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An oil tanker arrives at the Kinder Morgan Westridge marine terminal in Burnaby, B.C.

Rafal Gerszak/The Globe and Mail

A corporate spat has erupted in the race to carry oil to the British Columbia coast, as energy producers accuse a U.S. pipeline company of trying to charge exorbitant prices to ship crude.

The attack is being led by Suncor Energy Inc., the country's largest oil company, and is aimed at the Canadian unit of Houston-based Kinder Morgan Inc., which is seeking approval for a $5.4-billion expansion of its Trans Mountain pipeline. The Kinder project would allow for the shipment of another 890,000 barrels a day between Edmonton and Burnaby, B.C., where it connects to a dock that stands to be an important outlet for Canadian oil to find new buyers in California and Asia.

Major oil companies are eager to ship to the coast to take advantage of higher prices on world markets than they can get by shipping to refineries in the U.S. Midwest and Southeast. But some of them are balking at the price – known in the industry as tolls – which they argue would allow Kinder Morgan to earn returns on the project that are far above its historical 7 to 12 per cent.

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"The average projected [return on equity] would be approximately 28.3 per cent," wrote Greg Matwichuk, an Alberta chartered accountant who provided evidence on behalf of Suncor to the National Energy Board. That, he added, "is significantly greater than returns earned by other pipelines in Canada."

The dispute about tolls, which is set to burst into greater view when a public hearing begins Feb. 13, is a window into the high-stakes game under way for Canadian companies fighting to get oil to Pacific Coast as quickly as possible.

Building new outlets has taken on major new importance in recent months, with existing export pipelines effectively full and Canadian heavy oil selling at a discount as high as $42 (U.S.) a barrel to the North American benchmark, West Texas intermediate.

But oil companies' pain stands to be a gain for pipeline companies. Once boring utilities, pipeline firms in Canada have in recent years moved farther away from a model that largely assured them returns, albeit modest ones, irrespective of operating costs or how much oil they pump. Today, they are seeking higher returns while at the same time accepting more risk, in the belief that the fast-rising oil sands will provide plenty of crude for years to come.

Kinder Morgan says that it is not looking for anything like a 28.3 per cent return on Trans Mountain – and that it is taking additional risk to build the pipeline.

Instead of passing along the cost of power or some construction overruns to customers, for example, Kinder Morgan is proposing to largely shoulder any rise in those costs – save several exceptions, including changes in the cost of steel or large first nations financial considerations.

The company also points out, in documents before the National Energy Board, that the intense public scrutiny of pipelines today could impose additional safety measures and development delays. "These risks and resulting costs are not immaterial," the company says. In a statement, spokesman Andy Galarnyk added: "The return is not excessive. ... The toll principles have been agreed to by 13 very large sophisticated parties (including BP PLC, Imperial Oil Ltd.) representing 708,000 b/d – which in itself is sufficient."

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In Canada, pipeline tolls are typically negotiated with oil companies then reviewed by the National Energy Board. Total SA joined Suncor in questioning the proposed tolls. Most other companies signed contracts that obligated then to support Kinder Morgan.

There is no doubt, however, that Kinder Morgan is looking for solid Trans Mountain profits. In the documents, it says it targets unlevered internal rates of return of 12 to 15 per cent. But those returns would rise substantially with the borrowing typical of pipeline projects. They are also well above the 9 to 11 per cent levered returns typical in the Canadian pipeline industry. U.S. profits have, however, historically been higher, and Houston-based Kinder Morgan warns it won't build the expansion if it can't meet targets.

Suncor, in response, say it is "critical" for the NEB to make sure there is a "just and reasonable" cost to shipping oil to the West Coast at a time when companies are desperate for new pipelines. The company says it is "disturbed" by how pipeline firms are "exerting market power that flows from the infrastructure shortage and need and necessity of take away capacity."

Yet Suncor – through two subsidiaries – has already signed long-term contracts to ship oil through the expanded Trans Mountain system, whose tolls pale in comparison to the potential gains of accessing Pacific markets. Suncor has projected Trans Mountain tolls of between $4.15 and $5.48 (Canadian) a barrel. On Tuesday, the price difference between Canadian heavy oil and Maya, an international heavy blend, stood at just over $40 (U.S.).

The startling size of the price gap is weighing heavily on the province of Alberta, which through the National Energy Board posed Suncor a pointed question. It asked the company "to provide an estimate of the impact on Canadian oil producers if Trans Mountain decided not to proceed with the expansion."

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