Canada’s financial watchdog says the federal government is “very unlikely” to recoup its $4.5-billion investment in the Trans Mountain pipeline now that the project’s costs have soared by 70 per cent.

On Feb. 18, Trans Mountain Corporation announced the projected cost of the pipeline expansion has risen from $12.6 billion to $21.4 billion. The news release said the COVID-19 pandemic and last year’s floods in B.C.’s Hope, Coquihalla and Fraser Valley areas contributed to increased costs.

Last week, the NDP’s environment and climate change critic Laurel Collins wrote to Canada’s Parliamentary Budget Officer (PBO) Yves Giroux requesting an updated cost analysis of the pipeline and expansion project.

“It is crucial that we hear from the PBO again to lay out clearly what a boondoggle this project is,” Collins told Canada’s National Observer.

Even before costs jumped, the project already walked a fine line between profitable and unprofitable, according to a 2020 analysis by the PBO.

Based on the previous cost estimate of $12.6 billion, a startup date of Dec. 31, 2022, and several other factors, the pipeline and expansion project’s net value was $600 million. Now, the completion date has been pushed back to somewhere between July and September 2023, and Giroux told Canada’s National Observer he is “not hopeful that there will be any profits to be made from that pipeline, at least for the federal government.”

Based on his previous analysis, if construction costs increased by even 10 per cent to $13.9 billion, the project’s present net value would be an $800-million deficit.

“Now that we're talking about over $20 billion in construction costs, it is clearly non-profitable,” said Giroux.

“It will probably mean losses for Canadian taxpayers whenever the government decides to sell the pipeline to a private-sector entity,” he said, adding this loss is the most likely outcome unless some of his key assumptions change.

“Now that we're talking about over $20 billion in construction costs, it is clearly non-profitable,” Canada's financial watchdog @yzgiroux said about the ballooning costs of the #TransMountainPipeline. #cdnpoli #oilandgas #TMX

For example, if the cost oil producers are charged to use the pipeline “increases dramatically,” the project could come closer to breaking even, but “the long-term contracts that are used for the majority of the capacity of the pipeline do not suggest this will be a possibility in the near future,” he said.

Giroux said from a financial perspective, killing TMX right now would be the worst outcome because it would mean bearing the cost of the money spent so far and forgoing additional revenues from the expansion.

When the cost increase was announced, Finance Minister Chrystia Freeland said no more public funds will go to the Trans Mountain Corporation and that the Crown corporation that owns the massive oil pipeline will need to secure third-party funding through banks or public debt markets to complete the project. She said the project is “in the national interest and will make Canada and the Canadian economy more sovereign and more resilient.”

Because the pipeline will generate cash flow for decades, it will be able to finance itself on the private market by borrowing from institutional investors, banks or corporations, but the operator will have to borrow at higher rates, so the cost of financing will likely rise, said Giroux.

Eugene Kung, a staff lawyer with West Coast Environmental Law, says Freeland’s promise of no more public funds for the project is “a bit of smoke and mirrors” because any debt incurred by a Crown corporation is public debt.

“It's deceiving to leave the impression that this is not going to cost the Canadian public more, because it will,” he said.

According to the Canadian Development and Investment Corporation’s most recent interim report, the federal government has already borrowed and invested well over $14 billion in the project, including the original purchase. The Trans Mountain Corporation will have to secure upwards of $10 billion in funding to meet the revised project cost of $21.4 billion.

Freeland's office did not respond to Canada's National Observer's request for comment by deadline.

After the Trans Mountain Corporation announced the project cost increased by 70 per cent, Finance Minister Chrystia Freeland promised Canadians that TMX will not receive any more public funds. Photo from Trans Mountain via Facebook

The existing Trans Mountain pipeline carries 300,000 barrels of oil per day and is Canada's only pipeline system transporting oil from Alberta to the West Coast. The expansion project will essentially twin the existing pipeline, raising daily output to 890,000 barrels.

Ever since the purchase of TMX in 2018, the federal government has justified its decision by saying “every dollar” earned from the pipeline “will be invested in Canada’s clean energy transition.”

Collins said that claim was dubious at best from the get-go given the PBO’s financial assessments of the project and the urgent need to get off fossil fuels and reduce emissions.

Canada’s National Observer asked Environment Minister Steven Guilbeault why TMX should still be completed now that there will be no profits to fund climate action — profits his predecessor Jonathan Wilkinson told CBC are needed to achieve net-zero emissions by 2050.

“If the only thing we did to fight climate change is use the profit of the sales of the pipeline to invest in cleantech or climate-friendly technologies, I'd be worried. But it's not,” said Guilbeault, referring to measures such as methane regulations, carbon pricing, dedicated funding for bike and pedestrian infrastructure and investments in zero-emissions vehicles and chargers.

“What we need to do … going forward (is) reduce more and more our dependency on fossil fuels,” he said. “Does it mean that there will be absolutely no more projects ever built in Canada? That's not what we're saying. What we're saying is that we need to do less and less of those and more and more of the things that will help us reduce our emissions — like cleantech, like transit, like electrification, like renewables.”

Although the cost jump makes clear the federal government won’t reap any great benefits from selling TMX, Giroux said his assessments can’t account for broader impacts like better prices for Canadian oil, which he says could potentially lead to higher taxes for producers and more jobs in the oil sector.

A central rationale of the project is that the expansion would allow Canada to get a fair price for its oil in Asian markets. This claim was challenged by a 2020 study from the Canadian Centre for Policy Alternatives that found Canadian producers would be taking a loss of US$4 to $6 per barrel if they sold to Asian refineries through TMX compared to selling to U.S. refineries.

Just like the broader economic impacts of the pipeline are hard to calculate, so are the costs of climate change.

A new IPCC report warns humanity is entering an era of irreversible breakdown unless there’s immediate large-scale action to reduce emissions and lays bare the severe costs of climate change for vulnerable communities across the world. More serious climate impacts — like the disastrous wildfires, flooding and heat waves that marked the summer and fall of 2021 — are just a preview of what is to come, according to the report.

Collins said the NDP is calling on the federal government to abandon the TMX pipeline, calling it an “economic and environmental disaster.”

“The people who pay the cost of this are Canadians, it's our communities,” the Victoria MP said. “The cost is borne both in terms of the dollar spent, but also the cost when it comes to flooding, extreme heat, the impacts on our food systems and the future for our children and our grandchildren.”

Giroux said his office will do a cost analysis “probably in the course of this year” when more detailed financial information becomes available, adding it can’t be done in the immediate future because their work plan is “already quite full.”

— With files from The Canadian Press

Natasha Bulowski / Local Journalism Initiative / Canada’s National Observer

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Even economically, I expect it's much worse than this assessment suggests. The assessment assumes business as usual--for instance, it assumes that bitumen from the Alberta tar sands will have a market for the foreseeable future, and so they will continue flowing through the pipeline, and paying tolls, for decades.

This strikes me as unlikely. Governments may drag their feet, but just looking at the measures already legislated in terms of shifting towards electric cars, demand for oil is going to drop a lot just by 2030. Crude prices will of course fluctuate a lot in the coming years, there will be highs in between lows, but it's pretty clear that within 10-15 years even if we do a bad job of decarbonizing, supply of oil will be seriously outstripping demand. And the tar sands, as pretty much the most carbon-intensive and simply expensive source of oil on the market, will be among the first to become definitively unprofitable. Then the pipeline will be empty, and 10-15 years wouldn't be enough to make back the dough spent on it even if there were no cost overruns.

We don't know if the pipe will be collecting cobwebs and providing an underground rodent habitat with an echo in 10-15 years, but we do know that receivers sure aren't gonna pay premium prices for an expensive, low quality product (diluted at that), let alone with having to add transoceanic shipping costs on top.

The only thing that makes sense is that the new pipe will eventually replace the old pipe with the same old BC and Washington State customers on the far end. However, BC is going EV (not fast enough, but still ...), which will be an insidious drain on demand before the first decade of shipments is done.

Then you've got the best alternative destination: California refineries capable of processing heavy oil. But even they would be fools to up their offered price. Therefore, the myth of the so-called discount will prevail, mainly because it's a fair price based on expensive additional costs of processing raw bitumen.

It's very interesting that today one primary knock against a pipe carrying bitumen is economic, which is now paired with climate concerns.

While I understand how the expressed 70% increase comes from, I find it misleading and somewhat disingenuous (not the fault of National Observer). When this double extra-extra large behemoth of a White Elephant was first rolled in front of the National Energy Board, Kinder-Morgan sat there and with a straight face assured the Board that it was going to build the project for somewhere around $4 billion - cross their hearts and hope to die.

I think that as a matter of openness in reporting, it would be a service to the readers to mention that starting claim at least once in ANY article about this thing hanging around our necks.

The other three factors that are worth pointing out every time the viability of this bad joke is discussed are:
- there has NEVER been a business case presented that has withstood even cursory examination (These Asian refineries that supposedly are clamouring for dilbit do not exist. Dilbit requires purpose built refining capacity.),
- if there WAS overwhelming demand for this crud(e) there would be a bidding war already for the 300,000 barrels currently passing the the Westwood Terminal, and,
- the existing producers in the Alberta tar sands (I grew up in Calgary - that is what even Syncrude called it originally) are protected from the real costs of transporting this s**t once construction is completed. So we will be on the hook for a huge subsidy through the entire operational life of the carbon time bomb.

When Kinder-Morgan said they were prepared to walk away from the TMX project it was because they were unable to secure financing. Their executive suite probably fell off their collective seats when Canada ponied up way too much to take it off their hands. Since then, the probably break out in uncontrollable laughter every time the even hear a mention of it.

Last time I checked a few years back, there were 17 refineries in China and Indonesia that were designed for heavy oil. The problem was the price expectations of Alberta / Canada, which was nothing more than an expression of magical thinking and fantasy. There eventually was a couple or three shipments of dilbit to China but that was when the world price was at rock bottom in the mid 'teens. They were looking for a bargain and they got it, just like the foreign owners of refineries operating in the tar sands and supplying themselves with very cheap feedstock. At the time they weren't complaining at all about low prices, but were breaking out the Prosecco over the wide differentials between raw product costs and high value sales of refined products.

I think Rich Kinder et al really did fall off their leather-clad swivel office chairs when Trudeau and his oil whisperers panicked over a manufactured deadline and instantly ponied up. This is probably why Chrystia Freeland was recently doing all the media work on the completely unsurprising cost overruns instead of the Kid, who was obviously played in a game of Texas poker where naiveté should've been checked at the door.

The rumour mill was churning even before Bill Morneau left cabinet that the feds realized they got stuck with a white elephant (if not an outright lemon) and started secretly offering subsidies on future tolls to prospective buyers to sweeten the pot. Then there's the construction delays and project completion just as BC and other major consumers are ramping up demand destruction with EVs. Add all that to the 22 billion and -- wow! Just wow.

Revenue? What revenue?