Canadian Oil Pipeline Expansion Hits Snag, Causing Headache For Trudeau

An oil pipeline expansion project in western Canada is in jeopardy of collapsing. The pipeline's operator and the Canadian government have reached an impasse regarding who will cover the project's remaining costs, putting Prime Minister Justin Trudeau in a challenging spot, experts say.

The Trans Mountain expansion project aims to construct an additional pipeline alongside a pre-existing, 1950s-era pipeline. It was initially approved in 2013 and was 75% completed at the beginning of 2023.

The project aims to nearly triple the capacity of western Canada's pipeline infrastructure. The project's remaining price tag ballooned to over $22 billion (quadruple the initial estimate) due to the Covid-19 pandemic, adverse weather conditions and construction delays.

Trans Mountain, the pipeline operator, had a combined available credit of $11.6 billion as of July, according to Bloomberg. The Canadian government spent over $20 billion in 2018 to purchase Trans Mountain from Kinder Morgan, assuming majority ownership of the project.

In February 2022, Ottawa pledged to "spend no additional money on the pipeline," meaning Trans Mountain will need to secure external financing to cover the remaining $10.4 billion needed to complete the expansion. The Canadian government announced its intent to sell Trans Mountain in October, but has seen limited interest from other potential operators.

A poll released Tuesday found that 68% of Canadians would disapprove of the government taking a multi-billion dollar write-down to sell Trans Mountain, or to finance the remainder of the project. Meanwhile the Trans Mountain pipeline expansion remains uncompleted, with no party seemingly able or willing to cover its remaining costs.

Oil's Importance To Canada

Canada is the world's fourth largest oil producer, outpacing OPEC members like Iraq, Iran and the United Arab Emirates in daily production. Crude oil is Canada's single largest export product, accounting for 17% of total exports in 2021, according to the Organization of Economic Complexity.

Nearly all of Canada's oil exports go to the United States, and Canadian oil comprises 62% of total U.S. oil imports. Existing pipeline infrastructure connects the oil-producing regions north of Edmonton with a long system of pipelines snaking through through the central U.S. and ending at export terminals in the southern Gulf Coast.

The Trans Mountain pipeline extension, if completed, could reduce Canada's dependence on the U.S. for accessing international oil markets. It would be able to send around 20% of Canada's daily oil output to refineries in British Columbia, compared to a current capacity of only around 5%.

Canadian oil producers currently do not pay tariffs on oil exports to the U.S., but they miss out on added value in the refining process.

Trudeau In A Bind

The Trudeau administration finds itself in a challenging position, with some form of state assistance appearing necessary in order for the Trans Mountain expansion to become operational under a reasonable timeframe.

A major reason why the impasse remains unresolved, experts say, is Canada's next federal election, which is scheduled to take place sometime over the next two years.

Breaking the government's prior commitment to deny new funding to Trans Mountain would likely cost Trudeau and his Liberal party considerable support in the next election among the 68% of Canadians in opposition, and the move would be viewed as a contradiction to the government's energy transition policies. Yet the government sees the project as a priority, and has already sunk dozens of billions of dollars into it.

The pipeline expansion project has already been damaging to Trudeau, as Thomas O'Keefe, president of energy-oriented consultancy Mercosur Consulting Group, told International Business Times on Tuesday. The project "has engendered serious conflicts with Canadian indigenous communities," and gives Canada a reputation as "a laggard in the global effort to reduce greenhouse gas emissions."

"It is hard to understand why the Trudeau administration persists in completing the pipeline unless it is for domestic political reasons," O'Keefe said, referring to the lobbying influence of the construction and energy firms involved in the project.

Trudeau's headache will continue for the time being as he continues to pursue the pipeline extension's ultimate completion, while neither the Canadian government nor external companies appear willing to provide the $10.4 billion investment needed to finish the project.

The Trans Mountain pipeline expansion project sits in limbo, awaiting either a new source of financing or a change in government in order to avoid being scrapped altogether.