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Ottawa May Have Paid $1 Billion Too Much in Trans Mountain Buyout, Parliamentary Budget Officer Concludes

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The federal government may have paid up to C$1 billion more than it should have when it bought the Trans Mountain pipeline last year, Parliamentary Budget Officer Yves Giroux concludes in a report released late last week.

“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,” Giroux told media Thursday. “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.”

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Giroux’s report placed the value of the existing pipeline and the controversial Trans Mountain expansion project at between $3.6 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,” CBC reports.

“The government negotiated a purchase price at the higher end of PBO’s valuation range,” the report states, adding that “PBO’s financial valuation assumes that the pipeline is built on time and on budget.”

Even a one-year delay in the project “would reduce its value by $700 million,” the Edmonton Journal reports [2]. “A 10% increase in construction costs would reduce the value by $450 million.” And according to Giroux, “all indicators point that there will likely be a delayed construction. And construction costs—I think it’s also quite possible they will increase.”

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,” CBC states. “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.”

But even if Ottawa overpaid for the pipeline, “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,” CBC adds, citing the report. The PBO estimated the project will create 7,900 jobs during peak construction.

“From a financial perspective, the risks are significant for taxpayers, but should this get built, it 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 pipeline expansion is stopped, Ottawa could lose more than $2.5 billion.

Meanwhile, Canadian economist Robyn Allan is warning that the Trudeau government is on track to re-approve the Trans Mountain expansion based on future oil demand that will never materialize.

The outlook Trudeau is clinging to was prepared in early 2015 when Stephen Harper was still prime minister,” Allan writes [3] for National Observer. “It predicts that by 2035 there will be an increase in oilsands supply of more than two million barrels a day from its current level of three million barrels a day, taking total oilsands supply to five million barrels a day. Trudeau expects an increase in oilsands supply of almost 70% in little more than 15 years. This is a future that no longer exists.”

With major international fossils abandoning the tar sands/oil sands and selling off their assets, mostly to “Canadian-based producers whose debt loads are too high to satisfy investors that it’s financially prudent for them to expand,” Allan says producers’ final investment decisions tell a more honest story than their more general promises of future growth. “What they are saying through those decisions is that only about 250,000 barrels a day of additional supply will become available in the foreseeable future,” she writes. “By 2022—which is the earliest date Trans Mountain could become operational—supply is expected to begin a gradual decline as oilsands extraction projects become depleted.”

That “market-driven outlook is based on operating, under construction, and new projects green-lit by corporate boards, not political spin,” she adds. “Industry’s outlook is also consistent with a view of the future scientists say is necessary if the rate of increase in the planet’s temperature is to be contained.”