CALGARY, Alberta (Reuters) – Canadian regulators on Monday kicked off a two-day hearing to weigh up a controversial route change request from the Trans Mountain expansion (TMX) project that has sparked Indigenous opposition and may lead to further delays for the key oil pipeline.

After years of environmental opposition, regulatory hold-ups and ballooning costs, Canadian government-owned TMX is nearing completion and due to start shipping an extra 590,000 barrels per day of crude from Alberta to Canada’s Pacific coast in the first quarter of 2024.

Canadian producers are eagerly awaiting the increased export capacity that will open up access to markets in Asia and the U.S. West Coast and help support heavy oil prices.

But last month Tran Mountain Corp (TMC), the crown corporation building the expansion, asked the Canada Energy Regulator (CER) to change the approved route on a 1.3-kilometre (0.8 mile) section of pipeline near Kamloops, British Columbia, to avoid planned micro-tunneling construction that it now says is unfeasible.

TMC’s proposal to instead lay the pipeline through a different area nearby, using horizontal directional drilling and a conventional open trench, is being opposed by the Stk’emlupsemc te Secwepemc Nation (SSN) First Nation, whose territory the pipeline crosses.

Last week, TMC said being forced to continue with the micro-tunneling option could mean that segment of the pipeline is not completed until December 2024, versus a January completion date if the route adjustment is granted. Building the micro-tunnel could cost as much C$86 million ($63.64 million), the corporation added.

Earlier this year, TMC estimated the entire expansion project would cost C$30.9 billion, more than four times its original budget, and warned the price tag could rise further.

Concerns about TMX being delayed have already started weighing on Canadian crude prices, as traders worry rising oil sands production could get bottlenecked in Canada.

The dispute will also likely complicate the Canadian government’s plan to sell the pipeline once construction is finished. Trans Mountain was bought by Prime Minister Justin Trudeau’s Liberal government from Kinder Morgan Inc in 2018 to ensure it got built.

“It truly is a nightmare come true for the Canadian government,” said Morningstar analyst Stephen Ellis. “The response of the SSN First Nation seems quite compelling and detailed, and lays out Trans Mountain’s shortfalls in a very clear fashion.”

In letters already filed with regulators, the Indigenous group says altering the route would disturb lands that hold “profound spiritual and cultural significance”, and it only agreed to allow TMX to cross its territory in the first place because of assurances the micro-tunneling would work.

“Any support or consent that SSN has provided for the Project has been based on conditions that explicitly protect the Pípsell (Jacko Lake) Corridor from disturbance or harm,” the SSN said in an August filing.

Ellis said it seemed likely the expansion project would be delayed even if regulators grant TMC’s request, echoing a letter filed last week by Canadian Natural Resources Ltd, a major shipper on the pipeline.

The CER will hear arguments and cross-examinations from both the SSN First Nation and TMC over two days in Calgary, and extend the hearing to a third day if required.

A CER spokeswoman said regulators will issue a decision as soon as possible after considering all the evidence, and recognized the time sensitivities associated with hearing.

($1 = 1.3548 Canadian dollars)

(Reporting by Nia Williams; Editing by Aurora Ellis)

(Reuters) – A busy oil sands maintenance season and early summer wildfires put a dent in Canadian crude production in the second quarter, but oil companies are ramping up growth over the next two years and will add nearly 8% to Canada’s total output, analysts estimate.

The roughly 375,000 barrel per day (bpd) increase in two years would be more than Canada, the world’s fourth-largest oil producer, has managed to add over the last five years combined, even after promising European allies it would boost crude output in the wake of Russia’s invasion of Ukraine in early 2022.

According to Canada Energy Regulator data, Canadian oil production averaged 4.86 million bpd in 2022, up from 4.61 million bpd in 2018.

Much of the growth will come from oil sands producers like Cenovus Energy and Canadian Natural Resources Ltd (CNRL) tweaking operations to boost efficiency.

Companies are also moving forward on so-called “step-out” or “tie-back” oil sands thermal projects, where instead of building an entirely new facility to steam bitumen deposits, they are linking new areas with existing plants to speed up development and lower costs.

The move to boost output – while continuing to funnel free cash to shareholders – shows producers are confident prices will stay firm, analysts said.

“Companies can finally say things have recovered enough in the industry that we can maintain returns to shareholders and put some money into production growth,” said RBN Energy analyst Martin King.

Benchmark North American crude has averaged $75.64 a barrel year-to-date, declining from 2022 highs, but above the five-year average of $65.89 a barrel.

Increasing production would be at odds with the Canadian government’s effort to meet its goal of cutting carbon emissions by 40-45% by 2030, given oil and gas is the country’s highest-emitting sector.

RBN expects total Canadian crude output to increase 175,000 bpd this year and another 200,000 bpd in 2024, while S&P Global Commodity Insights analyst Kevin Birn said annual oil sands production alone will rise around 350,000 bpd by 2025.

Two-thirds of Canada’s crude comes from northern Alberta’s oil sands.

STEP-OUTS AND TIE-BACKS

Following a lacklustre second quarter, Cenovus downgraded its full-year production forecast due to wildfires, while Suncor Energy, CNRL and MEG Energy warned that output would come in at the lower end of their 2022 guidance after big maintenance turnarounds.

Output is expected to pick up in the second half of the year, and companies are making progress on tie-in projects.

Cenovus is building a 17-km (11-mile) pipeline connecting its Narrows Lake site to its Christina Lake processing facility that will add up to 30,000 bpd in 2025 , while CNRL is planning to develop the Pike project, purchased from BP in 2022, by stepping out from its Jackfish and Kirby facilities.

“It’s a great opportunity and quite innovative. Rather than building a central processing facility all way up at the site, we’ve been able to tie it back to our existing plant,” Norrie Ramsay, Cenovus’s executive vice-president upstream, told an earnings call this month.

The new volumes will coincide with the planned start-up of the 600,000 bpd Trans Mountain expansion (TMX) pipeline project in the first quarter of 2024. However, delays to TMX could result in pipeline congestion and force producers to ship crude by rail, adding costs.

“It’ll have to be done by the middle of next year or we’ll have to have more rail,” said Eight Capital analyst Phil Skolnick.

(Reporting by Nia Williams; Editing by Denny Thomas and Sephen Coates)