Trans Mountain Pipeline’s Costs Spike Again to Over CAD 30 Billion; Enbridge Should Benefit

The Trans Mountain Pipeline expansion, or TMX, project is now expected to cost CAD 30.9 billion, a more-than 40% increase from its estimate last year of CAD 21.4 billion and almost 3 times its original estimate of CAD 12.6 billion. The cost increases were attributed to inflation and supply chain challenges, floods, terrain issues, and higher water disposal costs, among other items. It is now almost certain that the Canadian government will lose billions of dollars on a sale, as we can’t see a pathway for any sale price to approach this current cost estimate. There are no fair value estimate or moat implications for our Canadian midstream coverage.

The pipeline is expected to be in service in the first quarter of 2024 and will add 590,000 barrels per day to the existing pipeline, bringing total capacity to 890,000 barrels per day. The pipeline is more than 80% complete, and given the still-substantial work to be completed, we think higher costs are still possible. With 80% of the pipeline already contracted under take-or-pay contracts, the higher costs can only be recovered with higher rates on the uncontracted 20% capacity, where the market largely sets tariffs.

The most positive implications are for Enbridge ENB: the more delays and higher costs from TMX, the more room Enbridge has to maneuver. Enbridge recently refined its near-term estimate (we interpret this as 2024-25) for TMX losses on its Mainline system to about 5%-6% of Mainline volumes before new production would restore volumes to historical levels, down from an earlier 10% estimate. The lower estimate is mainly because Enbridge sees rail volumes (about 150,000-200,000 barrels per day) moving first on to TMX, before Mainline begins to see an impact.