Trans Mountain Can't Put Shovels in the Ground this Summer
NEB submissions say the Project’s commercial viability needs to be proven again
VANCOUVER:Living Oceans has stated in a submission to the National Energy Board (NEB) that Trans Mountain cannot commence construction until it fulfills a condition set by the NEB to show commercial support.
“The NEB’s conditions require Trans Mountain to prove commercial support exists for the project,” said Karen Wristen, Executive Director for Living Oceans. “But that was done under the old certificate that was set aside by the Courts and is no longer valid. This condition must be met again under the new certificate issued by NEB.”
The submissions by Living Oceans to the NEB refer to Condition 57, which requires Trans Mountain to certify three months before it starts construction that 60 per cent of the pipeline’s capacity is contracted for 15 years and that any rights that shippers have to terminate the contracts have lapsed. The NEB invited comment on how to resume the regulatory process under the new certificate.
“Trans Mountain can’t start construction this summer, because it hasn’t satisfied this condition to show evidence that there is commercial support in today’s market,” said Karen Wristen. “Canadian taxpayers now own the pipeline and it’s all of us who will be on the hook for cost overruns if the shippers aren’t stepping up to absorb the new costs. We all need to know how much it’s really going to cost and who is picking up the tab.”
According to experts, the shippers’ contracts require Trans Mountain to provide updated capital cost and toll estimates to shippers within 90 days after the NEB issues a certificate for the Project. Shippers then have the option of terminating their contracts if they are not willing to pay the new tolls.
Trans Mountain must reconfirm the shippers’ contracts to meet the NEB conditions before it can start construction.
According to independent expert Robyn Allan ““The cost to construct the project has doubled since the NEB assessed the Project’s costs and benefits. That cost is tied to the rates or tolls that oil companies pay to ship oil on the pipeline. When that cost changes, the tolls change and shippers have a contractual right to review the new costs and tolls and decide whether or not to contract for long-term space on the pipeline.”
Dr. Thomas Gunton of Simon Fraser University provided evidence for Living Oceans and Tsleil-Waututh First Nation evaluating the public interest in the Project. He identifies several factors that have changed that undermine the commercial viability of TMX. These factors, including rising costs to build TMX combined with new lower cost alternative pipelines, mean that shippers may not reconfirm their contracts. Without contracts, the pipeline could not be built.
As Dr. Gunton states, “Trans Mountain’s own evidence shows that the construction costs for TMX have risen from the $5.5 billion identified in the Board’s report to at least $9.3 billion. That number continues to rise as time goes on. At the same time, oil markets have weakened and new competing pipeline projects have been approved that undermine the need for and commercial viability of TMX.”
Under the new completion cost scenario, the cost to transport bitumen products to Asia on TMX would be $2-3 USD higher than shipping it to the US Gulf coast and $5-6 USD higher than shipping it to the US Midwest on Enbridge’s pipelines.
Dr. Gunton cautions that “The economic case for TMX has weakened significantly over the last two years and building TMX in this market environment will put taxpayers money at high risk.”
Dr. Thomas Gunton: 250-477-7601
Robyn Allan: (Whistler) 604-962-4160
Karen Wristen, Living Oceans: 604-696-5044
The NEB invited public comment on the manner in which the Project’s regulation should unfold under the new Certificate of Public Convenience and Necessity, issued in June, 2019. Conditions that attached to the prior approval had been partially fulfilled before that approval was set aside by the Courts and the Board proposes to treat all of that work as if it were done under the new Certificate, unless material changes have occurred. Both Living Oceans and Robyn Allan filed submissions in response to that invitation. The Board is expected to issue a decision shortly.
Condition 57 reads as follows:
Commercial Support for the Project Trans Mountain must file with the Board, at least 3 months prior to commencing construction, confirmation, signed by an officer of the company, that: a) the Project has secured agreements or contracts that remain in force with shippers for a minimum term of 15-years for no less than 60 per cent of its total capacity (890,000 barrels per day); and b) any rights to terminate held by shippers that may have existed in any agreements or contracts between Trans Mountain and shippers (which may have reduced the Project’ s contracted total capacity to less than 60 per cent for a minimum term of 15 years) have lapsed and or expired because their conditions precedent have been satisfied or waived.
According to a letter filed with the NEB by Robyn Allan, under the terms of its contracts with shippers, Trans Mountain must give its shippers a new cost estimate 30-90 days after the issuance of a Certificate of Public Convenience and Necessity. The current Certificate was issued in June, 2019.
The contracts require the shippers to decide whether or not they want to subscribe for space on the pipeline at the rates indicated by the new cost estimate. As this process apparently must unfold as specified in the contract, the prior filing related to Condition 57 in 2016 cannot stand: the possibility exists that shippers will decline to subscribe at the new, higher rates and that the threshold of 60 per cent of capacity for 15 years will not be met.
Living Oceans submitted to the Board that material changes that have occurred since Trans Mountain last provided the National Energy Board with a cost estimate include:
- The project is now owned by a Crown corporation with the result that taxpayers, rather than Kinder Morgan, will be liable for cost overruns;
- the USD exchange rate on the purchase of foreign goods and services was given at par in the cost estimate cited by the Board, but is now at 1.31;
- competition for labour has increased, with the approvals of Site C and LNG Canada; with the result that labour will be more expensive and most likely brought in from outside B.C. or Canada;
- the price of oil is about half of its price at the time of the last public cost estimate and analysts indicate that it is now sitting at its long-term average real price;
- the price reduction has adversely affected new investment in bituminous oil reserves and sharply reduced the supply of oil and hence, the need for pipeline capacity; and
- the cost of the project has increased significantly. The NEB’s reconsideration report still cites the cost at $5.5 billion; the last budget presented to shippers set it at $7.4 billion. Current estimates range as high as $12 billion. The change in cost of completion is material to the question of commercial support for the project.
Evidence filed with the Government of Canada by Dr. Gunton and colleagues at Simon Fraser University concludes:
1. Costs to complete the Project have increased to at least $9.3 billion;
2. Costs to transport oil to Asia will be $2-6 USD higher than transporting it to US heavy oil refineries;
3. The Project will not increase the price per barrel of oil that Canadian producers will receive by shipping product to Asia. Over the past 6 years, prices paid for heavy oil at refineries in the US Gulf Coast have averaged $3.46 USD higher than the prices paid in Asia; and
4. Additional pipeline capacity has been approved and will come online before Trans Mountain could be completed. Production from Alberta’s tarsands has not increased as predicted by the NEB in its evaluation of the Project. The earliest date at which Trans Mountain’s capacity might be needed is 2025, if Keystone XL is not in service by that date and if oil markets fully recover. If Keystone is built or if oil markets do not recover, Trans Mountain’s capacity will likely never be needed.