Why the TMX Will Endlessly Spill Taxpayers’ Money
Trudeau’s boondoggle — $21.4 billion and rising — includes a sucker’s deal that keeps Canadians forever on the hook, explains economist Robyn Allan.
Andrew Nikiforuk
23 Feb 2022
TheTyee.ca
Tyee contributing editor Andrew Nikiforuk is an award-winning journalist whose books and articles focus on epidemics, the energy industry, nature and more.
Tyee contributing editor Andrew Nikiforuk is an award-winning journalist whose books and articles focus on epidemics, the energy industry, nature and more.
Prime Minister Justin Trudeau boasts of TMX benefits to Canadians at the Trans Mountain Terminal in Edmonton on July 12, 2019.
Photo by Jason Franon, the Canadian Press.
Don’t say the independent economist Robyn Allan didn’t warn you.
Four years ago, the former CEO and president of ICBC said that Prime Minister Justin Trudeau’s rash purchase of the economically troubled Trans Mountain expansion project would end up costing taxpayers billions.
And then more billions.
At the time Allan accused the Trudeau government of not being transparent or honest about escalating costs on a project that proposed to triple bitumen shipments from 300,000 barrels a day to 890,000 barrels a day for Asian markets.
She then estimated that taxpayers would foot a bill as high $20 billion right here in the pages of The Tyee.
And what did the Trudeau government reveal last week while Ottawa was under siege by angry occupiers? That its uneconomic pipeline, less than 50 per cent complete, will now cost at least $21.4 billion.
That’s a 70 per cent jump above the last inaccurate price tag of $12.6 billion offered by the government just two years ago.
Moreover, the megaproject won’t be finished for another year, if that.
Meanwhile, Finance Minister Chrystia Freeland talked about borrowing more money from public debt markets or the very bank, TD Securities, that originally, in 2018, recommended that Kinder Morgan sell to the Canadian government its 66-year-old pipeline along with engineering plans for an expansion.
Freeland promises that “no more additional public money” will go into the project.
But Allan told The Tyee this week that such a claim is absolute nonsense, because “all borrowing by Crown corporations is ultimately backed by taxpayers.”
Interest charges on existing government loans of $13 billion for the TMX project are already costing $700 million in interest every year, added Allan.
“The government-owned project has been badly mismanaged. The budget is out of control. The shippers, due to their contracts, are not responsible for the cost of the majority of the overruns, and taxpayers are being seriously misled,” Allan said.
Allan isn’t alone in that grim assessment. Gwyn Morgan, the former CEO of Encana (now Ovintiv) told Bloomberg News that the cost overruns posed a grand risk to Canadian taxpayers.
“In the commercial (real) world, no one’s going to finance a project running vastly over budget, with no firm remaining cost or startup date,” Morgan told Bloomberg.
‘It makes even less sense now’
Allan, the former senior economist for the BC Central Credit Union, first challenged the project’s economics back in 2013 and hasn’t stopped since. In her opinion, “It didn’t make any sense then, and Kinder Morgan knew it. And it makes even less sense now.”
Kinder Morgan Canada assured the National Energy Board in its 2013 project application that its U.S. parent had the money to build the then $5.4-billion project at the time. But that heavily indebted company did not.
So the Canadian subsidiary approached the Alberta government in 2014 for financial aid. But then-premier Alison Redford flatly refused to get involved.
The project’s business case has always been dubious. The only reports claiming that a profit could be made selling bitumen to overseas Asian markets were all paid for by Kinder Morgan. Critics have consistently raised doubts about such claims.
The most lucrative market for Canadian bitumen remains U.S. Gulf Coast refineries, which pay a premium for the heavy crude. Last year David Hughes, one of Canada’s foremost energy analysts, calculated that TMX was not needed, given additions to existing North American pipeline systems.
“The federal government, which owns TMX, has claimed higher prices are available in offshore markets that could be accessed by completing the TMX project,” wrote Hughes. “This is clearly not the case, as a detailed analysis of historical prices in Asia and transportation costs has shown. In fact, shippers on TMX stand to lose US$4-6 per barrel compared with U.S. exports on existing pipelines.”
As cost estimates for the project continued to climb, Kinder Morgan realized that the bulk of construction cost overruns would fall on the company and not shippers due to locked-in 20-year shipping contracts. It even warned shareholders of the risk in 2018 as projected costs rose above $7.4 billion.
About that time, the U.S. firm claimed that environmental protests and regulatory hurdles — all duly predicted by the company in its corporate presentations — made the project untenable.
Without providing any public cost benefit analysis or independent reports on the project’s finances, the Trudeau government bought the old pipeline and expansion plans for $4.5 billion in 2018.
Kinder Morgan executives paid their negotiating team US$575,000 in bonuses after sealing the deal. It might seem that Canadian taxpayers paid U.S. executives in Texas approximately C$750,000 in bonuses for outwitting the Trudeau government.
Tolls that keep on leaking money
But the big problem with galloping cost overruns boils down to tolls, says Allan: pipelines typically pay for their capital costs by charging shippers a toll to transport oil through their pipe.
But the contracts with oil products shippers such as Canadian Natural Resources Ltd., Suncor and Cenovus stipulate that a large share of the cost overruns can’t be passed on in tolls. They were signed when the pipeline was budgeted at $7.4 billion. Therefore, fully 75 per cent of the cost overruns at that time could not be passed on.
“No one in Ottawa or the tarsands will discuss the toll rates,” said Allan.
She says that taxpayers, not bitumen shippers, are not only liable for the majority of cost overruns now totalling $14 billion but will be subsidizing some of the richest oil companies in Canada with artificially low tolls that won’t reflect the cost of the project.
This sorry development may also explain why companies like Cenovus, CNRL and Suncor aren’t really complaining or panicking about rampant cost overruns.
“Why should they worry?” asked Allan. “Their tolls have been subsidized for any project costs exceeding $7.4 billion.”
“When Trans Mountain and the shippers know it’s not the shippers but the taxpayers who are paying for the majority of the project overruns, where’s the need for budget control?”
Alex Pourbaix, CEO of Cenovus, the largest shipper on the expanded pipeline, expressed little concern about the cost overruns. “While no one wants to see cost increases, they are often a fact of life with projects of this size,” he told the Globe and Mail last week.
Pourbaix didn’t mention that, if Allan is correct, taxpayers and not Cenovus would be paying for much of these increases.
Fiascos and potential conflicts
Ever since Trudeau bought the project in 2018, the project has been embroiled in one fiasco after another.
Safety issues shut down construction for months in 2020 and 2021 as the company repeatedly replaced contractors. Then came wildfires, floods and galloping inflation as well as upgrades and changes.
Concerns about potential conflicts of interest also dog the project. William Downe, who chairs the Trans Mountain board of directors, had a long career with BMO. And the government now says BMO is one of its financial advisers.
Brian Ferguson, the former CEO of Cenovus Energy, also sits on the Trans Mountain board and has sat on the TD Bank board since 2015. TD Securities advised Kinder Morgan on the sale of the pipeline to Trudeau’s government by providing a Fairness Opinion report.
There is more. Cenovus is the largest shipper on the project’s expansion (125,000 barrels a day). And Finance Minister Chrystia Freeland has identified TD Securities as another key advisor on how to handle project debt.
And then there is that small issue of climate change, added Allan.
“This project is a global-warming machine by the very fact it proposes to move more than half a million barrels of high-carbon bitumen a day. The very people who had their homes flooded by atmospheric rivers or burned by heat domes are now being asked to pay for this global-warming machine.”
Now a project that the government swore would only cost $7.4 billion has soared to $21.4 billion. And it is not even half finished.
Trans Mountain Deal Was Structured to Bleed Billions, Finds Economist
Don’t say the independent economist Robyn Allan didn’t warn you.
Four years ago, the former CEO and president of ICBC said that Prime Minister Justin Trudeau’s rash purchase of the economically troubled Trans Mountain expansion project would end up costing taxpayers billions.
And then more billions.
At the time Allan accused the Trudeau government of not being transparent or honest about escalating costs on a project that proposed to triple bitumen shipments from 300,000 barrels a day to 890,000 barrels a day for Asian markets.
She then estimated that taxpayers would foot a bill as high $20 billion right here in the pages of The Tyee.
And what did the Trudeau government reveal last week while Ottawa was under siege by angry occupiers? That its uneconomic pipeline, less than 50 per cent complete, will now cost at least $21.4 billion.
That’s a 70 per cent jump above the last inaccurate price tag of $12.6 billion offered by the government just two years ago.
Moreover, the megaproject won’t be finished for another year, if that.
Meanwhile, Finance Minister Chrystia Freeland talked about borrowing more money from public debt markets or the very bank, TD Securities, that originally, in 2018, recommended that Kinder Morgan sell to the Canadian government its 66-year-old pipeline along with engineering plans for an expansion.
Freeland promises that “no more additional public money” will go into the project.
But Allan told The Tyee this week that such a claim is absolute nonsense, because “all borrowing by Crown corporations is ultimately backed by taxpayers.”
Interest charges on existing government loans of $13 billion for the TMX project are already costing $700 million in interest every year, added Allan.
“The government-owned project has been badly mismanaged. The budget is out of control. The shippers, due to their contracts, are not responsible for the cost of the majority of the overruns, and taxpayers are being seriously misled,” Allan said.
Allan isn’t alone in that grim assessment. Gwyn Morgan, the former CEO of Encana (now Ovintiv) told Bloomberg News that the cost overruns posed a grand risk to Canadian taxpayers.
“In the commercial (real) world, no one’s going to finance a project running vastly over budget, with no firm remaining cost or startup date,” Morgan told Bloomberg.
‘It makes even less sense now’
Allan, the former senior economist for the BC Central Credit Union, first challenged the project’s economics back in 2013 and hasn’t stopped since. In her opinion, “It didn’t make any sense then, and Kinder Morgan knew it. And it makes even less sense now.”
Kinder Morgan Canada assured the National Energy Board in its 2013 project application that its U.S. parent had the money to build the then $5.4-billion project at the time. But that heavily indebted company did not.
So the Canadian subsidiary approached the Alberta government in 2014 for financial aid. But then-premier Alison Redford flatly refused to get involved.
The project’s business case has always been dubious. The only reports claiming that a profit could be made selling bitumen to overseas Asian markets were all paid for by Kinder Morgan. Critics have consistently raised doubts about such claims.
The most lucrative market for Canadian bitumen remains U.S. Gulf Coast refineries, which pay a premium for the heavy crude. Last year David Hughes, one of Canada’s foremost energy analysts, calculated that TMX was not needed, given additions to existing North American pipeline systems.
“The federal government, which owns TMX, has claimed higher prices are available in offshore markets that could be accessed by completing the TMX project,” wrote Hughes. “This is clearly not the case, as a detailed analysis of historical prices in Asia and transportation costs has shown. In fact, shippers on TMX stand to lose US$4-6 per barrel compared with U.S. exports on existing pipelines.”
As cost estimates for the project continued to climb, Kinder Morgan realized that the bulk of construction cost overruns would fall on the company and not shippers due to locked-in 20-year shipping contracts. It even warned shareholders of the risk in 2018 as projected costs rose above $7.4 billion.
About that time, the U.S. firm claimed that environmental protests and regulatory hurdles — all duly predicted by the company in its corporate presentations — made the project untenable.
Without providing any public cost benefit analysis or independent reports on the project’s finances, the Trudeau government bought the old pipeline and expansion plans for $4.5 billion in 2018.
Kinder Morgan executives paid their negotiating team US$575,000 in bonuses after sealing the deal. It might seem that Canadian taxpayers paid U.S. executives in Texas approximately C$750,000 in bonuses for outwitting the Trudeau government.
Tolls that keep on leaking money
But the big problem with galloping cost overruns boils down to tolls, says Allan: pipelines typically pay for their capital costs by charging shippers a toll to transport oil through their pipe.
But the contracts with oil products shippers such as Canadian Natural Resources Ltd., Suncor and Cenovus stipulate that a large share of the cost overruns can’t be passed on in tolls. They were signed when the pipeline was budgeted at $7.4 billion. Therefore, fully 75 per cent of the cost overruns at that time could not be passed on.
“No one in Ottawa or the tarsands will discuss the toll rates,” said Allan.
She says that taxpayers, not bitumen shippers, are not only liable for the majority of cost overruns now totalling $14 billion but will be subsidizing some of the richest oil companies in Canada with artificially low tolls that won’t reflect the cost of the project.
This sorry development may also explain why companies like Cenovus, CNRL and Suncor aren’t really complaining or panicking about rampant cost overruns.
“Why should they worry?” asked Allan. “Their tolls have been subsidized for any project costs exceeding $7.4 billion.”
“When Trans Mountain and the shippers know it’s not the shippers but the taxpayers who are paying for the majority of the project overruns, where’s the need for budget control?”
Alex Pourbaix, CEO of Cenovus, the largest shipper on the expanded pipeline, expressed little concern about the cost overruns. “While no one wants to see cost increases, they are often a fact of life with projects of this size,” he told the Globe and Mail last week.
Pourbaix didn’t mention that, if Allan is correct, taxpayers and not Cenovus would be paying for much of these increases.
Fiascos and potential conflicts
Ever since Trudeau bought the project in 2018, the project has been embroiled in one fiasco after another.
Safety issues shut down construction for months in 2020 and 2021 as the company repeatedly replaced contractors. Then came wildfires, floods and galloping inflation as well as upgrades and changes.
Concerns about potential conflicts of interest also dog the project. William Downe, who chairs the Trans Mountain board of directors, had a long career with BMO. And the government now says BMO is one of its financial advisers.
Brian Ferguson, the former CEO of Cenovus Energy, also sits on the Trans Mountain board and has sat on the TD Bank board since 2015. TD Securities advised Kinder Morgan on the sale of the pipeline to Trudeau’s government by providing a Fairness Opinion report.
There is more. Cenovus is the largest shipper on the project’s expansion (125,000 barrels a day). And Finance Minister Chrystia Freeland has identified TD Securities as another key advisor on how to handle project debt.
And then there is that small issue of climate change, added Allan.
“This project is a global-warming machine by the very fact it proposes to move more than half a million barrels of high-carbon bitumen a day. The very people who had their homes flooded by atmospheric rivers or burned by heat domes are now being asked to pay for this global-warming machine.”
Now a project that the government swore would only cost $7.4 billion has soared to $21.4 billion. And it is not even half finished.
Trans Mountain Deal Was Structured to Bleed Billions, Finds Economist
READ MORE
Allan takes no comfort whatsoever in the accuracy of her economic warnings.
“What disturbs me most is this,” said the economist. “As the truth of the full costs unfold and taxpayers realize the huge burden, it will erode faith in our democracy even more, and we can’t afford any more erosion of that faith.”
She still thinks a fiscally prudent government should kill the project: “They can stop it now and cut our losses. Industry doesn’t need the capacity, but they can’t talk about that fact because their shipping contracts forbid them from talking negatively about the project until it is completed.”
Moreover, she adds, the provision of jobs and the wages that go with them have exceeded all estimates due to cost overruns.
“If the government doesn’t cancel the project right away, the pipeline will be a $30-billion boondoggle by the time they close the books.”
And don’t say Robyn Allan didn’t warn you.
Allan takes no comfort whatsoever in the accuracy of her economic warnings.
“What disturbs me most is this,” said the economist. “As the truth of the full costs unfold and taxpayers realize the huge burden, it will erode faith in our democracy even more, and we can’t afford any more erosion of that faith.”
She still thinks a fiscally prudent government should kill the project: “They can stop it now and cut our losses. Industry doesn’t need the capacity, but they can’t talk about that fact because their shipping contracts forbid them from talking negatively about the project until it is completed.”
Moreover, she adds, the provision of jobs and the wages that go with them have exceeded all estimates due to cost overruns.
“If the government doesn’t cancel the project right away, the pipeline will be a $30-billion boondoggle by the time they close the books.”
And don’t say Robyn Allan didn’t warn you.
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