Canada’s Trans Mountain Targets Last-Minute Oil Shippers for High-Cost Pipeline

By Nia Williams

(Reuters) – The financial outlook for Canada’s Trans Mountain oil pipeline indicates it will depend significantly on last-minute shipping commitments to achieve profitability. This complicates the Canadian government’s efforts to sell the pipeline following the completion of its C$34.2 billion ($25.04 billion) expansion after numerous delays.

Documents filed by Trans Mountain during a regulatory dispute over its tolls suggest that it may take up to eight years to generate profits unless the pipeline effectively utilizes its uncommitted shipping capacity, which amounts to thousands of barrels per day.

Trans Mountain anticipates that the pipeline will be highly utilized as Canadian oil production increases. However, some traders and analysts caution that this may prove difficult due to elevated tolls and logistical challenges at the Port of Vancouver, where the pipeline terminates.

The pipeline, capable of transporting 890,000 barrels of oil per day, began operations in May and reserves 20% of its capacity for uncommitted or spot customers, who incur higher tolls than those with long-term contracts.

Regulatory documents submitted in April illustrate various utilization scenarios for the 178,000 barrels per day of spot capacity. If spot shipments are non-existent, the pipeline will not yield a positive equity return—profits after accounting for depreciation, interest, and taxes—until 2031. However, if Trans Mountain reaches its projection of operating at 96% capacity starting next year, a positive equity return could be realized by 2026.

Recently, a Trans Mountain executive mentioned that a modest amount of spot capacity is currently in use. Mark Maki, the company’s chief financial officer, stated that spot shipping is critical for the overall financial performance and he anticipates an increase in volumes later this year.

Spot shipping demand is challenging to predict, as it is influenced by fluctuating prices for Canadian oil compared to other heavy crude oils in the U.S. and Asian markets, according to analyst Stephen Ellis from Morningstar. He described Trans Mountain’s long-term expectation for 96% utilization as optimistic.

“Their reliance on spot capacity is one of their main vulnerabilities,” noted economist Robyn Allan, emphasizing that the financial projections hinge on very favorable assumptions for the next 20 years.

In contrast, Enbridge’s Mainline offers 100% spot capacity but at tolls approximately half of those charged by Trans Mountain. TC Energy’s Keystone pipeline retains around 10% for spot shipments.

A Canadian crude trader indicated that the demand for spot capacity on Trans Mountain would largely depend on the fullness of competing pipelines.

The Canada Development Investment Corporation (CDEV), which owns Trans Mountain, acknowledged in May 2023 that increased tolls might dissuade potential customers.

The projected tolls for pipeline transport have escalated due to the rising costs associated with the expansion, diminishing the pipeline’s competitive advantages.

Construction costs ballooned to nearly five times the original 2017 budget, leading to dissatisfaction from committed shippers such as Suncor Energy and Canadian Natural Resources, who now face higher than anticipated tolls. For instance, one challenging section of the pipeline soared from an estimated C$377 million in 2017 to C$4.6 billion in 2023 due to technical challenges.

Prime Minister Justin Trudeau’s administration acquired Trans Mountain in 2018 to facilitate the expansion, effectively nearly tripling shipping capacity from Alberta to the Pacific coast. However, the government never aimed to be a long-term owner and has indicated intentions to initiate a sales process.

A spokesperson for Canada’s Finance Ministry stated that the expansion represents a significant economic investment, generating revenue and creating well-paying jobs. Maki advised against rushing the sale, citing uncertainties regarding spot demand, the tolling dispute, and the plan to sell a stake to Indigenous communities.

“If uncertainties exist, it will negatively impact the sale price,” Maki explained.

Trans Mountain has borrowed C$17 billion from the government and secured a C$19 billion loan facility from commercial banks. Financial projections from April indicate it could incur over C$1 billion in interest payments annually until 2032, depending on interest rates and future capital structure.

Morningstar’s Ellis pointed out that even under the best-case assumptions, Trans Mountain is projected to generate only an 8% return on equity by 2034, which he characterized as the minimal acceptable return for a quality Canadian midstream asset. The ratio of Trans Mountain’s debt to EBITDA—a measure of a company’s ability to meet its debt obligations—is expected to begin at 11.6 in 2025 and remain above the typical 3.5 ratio for midstream companies until 2040.

“If this were not a government-owned entity, the market would likely struggle to support it. These leverage ratios are concerning,” Ellis remarked.

Trans Mountain asserted that interest payments may decrease if the corporation undergoes recapitalization, and it is collaborating with the government to refine its financing strategy.

Many analysts believe that Ottawa may need to accept a reduced price for its investment to make Trans Mountain attractive to potential buyers. Pembina Pipeline Corp, the only publicly traded company to express interest in acquiring Trans Mountain, has recently stated that there remains too much uncertainty in the market. Indigenous groups are also awaiting further clarity on the situation.

“Until the tolls are resolved, moving forward with the sale of the pipeline will undoubtedly be challenging,” commented Stephen Mason, CEO of Project Reconciliation, an Indigenous-led group seeking to bid for a stake in Trans Mountain.