For its next trick, Ottawa must unload the $34B Trans Mountain pipeline. It won't be easy

In her budget speech to the House of Commons on Tuesday, Finance Minister Chrystia Freeland took a moment to celebrate the finishing touch on expansionof the Trans Mountain oil pipeline.

The controversial project has been plagued by delays and massive cost overruns, but Freeland instead focused on its completion,highlighting the: "talented tradespeople and the brilliant engineers who, last Thursday, made the final weld, known as the golden weld, on a great national project."

For all the difficulties with developing and building TMX, Freeland still faces another major hurdle that is sure to prove contentious choosing when to sell it, who gets to buy it, and for how much.

An upcoming election and more than $34 billion in construction costs are raising the stakes.

Ottawa bought the project when it was on the verge of falling apart before there was ever a shovel in the ground in the face of legal, politicaland regulatory challenges.

The federal government has long vowed to sell the project(including at least a partial ownership stake to Indigenous groups) once construction was complete. That milestone has now been reached.

But the move will no doubt open a Pandora's box, says Daniel Bland, the director of the McGill University Institute for the Study of Canada and a professor in the department of political science.

He says any potential deal will face intense scrutiny considering theelection is due before the fall of 2025 and, most notably, because the actual sale price is expected to be far lower than the cost to actually buildthe pipeline.

"They were in a hot spot when they bought it back in 2018. They are still in a hot spot," said Bland.

How the governing Liberals handle Trans Mountain could impact how voters view the Liberal party's handling of financial, economic, Indigenous, and environmental issues.

"There's risk either way. If you sell it really fast, but you sell it at the price that is considered to be quite low, then you might be accused of just getting rid of it for political reasons but not having the interest of taxpayers in mind," he said.

"But, if you wait and you don't sell it, then you might be accused of being basically permanently involved or trying to be permanently involved in that sector of the economy in a way that many people, even people who are more conservative, may find inappropriate."

Deep discount

There has always been interest in buying it,including fromStephen Mason, the managing director of Project Reconciliation, a Calgary-based organization which aims to use a potential ownership staketo benefit Indigenous communities.

Nearly five years ago, Mason walked into then-federal finance minister Bill Morneau's office in Ottawa and made an offer to purchase Trans Mountain before construction had even begun on its expansion, which will transport more oil from Alberta to the British Columbia coast.

Morneau was interested, he says, butthe project wasn't for sale until the new pipeline was built.

Much has changed since that meeting in July 2019, including the ballooning cost of Trans Mountain to more than $34 billion (compared to an original estimate of about $7.3 billion) and numerous delays in construction.

Mason is still pursuing ownership. He won't discuss numbers, but suspects Trans Mountain is worth far less than$34 billion.

"My intuition is telling me that it's going to be a fairly significant writedown," he said. "I'm not sure the Liberal government wants to get into a public recognition of what the writedown is ahead of the election, but that is just my speculation."

New tolls

A critical factor in the timing and price of a potential sale is a dispute over how much oil companies will have to pay to actually use the new pipeline.

Several large oil producers signed long-term contracts to use 80 per cent of the pipeline. However, as construction costs have soared, so too have the tolls that companies will have to pay.

Those companieshave balked at the higher rates arguing they shouldn't have to bear the "extreme magnitude" of construction overruns. The Canada Energy Regulator has scheduled a hearing for September, at the earliest, to resolve the issue.

For now, the regulator has set an interim toll of $11.46 for every barrel of oil moved down the line. That price includes a fixed amount of $10.88 and a variable portion of $0.58. The fixed amount is nearly double what Trans Mountain estimated it would be in 2017.

"There's no way that you can have tolls high enough on TMX to cover a $34 billion budget," said Rory Johnston, an energy researcher and founder of the Commodity Context newsletter, who describes the cost overruns on the project compared to the original estimates as"gigantic."

WATCH|The climbing costs of TMX:

A post-construction review of costs should be done on TMX

2 months ago

Duration 3:28

Lessons could be learned on how the Trans Mountain expansion pipeline was developed and built, says company CFO Mark Maki.

He doesn't expect the final tolls to be much higher than the interim amount because, otherwise, the pipeline could become too expensive for oil companies to want to use. Based on the interim tolls, Johnston expects the federal government to likely only recover about half of the money it spent to buy and build Trans Mountain.

"There's no way anyone would pay the full cost of the pipeline because the tolls don't support it. You're going to need to discount it. You're going to need to take a haircut of at least 50 per centof this pipeline," he said.

The federal government currently owns the original Trans Mountain pipeline, built in 1953, the now-completed expansion and related facilities including storage tanks and an export terminal.

Potential buyers

The federal government has looked at offering an equity stake to the more than 120 Western Canadian Indigenous communities whose lands are located along the pipeline route, while finding a different buyer to be the majority owner.

Besides Project Reconciliation, other potential buyers includea partnership between the Western Indigenous Pipeline Group (WIPG) and Pembina Pipelines.

The group has the support from about 40 Indigenous communities and hopes to purchase the project within the next year, said Michael Lebourdais, an WIPG director and chief of Whispering Pines/Clinton Indian Band, located near Kamloops, B.C.

Those communities have to live with the environmental risk of a spill, so they should benefit financially from the pipeline, he says.

Pension funds and other institutions could pursue ownership too.

"There will be buyers. I'm not sure that they'll be willing to pay the full cost of construction but I think there'll be buyers for sure," said Jackie Forrest, executive director of the ARC Energy Research Institute.

The federal government will likely highlight the overall economic benefits of the new pipeline and the expected role of Indigenous communities in ownership, experts say, as a way to defend against criticism if the eventual sale price is low.

In her Tuesday speech, Freeland was already promoting the pipeline's expected financial boost by highlighting the Bank of Canada's recent estimate that the new Trans Mountain expansion will add one-quarter of a percentage point to Canada's GDP in the second quarter.