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Kinder Morgan sees delay of up to 9 months on Trans Mountain expansion

Kinder Morgan Canada Ltd's C$7.4 billion Trans Mountain oil pipeline expansion project could be delayed as much as nine months if the company cannot make up time lost to regulatory and other setbacks.

The Canadian affiliate of Houston-based Kinder Morgan Inc. is in the process of consulting with contractors on how to speed up construction of the project, which will almost triple the size of the conduit linking the oil sands hub of Edmonton, Alberta, with a marine terminal on Canada's west coast. The line is scheduled to enter service at the end of 2019.

Trans Mountain is under pressure from the British Columbia government, which has pledged to try to thwart the expansion, as well as local governments and Aboriginal groups. Each are taking part in a court challenge of the Canadian government's approval of the line. The project also faces National Energy Board hearings on the exact location of the pipe within the approved right of way that will not start until 2018.

Construction on the main part of the line was originally slated to start in September. Expansion of the company's marine terminal in Burnaby, British Columbia, is already underway.

"The pace of the permitting process, and therefore, our overall construction activity, has started off slower than we planned," Kinder Morgan CEO Steven Kean said on the company's third-quarter earnings call Oct. 18. "Without mitigation, what we have experienced so far translates into a delay of up to nine months. Again, the recent progress in permitting is promising, but we need to continue to seek ways to accelerate that progress."

Kean said the company will work with contractors to get their views on how delays of construction on the project can be reduced. The capacity of Trans Mountain, a 300,000-barrel-a-day conduit that was built during the Eisenhower Era, would be boosted to 890,000 bbl/d with the addition of new pipe and the reactivation of dormant pieces.

"We have a case where, with a lot of mitigation and with several assumptions, we can claw back to the December 2019 in-service date," Kean said. "There's work to be done on permitting and working with our contractors, which we really haven't had an opportunity to do, in terms of bringing them into examine our assumptions on cost and schedule and the rest. And we'll be doing that over the coming weeks and months."

Exports of gas to Mexico, which were expected to ease congestion at the Permian Basin hub of Waha in western Texas, have lagged expectations and that has producers in the prolific region setting their sights on other markets, Kean said. That could benefit the proposed Gulf Coast Express pipeline, a 2 Bcf/d project it is developing with DCP Midstream LP and Targa Resources Corp.

"I think that people are realizing that perhaps there's another way that they need to get out of Waha," Kean said. "The volumes going to Mexico … are not materializing as quickly maybe as the pipeline capacity to move to Mexico has materialized. And so now with the Texas Gulf Coast becoming more of a premium market, shippers are ... looking to get there."

The Gulf Coast Express project offers shippers the option to send gas to Mexico, if more demand materializes, or to the busy Texas Gulf area where LNG capacity is coming online, new petrochemical plants are coming online and power demand is growing for the industrial market, Kean noted.

The diversity of markets gives shippers and producers "the option to exploit a large number of different and varied markets and not bet on or depend solely on what the prospects for power demand growth in Mexico are," Kean said.

Kinder Morgan, which uses distributable cash flow as a key measure of financial performance, is on target to meet its expectations this year despite the impact on its facilities from Hurricane Harvey and lower contributions from its Canadian operations in the wake of its spin-off of Kinder Morgan Canada.

Separately on Oct. 18, Kinder Morgan reported third-quarter adjusted EBITDA of $1.75 billion, a decrease from $1.77 billion in the prior-year third quarter. The S&P Global Market Intelligence consensus analysts' estimate of adjusted EBITDA was $1.72 billion.