An influential international credit rating agency says the Trans Mountain pipeline dispute is "credit negative" for Alberta, even taking into account Ottawa's pledge to compensate the project's backers for money lost due to B.C.'s attempts to block the project.

Moody's Investors Service published a report Thursday saying that although the Canadian government's indemnity plan eases some of the credit risks, it's lacking in detail and might not be sufficient to shore up private sector interest.

"Overall, the dispute is credit negative for the Province of Alberta … as the project's cancellation would represent a potentially significant loss in revenue, increase its energy transportation costs and diminish future energy infrastructure investment and oil development at a time when the province is already forecasting a prolonged period of deficits and rapidly rising debt," the report says.

The federal government announced on May 16 that the federal government is willing to compensate Kinder Morgan, or any other backers that might take over the project, for any financial loss due to British Columbia's attempts to obstruct the company's $7.4-billion pipeline expansion.

The B.C. government is proposing to amend its Environmental Protection Act with new regulations mandating that companies seeking to bring more diluted bitumen through B.C. would need a permit from the province.

Kinder Morgan has threatened to abandon the project if a clear path forward isn't reached by May 31.

Finance Minister Bill Morneau has not said how much the government is willing to spend to cover losses accumulated because of B.C.'s efforts to block the project.

'Significant implications'

The Moody's paper argues that Alberta's fiscal situation would be significantly worsened if Trans Mountain is scrapped, given that the province is banking on that project — along with Keystone XL and Enbridge's Line 3 replacement — to add an additional $10.5 billion in royalties over the next five years.

"The project's cancellation would also have significant implications for investor confidence given that it would be the third major pipeline project failure in Alberta following the cancellation of Enbridge's Northern Gateway project in 2016 (following federal objection) and TransCanada's Energy East pipeline project in 2017 (following regulatory hurdles and political pressure)," the report says.

"In our view, a lack of successfully completed cross-border pipeline projects could ultimately impact TransCanada's decision whether to proceed with the Keystone XL project."

University of Calgary economist Trevor Tombe says it's hard to overstate the importance of the Trans Mountain expansion.

"Royalties are based on the industry revenue here. Alberta's oil price is low because of a high differential. That translates directly into lower royalties. There will also be fewer barrels produced. If new pipeline capacity doesn't come on line, then a lower return on investment for producers means less investment," he said.

"Without that additional royalty revenue, debt levels will be higher, and that's why an organization like Moody's is concerned about the issue."