Trans Mountain Corp. wouldn’t have been waiting for an international banking crisis to publish the latest cost analysis of the Trans Mountain pipeline expansion (TMX), but its leaders probably haven’t minded that the business pages have been filled with stories about the second biggest bank failure in U.S. history for the past five days.

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'Horrified': Trans Mountain's latest big cost increase catches watchers by surprise Back to video

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Authorities took control of Silicon Valley Bank on the morning of March 10, triggering a series of events that put international financial markets in a state of panic. Later that day, Trans Mountain said its new estimate of what it will cost to build TMX was $30.9 billion, a 44 per cent increase from last year’s projection.

The project was originally expected to cost $5.4 billion when it was first proposed by Kinder Morgan Inc. in 2013. The size of the latest cost increase caught even close observers of the project by surprise.

“I was horrified,” said Paul Poscente, chief executive of Axxcelus Capital Advisory, whose firm has been advising Indigenous groups hoping to acquire a stake in TMX.

Trans Mountain is the Crown corporation that Prime Minister Justin Trudeau’s government created when it purchased TMX — Canada’s only pipeline carrying crude oil from Alberta to the West Coast — in 2018 after Kinder Morgan threatened to cancel the expansion.

Poscente said that while he hadn’t been expecting good news ahead of the Trans Mountain update, he was caught off guard by the sheer size of the increase. “Does it have negative implications across the board for the project for Indigenous ownership? Yeah, it sure does. It’s absolutely disappointing on all fronts. I’m sure for the TMC team as well.”

Ottawa has tapped Canadian the investing banking arms of Toronto-Dominion Bank and Bank of Montreal to come up with a new valuation for the 1,150-kilometre pipeline, as well as to advise Trans Mountain on the search for potential purchasers since the federal government insists it wants to get out of the pipelines business.

The latest numbers could complicate the sale process. Here’s what you need to know:

Why do costs keep rising? 

The latest cost increases, according to the company, are due to inflationary pressures and supply chain challenges, which have driven up spending on labour, housing, food, fuel and materials. There have also been significant cost escalations associated with the project’s tunnel through Burnaby Mountain and higher costs as a result of building in more densely populated parts of British Columbia.

Potential returns on Trans Mountain’s expansion were already being squeezed in the last couple of years thanks to increases related to COVID-19 and catastrophic flooding in B.C that set back construction schedules in 2021 and required significant changes to the project’s scope.

And the final bill could climb further still, as the company warned that the $30.9-billion price tag doesn’t include reserves for “extraordinary” risks. “As with all projects of this size, risk to the final costs and schedule will remain as work is completed through 2023,” Trans Mountain said.

Of course, Trans Mountain isn’t alone in its struggle with ballooning pipeline construction costs.

TC Energy Corp. reported last month that the projected cost of its Coastal GasLink pipeline, which will carry natural gas across the province of B.C. to the LNG Canada export facility in Kitimat, has increased to $14.5 billion — up from $11.2 billion last July —  and could wind up costing an additional $1.2 billion if construction extends into next year.

How will the costs be recovered?

It remains to be seen exactly how TMX’s mounting capital costs will be recovered. Finance Minister Chrystia Freeland recently reiterated that no additional public money will be invested in the project.

It has also been clear for some time that pipeline tolls won’t be sufficient to cover the increased costs. Trans Mountain’s current expectations are that oil companies shipping on the line would cover between 20 and 30 per cent of the increased capital costs through higher tolls — though the company has said the tolls will be adjusted based on the final cost of the project.

And while the government has said it will rely on banks and public debt markets to raise the necessary money to complete the pipeline, independent analysts have cast doubt on the economic viability of the project, suggesting that in order for the Canadian government to attract private capital to the table, it might have to protect prospective investors and creditors by guaranteeing any debt.

It's an important project. It's just getting less viable to find a commercial solution to transfer ownership

Paul Poscente, chief executive, Axxcelus Capital Advisory

The Canadian government could wind up having to write off most of TMX’s cost, according to a 2022 analysis by the Institute for Energy Economics and Financial Analysis, since the total investment required to build the pipeline may not be fully paid back by the time it becomes a stranded asset.

Why does it matter? 

Federal and provincial officials in Alberta continue to defend TMX as a much-needed expansion of a key piece of infrastructure providing Canadian producers access to global markets. The project is viewed as insurance against the risk that Canadian heavy oil could face significant future price discounts without an increase in pipeline capacity.

BMO Capital Markets and TD Securities have determined that third-party financing is still a feasible option to fund the completion of the project. The banks estimate that once it’s complete, the Trans Mountain pipeline will generate earnings before interest, taxes, depreciation and amortization (EBITDA) of more than $2.4 billion per year, thanks to long-term shipping contracts with 11 Canadian and international producers and refiners who represent 80 per cent of the available capacity.

Expansion of the pipeline from 300,000 barrels per day (bpd) to 890,000 bpd will also support Canadian crude oil production growth and increased access to global energy markets, according to a recent economic analysis of the project by Ernst & Young.

“It’s a strong project backed by by credit-worthy shippers,” Poscente said. “It’s an important project. It’s just getting less viable to find a commercial solution to transfer ownership.”

• Email: mpotkins@postmedia.com | Twitter: mpotkins