One year of delay adds $812 million to a Canadian pipeline's costs: study

Unrecoverable personnel and overhead costs make up 90 per cent of losses due to regulatory delays. 

The study, conducted by the Canadian Energy Research Institute and released on April 6, 2020, drew on actual costings for the Trans Mountain Expansion (TMX) and the Coastal Gas Link pipelines.

"The cost of a delay to a project can be as high as 15 percent of the overall capital cost in the first year and results in negatively affecting the competitiveness of major Canadian oil and gas projects," wrote study authors.

"The estimated CapEx as a result of a 1-year regulatory delay is CAD$344 million and CAD$812 million for Natural Gas Pipeline project and Crude Oil Pipeline project, respectively."

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Regulatory uncertainty proved to be the biggest source of delays for both oil and gas pipelines. 

The study found that major oil and natural gas pipeline projects take approximately 13 additional months for approval in Canada than the United States, providing a competitive advantage to U.S. investments.

Trans Mountain was delayed by more than three years after its November 2016 approval because of regulatory and judicial delays.

The news will come as little surprise to those concerned about linkages between process-driven congestion and deliberate attempts to use the Canadian legal system to create delays that might lead to project cancellation.

A year after its approval, TMX faced a judicial review of the project which resulted in the Federal Court of Appeal ruling to void the approval in August 2018 before it was once again, with a variety of changes, approved in February 2020.

Using CERI's model, the lost three years would translate to approximately $2.5 billion in cost overruns. The reality proved to be much worse. The actual project price tag soaring by a staggering 70 per cent to $12.6 billion as of February 2020.

CERI stopped short of examining factors that led to regulatory slowness, but in the example of TMX it isn't difficult to see linkages between regulators' actions and the legal challenges that ultimately resulted in regulators being ordered back to the drawing board.

For example, Vancouver-based law firm Ecojustice claimed to be responsible for furnishing lawyers to support the legal challenge leading to TMX's judicial review, resulting in the costly additional regulatory processes. The group's marketing material is all about "saving the whales", yet mentions neither the numerous maritime protection conditions that were in TMX's initial approval, nor any of the additional (and costly) binding measures imposed afterwards. Even the unprecedented decision by the federal government to commission a special new class of oil tanker (the Vanmax) to carry oil through the seasonal habitat of resident killer whales went unacknowledged by pressure groups claiming to be acting in the whales' interest.

This has led to widespread suspicions that such campaigns really about stopping the project at all costs, rather than solving any gaps in the quality of its approval. 

In the Ecojustice example, Canadian charitable tax filings show the firm received more than $1 million in funding from unnamed non-Canadian sources in 2018, and a further $1.7 million in revenues flowing in from other organizations. Targeting the regulatory system through the courts proved to be a very efficient use of these resources. This has led many to comment on Canada's habit of tolerating cost-inflating actions like this that do little to further protect the environment, yet hand big advantages to competitor jurisdictions that lag Canada in ESG (Environmental, Social and Governance) performance.

Of the components that contribute to cost inflation, CERI said 50 percent comes from personnel cost of the first year occurred in the delay year; 40 percent from overhead costs; and 10 percent for unrecoverable equipment costs.

The study also looked at delay costs for LNG plants and various types of oil & gas wells, concluding that "the increased uncertainty of the decision-making process in Canada adds to the risk-adjusted value of the projects. In Canada, when increased costs are combined with increased risk, competitiveness is challenged."

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