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February 2019

Vol. 24, No. 6 Week of February 10, 2019

Do we have a deal for you

Canada likely overpaid for Trans Mountain pipeline, parliamentary assessment says

Gary Park

for Petroleum News

The Canadian government has been likened to a first-time buyer on a second-hand car lot for paying top dollar to Kinder Morgan to acquire its Trans Mountain pipeline system.

“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,” Parliamentary Budget Officer Yves Giroux told reporters after his watchdog office released its assessment of the purchase and the additional costs that lie ahead.

“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.”

The PBO said that if the planned expansion of Trans Mountain is scuttled the value of related multiple pipeline terminals and the Puget Sound Pipeline in Washington State will be negligible.

In addition, a failure to proceed with the expansion would slash the value of the Trans Mountain purchase to about C$2 billion, the PBO estimated.

Faced with the prospect of Kinder Morgan walking away from the expansion plan and the absence of any other candidates to take over the project, the government of Prime Minister Justin Trudeau decided to take the plunge in the interests of opening up new offshore markets for Alberta’s oil sands bitumen.

C$4.5 billion v C$3.6 billion

For an announced purchase price of C$4.5 billion, it took over the 66-year-old pipeline, which delivers crude to the Port of Vancouver and Washington state refineries, in May 2018 and inherited the plans to raise capacity to 890,000 barrels per day from the current 390,000 bpd.

The cost of that expansion has never been fully disclosed beyond an estimate that it could run to C$9.3 billion.

In its detailed valuation of the deal, Giroux’s office set a purchase price range of C$3.6 billion to C$4.6 billion, assuming that the expansion is completed on time and on budget - an increasingly remote prospect given that the project is bogged down in negotiations with First Nations and legal challenges.

Estimates of a completion date have been stretched from the end of this year to sometime in 2022.

Finance Minister Bill Morneau, a lead government player in brokering the Kinder Morgan deal, said the initial payout was actually lower than the C$4.5 billion he initially released, noting it was actually C$4.1 billion because of some capital gains taxes the government booked as a result of the sale.

Opposition — file ‘bungled’

Shannon Stubbs, natural resources spokesman for the federal Conservative Party, said Trudeau’s government had badly bungled the file.

“Not only did the Liberals spend C$4.5 billion of taxpayers’ money to purchase a pipeline that a private company was willing to build without a single tax dollar, they failed in their negotiations, spending C$1 billion more than what the PBO estimated it was worth,” she said.

Nathan Cullen, a Member of Parliament for the New Democratic Party, said the government should “stop this nightmare” and focus instead on investing in green technology and renewable resources.

“They panicked and they got fleeced by a Texas oil company,” he said.

Hinges on oil sales

The full value of the Trans Mountain expansion will only be realized if oil sands producers are able to sell more of their output on world markets, breaking free from being a captive of U.S. refineries.

“It is difficult to determine the impact of the (pipeline expansion) on the price differential between (West Texas Intermediate and Western Canada Select) grades. However, a recent PBO analysis determined that a reduction of US$5 per barrel in this gap would, on average, result in a 0.1 percent increase of real Gross Domestic Product and a 0.3 percent increase in nominal GDP,” the PBO report said.

While that debate ebbs and flows, federal Natural Resources Minister Amarjeet Sohi offered no encouragement to proponents of the pipeline expansion.

He said the government has no intention of cutting corners to accelerate a full review of the expansion, indicating only that the National Energy Board is expected to complete by Feb. 22 its review of the pipeline’s impact on ecosystems.

Sohi said the NEB will make recommendation to his department, while the government continues its consultations with 40 First Nations along the pipeline route - both steps required by a Federal Court of Appeal judgment.

Beyond that, he would not say whether the federal cabinet will issue its findings before Canada’s national election due this fall.






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