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Trans Mountain Buyout Drives Federal Deficit Up 36%, Gives Kinder Morgan a 637% Gain: IEEFA

Canada’s “folly” in buying the Trans Mountain pipeline will drive the federal deficit up by 36%, while delivering a 637% benefit to Kinder Morgan, the Cleveland-based Institute for Energy Economics and Financial Analysis concludes in a blistering report issued this week.

In addition to the C$4.5-billion purchase price for the project, IEEFA estimates the Trudeau government will have to spend another $11.6 billion to complete “a pipeline project that is unnecessary”.

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“Canada is weakening its finances by taking on unlimited costs to buy an unneeded pipeline with an uncertain future and giving an unusual profit to a U.S. company,” said IEEFA Director of Finance Tom Sanzillo, former first deputy comptroller for New York State. “Even though the government plans to sell the pipeline, such a deal would likely come at a loss given the unusual guarantees promised future buyers, weak market conditions, and the likelihood that the Canadian government would be selling the project under distressed conditions.”

Having made the decision to nationalize the project, the Trudeau government “owes its public a full explanation as to why it is buying the project, who benefits, and how the price and other details of the deal were set,” IEEFA says in a release.

“There is every indication that the Canadian government has bought the pipeline at a high price and is likely to resell it for far less than it will pay to build it,” Sanzillo said. “The Canadian government is taking open-ended responsibility to absorb all costs and ensure profits for any potential new owner of the pipeline. As a result, long-term cost increases for taxpayers are effectively uncapped, posing a significant, unquantifiable liability.”

IEEFA concludes the project will add $6.5 billion in unplanned expenses to Canada’s budget for the 2019 fiscal year, increasing a deficit already projected at $18.1 billion. “The transaction risks an increase in Canada’s annual deficit in FY 2020, too, reversing a deficit reduction trend that supports Canada’s strong recovery, sound fiscal position, and excellent credit rating,” the report states.

The 637% gain for Kinder Morgan is based on the $3.89 billion it will receive in the purchase deal. That figure is based on IEEFA’s estimate that the Houston-based pipeliner has spent $610 million on the project, considerably less than the $1.1 billion it has claimed.

While IEEFA’s analysis feeds climate hawks’ worst fears that the Trudeau government was thoroughly snookered on the buyout, the Seeking Alpha investment blog is jubilant this week about Kinder Morgan’s renewed business prospects, casting [2] the transaction as the “start of something good”. Following reports last week that pipeline capacity was insufficient to carry fracked natural gas from the U.S. Permian Basin, Kinder promptly announced [3] it was investing some of its winnings from Canadian taxpayers in a US$2-billion project to carry two billion cubic feet per day of gas along a 430-mile route to the Texas Gulf Coast.

Meanwhile, Natural Resources Minister and 2015 GreenPAC endorsee [4] Jim Carr said [5] he expects construction on the newly-rebranded Taxpayer Mountain pipeline expansion to begin “within weeks rather than months”.