Evidence of meeting #114 for Natural Resources in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was report.
A video is available from Parliament.
Jason Stanton Advisor and Analyst, Office of the Parliamentary Budget Officer
The sunk costs include the purchase price of $4.5 billion plus the additional $34.2 billion in terms of the construction costs. Those are the things that are considered sunk, and those are captured when we look at the overall balance sheet. Those are reflected there.
Bloc
Mario Simard Bloc Jonquière, QC
Understood.
The government will never recover that money. Is that correct?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
The government could recover at least a good chunk of it through the sale of the pipeline, but they're already considered sunk costs because the assets cannot be easily transferred. It's not cash; rather, it is an asset in the ground, so it's not easily transferable.
Bloc
Mario Simard Bloc Jonquière, QC
Right, I understand.
As for getting the money back on the purchase price, you're saying that it's still rather difficult to determine whether the government will manage to do that, because it depends on a number of factors.
The first thing that comes to mind is the context. The context that the government is trying to put forward is the reduction of hydrocarbons through the cap on emissions. My colleague Mr. McLean asked you a question about that earlier.
Consequently, if we consider the context, the rhetoric is inconsistent. On the one hand, they're suggesting, as the Minister of Finance did during her appearance before the committee, that the pipeline is a good thing and that it could be profitable, because it could be sold, allowing the government to recover its investment. She said that. On the other hand, they're putting a cap on emissions to reduce oil and gas production.
I don't want to nag you, since you aren't the commissioner of the environment. However, in your opinion, are the two views irreconcilable?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
As some MPs—yourself included—have mentioned, this could certainly be seen as contradictory. On the one hand, there's a desire to cap emissions from the oil and gas sector and commit to a net-zero economy by 2050—some countries are aiming for 2060. On the other hand, we're told that a pipeline will facilitate the export of petroleum products and increase the price at which producers can sell them. All that's based on the expectation that a profit will be made on the sale of this pipeline. So a lot of things can be seen as contradictory.
This leads us to believe that the sale price will probably result in a financial loss for the government, given the context and environment in which the future purchaser of the pipeline will have to operate. In that environment, emissions from the oil and gas sector will be limited for entirely desirable public policy reasons—that's what the government wants. So it cannot simultaneously be said that the pipeline will have significant value. It does, but it may not be as high as expected.
Bloc
Mario Simard Bloc Jonquière, QC
I don't want to make you say anything you don't want to say, but I'd like you to consider the following analysis.
I'm not a businessman, but I understand a very basic business concept called risk management. This means that a company doesn't usually invest capital in a risky project on which it might lose money.
If I look at your first report, I get the impression that no private company would have been prepared to assume all those risks to develop that pipeline infrastructure. The government did, and I don't see why a company would decide, in the future, to assume all the risks at a cost of $34 billion, knowing that new technologies may come along and make us less dependent on oil over the next 40 years, at the very least.
Is that a plausible analysis, in your opinion?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It's plausible and consistent with what we've seen to date.
Kinder Morgan didn't want to expand the pipeline. The government bought it for that reason. Now, according to our analysis of the costs, which have gone up, if we look solely at the financial transactions, it's likely that the government will lose money on this project. That's why there's a discount rate of about 8%, set by the Crown corporation that owns the pipeline. So your analysis is quite plausible.
However, it's also possible that a buyer feels the risks are much lower than our analysis indicates and decides to purchase it at a price that would satisfy the government.
Liberal
The Chair Liberal George Chahal
Thank you.
We'll now go to Ms. Blaney.
Welcome to the committee. You have six minutes.
Rachel Blaney NDP North Island—Powell River, BC
Thank you, Chair.
I thank the witnesses for being here today.
Mr. Giroux, I enjoy spending time with you. We did a lot of work on the “marriage after 60” report, so I have a great amount of respect for your work and that of your team.
However, I am a little disappointed with this report. It obscures for me a lot more than it actually reveals, and it muddies the water of an already difficult issue.
My question is about why you changed the fundamental methodology from a net present value to a present value. By removing the net and focusing on only the present value, you consider only revenues moving forward. Canadians really want answers for how they'll be paid back for the immense taxpayer load sunk into this project. It feels like you erased the cost of the purchase in building the pipeline.
Are you assuming that Minister Freeland will simply erase the debt load?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
No. In fact, we didn't go for a net present value because it would have had to also assume future costs of construction. Now that the construction is over and the pipeline is in operation, the costs to acquire and expand the pipeline are known, so we can rely on historical factors. Given that the pipeline is in operation, some of these costs can start to be amortized as part of the ongoing operations.
That's why we decided to go with what we thought was more appropriate in a future flows analysis. It's what an acquirer could expect to get in future revenues from the pipeline. They can do the simple calculation of looking at what is on the books in terms of assets and liabilities because it's known how much the pipeline cost to acquire and to expand.
We don't need to do a net present value of these costs because they're in the past, and some of these have already started to be written off, as I said, or amortized over the expected lifetime of the pipeline.
It's not at all a judgment that anything will be erased from the books or written off.
NDP
Rachel Blaney NDP North Island—Powell River, BC
Thank you for that, but we have to acknowledge that what we're seeing right now is basically the set-up of a shell company through the Trans Mountain financials, which makes it really easy, in my opinion, for the government to simply erase the debt. The Export Development Act allows a minister to simply order the debt disappeared.
Is this what you were factoring in when deciding to let go of the net present value analysis? Poof—the debt is gone. My concern is that the project will still lose money.
I know you talked about it really being the price a buyer is willing to pay, but it feels like it's now muddier and harder for Canadians to understand what that will actually look like for them in terms of the taxpayer money they have invested.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It's true that the ownership structure, through subsidiaries of Crown corporations and other subsidiaries, looks a bit more complex than one would expect. I think the reason for going with that ownership structure is to facilitate the sale to a private sector potential owner or potential bidders.
It doesn't mean that we.... At least, we don't anticipate any debt to be erased, written off or forgone by the Government of Canada. I think the ownership structure is clearly intended to facilitate an eventual transaction.
NDP
Rachel Blaney NDP North Island—Powell River, BC
I feel very strongly that your scenarios are not only highly optimistic but that they also pretend the climate crisis isn't real.
You assume that after 20 years, the contracts will just be renewed. Kinder Morgan, in the original toll methodology, clearly said they wouldn't go beyond a 20-year period because there was simply too much risk.
Would you agree that the world will be in a very dire situation if this pipeline continues to pump out bitumen at full volume for the next 40 years?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It's quite possible that their tolling system will be different in 20 years. We mentioned in the report that the two scenarios we have are only two scenarios. They're not the upper and lower bounds of the present value of the future income streams. There could be many alternative scenarios, depending on what happens with oil production in the oil sands sector and depending on future policy choices of the Government of Canada.
These are not meant to be the upper and lower bounds. There could be other scenarios happening. I'm there with you; depending on what happens with climate policy, the value could be slightly or significantly different.
NDP
Rachel Blaney NDP North Island—Powell River, BC
In your testimony, you talked a lot about what the buyer is willing to pay and about analyzing risk. We see the climate change impacts right now and this growing pressure to change and move forward with a greener opportunity. In that context, how was that assessed in your report in terms of looking through this lens of having something that's actually going to make money for a period of time?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We don't include various scenarios as to what happens to Canadian oil production. We looked at the Canadian Energy Regulator's scenarios for oil production in the country and we based it on that.
It's quite possible that lower oil production would lead to significantly different scenarios for pipeline utilization, but given how the tolling framework currently works, even if it were to be lower utilization, it would mean—given that tolling systems guarantee a certain level of return—that tolling would just go higher to ensure there's a minimum return to the pipeline operator.
There are a lot of moving targets, and for that reason it's very difficult to assess exactly how much a buyer would be willing to put up. It depends on their view of longer-term climate policies in Canada and the importance, or not, put on the oil sands sector in Canada. Various actors and potential buyers will have different perspectives as to the future direction of the oil and gas sector in the country and climate policies.
Liberal
The Chair Liberal George Chahal
Thank you, Mr. Giroux.
We'll now go to Mr. McLean for the next round.
Mr. McLean, you have five minutes.
Conservative
Greg McLean Conservative Calgary Centre, AB
Thank you, Mr. Chair.
Mr. Giroux, further to our last questions, there's no serious forecaster in the world who looks at energy production and sees a decrease in the amount of oil produced in the world in the next few years. There's no serious forecaster or western democracy who doesn't see Canada's contribution to that oil as being fundamental for world security and for greenhouse gas emissions because we have very good social outcomes and very good environmental outcomes.
Therefore, the main risk that I see in your analysis is the risk brought on by government, including what they announced two weeks ago about looking at cutting production from Canada. That's going to be a risk not just to the value of this project but also to energy security around the world and to environmental outcomes around the world.
Are you free to comment?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
As I said before in response to Ms. Blaney's question, what potential buyers see as the future direction of government policies with respect to oil and gas production and environmental standards and so on will affect their willingness to pay a certain amount for the pipeline.
On the issue of broader energy security worldwide, I don't think I'm the best person to comment on that, as it depends on a lot of factors.
Conservative
Greg McLean Conservative Calgary Centre, AB
Thank you.
With regard to the cost to capital, the one thing that's going to affect the cost to capital here, of course, is the uncertainty that this government's going to visit upon a buyer or that suddenly the status quo will change, as it does repeatedly with this government and its policies towards the oil and gas industry. Therefore, any buyer is going to require a guarantee that the ground isn't going to shift beneath their feet. That guarantee is going to have to be given by this government, which is going to be a cost.
Further to that, there are two parts to tolls. There's the fixed part of tolls and there's the variable part of tolls. If we oil production in Canada reduced by one million barrels a day, that fixed part of the tolls would be shared among a smaller number of barrels. Therefore, that fixed cost would go up and that would impact Canadian economic activity.
Have you calculated how much that would reduce Canadian economic activity?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
No, we have not looked at the broader impacts on Canadian economic activity of different oil-producing scenarios. We have looked at the potential value of the pipeline operations, acquisition and potential sale, but not the broader economic impacts under various different scenarios of oil and gas production in the country.
Conservative
Greg McLean Conservative Calgary Centre, AB
Thank you.
For the pipeline itself, I'm going to drill into some numbers here.
When the government bought this pipeline, it was supposed to cost $7.4 billion for the expansion when it was under Kinder Morgan. In 2020, you estimated that was up to $12.6 billion because it was suddenly more expensive. In 2022, your number was $21.4 billion, and now that number, as it turns out, is $34.2 billion. It's increased by a factor of five times, so this is a significant increase.
If you look at a comparable pipeline, you see that the CGL up in northern B.C. went up by almost a factor of two, not five. You can talk about engineering, but that was a new pipeline and a new route.
I think Canadians want to know, Mr. Giroux, where the money went.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's a very interesting question. We didn't do an audit of what happened in the construction phase and whether the funds were well spent or whether there would have been better ways to proceed with the expansion. That is a mission more appropriate for an auditor or an auditor general to look at. It's not within my mandate to look at that type of mission.
Conservative
Greg McLean Conservative Calgary Centre, AB
Thank you.
Would you recommend a cost analysis of the $27 billion of excess spending from the Government of Canada to produce a necessary pipeline to get our most important resource egressed to markets? Would you think that's something that should bear some auditing at the government level?