Canada's Trans Mountain Pipeline Faces Uncertain Future Post-Expansion
Canada's Trans Mountain oil pipeline, following a C$34.2 billion ($25.04 billion) expansion, is now at a critical juncture. Financial projections reveal that the pipeline will heavily depend on last-minute, or spot, shippers to achieve profitability, casting doubts on the government's plan to sell the pipeline amidst ongoing uncertainties.
Utilization Challenges
According to regulatory documents, the pipeline may take up to eight years to break even unless it secures spot shipments of thousands of barrels per day. While Trans Mountain is optimistic about high utilization rates as Canadian oil production increases, experts highlight potential challenges, including increased tolls and logistical issues at Vancouver’s port. The pipeline, with a capacity of 890,000 barrels per day, reserves 20% of its space for spot customers who face higher tolls than long-term contract holders.
Profitability Projections
The company’s forecasts show varied scenarios for the 178,000 bpd reserved for spot capacity. Without spot shipments, positive equity returns—calculated after expenses like depreciation and taxes—aren't expected until 2031. However, if the pipeline operates at 96% capacity from next year, positive returns could be realized by 2026.
Financial uncertainties were emphasized by spot capacity utilization being only “a little bit” in use, with expectations of increased volumes later in the year. Yet, forecasting spot-shipping demand remains complex, tied to the fluctuating price of Canadian oil in comparison to other heavy crudes in the U.S. and Asia.
Competitive Landscape
The success of Trans Mountain’s spot capacity is also threatened by competition. Enbridge’s Mainline, transporting crude to the U.S. and eastern Canada, offers 100% spot capacity at roughly half the tolls of Trans Mountain. TC Energy’s Keystone pipeline allocates around 10% for spot capacity. Higher tolls and cost escalations during the expansion—skyrocketing from the initial 2017 budget—may deter potential customers.
Government Strategies and Financial Constraints
The Trudeau government, which purchased Trans Mountain in 2018, aims to sell the pipeline but is cautious due to current market uncertainties, the tolling dispute, and plans to sell stakes to Indigenous communities. The expansion has significantly raised shipping capacity from Alberta to the Pacific coast, yet financial projections indicate potential challenges.
Trans Mountain has borrowed C$17 billion from the Canadian government and a C$19-billion syndicated loan from commercial banks, facing over C$1 billion in annual interest payments until 2032. Analysts suggest this heavy debt load would present serious challenges if the pipeline weren't government-owned.
Market Sentiments and Future Prospects
Morningstar and other analysts indicate that even in the best scenarios, the pipeline will yield minimal acceptable returns, while its debt-to-EBITDA ratio will remain above typical midstream firm levels until 2040. Restructuring and recapitalization efforts are underway to mitigate interest payments, but the overall outlook remains cautious.
Potential buyers are deterred by existing uncertainties. Pembina Pipeline Corp expressed interest but cited unresolved issues as a barrier. Indigenous groups, also interested in acquiring a stake, await clarity on toll resolutions before progressing. Until these challenges are addressed, Ottawa faces a tough sell, potentially needing to offer discounts to attract buyers.