Trans Mountain Pipeline Expansion Likely To Cost the Canadian Government Billions of Dollars

The Trans Mountain pipeline expansion, once seen as a savior for Canadian oil by offering a key export channel for Canadian producers to reach Asian markets, is now looking like it will be remembered very differently and negatively by investors and the Canadian government. A loss between CAD 15 billion and CAD 20 billion (based on a CAD 10 billion-CAD 15 billion valuation) is likely, with the potential for a higher loss still if the pipeline sees further cost increases. We continue to see Enbridge’s ENB Mainline system as the best alternative for the Trans Mountain expansion, as struggles by the Trans Mountain expansion mean more barrels remaining on the Mainline. As it stands, a vicious cycle of higher costs and higher tariffs for the Trans Mountain expansion serves as further fuel for shippers to commit to the Mainline (a major reason behind our narrow moat for Enbridge) and related U.S. expansions as it would likely be cheaper to ship Canadian barrels down to the Gulf Coast for export as it stands now, completely undermining the original purpose of the Trans Mountain expansion.

The project was originally conceived to move Canadian barrels to the west coast (Burnaby, British Columbia) for export instead of forcing Canadian producers into taking large discounts on their barrels to sell into the highly competitive U.S. market. Kinder Morgan KMI originally proposed the project in 2013, where it would add 590,000 barrels per day to the existing Trans Mountain pipeline, bringing total capacity to 890,000 barrels per day before running into project challenges and selling to the Canadian government in 2018. Eighty percent of the pipeline is under contract with shippers for 15- to 20-year terms. Now, with ongoing cost overruns due to a variety of COVID-19-related reasons as well as labor and weather issues, the project’s cost stands at over CAD 30 billion. For a pipeline that is only about 80% complete, higher costs are still possible with an in-service date expected in 2024.