Federal government faces potential loss if Trans Mountain pipeline is sold: budget watchdog

The federal government is facing a potential loss on the sale of the Trans Mountain pipeline as it assesses it is worth less than the cost of construction, the Parliamentary Budget Office said on Friday.

The pipeline could be worth between $29.6 billion and $33.4 billion, depending on what happens after the initial 20-year contracts expire, the budget watchdog said in an updated financial assessment of the controversial project.

Meanwhile, the cost of constructing the pipeline, which opened in May, came to $34.2 billion, dramatically higher than the 2017 estimate of $7.4 billion.

The PBO's valuation estimate does not take into account sunk costs, such as the $4.5 billion the federal government paid to buy the project in 2018, or capital expenditures before 2024.

Whether the government makes a profit or incurs a loss depends on what someone is willing to pay for it, the PBO said in its report, pointing out the numerous variables at play.

The potential sale will be affected by the number of potential buyers, their costs of raising capital, when and how it will be sold, market conditions at the time and whether it will be an arm's length transaction, the PBO said.

But if it is sold at the assessed value of the PBO, a loss will be incurred.

The state-owned Trans Mountain Corp. As of December 31, 2023, it had assets of $35.2 billion, debt of $26.9 billion and shareholders' equity of $8.3 billion.

“If the Trans Mountain Pipeline system were to be sold in 2024 at any of the (current values) calculated by PBO, the remaining amount after outstanding debt is repaid would be less than equity. TMC would take the balance of its equity and record a loss.”

For its valuation estimates, the PBO said the higher valuation would be if current contracts are renewed beyond 20 years, while the lower range would be if the pipeline returns to a cost-of-service scenario.

The PBO notes that the scenarios outlined by the Canada Energy Regulator show that there is significant spare capacity in the pipeline by the early 2040s, depending on what climate action is taken in the meantime.

The Trans Mountain Pipeline transports crude oil from Alberta to coastal BC. The expansion tripled the capacity of the existing pipeline, adding another 590,000 barrels per day of transportation capacity, bringing the pipeline's total capacity to 890,000 barrels per day.

Trans Mountain's expansion has temporarily eliminated the transportation bottlenecks that have hampered the Canadian oil industry's ability to grow for years. Now that companies have new options to ship barrels out of the oil-producing region of Western Canada, they can turn on the taps.

Now complete, Canadian oil production is breaking records, and economists say Trans Mountain will boost the GDP of both the province of Alberta and Canada as a whole this year.

The federal government has said it does not want to own the pipeline in the long term and has already launched the first of what is expected to be a two-phase divestment process.

The first phase involves talks with more than 120 Indigenous nations along the Trans Mountain route to see if any are interested in an equity stake.

In the second phase, the timing of which is unclear, commercial offers will be considered.

However, a possible sale is complicated by the fact that Trans Mountain Corp. is still embroiled in a dispute with oil companies over the tolls it wants to charge for the use of the pipeline.

Trans Mountain wants to charge higher tolls to offset some of the project's budget overruns, but oil companies don't want to be held responsible for construction-related challenges.

Canada's energy regulator will hold an oral hearing on the toll dispute next spring. Critics say if the CER rules that the oil industry won't have to pay for the bulk of the government's pipeline project cost overruns, taxpayers will be left on the hook.