Why the TMX will keep spilling taxpayers’ money
Don’t say independent economist Robyn Allan didn’t warn you.
Four years ago, the former CEO and Chairman of ICBC noted that Prime Minister Justin Trudeau’s reckless purchase of the economically beleaguered Trans Mountain expansion project would end up costing taxpayers billions.
And then more billions.
At the time, Allan accused the Trudeau government of not being transparent or honest about the escalating costs of a project that proposed to triple bitumen shipments from 300,000 barrels per day to 890,000 barrels per day. for Asian markets.
And what did the Trudeau government reveal last week as Ottawa was besieged by angry occupiers? That its unprofitable pipeline, less than 50% complete, will now cost at least $21.4 billion.
That’s a 70% jump from the last inaccurate price of $12.6 billion. Free by the government just two years ago.
Plus, the megaproject won’t be finished for another year, if that’s what it is.
Meanwhile, Finance Minister Chrystia Freeland has talked about borrowing more money from government debt markets or from the same bank, TD Securities, which originally recommended, in 2018, that Kinder Morgan sell to the Canadian government its 66-year-old pipeline and engineering plans for an extension.
Freeland promises that “no more public money” will go into the project.
But Allan told The Tyee this week that such a claim is utter nonsense because “all borrowing by Crown corporations is ultimately supported by taxpayers.”
Interest charges on existing government loans of $13 billion for the TMX project are already costing $700 million in interest each year, Allan added.
“The government-owned project was mismanaged. The budget is out of control. Shippers, by virtue of their contracts, are not responsible for the cost of the majority of overages, and ratepayers are being seriously misled,” Allan said.
Allan is not alone in this grim assessment. Gwyn Morgan, the former CEO of Encana (now Ovintiv) told Bloomberg News that cost overruns pose a big risk to Canadian taxpayers.
“In the (real) commercial world, no one is going to fund a project well over budget with no firm cost or start date,” Morgan said. Recount Bloomberg.
“It makes even less sense now”
Allan, the former chief economist at BC Central Credit Union, first challenged the economics of the project in 2013 and hasn’t stopped since. In his opinion,
“It didn’t make sense at the time, and Kinder Morgan knew it. And it makes even less sense now.
Kinder Morgan Canada assured the National Energy Board in its 2013 project application that its US parent company had the money to build the then $5.4 billion project. But this heavily indebted company did not.
The Canadian subsidiary therefore approached the Alberta government in 2017 for financial assistance. But Alison Redford, then prime minister, adamantly refuse to be involved.
The business case for the project has always doubtful summer. The only reports claiming that a profit could be made by selling bitumen in overseas Asian markets have all been paid for by Kinder Morgan. Critics have consistently cast doubt on such claims.
The most lucrative market for Canadian bitumen remains US Gulf Coast refineries, which pay a premium for heavy crude. Last year, David Hughes, one of Canada’s foremost energy analysts, calculated that TMX was not necessary, given additions to existing North American pipeline networks.
“The federal government, owner of TMX, asserted that higher prices were available in foreign markets which could be accessed by completing the TMX project,” Hughes wrote. “This is clearly not the case, as a detailed analysis of historical Asian prices and transport costs has shown. In fact, shippers on TMX stand to lose US$4-6 per barrel against US exports on existing pipelines.
As project cost estimates continued to rise, Kinder Morgan realized that the bulk of construction cost overruns would fall on the company and not the shippers due to locked-in 20-year shipping contracts. . He even warned shareholders of the risk in 2018 when projected costs topped $7.4 billion.
Around this time, the American company claimed that environmental protests and regulatory hurdles – all duly anticipated by the company in its corporate presentations – made the project untenable.
Without providing a public cost-benefit analysis or independent reports on the project’s finances, the Trudeau government purchased the old pipeline and expansion plans for $4.5 billion in 2018.
Kinder Morgan executives paid their negotiating team US$575,000 in bonuses after closing the deal. It might appear that Canadian taxpayers paid US leaders in Texas around C$750,000 in bonuses for outwitting the Trudeau government.
Tolls that keep losing money
But the big problem with runaway cost overruns comes down to tolls, Allan says: Pipelines typically pay for their capital costs by charging shippers a toll to move oil through their line.
But contracts with shippers of petroleum products such as Canadian Natural Resources Ltd., Suncor and Cenovus stipulate that much of the cost overrun cannot be passed on to tolls. They were signed when the pipeline was budgeted at $7.4 billion. Therefore, 75% of the cost overruns at that time could not be passed on.
“Nobody in Ottawa or in the oil sands is going to discuss toll rates,” Allan said.
She says taxpayers, not bitumen shippers, are not only responsible for the majority of cost overruns currently totaling $14 billion, but will subsidize some of Canada’s wealthiest oil companies with artificially low tolls. which will not reflect the cost of the project.
This sad development may also explain why companies like Cenovus, CNRL and Suncor don’t really complain or panic about rampant cost overruns.
“Why should they worry? Allan asked. “Their tolls were subsidized for any project cost over $7.4 billion.”
“When Trans Mountain and the shippers know that it is not the shippers but the ratepayers who are paying the majority of project overruns, where is the need for budget control?
Alex Pourbaix, CEO of Cenovus, the largest shipper in the expanded pipeline, Express careless about cost overruns. “While nobody wants to see cost increases, they are often a reality with projects of this size,” he told The Globe and Mail last week.
Pourbaix did not mention that, if Allan is correct, taxpayers, not Cenovus, would be paying for a large portion of those increases.
Fiascos and potential conflicts
Since Trudeau bought the project in 2018, the project has been embroiled in one fiasco after another.
Safety issues halted construction for months in 2020 and 2021 as the company repeatedly replaced contractors. Then came wildfires, floods and runaway inflation along with upgrades and changes.
Concerns about potential conflicts of interest also hamper the project. William Downe, who chairs the board of directors of Trans Mountain, had a long career at BMO. And the government now said BMO is one of its financial advisors.
Brian Ferguson, the former CEO of Cenovus Energy, also sits on the board of Trans Mountain and has served on the board of TD Bank since 2015. TD Securities advised Kinder Morgan on the sale of the pipeline to the Trudeau government by providing a fairness opinion.
There is more. Cenovus is the project’s largest expansion shipper (125,000 barrels per day). And Finance Minister Chrystia Freeland has identified TD Securities as another key adviser on how to manage the project’s debt.
And then there’s this little issue of climate change, Allan added.
“This project is a global warming machine in that it proposes to move over half a million barrels of high-carbon bitumen per day. The very people whose homes have been flooded by atmospheric rivers or scorched by heated domes are now being asked to pay for this planet-warming machine.
Today, a project the government swore would cost just $7.4 billion has ballooned to $21.4 billion. And it’s not even half finished.
Allan is in no way reassured by the accuracy of his economic warnings.
“What bothers me the most is that,” the economist said. “As the truth about the full costs comes to light and taxpayers realize the enormous burden, it will further erode faith in our democracy, and we can’t afford to erode that faith any longer.”
She still thinks a fiscally prudent government should kill the project:
“They can shut it down now and cut our losses. The industry doesn’t need the capacity, but they can’t talk about it because their carrier contracts forbid them from talking negatively about the project until it’s not finished.
In addition, she adds, the supply of jobs and the salaries that go with them have exceeded all estimates due to cost overruns.
“If the government doesn’t cancel the project right away, the pipeline will be a $30 billion mess by the time they close the books.”
And don’t say Robyn Allan didn’t warn you.
Teaser photo credit: By William Chen – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=62555725