The federal government now stands to lose 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 massively expensive infrastructure project more important than ever.
The latest analysis by the Parliamentary Budget Officer, released Wednesday, shows the net present value of the pipeline is negative $600 million, leaving it worth about $1.2 billion less than the PBO's estimate in December 2020.
The new financial analysis takes into account new developments such as the budget overruns disclosed in February that peg the current cost of the Trans Mountain expansion at $21.4 billion, a 70 per cent increase from an earlier estimate of $12.6 billion.
The new PBO report also reflects the fact that the pipeline's projected completion date has been pushed back to the third quarter of 2023.
"We heard that the costs had gone up months ago. We knew this was really bad news and would have a big impact on the value for the federal government. This (Wednesday's report) is just kind of the math confirming that,” said Richard Masson, executive fellow with the University of Calgary's School of Public Policy.
The 1,150-km 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.
Its expansion, for which construction is currently underway, will essentially twin the existing pipeline, raising daily output to 890,000 barrels to support Canadian crude oil production growth and ensure access to global energy markets.
The Trans Mountain project was bought by the federal government for $4.5 billion in 2018, after previous owner Kinder Morgan Canada Inc. threatened to scrap the pipeline's planned expansion project in the face of environmentalist opposition.
Federal Crown corporation Trans Mountain Corp. has blamed the ballooning costs since it took over the project on a variety of factors, including the COVID-19 pandemic and the effects of the November 2021 flooding in British Columbia, as well as project enhancements, increased security costs, route changes to avoid culturally and environmentally sensitive areas, and scheduling pressures related to permitting processes and construction challenges in difficult terrain.
On Wednesday, Adrienne Vaupshas — press secretary for federal Finance Minister Chrystia Freeland — said independent analyses from both BMO Capital Markets and TD Securities have found that the Trans Mountain pipeline project remains commercially viable.
The #TMX pipeline expansion project will be a definite money loser, a new report from Canada's parliamentary budget officer states. #TransMountain #cdnpoli
"The Trans Mountain Expansion Project is in the national interest and will make Canada and the Canadian economy more sovereign and more resilient," Vaupshas said in an email, adding the federal government still plans to launch a divestment process after the project is further derisked and after negotiations with Indigenous groups have progressed.
A number of Indigenous-led initiatives have previously stated their intentions to pursue an equity stake in the pipeline.
“How much will the feds get for this? Well, it could be that they have to give somebody hundreds of millions of dollars to take it off their hands," Masson said. "They'd probably do that through a loan guarantee, to help (a buyer) access cheaper financing."
Part of the reason why the value of Trans Mountain is declining as the project costs soar is due to the way oil companies pay for the use of the pipeline through tolling arrangements.
Due to Trans Mountain's existing long-term contractual agreements with oil shippers, only 20 to 25 per cent of the increased capital costs of the project can be passed on to oil companies in the form of increased tolls.
Masson said it wouldn't be easy for the federal government to get out of those contracts.
"The federal government was in charge of the project when the cost went up," Masson said. "So it's not so easy to blame the shippers – they weren’t the ones managing the project when the costs went up.”
Environmental groups were quick to point to the PBO's report Wednesday as proof that the federal government should never have purchased Trans Mountain in the first place.
"The federal government is losing money on the pipeline whose profits they promised would pay for green energy," said Keith Stewart, senior energy strategist for Greenpeace Canada.
"Rather than pouring billions more into a money-losing, climate-destroying pipeline that only benefits oil company bottom lines, let’s spend it directly on green energy solutions that help Canadians avoid pain at the pump 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, as the pipeline will help to link Canada's oil to its allies and trading partners around the world.
"In a world that is running short on energy and in need of 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 chief executive, in a statement.
Calgary-based oil company Cenovus Energy Inc. said in a statement Wednesday it believes the business case for Trans Mountain remains sound.
"The Trans Mountain expansion will play an important role by helping to ensure the long-term stability and future of our industry, providesustainable energy security for Canadians and make significant contributions to government revenues through taxes and royalties as well as good paying jobs for Canadians," said Cenovus spokesman Reg Curren in an email.
In its report, the PBO also looked at what would happen if the federal government were to stop construction this month and cancel the Trans Mountain project indefinitely, suggesting that such a move would require the government to write off over $14 billion in assets.
There has been no indication that the Trudeau government has any intention of cancelling the pipeline project.
In February, Freeland said Trans Mountain Corp. — a federal Crown corporation — will need to secure third-party funding 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 by The Canadian Press was first published June 22, 2022.