Ottawa may have overpaid for Trans Mountain by up to $1B, parliamentary budget officer says

PBO estimates construction of the expansion project will create nearly 8,000 jobs at its peak

The federal Liberal government may have overpaid for the Trans Mountain pipeline project by up to $1 billion, the parliamentary budget officer estimates — and there's a risk its value could decline further if there are any other delays in the construction timeline.

Even if Ottawa paid too much, however, the value of the project for Canada's oil producers — and in turn for government coffers — is considerable, as it will close a price gap that plagues the oilpatch, the Parliamentary Budget Office said in a report released Thursday.

The report says both the existing pipeline and the proposed expansion project are valued at between $3.6 billion and $4.6 billion, an imprecise range that pegs it at either well below the government's purchase price — $4.5 billion — or right on the money.

"The government negotiated a purchase price at the higher end of PBO's valuation range. PBO's financial valuation assumes that the pipeline is built on time and on budget," says the report.

The PBO said Ottawa was the only known entity that made a bid for the pipeline and its planned expansion, so it's possible the federal government could have negotiated a more favourable price.

"If it was a car, we would say they paid sticker price, they didn't negotiate very much, they didn't get that many deals or manufacturers rebates — quite the opposite," Parliamentary Budget Officer Yves Giroux told reporters Thursday morning at a press briefing.

"It's a very risky project to have bought something that nobody else in the private sector wanted to acquire. There are lots of retirement or pension plans that like to buy infrastructure of that nature that generate streams of revenues."

But the PBO's valuations are further complicated by the fact that it doesn't know just how much multiple pipeline terminals and the Puget Sound Pipeline — other assets Ottawa acquired as part of the transaction with the former project proponent, Kinder Morgan — are actually worth.

Those related assets are not included in the figure the PBO generated. Officials said Thursday that if the expansion is not built, the value of these properties would be negligible.
Finance Minister Bill Morneau, the man who helped broker the deal for the government, said Thursday the price paid was actually lower than the $4.5 billion figure he initially cited when he announced the purchase in May 2018.

He said the net purchase price was, in fact, $4.1 billion because of some tax advantages (capital gains taxes) the government booked as a result of the sale — taxes the government would have collected regardless of which entity purchased the project.
"We paid an appropriate price — right in the middle of the range that [the PBO] analysis was, the range for the purchase price," he said.

The PBO pegged the final purchase price at $4.4 billion "net adjustments," suggesting Morneau and the PBO are looking at different figures.

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Regardless, the PBO warned that any further delays to the project, increases in construction costs or other changes to the project's "risk profile" could devalue the project considerably, while negatively influencing the final price Ottawa could fetch when it eventually attempts to sell it to another entity.

A one-year construction delay would reduce the project's value by $700 million. If there are delays beyond the planned Dec. 31, 2021 completion date, the PBO said it would be fair to conclude at that point that the government overpaid for the asset. Giroux said he thinks further delay is likely, given the significant hurdles the project has faced to this point.

Shannon Stubbs, the Conservative natural resources critic, said the Liberal government has badly bungled the file.

"Not only did the Liberals spend $4.4 billion of taxpayers' money to purchase a pipeline that a private company was willing to build without a single tax dollar, they failed in their negotiations, spending a billion more than what the independent Parliamentary Budget Officer estimated it was worth."

(Ottawa bought the project after Kinder Morgan halted most of its spending on the project amid legal uncertainty.)

B.C. NDP MP Nathan Cullen said the government needs to "stop this nightmare" and focus instead on investing in green technology and renewable resources.

"They panicked and they got fleeced by a Texas oil company," he said.

Impact on GDP

The true value of the Trans Mountain Expansion Project (TMEP) will come from oil producers selling much more Canadian oil at world prices. Currently, because Canadian producers are forced to sell virtually all of their product to U.S. refineries, Western Canadian Select sells at a discount to West Texas Intermediate (WTI), the gold standard of U.S. oil pricing.

"It is difficult to determine the impact of the TMEP on the price differential between WTI and WCS grades. However, a recent PBO analysis determined that a reduction of $5 US per barrel in this gap would, on average, result in a 0.1 per cent increase in real GDP and a 0.3 per cent increase in nominal GDP," the PBO report says.

"That would translate into a $6 billion annual impact on GDP during the five-year period from 2019 to 2023."

The PBO estimates construction of the expansion project would create nearly 8,000 jobs at its peak.

While it's risky for taxpayers, the project "will be a relief for the oil sector in Alberta because it will accelerate the opening of markets for Canadian oil," Giroux said.

If the expansion is not built, the existing 65-year old Trans Mountain pipeline would be worth about $2 billion, the PBO estimates.

The government stepped in to buy the pipeline and planned expansion last year after Kinder Morgan halted all essential spending on construction amid entrenched opposition, and legal manoeuvring, from the B.C. government.

B.C. Premier John Horgan has sought to stop its construction in court, prompting Ottawa to step in and buy the project to "de-risk" it.

Indigenous groups have said they were not adequately consulted by the federal government before Prime Minister Justin Trudeau and cabinet gave the project the green light in 2016.

The Federal Court of Appeal quashed cabinet approvals for the project last August, citing those inadequate consultations and incomplete environmental assessments — on the very day Kinder Morgan shareholders agreed to sell most of the company's Canadian assets to Ottawa.

The federal government has vowed to build the project despite its legal challenges.