The federal government now faces losing money from its investment in the Trans Mountain pipeline, according to a new report from the Parliamentary Budget Officer.
The latest analysis, released on Wednesday, shows the pipeline’s net present value to be negative $600 million, making its value nearly $1.2 billion less than PBO’s estimate in December 2020.
The new financial analysis takes into account new developments such as budget overruns disclosed in February that pegged the current cost of the Trans Mountain expansion at $21.4 billion, a 70 percent increase from the previous estimate of $12.6 billion.
The new PBO report also reflects the fact that the projected completion date for the pipeline has been pushed back to the third quarter of 2023.
The 1,150-kilometre Trans Mountain pipeline transports 300,000 barrels of oil per day, and is Canada’s only pipeline system that transports oil from Alberta to the West Coast.
Its expansion, which is currently under construction, will essentially twin the existing pipeline, raising daily production to 890,000 barrels to support growth in Canadian crude oil production and ensure access to global energy markets.
The federal government bought the Trans Mountain project for $4.5 billion in 2018, after its former owner Kinder Morgan Canada threatened to cancel a planned pipeline expansion project in the face of opposition from environmentalists. Kinder Morgan was also concerned about the political risks posed by the British Columbia government and its legal challenges to the project.
Still viable, says Ottawa
On Wednesday, Adrienne Vaupshas – press secretary to Federal Finance Minister Chrystia Freeland – said independent analyzes from both BMO Capital Markets and TD Securities have found the Trans Mountain pipeline project remains commercially viable.
“The Trans Mountain Expansion project is in the national interest and will make Canada and the Canadian economy more sovereign and more resilient,” Fopchas said in an email, adding that the federal government still plans to launch a divestment process after more of the project is pulled and progress has been made in Negotiations with indigenous groups.
A number of Indigenous-led initiatives have previously stated their intentions to pursue an equity stake in the pipeline.
Environmental groups were quick to point to Wednesday’s PBO report as evidence that the federal government should never have bought Trans Mountain in the first place.
“The federal government is losing money on a pipeline they promised the profits of which would be paid for green energy,” said Keith Stewart, senior energy analyst at Greenpeace Canada.
“Instead of pumping more billions into a money-losing, climate-destroying pipeline that only benefits the oil company’s bottom line, let’s spend it directly on green energy solutions that help Canadians avoid pain at the pump while fighting climate change.”
In its report, the PBO also considered what would happen if the federal government halted construction this month and canceled the Trans Mountain project indefinitely, suggesting such a move would require the government to write off more than $14 billion in assets.
There is no plan to cancel the project
There was no indication that the Trudeau government had any intention of scrapping the pipeline project.
In February, Freeland said Trans Mountain Corp — a subsidiary of Federal Crown — would need to secure third-party funding to complete the project, either through banks or public debt markets.
However, the federal government agreed to sign a $10 billion loan guarantee for the project.
Part of the reason Trans Mountain depreciates as project costs rise is due to the way oil companies pay for pipeline use through fee arrangements.
Due to the long-term contractual agreements that Trans Mountain has with oil shipping companies, only 20 to 25 percent of the project’s increased capital costs can be transferred to oil companies in the form of increased transit fees.
This means that about $7 billion in cost overruns must be absorbed by Trans Mountain itself, eventually eroding the project’s revenues.
Alberta Energy Minister Sonia Savage said Albertans expect and count on completing the pipeline.
“This project is essential to the Alberta and Canadian energy sectors,” Savage told CBC News.
“Pipelines, including the Trans Mountain expansion, are essential to ensuring that we can move resources safely while working towards energy independence and security in North America.”