The federal government is seeking to reassure wary oil producers that they won’t face dramatic increases in shipping costs on an expanded Trans Mountain pipeline as a result of Ottawa’s planned acquisition of the beleaguered project.
During visits to Alberta in the past two days, Finance Minister Bill Morneau and Natural Resources Minister Jim Carr stressed that Ottawa intends to own the pipeline only so long as is necessary to overcome the political risk posed by the British Columbia government’s attempts to block construction.
However, the ministers have provided no assessment of potential cost escalation beyond the $7.4-billion figure provided by Kinder Morgan Canada Ltd. about 14 months ago, prior to a B.C. election that ushered in the current New Democratic Party government.
Producers who have signed contracts to ship increased volumes on the expanded pipeline – including companies such as Cenovus Enegry Inc., Imperial Oil Ltd. and Suncor Energy Inc. – are responsible for covering a portion of any cost increase through higher tolls.
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That has stoked unease as the federal government assumes control of a project already beset by delays, protests and litigation.
“It’s the producer that bears the financial consequence,” said Hal Kvisle, the former TransCanada Corp. executive who is now a director at oil sands producer Cenovus.
“The producer is the shipper, and what we get for our product back at the wellhead is going to be the global price of oil on the water offshore Vancouver minus the tariff. If the capital cost is 50 per cent overspent, the tariff is going to be 50 per cent higher, and it’s going to lead to a bad outcome once again for the Alberta producer.”
The transportation agreements shift some of the biggest construction risks to shippers, including costs tied to building through the most difficult terrain. Producers will see higher transportation fees owing to any cost increases on construction through the Coquihalla Summit, and between Langley and Burnaby, B.C., for example.
Under the formula, every $100-million increase in these uncapped costs translates to a 7-cent increase in the fee, or toll, paid by oil producers. Tolls had previously been pegged between $5 and $7 a barrel.
In an interview on Thursday, Mr. Carr said the government’s ability to push forward with construction reduces the prospect of cost escalation owing to delays caused by political interference from B.C. Construction, which was halted in April by Kinder Morgan, is now resuming, he said.
“There is a high level of confidence that these assets have value, that the price that Canada paid for these assets was reasonable, and that there is confidence this will be a revenue-producing asset in the future that will be attractive to prospective investors,” Mr. Carr said prior to addressing the Edmonton Chamber of Commerce.
He added the federal government will be more transparent about costs and revenues associated with the pipeline and the expansion project once the deal closes in August.
Producers have contracted for more than 80 per cent of the capacity for the expanded pipeline, which would nearly triple capacity to 890,000 barrels a day. Federal officials say Ottawa’s deal with Kinder Morgan includes the continuance of the shippers’ contracts.
The shippers are locked in, said one federal official with knowledge of the agreement. He added that the Trans Mountain project will provide significant value for oil sands producers.
Even if tolls rise by 20 per cent, producers should profit from an increase in the prices they receive on world markets, the official said.
In Ottawa on Wednesday, Mr. Morneau stressed that it would be oil companies, not federal taxpayers, who will be on the hook for higher costs. At the same time, he noted the government of Alberta has established a $2-billion contingency fund which would cover “extraordinary costs” and is aimed at providing a cushion so producers don’t face dramatic increases.
But the prospect of higher fees has raised concerns in Calgary, where large oil companies are wary of even the slightest increase in expenses.
“I’m paid to worry about costs,” Rich Kruger, chief executive of Imperial, said this week. “I worry about the cost of everything.”
With reports from Kelly Cryderman and Jeff Jones