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July 2023

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Editorial comment

I wonder how many World Pipelines readers have visited the American Dream mall, in East Rutherford, a suburb of New Jersey? The story of the mall is fascinating: the 3 million ft2 shopping and entertainment complex was built at a cost of US$5 billion and has a long history of setbacks. It opened six months before the COVID-19 pandemic hit, and has struggled financially since it opened (losing US$60 million in 2021). A fantastic article by Jason Del Rey explains the development’s “complicated 17 year history, marked by ownership changes, false starts, and broken promises” and analyses why this megamall, and other malls, have been failing.1

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One aspect of the story that interests me is the importance of marquee department stores in developing and sustaining malls. Historically, these “crown jewels of retail”, as Del Ray puts it, have acted as anchor tenants. Anchor tenants are established department stores or retail chains that commit to leasing some serious square footage (typically located at the end, or middle, of malls), drawing foot traffic through the complex. Malls have relied on the commitments of anchor tenants to legitimise their very existence.

But consumer behaviours have changed, and the middle-class shoppers who once visited department stores now see their money go further in standalone discount chains (TJ Maxx, Ross) and big-box stores (Walmart, Target). They can still get everything under one roof, but the roof no longer belongs to the likes of Macy’s or J.C. Penney. Three of the American Dream Mall anchors – Barneys New York, Lord & Taylor, and Century 21 – have gone bankrupt and closed, and this lack of underpinning threatens the survival of the mall. If you’re waiting for the connection to pipelines, stay with me! On p.5 of this issue, we report on the news that Trans Mountain Corp. has applied to regulators for tolls on the much-delayed Trans Mountain Extension (TMX) pipeline project, which is about 85% complete. Costs have ballooned over the course of the last decade: a new report from ESAI Energy notes that “since the initial rate filing in 2013 for TMX […] the overall cost of constructing the pipeline has skyrocketed, increasing over four-fold from initial estimates of US$5.5 billion in 2013 when Kinder Morgan proposed the project to about US$23 billion, as of March 2023”.2 Trans Mountain Pipeline was bought by the Canadian government in 2018, after Kinder Morgan Inc. looked to halt the extension project in the face of environmental opposition.

Rising construction costs impact the variable component of the shipping toll: the proposed tariff includes a formula that adjusts the toll for changes in the cost of the project. In the original agreements, Trans Mountain Corp. capped the risk exposure of committed shippers at 25%, meaning that under 25% of the cost increases will be passed on through higher tolls to the companies that will be shipping oil on the line. But ESAI explains that “TMX risks losing its committed shippers if the cost-of-service based tariff rises too much”. Is it a stretch to say that this is the anchor tenant conundrum of the pipeline shipping sector? The latest news is that committed oil shippers for TMX, including Cenovus Energy, Suncor Energy, and BP plc, have registered to intervene in the toll application. Reuters reports that a number of shippers are concerned that the uncapped cost component of the toll had increased from CAN$1.36/bbl in a 2017 cost estimate, to CAN$6.48/bbl.3 ESAI notes that about 80% of the capacity on TMX is contracted for between 15 - 20 years and the remaining 20% will be available as spot capacity. If the committed tariff ends up being higher than the market spot rate tariff, producers have the right to terminate their commitments on TMX.

A 2022 report from IEEFA says: “To make the project profitable, TMX would have to increase the currently projected tolling rate for using the pipeline’s transport services by 100%. A 100% increase in shipping costs, coupled with Canada’s already high production costs, would result in a price that would prevent Canadian oil from breaking into Asian markets”.4
The Canadian government is likely to sell TMX at a loss once it is complete.

  1. www.vox.com/recode/21717536/department-store-middle-class-amazon-online-shopping-covid-19
  2. North America Watch: Competition Heats Up for Oil Sands Takeaway in 2024’, ESAI Energy LLC, 22 June 2023.
  3. www.reuters.com/business/energy/oil-shippers-canadas-trans-mountain-expansion-dispute-pipeline-tolls-2023-06-27/
  4. https://ieefa.org/wp-content/uploads/2022/03/Trans-Mountain-Expansion-Could-Never-Return-the-Expected-26-Billion-Spent-by-Taxpayers_March-2022.pdf

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