TMX pipeline is a net loser of money for the feds: financial watchdog reports

The federal government is now at risk of losing money from its investment in the Trans Mountain pipeline, according to a new report, but Canada’s oil industry says the war in Ukraine has made the hugely expensive infrastructure project more important than never.

The Parliamentary Budget Officer’s latest analysis, released Wednesday, shows the pipeline’s net present value to be negative $600 million, putting it about $1.2 billion below the Parliamentary Budget Officer’s estimate. in December 2020.

The new financial analysis takes into account new developments such as budget overruns disclosed in February that peg the current cost of the Trans Mountain expansion at $21.4 billion, a 70% increase from an earlier estimate of $12. .6 billion.

The new PBO report also reflects the fact that the planned completion date of the pipeline has been pushed back to the third quarter of 2023.

“We heard that costs had gone up months ago. We knew that was very bad news and that it would have a big impact on the value to the federal government. This (Wednesday’s report) is not just some kind of math that confirms that,” said Richard Masson, executive fellow of the University of Calgary’s School of Public Policy.

The 1,150 km Trans Mountain pipeline transports 300,000 barrels of oil per day and is the only pipeline system in Canada transporting oil from Alberta to the West Coast.

Its expansion, which is currently under construction, will essentially double the existing pipeline, bringing daily production to 890,000 barrels to support growth in Canadian crude oil production and provide access to global energy markets.

The Trans Mountain project was bought by the federal government for $4.5 billion in 2018, after former owner Kinder Morgan Canada Inc. threatened to scrap the planned pipeline expansion amid opposition environmentalist.

The federal crown corporation Trans Mountain Corp. attributed the increased costs since taking over the project to a variety of factors, including the COVID-19 pandemic and the effects of the November 2021 floods in British Columbia, as well as project improvements, increased safety, costs, route changes to avoid culturally and environmentally sensitive areas, and planning pressures related to permitting processes and construction challenges in difficult terrain.

On Wednesday, Adrienne Vaupshas — press secretary to federal Finance Minister Chrystia Freeland — said independent analysis from BMO Capital Markets and TD Securities found the Trans Mountain pipeline project remains commercially viable.

The #TMX pipeline expansion project will definitely lose out, according to a new report from Canada’s Parliamentary Budget Officer. #TransMountain #cdnpoli

“The Trans Mountain expansion project is in the national interest and will make Canada and the Canadian economy more sovereign and resilient,” Vaupshas said in an email, adding that the federal government still plans to initiate a process of divestment after the project has been further de-risked and negotiations with Indigenous groups have progressed.

A number of Indigenous-led initiatives have already signaled their intention to take an equity stake in the pipeline.

“How much will the authorities receive for this?” Well, they might have to give someone hundreds of millions of dollars to get rid of it,” Masson said. “They would probably do it through a loan guarantee, to help (a buyer) access cheaper financing.

Part of the reason Trans Mountain’s value declines as project costs skyrocket is because of the way oil companies pay for the use of the pipeline through toll agreements.

Due to long-term contractual agreements between Trans Mountain and oil shippers, only 20-25% of the project’s capital cost increase can be passed on to oil companies in the form of increased tolls.

Masson said it would not be easy for the federal government to back out of those contracts.

“The federal government was responsible for the project when the cost increased,” Masson said. “So it’s not so easy to blame the shippers – they weren’t the ones running the project when the costs went up.”

Environmental groups were quick to cite the Parliamentary Budget Officer’s report on Wednesday as evidence that the federal government should never have bought Trans Mountain in the first place.

“The federal government is losing money on the pipeline it promised would go to pay for green energy,” said Keith Stewart, senior energy strategist for Greenpeace Canada.

“Rather than pouring billions more into a money-wasting, climate-destroying pipeline that only benefits oil companies’ bottom lines, let’s spend it directly on green energy solutions that help Canadians avoiding pump pain while fighting climate change.”

But the Canadian Association of Petroleum Producers, an industry lobby group, said the current global energy crisis that has been exacerbated by Russia’s invasion of Ukraine proves the importance of the Trans Mountain project, because the pipeline will help connect Canada’s oil to its allies and trading partners around the world.

“In a world that lacks energy and needs safe, secure and responsibly produced oil and natural gas, the Trans Mountain expansion is more important now than when the project began construction,” said Lisa Baiton, CAPP President and CEO. , in a report.

Calgary-based oil company Cenovus Energy Inc. said in a statement Wednesday that it believes Trans Mountain’s business case remains strong.

“The expansion of Trans Mountain will play an important role in helping to ensure the stability and long-term future of our industry, providing lasting energy security for Canadians, and making a significant contribution to government revenues through taxes and royalties as well as well-paying jobs for Canadians,” Cenovus spokesperson Reg Curren said in an email.

In his report, the Parliamentary Budget Officer also looked at what would happen if the federal government stopped construction this month and canceled the Trans Mountain project indefinitely, suggesting that such a move would force the government to write off more than $14 billion. dollars of assets.

There is no indication that the Trudeau government intends to cancel the pipeline project.

In February, Freeland said Trans Mountain Corp. – a federal Crown corporation – will need to secure third-party financing to complete the project, either through banks or public debt markets.

However, the federal government has agreed to sign a $10 billion loan guarantee for the project.

This report from The Canadian Press was first published on June 22, 2022.

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