Analysis | For Sale: A Brand New Oil Pipeline. $34 billion OBO.Call Ottawa | CBC News

Finance Minister Chrystia Freeland took a moment to celebrate the final completion of the Trans Mountain oil pipeline expansion during her budget speech in the House of Commons on Tuesday.

The controversial project has been plagued by delays and massive cost overruns, but Freeland instead focused on its completion, stressing: “Last Thursday, talented businessmen and brilliant engineers completed the final welds, known as Gold weld, in a great national project.

Despite the many difficulties involved in developing and building the TMX, Freeland faces another major hurdle that is sure to be controversial in choosing when to sell, who can buy it, and for what price.

The upcoming election and more than $34 billion in construction costs are raising the stakes.

Ottawa purchased the project before construction began, as it faced legal, political and regulatory challenges.

The federal government has long vowed to sell the project once construction is complete (including selling at least a partial ownership stake to Aboriginal groups). This milestone has now been reached.

But Daniel Brand, director of the McGill University Research Institute and professor of politics in Canada, said the move will undoubtedly open Pandora’s box.

He said any potential deal would face intense scrutiny given that elections would be held before the fall of 2025, most notably because the actual sales price is expected to be well below the cost of actually building the pipeline.

“When they bought it back in 2018, they were in a hot spot. They’re still in a hot spot,” Brand said.

How the governing Liberals handle Trans Mountain issues could affect how voters view the Liberals’ approach to financial, economic, Indigenous and environmental issues.

“There are risks either way. If you sell it very quickly, but you sell it for what is considered a fairly low price, then you could be accused of just getting rid of it for political reasons rather than with the taxpayers in mind. Benefit.

“But if you wait and don’t sell, then you could be accused of essentially being permanently involved or trying to be permanently involved in that sector of the economy that a lot of people, even more conservative people, might not feel is appropriate.”

deep discount

There has been interest in buying it, including from Stephen Mason, managing director of Project Reconciliation in Calgary, which aims to leverage potential ownership stakes to benefit First Nations communities.

About five years ago, Mason walked into the Ottawa office of then-federal Finance Minister Bill Morneau and made an offer to buy Trans Mountain before construction began on the company’s expansion project that would bring More oil is being shipped from Alberta to the British Columbia coast.

Mono expressed interest, but the project wasn’t for sale until after the new pipeline was built.

Much has changed since that July 2019 meeting, including the Trans Mountain project’s cost ballooning to more than $34 billion (originally estimated at around $7.3 billion) and numerous construction delays.

Mason is still seeking ownership. He wouldn’t discuss specific figures but doubted Trans Mountain would be worth much less than $34 billion.

“My gut tells me this is going to be a pretty big write-down,” he said. “I’m not sure the Liberal government wants the public to be aware of the writedown before the election, but that’s just speculation on my part.”

new tolls

A key factor in the timing and price of a potential sale is the dispute over how much oil companies would have to pay to actually use the new pipeline.

Several large oil producers have signed long-term contracts to use 80% of the pipeline. However, as construction costs soared, so did the tolls companies had to pay.

The companies have balked at higher rates, arguing they shouldn’t have to endure “extreme scale” construction overruns. The Canadian Energy Regulator has scheduled hearings as early as September to address the issue.

Currently, regulators have set a provisional charge of $11.46 per barrel of oil. The price includes a fixed amount of $10.88 and a variable component of $0.58. The fixed amount is nearly double Trans Mountain’s 2017 estimate.

“There’s no way TMX tolls are high enough to cover the $34 billion budget,” said Rory Johnston, an energy researcher and founder of the Commodity Context newsletter. He described the project’s cost overruns as: “huge.

He doesn’t expect the final tolls to be much higher than the interim charges because otherwise, the pipeline may become too expensive for oil companies to want to use. Under the interim tolls, Johnston estimates the federal government may only recoup about half of the money it spent to buy and build the Trans Mountain Highway.

“No one is going to pay the full cost of the pipeline because the tolls don’t support it. You need discounts. You need to cut the cost of this pipeline by at least 50 percent,” he said.

The federal government currently owns the original Trans Mountain Pipeline, built in 1953, the now-completed expansion and associated facilities including storage tanks and export terminals.

potential buyers

The federal government has considered offering equity to more than 120 Western Canadian First Nations communities whose lands lie along the pipeline route, while it seeks other buyers to serve as major owners.

In addition to Project Reconciliation, other potential buyers include a partnership between the Western Aboriginal Pipeline Group (WIPG) and Pembina Pipelines.

Michael Lebourdais, a WIPG director and leader of the Whispering Pines/Clinton Indian Band near Kamloops, B.C., said the group has the support of about 40 First Nations communities and hopes to purchase the project within the next year.

He said these communities must bear the environmental risks of the spill, so they should receive economic benefits from the pipeline.

Pension funds and other institutions can also seek ownership.

“There will be buyers. I’m not sure they’ll be willing to pay the full cost of construction, but I think there will be buyers,” said Jackie Forrest, executive director of the ARC Energy Institute.

Experts say the federal government is likely to emphasize the overall economic benefits of the new pipeline and the expected role of Indigenous communities in ownership as a way to fend off criticism if the final sale price is lower.

In his speech on Tuesday, Freeland had already highlighted the Bank of Canada’s recent estimate that the new Trans Mountain pipeline expansion would add a quarter of a percentage point to Canada’s second-quarter gross domestic product, touting the pipeline’s expected finances. increase.