The Decibel - The $34-billion bet on boosting Canada’s economy

Episode Date: May 13, 2024

After more than a decade, the Trans Mountain pipeline expansion project (TMX) has finally been completed. One of the country’s biggest infrastructure projects is seen as a major win for Albertan oil producers, with nearly 600,000 extra barrels shipped daily, ready for international buyers.But the future ownership of the pipeline remains up in the air. Many of the issues and questions that delayed the project – concerns over its safety and the environment, fights over Indigenous land rights, long-term economic risks – remain.Jeffrey Jones, The Globe’s sustainable finance reporter, explains the ballooning costs of the TMX and why one of Canada’s top exports is creating tension with its future climate targets.Questions? Comments? Ideas? E-mail us at [e-mail]

The Trans Mountain Pipeline expansion is finally done. It's one of Canada's biggest infrastructure projects. But a lot has changed in the decade since it was first announced. The government's priorities have shifted towards clean and renewable energy. And now that it's ready to start pumping oil across the Rocky Mountains, the federal government is looking to sell the pipeline. Jeffrey Jones is The Globe's sustainable finance reporter, and he's on the show to explain why it took so long to build the pipeline expansion,

who might be interested in buying it, and what it means for Canada's climate policy. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. Jeff, thank you so much for being here. It's a pleasure. We're going to start off really basic. What exactly is the Trans Mountain Pipeline Expansion Project? It's an expansion of a pipeline that's been in operation since the early 1950s.

So it extends to the Pacific coast at Burnaby, British Columbia, near Vancouver, from Edmonton, and extends across the Rocky Mountains. So the original pipeline's capacity was about 300,000 barrels a day of crude oil and petroleum products as well, so gasoline, diesel, jet fuel. And that entire pipeline system now will carry 890,000 barrels a day. Around 2012, the former owner of Trans Mountain, a U.S. company called Kinder Morgan, hostage on its exports to the United States. and protests so that their timeline kept on getting pushed out and the estimated cost of the project kept on going up and up and up. So in 2018, it said it couldn't go forward anymore with the delays that it had experienced. It said it would shut that project down. That's when the federal government moved in and decided to buy the project, the original pipeline for $4.5 billion, and pledged to complete the expansion.

Let me just ask you a little bit more about the cost of this, though, Jeff, because I think these numbers are quite eye-popping for a lot of people. The budget was initially $5.4 billion, but now it's taken $34 billion to actually get this pipeline expansion built. So what led to such an increase from the original price tag? Well, that's really the $34 billion question. Before Kinder Morgan sold the project to the Canadian government, that price tag was already going up because of the delays, because of court challenges. After the federal government approved this project, there was a court challenge made, and it was a successful court challenge that ruled that, first of all, Indigenous consultation wasn't up to the level that it should have been. They hadn't even started building it yet.

After 2018, let's not forget about some of the things that had happened. First of all, there was the pandemic. There was all of the supply chain issues that affected construction projects all over the world as a result of that. And there were fires, there were floods, there was all kinds of things like that that was affecting construction. It was almost biblical in nature. And beyond all of that, they also had to deal with more delays

and difficulty getting permits for some areas and protests that blocked some of the segments of the route. So costs piled up. But there will be some answers to be searched for in this because there are other projects that were being built around that same time that were indeed over budget, but not anywhere near this degree. What is the economic argument here, Jeff? Because this is obviously what is behind this pipeline is the money that could come from this. So how much could Canada actually make from this expansion? The economic return is going to be a longer proposition than anybody had envisioned at the start. So one economist, Trevor Toom from the University of Calgary says that the revenues that that pipeline is going to kick out over its lifespan is going to be well over the debt that was taken on to build that pipeline. former Bank of Canada Governor Stephen Poloz, who talks about the project generating revenue

in the order of $10 to $12 billion annually. He said that not all of this will be incremental to the Canadian economy, but it'll still be a big number and possibly around 0.5% of total GDP. And that will show up as an increase in productivity. And as we all know, that's a major issue these days. I want to ask you, though, kind of about the environment we're in now, because when the government actually bought this pipeline, pipelines were more kind of in the ethos. But we're not really talking about pipelines anymore. We're talking about renewable energy sources these days, particularly electric vehicle battery plants, which the government, federal and provincial levels have committed over $30 billion to. So this is a real push on this side of things now. And at the same time, now we've got this pipeline up and running. So Jeff, help me understand this. What is the government's plan for how these two kind of projects will really work alongside each other. Well, that's interesting, isn't it? I mean, the government had said, the Trudeau government had said very early on that it wants to move towards a much more clean energy future for this country.

But at the same time, it wants value for the resources that it is already producing. And this will have an impact, I think, when you talk about the eventual payout we talked about earlier of this project. If you're of the mind that Canada and the world is going to go through a speedy transformation to clean energy, this is going to have a pretty big impact on the long-term value of this project.

If you're of the view that the energy transition is going to be a much longer period, say 25 years, then obviously the economic impact will be that the project is viable for a much longer period of time. And this pipeline expansion will triple the capacity of oil to the West Coast. Nearly triple, yeah. Nearly triple, yeah, from 300,000 to, I believe, 890,000 barrels a day. Do we know, is there that kind of demand? What is the global demand for oil? Well, as it stands right now, that's a lot of crude in the Canadian context for sure.

And don't forget, Canada is already producing more than it ever has. The issue is the value of that crude, the fact that the industry believes it's held hostage almost to one customer. As a matter of fact, just 10 refineries in the US Midwest and Gulf Coast. That's pretty much the sum total of Western Canada's oil exports. So what happens now? Well, the pipeline now has much more capacity to access markets in the Pacific Rim. And as far as the industry is concerned, that allows it to access much more lucrative markets than it has in the past. So that's the value proposition for the industry. I guess I'm wondering about the timelines here, about how quickly this transition might happen, Jeff. The International Energy Agency has said

that global demand for oil will peak in 2030, which is only a few years away now, and then start to decrease after that because of global commitments to move to other sources of energy to meet climate goals. So I guess, do we know how long this pipeline will actually be profitable? Well, there's nobody that is saying that there will be no oil used in 2050. And that's obviously the global target for getting to net zero. The question is, will Canadian oil be seen as a cleaner alternative to other crude oils? The oil sands are a very high carbon source of crude, but there are plans in place for carbon capture and storage, a massive project in the Fort McMurray area that the industry is banking on will make it a premium product for the world as

demand for lower carbon alternatives starts to pick up. Now, that's a roll of the dice. We don't know if that's going to happen, but that's what they're betting on. We'll be back after this message. Jeff, as we established, Ottawa currently owns this pipeline. But of course, it does want to... I should say that. I own it. You own it. We all own a little piece of it, right?

That's right. But it does want to find a buyer, right? It doesn't want to hold this pipeline forever. Is it likely to find a buyer? And is it likely to, I guess, make the money back from the initial cost? Well, the government has said from the start that it does not intend to be the long-term owner of TMX. So the idea is, from the government's point of view, that there will be an auction for its interest. And there's already some parties that have shown some interest.

Most interesting has been at least two groups of Indigenous bears that are talking about gaining stakes for communities along the route, which would be a major sea change in how major infrastructure is owned and operated in this country. Up until now, Indigenous groups have gained some revenue from these types of projects in terms of land access fees and some jobs, but they argue now that this would give them a seat at the table and be able to have a say in exactly how this project is operated and whether there may be expansion in the future or you name it. So that's one of the options out there. Another is, having seen that the major work is already done, what if another pipeline company comes along and decides to make a bid for it? You mentioned there's two options there, right? A company could buy it or one of these two indigenous groups could potentially buy part of this pipeline or all of this pipeline.

Jeff, you said this would be kind of a different model than what we've previously seen in Canada. What would be the impact of having one of these indigenous groups by the pipeline and have a seat at that table, as you said? Well, it could change the calculus on how this pipeline and the development of this market goes ahead. Obviously, environmental groups are not pleased with this money being spent on this massive expansion and the potential impact, should there be an oil spill or some kind of marine disaster, because don't forget, they're going from something like four tankers a month in Burrard Inlet to 34. So that's a lot of tanker traffic. I should mention from some of the indigenous groups in the coastal areas as well,

still remain dead set against this project. But one of the groups called Chinook Pathways, the indigenous ownership group is called Western Indigenous Pipeline Group. And one of the senior executives with that is a chief named David Jimmy, whose community had at first opposed the project, fought against it. was, why not get some control over how it's operated? And also for the community that he represents, why not get an ownership stake that will allow revenue to build up and perhaps invest in all kinds of other industries? The other indigenous bidder is a group called Project Reconciliation. And they estimate that after servicing the debt, that cash flow could be as high as $430 million annually. So it's not chump change. Yeah. I mean, have these groups said how they would finance the cost potentially of buying

the pipeline? Well, Project Reconciliation aims to take on its own debt instruments that would be backed by the government. So there would be no direct federal subsidy. The other project, Chinook Pathways, is partnered with a pipeline company that would be responsible for its own share of the project, and the Indigenous partners would have a similar arrangement with regard to government backstop debt. The pipeline runs through the traditional territories of more than 130 Indigenous groups, 15 First Nation reserves. How have different communities responded to these environmental concerns? I think it reflects just the diversity of thought across any society. We've seen the Tsleil-Waututh, for instance, on the West Coast remain staunchly opposed

to this project for environmental reasons and its impact on traditional life. At the same time, we've seen, for instance, indigenous communities in Alberta who are much more used to the oil industry and industrial operations and already have stakes in whether it's production or oil and gas service companies. And so they're very familiar with the way this works. And others are stepping into it for the first time. And as you mentioned, there are some Indigenous groups who are opposed to the pipeline, some for environmental reasons.

There are a lot of environmental concerns here. So maybe we can talk about those, Jeff. You know, just with regular operations of this expansion here, what impact would this project have on the environment? Well, there are predictions that this massive new conduit to the coast will prompt the industry to boost its production. So that will mean higher carbon emissions. And climate activists have obviously been dead set against that happening. There are always safety concerns when it comes to transporting crude oil over some pretty rugged conditions and over to the coast.

But at the same time, it's probably going to end up safer than shipping that crude by train. And finally, there's going to be a massive increase in the number of tankers in Burrard Inlet at Burnaby. So we're going to see more ships going in and out of that harbor area, which will mean impacts on wildlife. The sound is an issue with killer whales and other marine life. And of course, there's the safety issue when it comes to just navigating that area with so much extra ship traffic. Yeah. Yeah. I think it's an average of five tankers a month right now. It's going up to

potentially 34 tankers each month. So that could be more than one a day. That's quite an increase. It really is. Yeah. And when you're talking about that specific area too, Jeff, those tankers have to go under three different bridges to get out to the ocean. And there's a lot of islands around there. The navigation has to be quite precise. So there could be a lot of concerns about the wildlife and the environment there. And it can be tricky from a safety standpoint, as we found out earlier this year with that terrible accident in Baltimore. Yeah. Okay. So this is just, you know, regular

operation here, Jeff. What happens in the case of an environmental disaster, right? Like the pipeline leaks or there's a tanker spill? Yeah. Well, if that happens, there is a response plan in place and also a company set up to deal with marine disasters. We've seen oil spills across the country and the United States and everywhere else. So it's a question of making sure that the flow of oil gets turned off quickly. The response plan kicks into place. And finally, the cleanup takes place in a way that causes as least disturbance as possible. The company is responsible for these types of accidents, as is its insurance company. Very lastly here, Jeff, the pipeline expansion has been built.

Oil has begun flowing. How and maybe when will we actually know if this project was worth it? Well, that'll come in the coming years and probably decades. We'll see how quickly the energy transition takes place, how committed Canada is to meeting its climate goals. And if that transition takes place in a speedy manner, quicker than some people have been forecasting, then there is a risk, some say, of it becoming a stranded asset. If it takes place over a longer period of time, if you're looking at 25, 30 years, the payback for the Canadian economy could be substantial. Jeff, we'll have to wait and see. Thank you so much for taking the time

to speak with me today. It was a pleasure. That's it for today. I'm Mainika Raman-Wilms. Our intern is Aja Sauter. Zura Jabril joins us as a fellow of Carleton University's Brooke Forbes Award. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you soon.