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Trans Mountain pipeline expansion still has hurdles to cross

  • Commodity Oil

Calgary — The Canadian government's deal to buy Kinder Morgan's Trans Mountain crudepipeline is far from over, with industry executives anticipating a six-monthdelay in the planned startup, keeping Alberta heavy oil prices at steepdiscounts to global benchmarks.

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Canada said in late May it will buy the 300,000 b/d pipeline and 590,000 b/dexpansion project for $3.5 billion.

Alberta producers are keen on expanding the pipeline to access Asian customersvia the Westridge export terminal in Burnaby, British Columbia. The expansionwas originally scheduled to start up in December 2020, but that is lookingunlikely unless construction resumes soon.

"Pipeline construction is a seasonal activity during summer to the fall [Juneto August] in Western Canada and failure to start work on the maininfrastructure works will also drive up expansion costs," Chris Bloomer,president of the Canadian Energy Pipeline Association, said in an interview.

"There are a few regulations that will be issued during the bird-nestingseason [as ownership changes hands]," said Keith Chiasson, senior vicepresident for downstream with oil sands producer Cenovus Energy, noting acloser look will also be taken at the construction schedule.

Kinder Morgan is now in talks with contractors on a new cost estimate and timeschedule to restart work on the pipeline expansion that was stopped April 8.The expectation is the construction contracts will be revalidated, Bloomersaid.

Kinder could not be reached for comment on what their next steps would be inthe transition process. The deal is expected to be ratified by its board bythe fourth quarter.

Kinder Morgan has estimated an expansion of the Trans Mountain pipeline willcost C$7.5 billion.

CROWN CORPORATION

June to August will also be a targeted timeline for the federal government toset up a crown corporation, or state-owned entity, to take over the projectand pay Kinder for carrying out the expansion work, said Greg Stringham,president of GS3 Strategies.

The federal government has underwritten political and legal risks associatedwith the planned expansion," Stringham said. "But is doesn't include the risksassociated with the cost of labor, steel and delays in completion."

Legal issues may also stand in the way of the expansion, RBN Energy said in aresearch note early June.

"There are a handful of outstanding legal challenges in the British ColumbiaCourt of Appeal and Canada?s federal Court of Appeal that must be resolved,and while Kinder has prevailed in a number of recent court rulings, you neverknow what a court might say," the note said.

Unprecedented step

Kinder's setting of a May 31 deadline to pull out of Trans Mountain Expansion,unless it received certainty regulatory and legal certainties, was a"near-death" experience for the federal government as it would result inCanadian crude being discounted to global prices for a long time, DennisMcConaghy, a former Trans Canada executive, said late Tuesday at the GlobalPetroleum Show in Calgary.

Western Canadian Select crude has averaged a $17.84/b discount to WTI so farin June, out from a $10.29/b discount in June 2017, S&P Global Platts datashows.

With two proposed export projects -- the 525,000 b/d Northern Gateway and the1.1 million b/d Energy East -- taken off the radar in the past two years, thefederal government was left with only one option, Tim McMillan, president ofthe Canadian Association of Petroleum Producers, said at the show.

"We have always said that the government shouldn't find itself in a positionof no choice," McMillan said.

Yet, nationalizing the project was a "terrible" precedent that the Canadiangovernment has set with the Kinder deal, McConaghy said.

"For future growth of oil sands, confidence of the private sector to invest inAlberta has to be restored. This will be critical going forward," McConaghysaid.

The Canadian Association of Petroleum Producers said Tuesday oil sandsinvestments have dwindled for four consecutive years, with just C$12 billionexpected to be spent in 2018.

Deadline next month

Kinder has until July 22 to help Ottawa find a buyer for Trans Mountain andits expansion. Six weeks is an awfully short time to put through a deal withthe current investment climate in Alberta, Bloomer said.

First Nations bands along the pipeline route and Canadian pension funds arebeing touted as probable buyers, but there is "still lots of capital exposure"and risks associated with such a deal, Bloomer said.

The Alberta government has offered to contribute up to C$2 billion for theexpansion that will be converted into equity, Premier Rachel Notley said atthe Calgary event Tuesday, noting such spending will only happen after firstoil flows through the expanded pipeline.

"We are getting a new pipeline built from Alberta and we are going about itdifferently than it has been traditionally done," she said.

The Alberta government in the 1970s invested in oil sands projects tokick-start the development process.

"That subsequently opened up the gates for future investment," Notley said.

--Ashok Dutta, ashok.dutta@spglobal.com