Dmitriy Frolovskiy is a political analyst and consultant on policy and strategy.
This essay is part of the Prosperity’s Path series. In a time of geopolitical instability and a shifting world order, the challenges facing Canada's economy have only gotten more visible, numerous and intense. This series brings solutions.
Ottawa has finally agreed, in principle, to a new oil pipeline to the Pacific coast. Alberta is due to formally submit its proposal for it by July 1.
It’s a breakthrough energy advocates waited far too long for – and one that may have come a little too late. Private-sector interest has waned over the years, and no company yet has said it’s interested in the pipeline. Maybe Alberta has been working hard on securing a private sector proponent and would produce one in its proposal. But if that doesn’t happen, no one can blame the private sector for its lack of enthusiasm.
Two major pipeline projects have failed in Canada. Former prime minister Justin Trudeau, who had overchampioned climate policies, had talked about “phasing out” the oil sands. Despite preventing a third pipeline from failing, Mr. Trudeau’s government brought in carbon taxes, an oil tanker ban, an emissions cap and harsher fuel standards and project assessments. A string of foreign oil majors exited the oil sands.
Years of neglecting the industry’s voices and wrapping the sector in ever more layers of red tape, applied with the zeal of the Peronists in Argentina almost a century ago, came with a cost. And investor trust does not come back on the strength of a single good decision. Just like everything, it must be earned.
Ottawa must step up and and fix what it broke.
It is no secret that Canada sells almost all its crude to a single buyer to the south – the same buyer that now threatens to annex it. The new line to the coast is designed to give producers a second market, much-needed economic diversification and some insurance if the current West Coast Trans Mountain system fills up again. (The pipeline reached full capacity for the first time this month).
But building a pipeline is a business that always carries some risk – in this case, that includes the the possibility that a project costing billions may never deliver what it pledged.
These fears are grounded not only in worry that Canada has decided to enter Asian markets a little too late, but also in the record of past pipeline ventures. Businesses remember Northern Gateway, approved and then cancelled, with $373-million in Enbridge development spending gone. They remember the ill-fated Energy East, on which TC Energy Corp. wasted $1-billion. And they remember the Trans Mountain expansion, from which Kinder Morgan walked away rather than carry the construction risk. Ottawa paid $4.5-billion in 2018 to keep it alive, its total cost having rose from an estimate of $5.4-billion to about $34-billion.
Because of that, it is hard to blame private investors for hesitating on the new West Coast pipeline. And no wonder there are plenty of analysts who think it will never get built.
Crude oil tankers dock at the Trans Mountain Westridge Marine Terminal, where crude oil from the expanded Trans Mountain Pipeline is loaded onto tankers, in Burnaby, B.C. After four years and more than $34-billion in costs, the pipeline expansion went into service in 2024.DARRYL DYCK/The Canadian Press
So what is the solution, then?
Canada needs export diversification and energy-security benefits as never before. Assuming the status quo in terms of U.S. trade will return once the political winds in Washington change is a mistake. And it would mean that agency over Canada’s domestic politics no longer rests in solely Ottawa.
This is why building this pipeline is no longer just a business case, but even more so a case of sovereignty and security. Because of that, and because the project is long overdue, Ottawa is obliged to step in.
It should own any cost overrun. A national-interest designation for the pipeline, which Ottawa is seeking, removes some of the permitting risk. But it leaves some risks no designation can mitigate: whether demand still holds for a line that would not move a barrel until 2033 or 2034, and whether the approval survives the next election, with a B.C. premier, coastal First Nations and a northern B.C. tanker ban all potentially in the way. (Premier David Eby appears to have softened his stance in recent days, though that may change – and through the long life of pipeline construction, the B.C. premier may change, too.)
The number that unfortunately keeps private capital out is the potential overrun. For instance, Trans Mountain‘s $34.2-billion budget is almost six times bigger than its original estimate. There is no private board that would price an overrun of nearly $29-billion into such a project.
Based on that, Ottawa has few options but to eliminate that construction risk with a capped cost-overrun backstop. If a new pipleine were to cost in the same neighbourhood as the $34-billion Trans Mountain expansion, the overrun potentially could be $15-billion. This is based on typical megaproject overrun of about 40 per cent. (Though TMX was an addition to an existing system and not a brand new route, it is the only completed major pipeline in recent years and thus serves as a good benchmark.)
The $34-billion price would be the contracted ceiling for its construction. Ottawa would be responsible for absorbing any costs above that amount.
There is no need to devise any new mechanics for funding. For instance, the Canada Growth Fund’s $15-billion already uses some instruments – equity, debt and offtake-style contracts – to take the risks private capital will not carry. The same approach should be applied towards the pipeline.
A section of the Trans Mountain pipeline expansion under construction in Acheson, Alta., in 2019. When Kinder Morgan walked away from the project, Ottawa paid $4.5-billion in 2018 to keep it alive, its total cost having rose from an estimate of $5.4-billion to about $34-billion.Candace Elliott/Reuters
Unfortunately, there is no other way to ensure a project can be built without the ability to tap Ottawa as backstop. The government is running deficits and any money would ultimately draw from the same well of any federal spending: debt. But this is a project that is worth the spend. And Ottawa can take some equity in the pipeline or a share of the toll in return to get some of the money back.
A government reluctant to keep its own money out cannot expect a private board to carry the uncertainty that government created. The solution costs something. This cost, like the risk, has to be something Ottawa is willing to take on if it is serious about the project after all.
There are real trade-offs. But the honest version of this debate starts by admitting there is no clean answer. Any real fix is a compromise, and a costly one.
Years of neglect always carry a cost. Better to pay it now, before the interest compounds.