Trans Mountain still faces huge ‘execution risk up until the oil starts flowing’, Moody’s warns

CALGARY – The oilpatch applauded Ottawa’s long-awaited announcement that it will build the Trans Mountain pipeline expansion, but also worried about further delays to the $7.4 billion project.

“Does it change investment strategies at the operating level or from foreign investment? No, it doesn’t,” said Grant Fagerheim, president and CEO of oil-producing Whitecap Resources Inc.

“This is one positive step. Do they have the fortitude and desire to push through to get the pipe built?” Fagerheim said, noting that he expected continued legal challenges.

Trans Mountain Corp., the Crown corporation responsible for building the pipeline, said it was seeking regulatory approvals that would allow the project to “be brought back to the same state of construction readiness that it was prior to the Federal Court of Appeal decision.”

“We are ready to re-start the project. We thank the many Canadians who have been unwavering in their support, and we’re excited to deliver on our commitments and ensure as many people as possible will benefit from this important Canadian project,” Ian Anderson, president and CEO of Trans Mountain, said in a release.

Flanked by his top ministers, Prime Minister Justin Trudeau re-approved the Trans Mountain project, frequently called TMX, to deliver 590,000 barrels of oil per day from Alberta to British Columbia, saying construction on the long-delayed pipeline would begin this season. He added that Ottawa will use all the profit it generates to fund solutions to climate change.

In addition, he said the government intended to use the profits derived from the project to fund renewable energy in Canada. “We’ve decided that every dollar the federal government earns from this project will be invested in the clean energy transition,” Trudeau said.

“We believe that TMX could solve a core economic challenge that we currently face. Right now, we basically have only one customer for our energy resource,” Trudeau said, referring to the fact that virtually all Canadian oil exports go to the United States.

We believe TMX could solve a core economic challenge we currently face. We basically have only one customer for our energy resource

Prime Minister Justin Trudeau

A re-approval of the project was necessary after the Federal Court of Appeal overturned its previous construction permits last summer on the grounds that Ottawa hadn’t properly consulted with affected First Nations or considered the project’s impact on marine wildlife, which led to a new round of consultations with affected Indigenous groups.

“We listened and we are acting on what we heard,” Trudeau said of the consultations, though he noted that some environmental and First Nations groups were still opposed to the pipeline.

Indeed, environmental activists including Greenpeace’s Mike Hudema and Stand.Earth’s Tzeporah Berman both issued statements after the approvals saying opposition groups would continue to challenge TMX in an attempt to block the project.

“We stand by city leaders, the B.C. government and First Nations who oppose this project, and we call on organizations and individuals around the world to stand with us,” Berman said in a release.

As a result, the project continues to face “a tremendous amount of execution risk up until the oil starts flowing,” Moody’s Investors Services vice-president Gavin MacFarlane said in an email.

Estimates for total construction costs vary. The Parliamentary Budget Office said the price tag will be about $9.3 billion. Credit Suisse said Monday in a research note it’s expected to cost $7.4 billion to build.

“The focus now is getting shovels in the ground as soon as possible,” Explorers and Producers Association of Canada president Tristan Goodman said in an email.


Steel pipe to be used in the oil pipeline construction of the Trans Mountain Expansion lies at a stockpile site in Kamloops, B.C.

Dennis Owen / Reuters

Canadian oil companies are currently pumping more crude than the country’s pipeline networks can move, leading to steep discounts for domestic heavy oil blends relative to the U.S. and skyrocketing crude-by-rail exports, and are therefore desperate for a new pipeline project to alleviate the pressure.

“Time is of the essence and we are hopeful that construction can resume shortly such that the existing schedule can be maintained,” Suncor Energy Inc. president and CEO Mark Little said in an emailed statement.

Indeed, the decision doesn’t usher in “complete euphoria” in the Canadian oil and gas industry, which in recent months has watched other pipelines — like TC Energy Corp.’s 830,000-bpd Keystone XL project to the U.S. Gulf Coast — get overturned following legal challenges, said Jennifer Rowland, a senior analyst with Edward Jones in St. Louis.

“It is at least a step in the right direction. It’s a pipe that’s not just flowing north and south,” Rowland said, noting that Trans Mountain would allow Calgary-based oil companies to ship their crude to Asian markets.

“Getting a positive decision and starting construction on the pipe, well, that moves the ball down the field. You haven’t thrown an interception but you’ve still got a lot of work to do,” said RS Energy Group director Samir Kayande.

In the meantime, he said crude-by-rail shipments could climb to 400,000 bpd over the next few years until the Trans Mountain project is completed, which he believes won’t occur until 2022.

In March, the last month for which National Energy Board data is available, Canadian oil companies exported 168,483 bpd on railway cars.

We will be seeking new owners at the appropriate time, when the project is de-risked

Finance Minister Bill Morneau

One potential way the federal government believes it can mitigate the risk of legal challenges and First Nations opposition is by striking additional agreements with affected First Nations to either sell an equity stake in the project or provide revenue-sharing agreements.

“The pipeline is an incredible opportunity for Indigenous communities within our province to secure ownership in an important asset for Canada, and we are encouraged by the acknowledgement of possible Indigenous ownership,” said Tony Alexis, who is both chief of the Alexis Nakota Sioux Nation and a leader with the Iron Coalition, a First Nations group with ambitions of buying the project.

Ottawa purchased the Trans Mountain pipeline and expansion project from Houston-based Kinder Morgan Inc. for $4.5-billion last year when the company announced that legal challenges and opposition from the government of British Columbia made the project too risky for a private sector company to pursue.

“We will be seeking new owners at the appropriate time, when the project is de-risked,” Finance Minister Bill Morneau said, reiterating that the federal government did not want to be the long-term owner of the project.

Trudeau and Morneau both said Tuesday the government would be launching new consultations with First Nations to negotiate either the sale of an equity stake in the pipeline, revenue sharing agreements or another arrangement with affected First Nations along the route.

“It could be an equity stake, revenue sharing or something else altogether. We’re coming to the table with an open mind,” Trudeau said.

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