Boom or Bust? Canada’s Trans Mountain Pipeline Creates Financial Repercussions Spiral
The Trans Mountain Pipeline under construction farmland, in Abbotsford May 3, 2023. PHOTO BY DARRYL DYCK /THE CANADIAN PRESS.
Within the intricate network of Canada's economic infrastructure lies the Trans Mountain Corporation, a key player in the intercontinental transportation of oil products. With a steadfast commitment, Trans Mountain Corporation reliably delivers approximately 300,000 barrels of petroleum products daily, serving as a vital conduit for Alberta and British Columbia.
The ongoing Trans Mountain Expansion Project (TEMP) significantly enhances Canada's energy capacity. This project involves twinning the existing 1,150-kilometer pipeline between Strathcona County, Alberta, and Burnaby, British Columbia, almost tripling its daily capacity to 890,000 barrels daily.
The expansion reduces the need for international import of oil to the East Coast, outgrowing dependence on the USA as a market for oil and moving forward to sustaining a self-reliant economy. Likewise, many countries resort to nearshoring, geographically relocating trade operations to nearby countries close to their markets and time zones. Nearshoring cuts costs, increases reliability, and is a practical response to geopolitical tensions, such as political instability and military conflicts between countries that create uncertainty surrounding supply chains. The USA is currently submerged in the escalating war in the Middle East, Russia-Ukraine interactivity, and presidential elections, inducing a volatile oil market. As a result of distancing trade operations from the USA, Canada is reputed as the fourth-largest crude oil exporter in the world. It has reversed its role to become the largest foreign supplier of crude oil to the USA. Crude oil rose to become Canada's top exported product with exponentially growing profits, selling more than $1.54 trillion in oil and gas exports in the past two decades.
Twinning the Trans Mountain Pipeline will rampantly increase the value of Canadian oil by expanding access to world markets where oil prices are reaching record highs. Global oil consumption has grown for many years and will rise by 1.24 million daily barrels in 2024. The Trans Mountain Expansion Project is in position to reap the benefits of this surging demand and is expected to generate $644 million per year in revenue once it begins operations in 2024, contributing billions of dollars to the country’s GDP. Canada's tax revenue will climb while the project provides billions of dollars in wages to over 2,200 workers.
As of September 30, 2023, construction of the Trans Mountain Expansion Project is approximately 96% complete. TEMP is incurring hefty costs, over $26.1 billion in construction and $3.8 billion in financial carrying costs since the project's inception. Scaling costs with expansion, the March 2023 assessment by Ernst & Young states the project will spend another $3.7 billion during operations through 2043. The Trans Mountain Corporation has blamed the ballooning costs on evolving compliance requirements, Indigenous accommodations, stakeholder engagement, compensation requirements, extreme weather, the COVID-19 pandemic and challenging terrain. With global inflation and delays to completion caused by supply chain challenges and severe floods, TEMP prices will soar unchecked, leaving taxpayers to pick up a huge tab and face a $20 billion loss.
On August 31, 2018, the Canadian government purchased the pipeline for $4.5 billion from Kinder Morgan through the Trans Mountain Corporation to continue its expansion for national interest and is grappling with financial blowback. The Liberal Cabinet approved an additional CAD 3 billion loan guarantee under the Canada Account at Export Development Canada for risky ventures to help finish the massively over-budgeted expansion project. As the expanded pipeline operations begin, the "excess cash flow of the expanded system will be used to pay down debt." Chief Investment Officer Laura Lau said she doubts the government can recoup its $30.9 billion investment or the $4.7 billion by selling Trans Mountain. A net negative economic cost, the Trans Mountain Expansion Pipeline, has jeopardized Canada's economic growth and raised the likelihood of nationwide financial crises.
Suffering under repeated cost overruns, Prime Minister Justin Trudeau is now adamant about selling the Trans Mountain Pipeline to another pipeline operator. However, the government faces many challenges in unloading it, including high-interest rates and fights over costs with oil companies. Canada’s credibility as a successful pipeline operator has taken damage and demonstrates a downward financial spiral. Investing money in the pipeline is now a risky gamble, alienating foreign investors and central banks from further financing the pipeline expansion. Killing the project before reaching the break-even point would force the government to bear the debt and forgo any chance of profit. The government should focus on generating revenue from other assets and funneling it to the pipeline costs will save Canada’s future and financial reputation in oil exports.