Canada’s case for Trans Mountain assumes the pipeline will operate for 100 years. PBO disagrees

Secret reports the federal government is relying on to argue the Trans Mountain pipeline expansion is commercially viable are based on the unrealistic assumption the pipeline will operate for 100 years, Canada’s financial watchdog told Canada’s National Observer.

For months, Finance Canada has refused to share any information about the financial reports produced by TD Securities and BMO Capital Markets, which Finance Canada says prove TMX is still commercially viable despite ballooning construction costs.

“We believe that's probably too long of a time horizon, to assume that the pipeline will be operating for at least another century ... let alone to take into consideration revenues that will be generated over such a long period of time,” Parliamentary Budget Officer Yves Giroux told Canada’s National Observer.

“Also, because of the various commitments to net-zero or to reduce reliance on fossil fuels, we didn't think that using a 100-year time horizon was appropriate.”

Giroux said his office did not view the TD and BMO reports directly, but did talk to Finance Canada officials about the findings and methodology to inform its independent analysis.

Finance Canada did not return requests for comment by deadline.

In its most recent report, the PBO used a much shorter 40-year time frame to analyze the profitability of the Trans Mountain pipeline and expansion project. Giroux’s report confirms what was already clear: TMX is no longer a profitable investment.

The main difference between the PBO’s report and the TD and BMO ones is the time frame, which explains why the government believes Trans Mountain is profitable, said Giroux. “We don't have the same view.”

For the first time, the PBO also modelled a scenario where the project is cancelled immediately and found the government would have to write off an estimated $14.4 billion worth of assets. A cancellation would bankrupt the Trans Mountain Corporation, the report says. The federal government has shown no signs it intends to cancel the project.

Considering how much has already been spent on construction, it's probably better at this point to complete the project so it can start generating revenue, said Giroux.

The PBO just looks at the net present value of the project, or the value of its potential investment opportunity — other economic costs or benefits were not included in the analysis.

From Ottawa’s vantage point, it doesn’t matter if TMX is a money loser because it will incentivize investment, create jobs and increase income tax and royalty revenues, said Rory Johnston, a market economist at investment firm Price Street. Because it supports those aims, it makes sense as government policy when it wouldn't necessarily as a commercial, private decision, said Johnston.

For example, when the pipeline is in operation, there's an expectation Canadian oil from western provinces, notably Alberta, will be able to sell at a higher price than it currently does, which would generate benefits for the Canadian economy, said Giroux.

The PBO’s new analysis was prompted by questions from MPs like NDP environment critic Laurel Collins, who requested an updated cost analysis of the pipeline and expansion project after costs soared in February. The price tag currently sits at $21.4 billion — up 174 per cent from an estimated $7.8 billion when the government first bought the pipeline from Kinder Morgan in 2018.

To keep the planet from reaching dangerous levels of warming, the world must rapidly move away from fossil fuels, which would render a lot of the industry’s infrastructure worthless. A study recently published in the journal Nature Climate Change found Canadians stand to lose $100 billion based on oilfields and production equipment alone — not including pipelines or refineries.

Canada’s Energy Regulator has yet to model a net-zero by 2050 scenario despite the fact that limiting global warming to 1.5 C requires the entire world to cut its greenhouse gas emissions by 45 per cent by 2030 and achieve net-zero emissions in 2050. In December, Natural Resources Minister Jonathan Wilkinson asked the regulator to include Canada’s net-zero by 2050 goal in its 2022 report.

The PBO’s calculations don’t account for the risk of TMX becoming a stranded asset during the global energy transition.

“That's a potential impact that would negatively weigh on the price of the pipeline and its long-term profitability,” said Giroux, adding it’s part of why his office doesn’t think TD and BMO’s century-long lifetime assumption is realistic.

There are many problems with using a 100-year time frame, said Omar Mawji, energy finance analyst for Canada for the Institute for Energy Economics and Financial Analysis.

“Either the people doing the analysis don't quite understand the dynamics of a pipeline and a supply source. Or, you know, they're doing it because … they're trying to look for a way to make it profitable,” Mawji told Canada’s National Observer.

He said a pipeline’s lifetime is typically 40 years, and the life of most oilsands projects is 40 to 50 years. If TD and BMO’s 100-year lifetime analysis is any indicator, there would have to be new oilsands projects approved in the near future and then again in 2050 or 2060, said Mawji.

The federal government says Canada’s current climate plan will reduce greenhouse gas emissions 40 per cent below 2005 levels by 2030. If the government wants to hit that target, Mawji said it's “very hard to assume” it will approve more oilsands projects.

“On one hand, they're saying, ‘Our objective is to reduce CO2 emissions in the oil and gas sector by this much,’” he said. “But on the other hand, ‘We want to build a pipeline that, for it to be economic, would require additional oilsands production.’”

Ongoing investments in fossil fuel infrastructure are undermining the massive reduction in emissions needed to meet the Paris Agreement goal of limiting global warming to well below 2 C (preferably 1.5 C), according to the most recent report by the Intergovernmental Panel on Climate Change. The panel also found emissions from existing fossil fuel infrastructure could single-handedly exhaust the world’s remaining carbon budget, meaning there is no place for new infrastructure in a climate-safe future.

Roughly halfway through its life, the project will also need “major reconstruction” to stay in use, and at that point, if there’s not enough oil passing through the pipeline, an operator could decide it's not worth reinvesting in, said Mawji.

Last month, the federal government greenlit a $10-billion guarantee on a loan for the Trans Mountain Corporation that was quietly financed by Canada’s six biggest banks, including BMO and TD. The loan guarantee assures investors that if the Crown corporation can’t repay the loan, the public will pick up the tab. This is a win-win for the banks because even if the project isn’t completed, they are guaranteed their money back, said Mawji. As underwriters of the debt, TD and BMO are “going to give the government a report that shows that it's worth it,” he said.

While a case can be made for the economic benefits of building TMX, Mawji said it's also important to consider what the benefits would have been if those billions had instead been spent to incentivize investment in renewable energy.

“It's a frustrating thing for the taxpayer … especially if you voted based on climate change,” said Mawji.