(Bloomberg) -- Prime Minister Justin Trudeau’s government is likely to stall the sale of the Trans Mountain oil pipeline until after Canada’s national election in 2025, according to officials familiar with internal discussions.
The pipeline, which transports crude from Alberta to the west coast for export to global markets, was bought by the government in 2018 to rescue a project to nearly triple its capacity. Trudeau has said the government doesn’t intend to be a long-term owner.
The Trans Mountain expansion was finally completed this year and oil is now flowing through the line. It’s already boosting Canada’s crude exports. But preparing it for a sale before the next election is proving complicated, and reasons to delay are piling up.
Trudeau and Finance Minister Chrystia Freeland haven’t made any final decision on the timing of an auction, cautioned the officials, speaking on condition they not be identified.
The government has promised to grant equity to dozens of indigenous groups in Western Canada, and that process is moving slowly.
There’s also a regulatory battle over how much Trans Mountain charges oil companies to ship crude on the line. At about C$34 billion ($24.6 billion), the project cost several times more than initial estimates — costs that it wants to pass on to its customers over time. Major oil producers including Cenovus Energy Inc. and Suncor Energy Inc. are pushing back.
Oral hearings on pipeline tolls are scheduled to begin next May, according to a spokesperson for the Canada Energy Regulator. Until final tolls are decided, potential buyers won’t have certainty on the pipeline’s long-term revenue.
Analysts have disagreed about the potential valuation of Trans Mountain, with estimates ranging as low as C$15 billion and as high as around C$30 billion. Even at the low end, it would be among the largest government-led asset sales in Canadian history.
Delaying a sale gives the government more time to prove the value of the enlarged Trans Mountain system — which has a capacity of almost 900,000 barrels a day — and pay down or refinance debt. The government may also be in a position to fetch a higher price later on, if interest rates decline.
It also comes with financial and political risk. Government ownership and expansion of Trans Mountain has harmed Trudeau’s support with the environmentalist part of his political base, and he needs to consolidate left-leaning voters ahead of an election.
On the other hand, selling it now has the potential to bring fresh criticism of the government, if it’s unable to recoup the cost of construction.
There’s also concern in Ottawa about launching a sale that gets interrupted by an election — and possible change of government. A national vote is due in October 2025, but under Canada’s parliamentary system it might happen earlier.
“The federal government will launch a divestment process in due course,” Katherine Cuplinskas, a spokesperson for Freeland, said in an email, declining to give specifics on timing. The pipeline expansion is an important investment in Canada’s economy, she added, and is already boosting gross domestic product. In April, the Bank of Canada estimated that the startup of the line would add about one-quarter of a percentage point to GDP growth in the second quarter.
Indigenous Ownership
Potential buyers of Trans Mountain include pension funds and other institutions and well as infrastructure funds. But any buyer will probably want certainty on the size and scope of the indigenous stake in the business.
Trudeau’s government has promised to give an ownership interest to indigenous groups, which have historically shared little of Canada’s enormous resource wealth. The courts have identified more than 100 First Nations in the western provinces that are impacted by the pipeline. Negotiations on how their stake will be divided are complex, and government officials told Bloomberg they didn’t know how long it will take to reach a conclusion.
Last year, Freeland proposed a special-purpose vehicle that would hold a stake in the pipeline, and each indigenous group could decide whether to opt in. She also said the government would provide risk-free capital for groups wishing to take part.
The looming election also makes it difficult to begin an auction, which would involve giving prospective buyers access to Trans Mountain’s operational and financial data.
Trudeau doesn’t have full control over election timing because his Liberal Party caucus doesn’t have a majority of the seats in the House of Commons. During an election period, the government formally goes into caretaker mode, delaying major decisions. Trudeau’s Liberals are far behind the Conservative Party in opinion polls.
Conservative lawmaker Jasraj Singh Hallan, the party’s spokesperson on finance issues, said the Conservatives would prefer to have the private sector own the pipeline, but would need to assess the situation if elected.
“If it wasn’t for Trudeau’s gatekeeping and anti-development regulations, the Trans Mountain pipeline would have been built by the private sector and it would have not cost Canadians a dime,” Hallan said in an emailed statement.
Listen on Zero: Would You Buy “Net-Zero Oil"?
--With assistance from Robert Tuttle and Laura Dhillon Kane.
©2024 Bloomberg L.P.