Trans Mountain Corp (TMC), a government-owned Canadian entity, has submitted an application to regulators for tolls on its long-awaited pipeline expansion project to Canada's west coast, Reuters reported on Tuesday, June 6, 2023.

According to the report, the company stated that shipping fees would rise if project costs continued to escalate.

The Trans Mountain Expansion (TMX) aims to triple the flow of crude oil from Alberta's oil sands to Burnaby, British Columbia, reaching a capacity of 890,000 barrels per day (bpd). However, the project has faced significant challenges, including regulatory obstacles, environmental opposition, and soaring expenses.

In March, TMC disclosed that the expansion would cost $23 billion (C$30.9 billion), more than four times the initial estimate, with the potential for further increases in the final bill.

The tolling application indicates that TMX, slated to commence operations in Q1 2024, is approaching the finish line after over a decade since its inception.

Analysts have cautioned that the pipeline will struggle to recover the billions invested in its construction. They also noted that the Canadian government, which acquired the project in 2018 to ensure its completion and plans to sell it once finalized, may incur significant losses.

"TMX is really trapped between a rock and a hard place. It is unlikely to be able to charge a rate compatible with earning viable returns on a C$31 billion investment," stated Morningstar analyst Stephen Ellis, estimating the pipeline's value at around $11.2 billion (C$15 billion) upon completion.

In an application submitted to the Canadian Energy Regulator (CER) on June 1, TMC proposed a base toll ranging from $8 to $9 per barrel, depending on the type of crude oil and its final destination. Shippers committing to terms over 15 years or volumes exceeding 75,000 bpd would be eligible for a discount.

The filing emphasized that the toll is based on the latest cost estimate and is subject to change and outlined the potential for a $0.05 (C$0.07) increase per barrel for every additional $74.5 million (C$100 million) spent on uncapped costs, currently estimated at $6.8 billion (C$9.1) billion.

Uncapped costs encompass specific pipeline segments and other factors such as indigenous and community consultation.

"The tolls adjust for changes in the cost of the project based on a formula specified in the contract," explained a spokesperson from Trans Mountain in an email statement.

Ben Pham, an analyst at BMO Capital Markets, highlighted that the TMX tolls compare unfavorably to the $8 to $10 per barrel for Canadian crude reaching the U.S. Gulf Coast. This is significantly higher than the initial TMX expected toll of approximately $4.50 per barrel.

A month ago, Enbridge, a competitor in the pipeline sector, reached an agreement with shippers on its Mainline network, reducing tolls.

According to Morningstar's Ellis, the Canadian oil market, which has faced limited pipeline capacity for years, will have a surplus export capability starting next year. Consequently, TMX may be vulnerable to undercutting by rival projects.