Varcoe: Despite rising costs, retiring Trans Mountain CEO confident project will net ‘nice return’ for taxpayers


Ian Anderson is winding down his time as chief executive officer of Trans Mountain Corp., preparing to retire at the end of next week.

After more than a decade working on a project to expand the corporation’s pipeline, he remains confident the federally-owned development will be finished — and be profitable — for Canadians, even with the price tag ballooning and the construction schedule slipping again.

“There is no doubt that as costs go up, the ultimate returns to the investor go down,” Anderson said in an interview.

“The returns go down, but they do not go down to any point near where the project is not feasible, viable, or a prudent investment whatsoever.”

Anderson also believes geopolitical tensions and concerns about energy security in the world today have “reinforced the need for the project.”

What he’s less certain about is the ability of Canada to build another major oil pipeline, given the odyssey that’s confronted the Trans Mountain expansion. The journey has included lawsuits, environmental and political opposition, regulatory delays, the pandemic and extreme weather disruptions to construction.

“Somebody joked one day that the last thing that can happen would be locusts,” Anderson added. “It really has been a journey of extremes.”

Those extremes were highlighted last month by news the project’s price tag has shot up to $21.4 billion.

It’s a massive jump from the prior estimate of $12.6 billion, which was set in 2020, or an early forecast of $5.4 billion made back in 2013.

The development’s expected completion has also been extended into the third quarter of 2023, instead of the end of 2022.

What hasn’t changed is Anderson’s faith in the logic to get it built.

FILE PHOTO: A pipe yard servicing government-owned oil pipeline operator Trans Mountain is seen in Kamloops, British Columbia, Canada June 7, 2021.
FILE PHOTO: A pipe yard servicing government-owned oil pipeline operator Trans Mountain is seen in Kamloops, British Columbia, Canada June 7, 2021. Photo by REUTERS/Jennifer Gauthier/File Photo

The expansion will nearly triple the capacity of the existing pipeline, shipping 890,000 barrels per day of oil and refined products from the Edmonton area to a terminal at Burnaby, B.C., for export.

Ottawa bought the pipeline from Kinder Morgan in 2018 for $4.4 billion and intends to sell it once the project is substantially derisked.

However, critics question the expansion’s underlying economics and the Trudeau government’s decision to acquire the development after the private owners were about to walk away.

Parliamentary Budget Officer Yves Giroux told Canada’s National Observer last month that with construction costs now pushing above $20 billion, the TMX project is “clearly non-profitable.”

In an interview Monday, Giroux noted an analysis done by his office in 2020 determined a 10 per cent hike in construction costs would reduce the project’s profitability by about $400 million.

“If we assume no change to the pipeline utilization, I think it’s fair to say it’s clearly not going to be profitable,” he said.

“It doesn’t mean that the government wasn’t justified in buying the pipeline … that doesn’t take into account the broader objectives of ensuring that Canadian oil can get to market and can fetch a better price.”

Increasing market access for Western Canadian oil has always been one of the main objectives of expanding the 68-year-old pipeline.

Anderson disputes any notion the project will be a money loser, noting Trans Mountain has dedicated long-term shippers who have contracted for 80 per cent of its capacity and they remain on board.

“There is no write-down anticipated whatsoever and we expect that Canada will be able to (sell) this company in the future for a nice return,” he said.

“All market analysis that we’ve done … has reinforced our assumption that the pipe will be full and will remain full for a long period of time.”

What is indisputable is the construction costs and timeline have changed due to many factors.

According to the federal Crown corporation, financing expenses have jumped by $1.7 billion as delays and higher costs have added up. Scheduling pressures boosted the tab by $2.6 billion, while project enhancements contributed $2.3 billion.

Another $1.7 billion increase came from the impact of the pandemic, some shortfall in contractor productivity levels and extreme weather, including last year’s flooding in British Columbia.

Anderson pointed out about 20 to 25 per cent of the cost increases will be passed through to shippers through tolling charges, adding about 80 to 90 cents per barrel.

However, the project will reach “high single-digit returns, which are consistent with other regulated projects in this country,” he said.

Giroux said he hopes Anderson is right about the financial prospects of the project, “for the sake of taxpayers.”

Parliamentary Budget Officer Yves Giroux.
Parliamentary Budget Officer Yves Giroux. Photo by Adrian Wyld/The Canadian Press/File

People also need to consider the broader economic benefits and energy security considerations associated with the development, he said.

Concerns about security of energy supply have resurfaced recently with Russia’s invasion of Ukraine and soaring global oil prices.

But does this change the equation for any future oil pipeline to be built in Canada?

“The current geopolitical conditions globally are reinforcing the fact that infrastructure and access matter,” Anderson said.

“Ultimately, it’s going to be about supply and demand. My judgment would be, absent geopolitical decisions to build more, this could be the last one.”

Energy economist Peter Tertzakian believes recent events have strengthened the importance of energy security and the strategic rationale for expanding Trans Mountain. It will allow Canada to get more oil to international markets through its own territory.

However, he doesn’t see the likelihood of a major oil pipeline being built in the country changing.

“I think probabilistically, it is the last one,” said Tertzakian, deputy director of the ARC Energy Research Institute.

“But we shouldn’t underestimate the productive capacity of Canada. We are the fourth-largest producer of oil and gas in the world.”

Construction on the Trans Mountain project is just over 50 per cent complete.

Anderson, whose retirement was announced the same day of the new cost estimate, will be watching the project enter the home stretch from the sidelines.

As for his future, the 64-year-old Anderson said he remains interested in important issues for Canada, including the energy transition and Indigenous reconciliation in the country.

“I have got one more thing in me; I don’t know exactly what it will be,” he added.

“I am not hanging up my skates yet.”

Chris Varcoe is a Calgary Herald columnist.


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