Estimated cost of Coastal GasLink pipeline surges to $14.5-billion

The cost estimate has surged for building the Coastal GasLink pipeline project in northern British Columbia, leaving uncertainty over when the route will be completed.

Calgary-based TC Energy Corp. TRP-T said on Wednesday that it has increased Coastal GasLink’s expected cost to $14.5-billion. That’s up nearly 30 per cent from the previous estimate last year of $11.2-billion and up 134 per cent from the original price in 2018 of $6.2-billion.

TC Energy, which co-owns the B.C. project, said it hopes to complete the natural gas pipeline by the end of this year, but it warned that if the construction activities extend into next year, the price could jump by another $1.2-billion.

Coastal GasLink is facing cost pressures from a shortage of skilled labour, as well as addressing “underperformance” in work done by some subcontractors and dealing with challenges related to mitigating soil erosion and sediment, TC Energy said.

The 670-kilometre pipeline is designed to transport natural gas from northeast B.C. to LNG Canada’s $18-billion export terminal, which is under construction in Kitimat, B.C.

Shares in TC Energy fell $3.22 to close at $54.11 apiece on Wednesday on the Toronto Stock Exchange.

“The market remains concerned regarding additional cost overruns on the project,” Scotia Capital Inc. analyst Robert Hope said in a research note. Given the uncertainty over the final cost and timing for construction completion, he added that the “project isn’t out of the woods yet.”

The goal at Coastal GasLink is to test the pipeline next year and have it ready to supply LNG Canada in 2025, when exports of liquefied natural gas are slated to begin to Asia from Kitimat.

“We are disappointed with the increase in the Coastal GasLink project costs,” TC Energy chief executive officer François Poirier said in a news release. “We continue to be laser-focused on safely completing this critical piece of energy infrastructure at the lowest possible cost, which will enable Canada’s first direct path for LNG exports.”

TC Energy said there is strong interest in its previously disclosed plans to sell $5-billion in various assets, and that divestment program could be expanded.

When LNG Canada’s co-owners approved construction of the Kitimat terminal in the fall of 2018, Prime Minister Justin Trudeau pegged the total investment at $40-billion, including the original estimate of $6.2-billion for Coastal GasLink, but the forecast for pipeline costs has soared by $8.3-billion since then.

Total costs will now be at least $48.3-billion for LNG Canada’s Phase 1, counting the $18-billion Kitimat terminal and various infrastructure that includes the revised estimate of $14.5-billion for the pipeline, as well as annual budgets for drilling in the North Montney region in northeast B.C.

TC Energy concluded the sale of a 65-per-cent stake in the pipeline venture in 2020 to Alberta Investment Management Corp. and KKR & Co. Inc.

TC Energy, which currently owns 35 per cent of Coastal GasLink, announced a deal last year to set aside a 10-per-cent stake for the planned equity sale to as many as 20 elected First Nation councils along the pipeline route. TC Energy now expects to book an impairment charge to its equity interest in the pipeline project when it releases its fourth-quarter results on Feb. 14.

While TC Energy has already told investors that it would take a financial impairment on the project, the severity of the charge could depend on how much of the pipeline’s rising costs might be recouped by the company through imposing higher tolls to its customers, said Clark Williams-Derry, a Seattle-based analyst with the Institute for Energy Economics and Financial Analysis (IEEFA).

Mr. Williams-Derry forecasts that the Coastal GasLink project’s costs for transporting natural gas across British Columbia could end up being double the costs of shipping the fuel from northeast B.C. to the Gulf of Mexico.

A new report by IEEFA said Canadian independent producers could increasingly look to the U.S. Gulf Coast as an attractive market for sending supplies of natural gas instead of relying on plans by LNG proponents in B.C. to export overseas from Canada’s West Coast.

Details yet to be worked out include how the increased pipeline cost will be specifically allocated. “LNG Canada continues to monitor Coastal GasLink’s cost and schedule developments. While we cannot disclose specifics, a commercial agreement is in place that addresses risk allocation,” LNG Canada said in a statement.

The Kitimat terminal is located on the traditional territory of the Haisla Nation. About 190 kilometres of the contentious pipeline route cross the Wet’suwet’en Nation’s traditional territory. Wet’suwet’en hereditary chiefs who oppose Coastal GasLink say they have jurisdiction over that territory.

London-based Shell PLC RYDAF is the largest partner in LNG Canada, with a 40-per-cent stake, followed by Malaysia’s Petronas PNAGF at 25 per cent. The other co-owners are PetroChina PCCYF (15 per cent), Japan’s Mitsubishi Corp. MSBHF (15 per cent) and South Korea’s Kogas (5 per cent).

LNG Canada’s co-owners are considering whether to forge ahead with Phase 2 expansion plans that would double export capacity of natural gas in liquid form.

Five proposals for exports using tankers remain active in B.C., including potential expansions at LNG Canada in Kitimat and FortisBC’s Tilbury LNG domestic plant in Delta. The other three projects are Cedar LNG, Ksi Lisims LNG and Woodfibre LNG.

Source link