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Vol. 23, No.33 Week of August 19, 2018
Providing coverage of Alaska and northern Canada's oil and gas industry

Double blow for line

Kinder Morgan discloses rising costs, possible 1-year delay, for Trans Mountain

Gary Park

for Petroleum News

Like almost every large-scale energy project, the costs of expanding Canada’s Trans Mountain oil pipeline are climbing and the deadline for a startup date is extending.

In a filing with the U.S. Securities and Exchange Commission, the current owner, Kinder Morgan Canada, updated the construction budget for plans to increase pipeline capacity to 890,000 barrels per day from 300,000 bpd. It was the first official cost update since February 2017.

The new price tag is now either C$8.4 billion with a completion date of December 2020, or more likely C$9.3 billion by December 2021, compared with the original C$4.3 billion.

The news generated a collective shrug from the Alberta government, which could become a co-owner of the facility, and TD Securities, the banker for Kinder Morgan, which said the project will still be profitable, even if final outlay is C$9.3 billion.

The bank estimated Trans Mountain could still generate about C$1 billion a year in cash flow at the top end of the price range.

A spokeswoman for Alberta Premier Rachel Notley insisted the Kinder Morgan filing “is not an updated projection ... it is economic modeling based on a number of scenarios.”

She said an increase in the expansion cost could be one scenario that would trigger a decision by Alberta to become an equity partner.

“There is a threshold ... that hasn’t been disclosed yet and won’t be until the sale is final,” she told the Globe and Mail.

Notley has said her government is willing to invest up to C$2 billion as a backstop to ensure the project goes ahead, assuming that shareholders agree on Aug. 30 to approve the sale of the existing Trans Mountain line to the Canadian government for C$4.5 billion.

Many details not yet known

However, many of the details won’t be known until the handover is completed and the federal government has signed construction contracts.

A spokesman for Canada’s Finance Minister Bill Morneau said his government decided to make sure the project was built only after undertaking a detailed analysis, “with the full understanding of the project’s economics and future benefits to Canadians.”

Richard Masson, a former head of the Alberta Petroleum Marketing Commission, said the expansion is structured in such a way that the owner of the pipeline will be on the hook for about three-quarters of any increase in costs, depending on the nature of those costs.

But he said it would be best for the project to be completed, noting that the 60-year-old existing line from Alberta to an export terminal in Vancouver has been operating at full capacity since 2009, leaving rail as the only fallback for producers hoping to make shipments to the Pacific Coast in British Columbia and Washington state.

Canada’s Natural Resources Minister Amarjeet Sohi said the project remains “on track” regardless of rising costs and delayed construction timelines.

He said the current construction season has been “saved,” despite delays, protests, aboriginal court challenges and political interference from the British Columbia government.

Sohi said the latest cost estimates are only hypothetical and were prepared as potential cases by TD Securities.

Dan Tsubouchi, chief market strategist at Calgary-based Stream Asset Financial Management, was less optimistic, cautioning that in order to meet the revised in-service date “they’ve got to be going full tilt.”

Preparatory construction work

Preparatory construction work is scheduled to start in Alberta on Aug. 25 and in eastern British Columbia on Sept. 3, with pipeline installation expected to start in early 2019.

Trans Mountain must also meet 48 of the National Energy Board’s 157 conditions for approving the project before construction can start.

At the start of this month, 22 of the conditions had been met, but the filing for the other 26 were still under review.

Kinder Morgan Canada President Ian Anderson said “progress has been made on signing employment and procurement contracts, preparation activities, receiving materials, seeking permits, meeting conditions, refining engineering designs and notifying (pipeline) neighbors and stakeholders about upcoming construction activities.”

Evraz North America will supply 275,000 metric tons of pipe, which were fabricated at the company’s plant in Regina, Saskatchewan, while Kinder Morgan Canada confirmed that material for the pipeline has been primarily sourced from recycled metal operations in Alberta, Saskatchewan. Manitoba and Ontario.

“We do not have any plans to purchase pipe from the United States,” the company said when asked whether U.S. steel tariffs would affect costs.

Opposition front

On the opposition front, the Union of British Columbia Indian Chiefs said it is “frustrated” and “outraged” that costs are rising at the same time the impact of climate change is spreading around the world.

“The Arctic Circle is burning in Sweden, intense wildfires are ripping through California, heatwaves are breaking records across the world, 400 wildfires are raging in British Columbia,” said union Grand Chief Stewart Phillip, “and the Canadian government wants to buy an overpriced 60-year-old leaky pipeline and build another one that will guarantee an expansion of greenhouse-gas pollution produced by the tar sands at a time when we should be hitting the emergency shutdown button to prevent catastrophic climate chaos.”

UBCIC Vice President Bob Chamberlain said the planned pipeline “defies any form of rational decision making that we as a country continue to embrace massive projects that will without question add to global warming.”

“The ballooning cost underlines the irresponsible decision making that Canadian taxpayers will bear the burden for generations to come,” he said, calling for efforts to be diverted to developing a comprehensive renewable energy strategy.

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