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

The federal Liberal government may have overpaid for Canada’s Trans Mountain pipeline project by more than $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 building timeline.

However, even if Ottawa paid too much, the value of the project for Canada’s oil producers, and in turn 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.”

The PBO valuations are further complicated by the fact they do not have a figure for just how much multiple pipeline terminals and the Puget Sound Pipeline — other assets Ottawa acquired as part of the transaction with the former proponent, Kinder Morgan — are worth. Those related assets are not included in the figure the PBO generated, but officials said Thursday if the expansion is not built, the value of these properties would be low.

Regardless, the PBO warns that any further delays to the project, an increase in construction costs or other changes to the “risk profile” threaten to devalue the project considerably, while negatively influencing the final sale price Ottawa could fetch when it eventually sells it to another entity.

A one-year 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 is fair to conclude the government would have overpaid for the asset.

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

Impact on GDP

The true value of the Trans Mountain Expansion Project (TMEP), however, will be derived 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 in 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.”

If the expansion is not built, the 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 pending the outcome of legal issues.

B.C. Premier John Horgan sought to stop its construction, prompting Ottawa to step in and buy the project to “derisk” it.

Indigenous groups have said they were inadequately 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 inadequate consultations and 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.