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Coastal GasLink Cost Skyrockets 70% to $11.2B

The projected cost of the contentious Coastal GasLink pipeline spanning northern British Columbia has skyrocketed 70% to C$11.2 billion in the wake of a freshly-inked deal between operator TC Energy Corporation and the group building a liquified natural gas (LNG) terminal on the West Coast.

TC Energy CEO Francois Poirier said a sheaf of revised agreements with LNG Canada “settles all outstanding disputes” and allows for “timely execution of our largest LNG-linked project,” The Canadian Press reported last week. Poirier put the announcement in the context of the temporary global spike in fossil fuel demand brought on by Russia’s invasion of Ukraine.

TC Energy said it expects “mechanical completion”—when all construction and testing is wrapped up and the tubes are ready to move the chilled gas—by the end of 2023.

The 670-kilometre pipeline, which aims to carry fossil gas across the province to the LNG Canada processing and export facility in Kitimat, is already about 70% complete, Poirier said. But until last Thursday, the reported cost of the pipeline stood at just $6.6 billion.

“Capital costs have increased from the original cost estimates made in 2012, and the revised agreements incorporate a new cost estimate for the Coastal GasLink project of $11.2 billion,” Poirier told investors on a conference call.

He said TC Energy will cover part of the difference with a series of investments totalling $1.9 billion that kick off this month. “We currently estimate our portion of the equity contributions to Coastal GasLink LP over the project life to be approximately $2.1 billion,” the Calgary-based pipeliner said in a statement.

Last November, TC Energy said it was prepared to sink up to $3.3 billion into the project.

Details of the settlement with LNG Canada were not disclosed, but the long-running dispute had to do with cost overruns and missed project deadlines due to COVID-19, severe weather, project scope, and “other events outside of Coastal GasLink LP’s control,” TC Energy said.

“Together with LNG Canada, this project will provide the first direct path for Canadian natural gas to reach global LNG markets,” Poirier said, deeming the deal a “significant milestone.”

The project has faced political and environmental obstacles over the past few years, CP observes.

A series of protests by members of the Wet’suwet’en Nation and other Indigenous and green groups has repeatedly stalled construction along parts of the pipeline, while a pair of fines from the B.C. government nabbed the company for non-compliance with environmental orders this year. Last fall, analysts warned the project was well on its way to becoming a “financial albatross”.

Poirier noted that TC Energy has agreements with all 20 elected First Nations councils along the route, and signed option deals earlier this year for potential sale of a 10% stake to two Indigenous groups representing 16 of those communities, CP writes. Indigenous land defenders have repeatedly pointed out that those elected councils have no jurisdiction over the wider territory that traditional leaders have been campaigning to protect.

Poirier also alluded to the energy turmoil stirred up by Russia’s invasion of Ukraine in February, saying global demand for LNG is projected to grow by 50% by 2030, to 75 billion cubic feet a day, from 50 billion currently. “This growth is largely underpinned by heightened energy security concerns and the reorder and reorientation of the energy mix,” he said.

“This next wave of LNG demand is creating significant opportunities that align with our strategy,” Poirier added. “TC Energy’s unparalleled asset footprint will play a critical role in securing global energy supply.”

But within a couple of weeks of the Russian invasion, the European Union had pledged to cut Russian gas demand by 65% this year, replacing it only temporarily with other supply sources while it accelerates its transition to energy efficiency and renewable energy. In April, with the United States fossil industry anticipating Poirier’s messaging about future gas demand, the Institute for Energy Economics and Financial Analysis reported the U.S. would need no new LNG facilities to fulfill its commitments to Europe.

In mid-July, European climate consultancy Ember said EU gas demand will peak in about three years.

Before even factoring in those assessments, RBC Capital Markets analyst Robert Kwan questioned whether financial returns on Coastal GasLink will be more modest than the initially anticipated returns, “which I think were pretty low to begin with.”

“Phase 1 clearly didn’t achieve its initial return objectives,” replied Bevin Wirzba, TC Energy’s head of natural gas pipelines. “But as we indicated, coming to a settlement puts the project in the best position to move forward.”

Phase 1 of the project involves building the actual pipeline, CP explains. During Phase 2, TC Energy plans to more than double its capacity by installing compressor stations.

TC Energy owns 35% of the project, after selling a 65% stake to KKR & Co. Inc. and Alberta Investment Management Corp. (AIMCo) in 2020, CP says. That’s the same AIMCo that lost more than $4 billion for Alberta public pension funds in 2020 by placing a bad bet on fluctuating oil prices.

The main body of this report was published by The Canadian Press on July 28, 2022.