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Coastal GasLink price tag climbs to $14.5 billion and could go even higher

tc-energy-vw0201
tc-energy-vw0201

TC Energy Corp. has hiked the price tag for its embattled Coastal GasLink pipeline project once again.

The 670-kilometre pipeline, which will ship natural gas to LNG Canada’s export facility in Kitimat, British Columbia once complete, is now expected to cost around $14.5 billion — and could cost a further $1.2 billion if construction is extended into 2024, the company said in a release Feb. 1.

Coastal GasLink’s price tag had already risen to $11.2 billion last July, up from a prior estimate of $6.6 billion. The Calgary-based pipeline firm had signaled in December that it would be revising the total higher following a cost and schedule risk analysis.

“We are disappointed with the increase in the Coastal GasLink Project costs,” said TC Energy’s chief executive François Poirier in a statement. “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. The project will provide substantive benefits for Indigenous and local communities across the project route, our customers, the Western Canadian Sedimentary Basin, as well as playing a vital role in enabling global energy security and emissions reduction contributing to global climate goals.”

The company said it is still targeting mechanical completion by the end of 2023, with commissioning and clean-up work continuing into 2024 and 2025. TC Energy, however, also acknowledged that its risk analysis had considered the potential impact of an extension of the construction schedule “well into 2024,” a delay which it estimates would increase the cost by up to $1.2 billion.

The new estimate of $14.5 billion excludes any potential cost recoveries, TC Energy said, and incorporates contingencies for certain factors that may be outside of the company’s control, including labour issues, contractor performance and weather-related events.

Currently, the project is approximately 83 per cent complete, the company said.

Due to the mounting cost of the project and the additional funding that will be required for completion, TC Energy said it will recognize an impairment to its equity investment in Coastal GasLink LP in its fourth quarter 2022 financial results.

TC Energy has blamed the cost overruns on the higher price of materials, a shortage of skilled labour and contractor underperformance and disputes, as well as other “unexpected events” including drought conditions and challenges with erosion and sediment control.

The project’s ballooning costs have also spurred critics of the sector to question the viability of other Canadian liquified natural gas (LNG) projects.

A new report out by U.S. environmental think tank the Institute for Energy Economics and Financial Analysis (IEEFA) said rising construction costs and policy changes have “eroded LNG Canada’s financial underpinnings, casting a pall on proposals to build more LNG export capacity on Canada’s west coast,” including projects like Woodfibre LNG in Squamish, B.C.

The report suggested that Coastal GasLink’s higher price-tag would translate into higher tariffs for shippers using the pipeline, potentially making it more profitable for some western gas producers to use existing pipeline networks to U.S. markets — undermining the case for other LNG export projects on the west coast.

“The escalated cost of the CGL pipeline — coupled with the new (B.C.) royalty regime and the court decision requiring consideration of cumulative impacts on First Nations treaty rights — puts even more doubt on projects that have yet to reach construction,” wrote Clark Williams-Derry of IEEFA. “High-cost infrastructure continues to pose a challenging hurdle for Canadian LNG projects.”

Still, TC Energy and other Canadian oilpatch leaders say the case remains strong for LNG infrastructure that enables exports to markets in Asia where governments are hungry for reliable energy sources capable of displacing coal.

To cover the rising costs from Coastal GasLink and pay down debt, TC Energy previously announced plans to put more than $5 billion in assets up for sale this year and the company said that strong market interest and valuations support “upsizing” that sale. It’s not yet known which assets will be targeted, though Poirier had said previously that there were “no sacred cows” when it came to what could go on the chopping block.

The company’s Keystone Pipeline had previously been a rumoured target for divestiture — though that was prior to a 14,000-barrel spill from the pipeline into a Kansas creek in December. The spill prompted a nearly month-long shutdown of the cross-border pipeline which carries crude oil from Alberta to refineries in the U.S. midwest and Gulf Coast.

“Our strategic priorities for 2023 remain unchanged,” Poirier said. “Our focus is on safe project execution and operational excellence, strengthening our balance sheet and financial flexibility, enhancing returns on our assets, and advancing our decarbonization and low-carbon opportunities.”

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