The soaring cost of the Trans Mountain Pipeline Expansion (TMX) has pushed the still-uncompleted mega-project Ottawa bought for Alberta further into the red, says a report released June 22 by the Parliamentary Budget Officer says.
This quickly earned the project the uncomplimentary sobriquet “boondoggle” from Environmental Defence’s national climate program manager, Julia Levin.
The Trudeau Government made the decision in 2018 to buy the 70-year-old pipeline that runs 1,150 kilometres from Alberta to the West Coast near Vancouver from Kinder Morgan Canada Inc. and to take on the cost of the expansion the company had first proposed in 2013.
It’s the only pipeline carrying Alberta 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 then-owner Kinder Morgan Canada Inc. 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 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 inflamed the debate in the province.
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 (PBO) Yves Giroux said the estimated cost of the massive construction budget for the project has surged from $12.6 billion when the PBO last looked at the project in 2020 to $21.4 billion now.
When Ottawa chose 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 PBO 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 now at minus $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 Government of Canada 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 being 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, as generally seems to be the effect of overabundance on prices.
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 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.
The report explains, “PBO requested updated projected future cash flows for the Trans Mountain Pipeline system from the Canada Development Investment Corp. (CDIC), the Crown corporation holding the Trans Mountain assets.”
CDIC, 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.” (Emphasis added.)
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 yesterday’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 “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.”
“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.”
Even though 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, there’s still not much chance of that happening.
Both the federal and Alberta governments yesterday signalled their determination to keep working on the 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.