The $34B Trans Mountain pipeline expansion has begun operating

CALGARY -

Wednesday marked the start of the long-awaited, $34-billion Trans Mountain pipeline expansion.

Crown corporation Trans Mountain says the expansion running from Alberta to the B.C. coast will now transport crude oil.

The system has been filling up for weeks and is now 70 per cent full.

The twinning of an existing pipeline took more than four years and was one of the most costly infrastructure projects in Canadian history, with an original price tag of $5 billion in 2013 that ballooned nearly seven-fold.

The expansion increases capacity from 300,000 barrels per day to 890,000.

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"This is the first time Canada will have the ability to access the international market directly through its own borders and territories and that volume will be free to flow to the highest price point globally," said Kevin Birn, S&P Global Commodity Insights analyst.

"This is significant as the fourth-largest producer of oil for almost its entire history with the exception of the Canadian offshore and Newfoundland, almost all of its crude oil has been shipped and moved down to the United States or the U.S. Midwest and then the Gulf Coast."

Birn says Western Canada has tried to get pipeline capacity for over a decade but at times that capacity was not able to come online when needed.

That resulted in the volume being produced in the region overtaking available capacity and an expansion of crude by rail transport, leading to overproducing, discounts of oil prices and volatility.

"This will help provide greater price security by having more egress capacity. The Canadian system as a whole did about 4.9 million barrels per day and we think it could go well over five this year," Birn said.

The expansion is also a positive for the region of Fort McMurray-Wood Buffalo.

"The communities within the region support the success of the energy industry, so ultimately, what is good for the energy sector is good for us," said Mayor Sandy Bowman.

"It creates an opportunity to show that Fort McMurray-Wood Buffalo is open for business and investment."

The government purchased the pipeline for $4.5 billion in 2018 to get the project over the finish line and has stated it does not wish to be its long-term owner.

Experts say because the project's price tag ballooned, the government will likely take a significant write-down if it sells.

'We will dispose of it in due course': Freeland 

As the expansion reaches completion, Finance Minister Chrystia Freeland says Ottawa is still looking to sell.

"The important thing now has been for the project to be operational and we have been clear from the outset that we will dispose of it in due course," Freeland said.

"The prime minister took on this project because he recognized it was in the national interest. He recognized it was just a bad deal for Canada to be leaving money on the table and sending that money directly to the United States."

Freeland says the project will significantly impact Canada's gross domestic product and bring stability to the oil price differential between Western Canadian Select (WCS) and West Texas Intermediate (WTI)

In 2018, WCS was selling at a $47 discount compared to its American counterpart, but today that differential is $10.44.

Freeland says that points to a clear "vindication" of Prime Minister Justin Trudeau's decision to purchase the project.

'Worth every penny': U of C economist

University of Calgary economist Trevor Tombe says the $34-billion cost to build the expansion was 'worth every penny.'

Tombe says taxpayers are not on the hook in the way they might think and the project's economic benefits will surpass its cost.

"Taxpayers purchased the project for about $4.5 billion and the construction cost and these overruns were funded largely through debt," he said.

"So the question is whether the pipeline's revenues will be sufficient to cover interest on that debt and gradually repay it over time, and it does look like that's the case."

Tombe projects much more in revenue than expenses given the pipeline anticipates annual revenues of $3 billion and expenses of less than $500 million.

Interest on the project's large debt will exceed $1.6 billion per year, but Tombe says that still leaves considerable cash available to start repaying debt.

He says interest costs will gradually fall as revenues and profits increase.

"It's easy to see a scenario where the value of the pipeline today to a potential buyer is on the order of somewhere between ($4 billion) to maybe $9 billion and so that leaves considerable room for taxpayers to actually recoup all that was put into the project," he said.

Tombe says to value the pipeline today, one shouldn't just add up revenues minus expenses because a dollar tomorrow is worth less than a dollar today.

"If each year 'discounts' the value of money, by say eight per cent, then I estimate the value of projected earnings (before depreciation and interest) over the next 20 years is between $26 billion and $38 billion, depending on the scenario," he said.

"Some of that will go toward interest and debt repayment, but between $4.2 billion and $8.6 billion is left over."

Potential buyers expressing interest

The federal government has looked at offering an equity stake to more than 120 Western Canadian Indigenous communities with lands located on the pipeline route but also for a majority owner.

Parties that have expressed interest include the Western Indigenous Pipeline Group and Pembina Pipeline, with support from about 40 Indigenous communities.

Others include Project Reconciliation, a Calgary-based organization aiming to use a potential ownership stake to benefit Indigenous communities.

"It was important to get to an ownership model that made sense for those communities that are closer impacted or are in close proximity to the reserve land. They should own a bigger piece than those communities that maybe are 100 kilometres away," said Stephen Mason, Project Reconciliation CEO.

"We went to great lengths getting finance ready in an ownership model that was fair and equitable, and a governance structure around that which gave a voice at the table for 120 indigenous community owners, owners to the pipeline."

Mason says input from Indigenous communities is extremely valuable for the environmental monitoring and stewardship of the land.

"What is even more important is they share in that economic participation and still have their voice at the table," he said.

New tolls 

Trans Mountain is currently locked in a dispute with its oil company customers about the expanded system's higher-than-anticipated tariffs and tolls.

The Crown corporation has said the higher fees are necessary to help cover the budget overruns.

The Canada Energy Regulator has scheduled a hearing in September.

An interim toll of $11.46 for every barrel of oil moved down the line has been set, which includes a fixed amount of $10.88 and a variable portion of $0.58.

Rory Johnston, energy researcher and founder of Commodity Context, says the fixed amount is nearly double what Trans Mountain estimated in 2017.

"I think that reflects the very high cost of construction of this pipeline," he said.

CAPP expects economic, social, geopolitical benefits

The Canadian Association of Petroleum Producers (CAPPS) says the completion of the project promises to deliver economic, social and geopolitical benefits to the country.

"With improved access to global markets, Canadians can look forward to receiving higher value for our energy resources, meaning more money coming back into the economy," said Lisa Baiton, CAPP president and CEO.

"This contributes to our GDP, which enhances every Canadian's buying power and quality of living standards, not to mention supporting more government revenues, jobs and opportunities for Canadians to prosper."

CAPP says the project also excelled in its commitment to meaningful public engagement and Indigenous participation.

The project employed more than 3,000 Indigenous workers, nearly $5 billion was spent with Indigenous suppliers and contractors and it has delivered more than $580 million in benefits-sharing arrangements with 69 Indigenous communities.

With files from The Canadian Press