now the energy regulator has received letters of comment from the oil shippers and other groups (like the Tsleil-Waututh Nation), it will either issue a decision on Trans Mountain’s request or hold a hearing, Ruth Anne Beck, communications officer at CER, explained in an emailed statement. The CER has not yet decided which route to take.

“If the CER is consistent with its regulatory policy, it should review the application, conclude that the current tolls that are being applied for are not sufficient to cover the cost of the pipeline and maintain its financial viability, and they should set tolls that are significantly higher,” said Gunton. “Will they do that? Who knows? I doubt it.”

In this scenario, “everybody is significantly worse off as a result of building this pipeline,” said Gunton. Oil shippers end up paying more than they would to use Enbridge’s Mainline pipeline, Enbridge loses out on oil volume and Canadian taxpayers are out billions of dollars for the project itself as well as environmental costs in the billions, he said.

Trans Mountain has asked CER for a decision by Sept. 14, writing a delay beyond that “could jeopardize the in-service date” for the new pipeline. TMX is currently 90 per cent complete, with planned mechanical completion expected by the end of 2023, according to an emailed statement from Trans Mountain media relations.

The Tsleil-Waututh Nation also noted the Canada Development Investment Corporation’s 2022 annual report found storms, droughts and flooding present “acute risks” to the pipelines and infrastructure. Any tolling structure must account for the increased spending needed to deal with the prevention of and fallout from climate change-related risks, the nation maintains.

When the federal government bought TMX from Kinder Morgan in 2018, Prime Minister Justin Trudeau told Canadians its profits would help fund climate action.

Finance Canada regularly cites two financial reports produced by TD Securities and BMO to say TMX is still viable, but Canada’s National Observer discovered those reports assume an unrealistic 100-year lifetime.

More recently, the department has been pointing to a March 2023 report, also by TD Securities and BMO Capital Markets, that says third-party financing is a feasible option to fund the completion of the project and that they “believe investors … would participate in a process involving a sale of all or a portion of [Trans Mountain Corporation].”

The fact that government loan guarantees have been necessary to finance a total of $13 billion of the project clearly shows it is not viable and that third-party financing is not a feasible option, said Gunton.

Natasha Bulowski / Local Journalism Initiative / Canada’s National Observer

Updates and corrections

| Corrections policy
July 24, 2023, 06:17 pm

This article has been corrected to remove an incorrect reference to the end destination of Trans Mountain's product

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TMX was always a nightmare, not a dream, even for the oil & gas industry in Canada that backed this no hoper of a hail Mary. One had only to look at the track record of those who were selling it for pete's sake!

Even now the scrap metal value of the pipe itself is worth more than whatever eventually flows through it, and neither will ever repay the money sunk into it. Ah, the eternal trap of "sunk costs"!

Unfortunately, we in BC are held hostage to the potential of toxic spills on land and into the sea, for the arrogance of TMX management and federal agencies who stomped on the heads of local municipalities who are directly impacted by the pipe, the expanded tank farm and the marine loading terminal (especially Burnaby, Jagmeet Singh's riding), and the ongoing dependency of BC residents who burn the fuel TM ships. BC is no closer to full electrification in its road transportation than it was when TMX first popped on the scene as a new project, though its EV sales are getting better.

Nonetheless, it will be extraordinarily interesting to see TMX unfold in the next few years as its debt crushes all financial logic and its markets diminish with the transition to renewables and EVs.

Thank you Natasha for a rather nice article and graphic.

Re: ““The Trans Mountain Expansion Project will ensure Canada receives fair market value for our resources while maintaining the highest environmental standards,” a Department of Finance official said ..”. This is misleading. Canada already receives fair market value because the oil companies have for many years exported oil using the tanker terminal in Burnaby, B.C. Trans Mountain told us for years that exports were five tankers per month; this was false as this rate only occurred in 2009 and 2010. In 2019 the rate was one per month and since than it has been two per month. The tanker terminal has had a capacity of over ten tankers per month, but never used it. (for details ask for my reports at [email protected])

The only way I can see tanker exports increasing is if the oil companies reduce their prices. Will they?

The letter to The Canada Development Investment Corporation from BMO and TD that is referenced is interesting in that no persons are named as signatories. Does nobody claim any responsibility for the contents and advice? The CDEV Board should have asked for real names and signatures.

Worse still, although there is what appears to be a hand-written signature “TD Securities Inc.” this is clearly not hand-written on this document since it appears to be identical to the “signature” on the May 28, 2018 ‘Fairness Opinion’ provided by TD Securities to Kinder Morgan. This practice should not be permitted.

Part of the reason Kinder-Morgan put a drop dead date on the TMX plan was because they COULD NOT SECURE FINANCING for the project. It also hinged on the "take or pay"contracts already signed for use upon completion (the lease holders either had to use the capacity - take - in the contract. or pay for the unused capacity - pay).

What many Canadians fail to understand is that when they hear a market report saying that the world price of oil is X/barrel it doesn't take into consideration two factors. First is that there is no direct relationship between that price and production costs. Second is that the cited price is for West Texas crude, a light and easily refined base material that bears absolutely no resemblance to Western Canada Select - as the product out of the tar sands is euphemistically named. On the latter factor the price discount (difference between the two grades) is usually ~20%. So if the WTI is selling at around $75US/bbl then the best a tar sands producer can hope to get is $60US/bbl - if they are lucky. The last time I saw a published estimate on the production costs for WSC it was well over $65/bbl and that is BEFORE the shipping costs.

Shipping costs brings us to another interesting set of problems.

After paying the below cost of carriage through the TMX pipeline and the dilbit (diluted bitumen - the stuff coming out of Ft McMurray and environs is too thick to flow on its own at normal temperatures and pressures) it arrives at the Westridge Terminal in Pt Coquitlam, BC on the Burrard inlet. To reach the California refineries that are currently buying almost all of this toxic brew it must be loaded onto a tanker capable of passing under the Lions Gate Bridge between Vancouver and the north shore communities of North and West Vancouver. The largest tankers capable of doing so are ones called Afrimax. Substantially smaller than the Very Large Crude Carriers (VLCC) and Ultra class (ULCC). The thing that would make this all laughable, if it wasn't so potentially disastrous, is that even the Afrimax class of crude carrier CANNOT be filled to capacity. All of which adds to higher shipping costs. It is also why the bulk of tar sands crude that does reach Asia currently goes south through the Keystone (old version, not the chronically plagued expansion proposal) to loading platforms in the Gulf of Mexico off Louisiana and Texas.

Finally, there is the straw man argument of "feeding the demand from Asian markets" that is regular trotted out. Forgive me for sounding cynical, but if such a demand existed, wouldn't there be two things indicating that?

One would expect a bidding war for the product already reaching the West Coast - conspicuously absent to date. And, because you can't feed dilbit into a standard oil refinery, either frantic efforts to upgrade existing refineries or massive investment in purpose built refineries. Something once again completely nonexistent as of today.

The TMX is a pipeline to nowhere. Wanted only by a handful of politicians and oil executives who, from where I am sitting, appear to have lost touch with reality.

1) The Westridge Marine Terminal is actually in Burnaby, B.C. (not Port Coquitlam)
2) it is the Second Narrows rail and highway bridges that limit the size of tankers that can transport oil to the high seas. (not the Lions Gate bridge)

There is a disconnect between two views of the finances that needs to be resolved.

A) The BMO and TD advisory report to CDEV that is referred to states

“,... we understand that the Company is expected to generate earnings before interest, taxes, depreciation and amortization (“EBITDA”) of more than $2.4 billion per year, underpinned by long-term shipping contracts, and, on that basis and at that time, the Company will be commercially viable;” and

“Third-party financing is a feasible option to fund the completion of TMEP. The expected future cash flows generated by TMC, upon completion of TMEP, are of a quality and size sufficient to support an investment grade credit rating of the Company assuming an appropriate capital structure. An investment grade credit rating would enable the Company to access debt financing in the private markets without reliance on government support;”

If this latter claim is true then why did these banks lend Trans Mountain B$10 at 1.8% interest, and why did they need a guarantee from the government.

And, why did the government use a ruse to give Trans Mountain billions of dollars in exchange for shares which are considered worthless.

B) Economist Robyn Allan indicated that the government will probably have to write off something of the order of B$17 provided to Trans Mountain.

How can these two views be resolved? Let us see all the details of the calculations, then we can determine who is right. Alternatively make the banks purchase the pipelines at cost; that will force them stand by their words.

An interesting idea. The banks, oil companies and the Alberta government could buy this asset at cost and take the burden off Canadian taxpayers.

Thirty billion would go a long way in things like building renewable energy projects, urban transit and debt reduction.