Market News

That means taxpayers may be left to bear a roughly C$20 billion writedown, according to Morningstar Inc analyst Stephen Ellis.

A government spokesperson declined to comment on the pipeline’s potential impact to taxpayers, but said the project was an “important investment in Canada’s economy” that would “ensure Canada receives fair market value for our resources while maintaining the highest environmental standards.”

The pipeline operator is also offering 80% of its expanded capacity to companies with contracts lasting decades.

Fees of as much as C$11.46 a barrel have already drawn rebuke from some that signed contracts, with Canadian Natural Resources Ltd. saying in a June 22 letter it may “impact the overall competitiveness of Canada’s oil industry.”

A company with a 20-year contract would pay about 30 cents more per barrel to ship crude to China using Trans Mountain than via the alternative Enbridge Inc. pipeline systems to the US Gulf Coast, based on proposed tolls and term contract tanker rates, according to Skip York, chief energy strategist at Turner Mason & Co.

Most Canadian oil exports to East Asia are shipped to the Gulf on Enbridge pipelines, TC Energy Corp.’s Keystone system or by rail. From there, the crude is loaded into tankers for journeys of as many as 49 days across three oceans.

Trans Mountain refuted claims the line won’t be competitive. The expansion will have a cost advantage of $2.50 a barrel for shipping to China versus shipping through the Gulf Coast and a bigger advantage to Japan or South Korea, the company said in an email, without specifying how it calculated that cost. “While marine costs fluctuate around the world as conditions change, in the long run, we expect the cost advantage for Trans Mountain to be maintained.”

In certain circumstances, York said the Vancouver route could be cheaper. A company with long-term contracts on Trans Mountain stands to save 40 cents a barrel to reach China over using Keystone. Spot suppliers could save $1.60 a barrel over Enbridge.

Still, crude shipments from Vancouver to East Asia are relatively rare, which makes tanker rates more expensive.

And a major setback for Trans Mountain users relates to capacity limits of Aframax tankers, the largest that can access Vancouver’s marine terminal. The vessels carry less than half the volume of the so-called Very Large Crude Carriers that serve the Gulf Coast. The volume difference means that even though the journey is much shorter, shipping out of Vancouver could be pricier.

The high costs of using Trans Mountain could result in much of the Canadian oil being sent to US West Coast refineries instead of getting shipped to Asia, though there are limits to how much Canada’s southern neighbor can process.

Tanker rates from Vancouver could fall once the route becomes more common. But Trans Mountain won’t be the cheap route to Asia as originally billed.

“The project has failed in that respect for sure,” Allan said.

(Adds government comment in seventh paragraph)