Saturday, June 25, 2022

Trans Mountain Expansion a Money Loser for Taxpayers

Independent parliamentary budget officer warns soaring costs means Trudeau’s 2018 purchase of the pipeline has gone wrong.


David Climenhaga 
23 Jun 2022
Alberta Politics
‘Trans Mountain no longer continues to be a profitable undertaking,’ the parliamentary budget officer reported Wednesday.
 Photo via Trans Mountain.

The soaring cost of the Trans Mountain pipeline expansion has pushed the uncompleted megaproject Ottawa bought to satisfy Alberta further into the red, says a report released Wednesday by the parliamentary budget officer.

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This quickly earned the project the uncomplimentary sobriquet “boondoggle” from Environmental Defence’s national climate program manager Julia Levin.

The Trudeau government decided in 2018 to buy the 70-year-old pipeline that runs 1,150 kilometres from Alberta to Burnaby, B.C., from Kinder Morgan Canada Ltd. It also took on the cost of tripling the pipeline’s capacity, which the company had first proposed in 2013.

It’s the only pipeline carrying Alberta’s petroleum products to the Pacific Coast, and Ottawa was clearly responding at the time both to pressure from the NDP provincial government of then-premier Rachel Notley and threats by Kinder Morgan Canada Ltd. to pull the plug on the project in the face of environmental and political opposition in British Columbia.

The charming belief prevalent then and now in Alberta was that, never mind the law of supply and demand, the expanded line would miraculously increase the price fetched by oilsands bitumen by getting it to new markets in Asia via pipeline and ocean tanker, an idea that inflamed the debate in B.C.

At the time of the federal decision to take over the project, the cost of the purchase was said to be $4.5 billion.

The short analysis report published Wednesday by the Office of Parliamentary Budget Officer Yves Giroux said the estimated cost of the massive construction budget for the project has surged from $12.6 billion when the office last looked at the project in 2020 to $21.4 billion now.

When Ottawa made the decision in 2018 to buy, expand, run and eventually sell off the pipeline to the private sector, the expansion project’s cost was estimated to be about $7.5 billion.

As a result of the soaring costs, the parliamentary budget office report by analysts Jason Stanton and Kaitlyn Vanderwees said, “Trans Mountain no longer continues to be a profitable undertaking” and will result in a net loss for the federal government.

A chart in the report shows the current value of the pipeline system is now estimated at negative $600 million.

What’s more, the report said, if Ottawa were to pull the plug on the TMX project at the end of this month and suspend it indefinitely, the Canadian government would have to write off more than $14 billion in assets.

“The net impact would result in a significant financial loss for the Government and would lead to the Trans Mountain Corp. no longer being a going concern,” the report said. The company is a subsidiary of Crown-owned Canada Development Investment Corp. that has operated the pipeline since Kinder Morgan was paid off and got the hell outta Dodge.

Well, no surprise there, really. The business plan on which the expansion project and subsequent federal purchase was based always seemed more than a little iffy, especially since it depended in large part on the notion that expanding the supply of diluted Alberta oilsands bitumen to Asia would cause the price fetched by the stuff to increase.

That’s not actually how the law of supply and demand, normally thought to be pretty ironclad, is supposed to work. Indeed, one would have thought that, as earth scientist David Hughes has been predicting since 2016, increasing supply might just do the opposite.

More than a little ironically, world oil prices are now way up — for the moment, at least — not because the Government of Canada has been building pipelines, but because Canada and other western nations have been trying to force Russia to shut pipelines down in response to its invasion of Ukraine.

This is another indication that the law of supply and demand still operates just as explained in economics textbooks.

Long-term contractual agreements with shippers that mean most of the growing costs of the expansion can’t be passed on to oil companies also impact the viability of the project.


All this said, the report does not present information that non-expert readers would need to reach their own conclusion about what Ottawa should do next.

“PBO requested updated projected future cash flows for the Trans Mountain Pipeline system from the Canada Development Investment Corp., the Crown corporation holding the Trans Mountain assets,” the report explains.

The Crown corporation, it said, “provided all requested information to PBO, but the information was classified as commercially confidential. The data’s confidentiality did not inhibit PBO’s work to model the data, assess the value of the Trans Mountain assets, or publish the analytical results in this report.”

In other words, we’ll just have to trust the PBO — a situation that provides the grounds for a lot of mischief by supporters of pipelines, no matter what.

As a result, the report requires a certain amount of reading between the lines to try to figure out which course of action — pumping or dumping — makes more sense in the long run.

Notwithstanding the PBO’s stated mission of helping Parliament “by providing economic and financial analysis for the purposes of raising the quality of parliamentary debate and promoting greater budget transparency and accountability,” nowhere in Wednesday’s report does it say explicitly that a write-off would be a more prudent course of action than continuing to operate what may well turn out to be a white elephant.

Without the data not available to the public, it’s hard to argue with Levin’s conclusion that “the Trans Mountain pipeline has become a financially dangerous boondoggle.”

“The government has often justified the pipeline by promising that its eventual profits will fund clean energy projects; this is flimsy logic given the disastrous climate and environmental impacts of the project,” she said in a news release. “The PBO update shows this argument doesn’t hold water: there will be no profits, only financial losses for Canadians and more carbon emissions for the planet.”


Why the TMX Will Endlessly Spill Taxpayers’ Money
READ MORE

“As the costs of the project keep ballooning, the government should cut its losses and cancel construction of the expansion pipeline,” she concluded, “before even more of our dollars are wasted; public dollars that could be instead invested in developing sustainable energy systems.”

Prime Minister Justin Trudeau should have noticed by now that the only thing likely to earn him more abuse from Albertans than not giving them what they want is giving them what they want. But there’s still not much chance of his government killing the project.

Both the federal and Alberta governments signalled their determination Wednesday to keep working on the expansion project.

“The Trans Mountain Expansion project is in the national interest and will make Canada and the Canadian economy more sovereign and more resilient,” Adrienne Vaupshas, federal Finance Minister Chrystia Freeland’s press secretary, told the Canadian Press.

“This project is necessary for Alberta and Canada’s energy sectors,” Alberta Energy Minister Sonya Savage advised CBC News.

 
David J. Climenhaga is an award-winning journalist, author, post-secondary teacher, poet and trade union communicator. He blogs at AlbertaPolitics.ca. Follow him on Twitter at @djclimenhaga.

Canada's business case for Trans Mountain assumes 100 years of operation. The PBO is not so sure

Canada's National Observer
Yesterday 

Secret reports the federal government is relying on to argue the Trans Mountain pipeline expansion is commercially viable are based on the unrealistic assumption the pipeline will operate for 100 years, Canada’s financial watchdog told Canada’s National Observer.

For months, Finance Canada has refused to share any information about the financial reports produced by TD Securities and BMO Capital Markets, which Finance Canada says prove TMX is still commercially viable despite ballooning construction costs.

“We believe that's probably too long of a time horizon, to assume that the pipeline will be operating for at least another century ... let alone to take into consideration revenues that will be generated over such a long period of time,” Parliamentary Budget Officer Yves Giroux told Canada’s National Observer.

“Also, because of the various commitments to net-zero or to reduce reliance on fossil fuels, we didn't think that using a 100-year time horizon was appropriate.”

Giroux said his office did not view the TD and BMO reports directly, but did talk to Finance Canada officials about the findings and methodology to inform its independent analysis.

Finance Canada did not return requests for comment by deadline.

In its most recent report, the PBO used a much shorter 40-year time frame to analyze the profitability of the Trans Mountain pipeline and expansion project. Giroux’s report confirms what was already clear: TMX is no longer a profitable investment.

The main difference between the PBO’s report and the TD and BMO ones is the time frame, which explains why the government believes Trans Mountain is profitable, said Giroux. “We don't have the same view.”

For the first time, the PBO also modelled a scenario where the project is cancelled immediately and found the government would have to write off an estimated $14.4 billion worth of assets. A cancellation would bankrupt the Trans Mountain Corporation, the report says. The federal government has shown no signs it intends to cancel the project.

Considering how much has already been spent on construction, it's probably better at this point to complete the project so it can start generating revenue, said Giroux.

The PBO just looks at the net present value of the project, or the value of its potential investment opportunity — other economic costs or benefits were not included in the analysis.

From Ottawa’s vantage point, it doesn’t matter if TMX is a money loser because it will incentivize investment, create jobs and increase income tax and royalty revenues, said Rory Johnston, a market economist at investment firm Price Street. Because it supports those aims, it makes sense as government policy when it wouldn't necessarily as a commercial, private decision, said Johnston.

For example, when the pipeline is in operation, there's an expectation Canadian oil from western provinces, notably Alberta, will be able to sell at a higher price than it currently does, which would generate benefits for the Canadian economy, said Giroux.


The PBO’s new analysis was prompted by questions from MPs like NDP environment critic Laurel Collins, who requested an updated cost analysis of the pipeline and expansion project after costs soared in February. The price tag currently sits at $21.4 billion — up 174 per cent from an estimated $7.8 billion when the government first bought the pipeline from Kinder Morgan in 2018.

To keep the planet from reaching dangerous levels of warming, the world must rapidly move away from fossil fuels, which would render a lot of the industry’s infrastructure worthless. A study recently published in the journal Nature Climate Change found Canadians stand to lose $100 billion based on oilfields and production equipment alone — not including pipelines or refineries.

Canada’s Energy Regulator has yet to model a net-zero by 2050 scenario despite the fact that limiting global warming to 1.5 C requires the entire world to cut its greenhouse gas emissions by 45 per cent by 2030 and achieve net-zero emissions in 2050. In December, Natural Resources Minister Jonathan Wilkinson asked the regulator to include Canada’s net-zero by 2050 goal in its 2022 report.

The PBO’s calculations don’t account for the risk of TMX becoming a stranded asset during the global energy transition.

“That's a potential impact that would negatively weigh on the price of the pipeline and its long-term profitability,” said Giroux, adding it’s part of why his office doesn’t think TD and BMO’s century-long lifetime assumption is realistic.

There are many problems with using a 100-year time frame, said Omar Mawji, energy finance analyst for Canada for the Institute for Energy Economics and Financial Analysis.

“Either the people doing the analysis don't quite understand the dynamics of a pipeline and a supply source. Or, you know, they're doing it because … they're trying to look for a way to make it profitable,” Mawji told Canada’s National Observer.

He said a pipeline’s lifetime is typically 40 years, and the life of most oilsands projects is 40 to 50 years. If TD and BMO’s 100-year lifetime analysis is any indicator, there would have to be new oilsands projects approved in the near future and then again in 2050 or 2060, said Mawji.

The federal government says Canada’s current climate plan will reduce greenhouse gas emissions 40 per cent below 2005 levels by 2030. If the government wants to hit that target, Mawji said it's “very hard to assume” it will approve more oilsands projects.

“On one hand, they're saying, ‘Our objective is to reduce CO2 emissions in the oil and gas sector by this much,’” he said. “But on the other hand, ‘We want to build a pipeline that, for it to be economic, would require additional oilsands production.’”

Ongoing investments in fossil fuel infrastructure are undermining the massive reduction in emissions needed to meet the Paris Agreement goal of limiting global warming to well below 2 C (preferably 1.5 C), according to the most recent report by the Intergovernmental Panel on Climate Change. The panel also found emissions from existing fossil fuel infrastructure could single-handedly exhaust the world’s remaining carbon budget, meaning there is no place for new infrastructure in a climate-safe future.

Roughly halfway through its life, the project will also need “major reconstruction” to stay in use, and at that point, if there’s not enough oil passing through the pipeline, an operator could decide it's not worth reinvesting in, said Mawji.

Last month, the federal government greenlit a $10-billion guarantee on a loan for the Trans Mountain Corporation that was quietly financed by Canada’s six biggest banks, including BMO and TD. The loan guarantee assures investors that if the Crown corporation can’t repay the loan, the public will pick up the tab. This is a win-win for the banks because even if the project isn’t completed, they are guaranteed their money back, said Mawji. As underwriters of the debt, TD and BMO are “going to give the government a report that shows that it's worth it,” he said.

While a case can be made for the economic benefits of building TMX, Mawji said it's also important to consider what the benefits would have been if those billions had instead been spent to incentivize investment in renewable energy.

“It's a frustrating thing for the taxpayer … especially if you voted based on climate change,” said Mawji.

Natasha Bulowski, Local Journalism Initiative Reporter, Canada's National Observer

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