Canada's Trans Mountain oil pipeline faces a profitability hurdle, potentially complicating Ottawa's efforts to sell the recently completed expansion project, Reuters reported on Thursday, June 27, 2024, citing financial projections and industry analysts.

According to documents filed by the pipeline corporation, the C$34.2 billion ($25.04 billion) expansion, which nearly triples Trans Mountain's capacity to ship crude from Alberta to the Pacific Coast, relies heavily on securing last-minute shippers to turn a profit. 

The documents, submitted as part of a regulatory dispute over tolls, suggest it could take up to eight years for Trans Mountain to become profitable unless it fills a significant portion of its uncommitted capacity.

Trans Mountain officials remain optimistic, projecting the pipeline will be highly utilized as Canadian oil production grows. However, traders and analysts warn that higher tolls and logistical constraints at the Port of Vancouver, the pipeline's terminus, could pose challenges.

The 890,000 barrel-per-day pipeline launched service in May and reserves 20% of its capacity for uncommitted, or spot, customers who pay higher rates than those with long-term contracts.

Financial projections filed in April show different scenarios for utilizing that 178,000 barrel-per-day spot capacity. 

In a scenario without spot shipments, the pipeline wouldn't generate a positive equity return until 2031. Under Trans Mountain's forecast of 96% utilization starting next year, a positive equity return would be achieved in 2026.

Trans Mountain executives acknowledge some spot capacity is currently being used but expect volumes to rise later this year. Analysts, however, view the company's long-term utilization target as ambitious.

"Their reliance on spot is a major weakness," said Robyn Allan, an independent economist who has studied Trans Mountain's finances. "Everything hinges on a very optimistic set of projections."

Compared to Trans Mountain, rival pipelines like Enbridge's Mainline, which serves the U.S. Midwest and eastern Canada, offer full spot capacity at roughly half the toll rate.

The Canadian government, which acquired Trans Mountain in 2018 to ensure the expansion's completion, has always intended to sell the asset. However, uncertainties surrounding spot demand, a tolling dispute, and plans for Indigenous ownership stake complicate the sale process.

Trans Mountain's significant debt burden, with over C$1 billion in potential annual interest payments until 2032, further discourages potential buyers. Analysts say the government may need to accept a discount on its investment to attract interest.

Pembina Pipeline Corp, the only publicly listed company to express interest, recently cited ongoing uncertainties as a reason for holding off. Indigenous groups have also expressed their desire to take a stake in the pipeline but await more clarity on the sale process.

"Resolving the toll dispute is crucial before the sale can move forward," said Stephen Mason, CEO of Project Reconciliation, an Indigenous-led group interested in bidding for a stake in Trans Mountain.