Natural Resources Committee on Nov. 18th, 2024

[The Chair, Liberal, George Chahal]

I call this meeting to order.

Welcome to meeting number 114 of the House of Commons Standing Committee on Natural Resources.

Before we begin, I would like to ask all participants to read the guidelines written on the updated cards on the table. These are the updated cards. These measures are in place to help prevent audio and feedback incidents and to protect the health and safety of all participants, including the interpreters. You will also notice a QR code on the card that links to a short awareness video.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, June 6, 2024, the committee is resuming its study of the Trans Mountain pipeline expansion.

Today's meeting is taking place in a hybrid format. I would like to remind participants of the following points: Please wait until I recognize you by name before speaking, and all comments should be addressed through the chair.

Members, please raise your hand if you wish to speak, whether participating in person or via Zoom. The clerk and I will manage the speaking order the best we can.

I use these two cards: Yellow is the 30-second warning and red means time's up. I will try not to cut you off mid-sentence, but when time is up, I will ask you to cede the floor.

Now I would like to welcome our guests for today's study.

From the Office of the Parliamentary Budget Officer, we have Yves Giroux, Parliamentary Budget Officer, and Jason Stanton, adviser and analyst.

Welcome to our committee. You have up to five minutes for your opening statement, Mr. Giroux. The floor is yours, sir.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Good day, Mr. Chair and members of the committee.

Thank you for the invitation to appear before you today. We are pleased to be here to discuss our most recent analysis of the Trans Mountain Pipeline, which was released on November 8, 2024. With me today, I have Jason Stanton, advisor-analyst with my office.

Since our last report was published in June 2022, the total project cost estimate for the Trans Mountain expansion project has increased by $12.8 billion to a total of $34.2 billion and it began commercial operations on May 1, 2024. Our latest report provides a current financial valuation using a discounted cash flow method on a go-forward basis. The analysis incorporates new data in conjunction with relevant publicly available information. The analysis does not include previously incurred costs, such as the purchase price or capital expenditures prior to 2024. It is also important to note that the report does not present an audit or evaluation of the Trans Mountain expansion project construction or operating costs of the type performed by the Auditor General.

The report presents two scenarios to illustrate how the value of the pipeline could be impacted by the future servicing and tolling framework.

While most of the Trans Mountain pipeline system's capacity is earmarked toward committed contracts for the first 15 to 20 years of operation, once they expire, it is uncertain what kind of service and tolling framework will prevail. We estimate that a scenario in which contracts are renewed has a current value of $33.4 billion, while a reversion to a cost-of-service scenario has a current value of $29.6 billion.

However, there is also uncertainty in some of the underlying assumptions on pipeline utilization, tolls and discount rate, all of which can impact the valuation. This is why the report also includes an assessment of the valuation's sensitivity to these key factors. Based on Trans Mountain corporation's most recent annual report, if the Trans Mountain pipeline system were sold in 2024 at either of the present values calculated in our report, the government would record a loss on the sale. However, whether the government records a profit or loss on the sale of the Trans Mountain pipeline network will ultimately be determined by the price a buyer is willing to pay. This would depend on such factors as the number of interested buyers, their costs to secure the necessary funds, the timing and method of sale, market conditions, and whether some groups are given priority in the sale.

Jason and I would be pleased to respond to any questions you may have, regarding either our analysis of the Trans Mountain pipeline system or other PBO work.

Thank you.

[The Chair, Liberal, George Chahal]

Thank you, Mr. Giroux, for your opening statement.

We will now proceed to the first round of questioning. I'll begin with Mr. McLean for the first six minutes.

Mr. McLean, welcome to the committee. The floor is yours.

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you, Mr. Chair.

Thank you, Mr. Giroux, for coming to the committee on this important matter. We have a lot to ask you on this, including, of course, your numbers on what this is worth to Canada as a sale.

Let me just go through this.

Before this pipeline was built, Canada had oil pipeline capacity of 4,690,000 barrels per day. The extra 590,000 barrels per day of expansion that the TMX brought to Canada brings us to 5,280,000 barrels per day of expansion. What that has accomplished in the time it's been open is a reduction in what's called the differential. The differential applies to all those 5.28 million barrels. That differential was $18.65 U.S. a barrel last summer. This summer, because of the opening of the pipeline, it's $15.05 U.S. per barrel.

About $3.60 U.S.—let's call it five dollars Canadian differential—across 5.28 million barrels per day equals an extra bump to the Canadian economy of $9.5 billion and an extra tax take to the government of $2.8 billion per year.

Were any of these numbers included in your analysis?

[Yves Giroux]

The analysis looks at the financials involved in the transaction of buying the pipeline and making its expansion effective, as well as the potential costs of an acquirer, or somebody who would buy the pipeline. It does not take into account the broader benefits.

However, in previous reports, we estimated that a reduction in the price discount at which Western Canadian Select sells of five dollars U.S.—that was prior to the pandemic—would entail additional benefits to the country of $6 billion for every segment of five dollars U.S. in reduction in the discount at which WCS sells.

There are obviously broader benefits, which is probably why the government decided to proceed with the purchase and the expansion of the pipeline.

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you.

One of the biggest risks that isn't in your report here is the risk of government itself. The risk the government brings to this equation is consistent with the Minister of Environment's report last week. He plans to cut emissions in Canada at a rate by 2032 that is, according to every player in industry, an indication that we'll have to cut production by one million barrels per day.

Take that 5,280,000 barrels per day and turn it down by one million per day. Number one, as Eric Nuttall, a portfolio manager, said, “It's economic idiocy.” As the minister himself said, “Look around the world, no other major oil and gas producer is doing what we’re doing.”

In your opinion, will the one million barrels per day of reduced capacity have an effect on the sale price, potentially, of the TMX pipeline?

[Yves Giroux]

It's hard to assess exactly what the impact of the cap on oil and gas emissions will have or could have on the value of the Trans Mountain pipeline. There is quite a bit of uncertainty with respect to the pricing of such a unique asset, especially given the lifespan of the asset, which we have estimated at 40 years but which could be longer than 40 years. There are pipelines that are functioning well after the initial first 40 years of their building and entering into operation.

I can't pronounce, really, on the impact solely of the cap on oil and gas emissions. We haven't yet studied that. However, there is work under way in my office to look at the economic impacts of the cap on oil and gas emissions, for which regulations were very recently released.

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you.

The toll that Alberta, Saskatchewan and British Columbia shippers pay to get to Westridge terminal from the producing fields and the storage facilities is almost a dollar higher than it is to get to the gulf coast in the U.S. It's a much shorter distance but a higher toll. Can you tell us what impact that will have as a result of the great cost excesses built into building this TMX pipeline?

[Yves Giroux]

My understanding of the tolling framework is that it guarantees a certain return to the operator. The higher cost of building the expansion and operating the pipeline means that the tolls have to be higher, ultimately, for the users of that pipeline. Cost increases have to be passed on, at least partly, to the users. It increases the cost that oil producers have to pay to use the pipeline, and that probably leads to situations such as the one you mentioned.

[Greg McLean, Conservative, Calgary Centre, AB]

That would lead towards what we call the economic idiocy of making our oil and gas production more expensive in Canada vis-à-vis the oil it displaces around the world. Would you agree?

[Yves Giroux]

Well, the higher cost of building a pipeline means that in order to guarantee a certain return to the owner, it has to lead to higher tolls, other things being equal.

[Greg McLean, Conservative, Calgary Centre, AB]

I have a final question here, Mr. Giroux.

Do you think there's any connection between an emissions cap and the value of the pipeline at the end of the day?

[Yves Giroux]

Ultimately, yes, because—

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you.

[The Chair, Liberal, George Chahal]

We'll now go to Mr. Schiefke for the next six minutes.

Go ahead, Mr. Schiefke. The floor is yours.

[Peter Schiefke, Liberal, Vaudreuil—Soulanges, QC]

Thank you very much, Mr. Chair.

Thank you very much for appearing before the committee this morning.

Mr. Giroux, the “Trans Mountain Pipeline - 2024 Report” stated, “Whether the Government records a profit or a loss on the eventual sale of the Trans Mountain Pipeline system will depend on what someone is willing to pay for it.”

The Minister of Finance, when she was here before committee, indicated that she's “confident” that the $34 billion invested in the pipeline can be returned to Canadians. Given the more optimistic current value of $33.4 billion that your office attributed to the pipeline, can you expand on some of the current factors that could potentially lead to a higher rate of return on the eventual sale of the pipeline?

[Yves Giroux]

For example, if an eventual buyer deems that the 8% discount rate that is used by CDEV, the corporation that owns the pipeline, is too high and that we're to assume a lower discount rate, then the value of the pipeline goes up.

Similarly, if a willing buyer has a cost of capital that is lower than others, then it could see additional value in buying the pipeline.

By the same token, if the government decides to incite or incentivize certain indigenous groups to be partners in a minority stake or even in a greater share of ownership, then a participant, a willing buyer, could see additional value in partnering with indigenous groups and first nations.

These are all examples of factors that could incentivize people to buy the pipeline at a value that is higher than the present value of future flows suggests.

[Peter Schiefke, Liberal, Vaudreuil—Soulanges, QC]

Thank you.

It was assessed that TMX will generate $92.3 billion in direct and indirect economic benefits to Canada and Canadians over the next 10 years. However, your report didn't look at all the impacts. You didn't consider the profits generated by the pipeline while it is owned by our government. You didn't include the federal tax revenues from the project.

Why did you choose to exclude those benefits from your report?

[Yves Giroux]

In our view, any buyer would probably take a selfish interest in buying the pipeline. It presumably wouldn't factor in benefits other than to shareholders if it were to buy the pipeline, assuming it's a private sector entity or a non-resident entity, as could happen with foreign purchasers. The buyer wouldn't be concerned about the broader benefits, the economic activity and so on. It would very likely look at the returns on its investment. That's why we looked at the same things that a private sector buyer would look at.

[Peter Schiefke, Liberal, Vaudreuil—Soulanges, QC]

Thank you.

Obviously, the economic benefits for Canadians and the province of Alberta are enormous; $92 billion is a lot of economic activity.

Above and beyond, if the Government of Canada was able to sell it for the costs associated with building it and putting it in place, would this project have significant economic benefits for Canadians?

[Yves Giroux]

I think, without a doubt, that there would be broader benefits. There are already benefits because the pipeline is in operation. As one of your colleagues indicated, the discount at which WCS sells has been reduced, so Canadian oil producers can fetch a better price, presumably, than without the expansion itself.

[Peter Schiefke, Liberal, Vaudreuil—Soulanges, QC]

Thank you, Mr. Giroux. I have one last question for you.

When you consider all of the benefits from the pipeline—the profits while the Government of Canada holds the pipeline, the federal tax revenues, the benefits for the province of Alberta and the broader economic benefits, as well as the sale—do you think the Government of Canada will lose money on this project if you look at the entire picture?

[Yves Giroux]

It's hard to say that with certainty. It depends a lot on the price at which the government does sell the pipeline.

[The Chair, Liberal, George Chahal]

Thank you.

We'll now go to Monsieur Simard for six minutes.

Monsieur Simard, the floor is yours.

[Mario Simard, Bloc, Jonquière, QC]

Thank you, Mr. Chair.

Mr. Giroux, thank you for coming; I appreciate it.

You started by saying that the analysis doesn't include previously incurred costs, which correspond to the purchase price plus interest.

How much are those costs?