Natural Resources Committee on Nov. 18th, 2024

[Rachel Blaney, NDP, North Island—Powell River, BC]

Thank you, Chair. I'm going to watch for nods too now.

One thing I find very frustrating about a lot of this is that information is very fragmented. One part is looked at. If you don't look at the whole context, it makes things hard. I understand that as time moves on, risks and things change, but that fragmentation is a bit frustrating, I think, for me and many Canadians.

We know there's a recent report from the International Institute for Sustainable Development. It shows that allowing the current discounted toll rate could amount to a subsidy of $8.7 billion to $18.8 billion.

Have you looked into the toll discounts being given to the oil companies and compared what that might look like for a purchaser?

[Yves Giroux]

No. We looked at the current tolling framework, which, in my understanding, assumes a certain minimum rate of return for the pipeline owner and operator. I haven't looked at the potential subsidy.

[Rachel Blaney, NDP, North Island—Powell River, BC]

We know oil companies often complain that they're already paying too much when they're only being charged less than half of the full cost. For a company to buy this project and make their money back, they have to charge in the neighbourhood of dollars per barrel. This would have a serious impact on the scenario of high utilization of the pipeline.

Do you think that's the case?

[Yves Giroux]

I'm not sure. Right now, it seems to be that the pipeline is in operation and is being used to a large extent. Given the contracts in place right now, we have assumed that the utilization rate will be close to full capacity for the next 15 to 20 years. The big unknown is what happens after these long-term contracts expire in 15 to 20 years.

[Rachel Blaney, NDP, North Island—Powell River, BC]

Knowing that risk, how are you assessing that in the report itself?

Again, I'm going to come back to that general idea that Canadians want to know that the money they have invested is going to be paid back to them. We know that it depends on what the business is willing to pay, but how are these things being quantified? What kinds of risks do you feel that Canada is taking through this process?

[Yves Giroux]

This risk is being quantified by using a discount rate of about 8%—the same as CDEV—and by having one potential scenario in which the long-term contracts are not renewed for the same percentage of the capacity of the pipeline and where a greater proportion is on the spot market.

However, as I said, there could be multiple other scenarios. Who knows what will happen in 15 to 20 years? There could be a much lower proportion of long-term contracts for the utilization and a much larger proportion on the spot market. That's inherently difficult to quantify.

[The Chair, Liberal, George Chahal]

Thank you, Mr. Giroux.

We'll now go to Mr. Patzer.

You have five minutes.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Thank very much.

I want to just say thank you for coming and for doing this report. It was definitely illuminating, to say the least.

When we had the Minister of Finance here, she gave a statement. It was something along the lines that she hopes we're going to sell it for more than the $34 billion it took to build it.

Given the report that you've written, that's not very likely, is it?

[Yves Giroux]

As I said, we don't think that's the price that a willing buyer would be willing to pay for the pipeline. It doesn't mean that nobody will be willing to pay more than what we estimate. It depends on their perspective of the future direction of Canadian environmental policy, oil production and their cost of capital, for example, and whether they partner with other groups, such as indigenous groups, which could make it more desirable. Some may see it as less desirable if such conditions were imposed. There are a lot of variables that come into play.

Based on numbers and the discount rate that CDEV is using, we don't think the government will make a profit by selling this pipeline, but we could be proven wrong.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Do you think the government was using numbers that were different from what you had available to you as part of the study that would have possibly given them the ability to say that?

[Yves Giroux]

One of the important factors in assessing the value of the pipeline for prospective buyers is the discount rate. We used the same one as the government is using, so that's a big factor.

One of the others is the future tolling framework, and I don't know that there is any change that's been announced or that's in the pipeline. Maybe the government has information as to interest that has been expressed to them from prospective buyers who are very interested, but we're not aware of any such discussions or of prospective buyers having indicated an interest. By and large, the government would be using the same numbers as we are using.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

When you look at how we got to where we are today, the original proponent was going to build this project, and I wouldn't say it was a lack of interest on their part. I think what happened—and they've made it pretty clearly known—was a lack of political will and regulatory certainty. They already had the approval in place, and then the goalposts kept moving repeatedly. Those delays and the lack of clarity and certainty by the government are what ultimately chased them away, which then forced the government to step in and buy this this pipeline.

A prospective buyer is probably going to want to buy it for as little as possible to maximize their revenue. That is just good business sense on their part. We're here to defend the taxpayers' dollar at the end of it, and we're looking at what the government has spent on it.

When you look at government regulation—again, it prevented the proponent from building—and then you look at the pancaking of these new regulations, like the emissions cap, the fuel regulations that they're imposing and the way the carbon tax is being piled in on top of things, as a proponent, why...?

Where is the future going to be for these guys if they're going to spend that kind of money on a project, yet this is what's happening? How does the government expect to get full value when they're pretty much literally shooting themselves in the foot here—shooting the taxpayer in the foot—by imposing all these policies on people? That has to be a painful pill for a prospective buyer to swallow.

[Yves Giroux]

That's a very good point.

The government is currently in a situation of owning an asset whose value is determined in part by the government's own policies on oil and gas production, and on the environment. The point you raised is very valid. That's probably why the government is interested in selling. It doesn't want to be judge and party at the same time. It owns a big asset, but it regulates in a way that affects, quite directly, its value. A prospective buyer would have to consider that. The environment in which it evolves determines the value of that asset.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Thank you.

[The Chair, Liberal, George Chahal]

Thank you, Mr. Giroux.

Before I go to our next speaker, I have a follow-up question for you.

It looks like a cost-benefit analysis was not done by you, because you're not looking at the benefits for federal-provincial coffers. In this case, significant dollars will benefit the Province of Alberta, as well as its municipalities.

Why did you not undertake a full cost-benefit analysis of the entire project, regarding its benefit to Canadians?

I have a question to follow up on that one.

Economist Trevor Tombe was here. He suggested that the government could profit between $4 billion and $8 billion from the sale of the pipeline. There's a real discrepancy between what he said about his analysis and what you provided today. Could you provide some comment on that?

[Yves Giroux]

Sure.

Generally speaking, we don't do cost-benefit analyses because although the costs or the revenue streams of different measures are usually measurable, the benefits can be much more diffuse and harder to measure, in many instances. That's not to say they cannot be measured, but it's more difficult. By “more difficult”, I mean it's more subjective.

Furthermore, if we were to do a cost-benefit analysis, it would more squarely put us in the camp of being seen as determining or pronouncing on whether government policies are good or bad, which could put governments in awkward situations. Ultimately, cost-benefit analyses are the resort of legislators in your role of voting on legislation. We provide you with information on the costs, and sometimes the revenues. However, the cost-benefit analysis is better done by the government itself, I think.

With respect to alternative valuations, it's hard to criticize or comment on other people's assessments when I haven't looked at exactly how they are done. However, I know that people sometimes assess a lifespan of more than 40 years, so that increases the value of a pipeline. Given that it's very hard to figure out what oil demand will be in 40 years, going beyond 40 years is even more risky. As you go further out, there are additional revenues, but revenues in 60 or 70 years are of little added value when you're looking at an asset now.

There could be other benefits, as you and some of your colleagues have mentioned, which would increase the value of such a policy move by the Government of Canada. However, they are not relevant for a private sector buyer.

[The Chair, Liberal, George Chahal]

Thank you for the clarification.

I'll now go to Mr. Jowhari.

Mr. Jowhari, go ahead. You have five minutes.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you, Mr. Chair, and once again welcome, Mr. Giroux and your team here.

First of all, thank you very much for making the time to meet with us during the constituency week. I had more than five minutes to ask a lot of questions, and you were kind enough to provide the answers.

A lot of questions that I was going to ask have been asked by my colleagues, but I want to go back to table 3. Specifically, when we had the conversation, you talked about three elements. You talked about the pipeline utilization. You talked about the toll. You talked about the discount rate, and you did a sensitivity analysis, plus or minus 2.5%, across the board.

As I was looking at the table, I realized that if we increase the pipeline utilization under a contract renewal and under a present value calculation of 40 years, if it goes up by 2.5%, if the toll goes up by about 2.5%—which is from 11.4¢ to about 11.6¢—and if the discount rate actually comes down by 0.5%, then we are into, roughly, about $4 billion, whether it's sold at $33 billion or whether somebody buys it at $29 billion. Just from an asset point of view, we've made money, forgetting about the economic benefit of $250 billion a year to the Province of Alberta and all the other job benefits downstream.

One of the areas that really piqued my interest was the discount rate. Having a management consulting background, I know that usually the discount rate is higher when there are more risks associated with the project. The risks include the cost, the timeline and many other factors. When you did the calculation, you talked about the fact that you used 8%, and that was the CDEV rate. When you look at those risks, in your opinion, has the risk been dramatically reduced now that we are in the position that we are?

The pipeline has been completed. We see that utilization going up. Do you see a scenario in which all of these risks should put us in a position to be able to use a lower discount rate, which by default increases the value?

[Yves Giroux]

If you look at the situation in 2018 compared to now, the risks have significantly gone down because the pipeline has been expanded; it's in operation. These types of risks related to the construction and the operation of the pipeline have gone down significantly. Oil is flowing, so from that perspective, risks have gone down, which suggests a lower discount rate.

The risks that remain relate to future oil demand, which could be affected by the demand on the world markets, the price at which Canadian oil can be sold compared to cheaper alternatives—if that were the case—and whether or not policies, not just in Canada but globally, will affect oil demand. That's why there is still an element of risk.

The question of whether a lower discount rate should be used is a very valid question, and I'm sure that various proponents or potential buyers could see a different discount rate being applied, be it higher or lower. That's why, this being subjective and a value judgment, we decided to use CDEV. They benefit from the expertise of owning and operating the pipeline indirectly and also of having a good window as to the potential market and government policies, as does each and every one of us.

We could have gone for a lower, or maybe higher, discount rate, recognizing that it is a value judgment. That's why we have the sensitivity analysis in our report. Others can have a different perspective on the proper discount rate to use, and they can look at the sensitivity analysis that we performed to use a slightly different discount rate.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you.

Both the minister and the CEO of TMX came and said that we were going to be a smart buyer—

[The Chair, Liberal, George Chahal]

Mr. Jowhari, you're out of time.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you very much.

[The Chair, Liberal, George Chahal]

Thank you.

We'll now go to Mr. Falk.

Mr. Falk, you have five minutes.

[Ted Falk, Conservative, Provencher, MB]

Thank you, Mr. Chair.

Thank you, Mr. Giroux and Mr. Stanton, for your attendance here today and for the information in the report you've provided.

I want to clarify a few things.

The initial cost of purchasing the TMX was $4.5 billion and the construction cost was $34.2 billion, for a total of $38.7 billion or $39 billion. What is the likelihood of the Government of Canada recovering that cost on a sale?

[Yves Giroux]

Based on the assessment we did on the two scenarios, we don't think it is the most likely outcome that the government will recover all the money it has spent acquiring and expanding the Trans Mountain pipeline.