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.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I think it's certainly worth exploring. That is something that this committee might well wish to look at, given the billions of dollars at stake.
Conservative
Greg McLean Conservative Calgary Centre, AB
Thank you very much.
The whole thing we're looking at here.... Let's look at the lack of connection between the value of this pipeline, if you will, which is predicated upon a supply of oil getting to market or getting to tidewater, and then two weeks ago, two ministers came out saying that we're effectively going to be cutting Canadian production by a million barrels a day.
I'll quote Michael Belenkie—
Liberal
The Chair Liberal George Chahal
Mr. McLean, your time is up for your question. You can maybe ask in the next round.
Liberal
The Chair Liberal George Chahal
You can in the next round. You'll have another opportunity, or somebody on your team will. Thank you.
I'll now go to Ms. Lapointe for five minutes.
November 18th, 2024 / 11:35 a.m.
Liberal
Viviane LaPointe Liberal Sudbury, ON
Thank you, Chair.
The report highlights potential anticipated revenues from the expanded pipeline.
Can you elaborate on how the projected increase in revenue from expanded export capacity can contribute to Canada's overall economic growth, especially in terms of benefiting the broader Canadian economy while the government holds the project?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We didn't specifically look at the economic benefits of this expansion, but in previous reports we looked at what it would mean to have the Canadian oil. We looked at Western Canada Select and getting a better price for that commodity. We didn't look at expanding production or anything like that, but what it could do to the price that producers can get if more markets were available for WCS, as we call it.
We estimated, I think in 2018, that a $5 increase in the price of Canadian oil—so the discount being smaller—would lead to $6 billion of additional benefits for the Canadian economy. That was in 2018, so one can assume that it's increased since then, and we have not updated that number. Assuming that it's still the same number and the government is taking about 15% as usual, the federal government benefits to the tune of about 15% on economic activity, generally speaking, so at $6 billion, right there, if you do simple math, it's about a billion dollars more in federal tax revenues if that was the reduction in the discount at which Canadian oil sells.
Just from the federal government's perspective, there are significant amounts of money in additional tax revenue each and every year that the pipeline is in operation.
Liberal
Viviane LaPointe Liberal Sudbury, ON
In considering fluctuating global energy prices and increasing competitiveness in the energy market, your report, as I understand it, covers two potential scenarios. Can you elaborate on the considerations the report touches on regarding future market conditions that might impact the profitability of the pipeline?
Advisor and Analyst, Office of the Parliamentary Budget Officer
For the purpose of the report, we assumed two different scenarios, given that there is uncertainty in terms of what's going to happen. I think, as Mr. Giroux said, there is a lot of uncertainty after the initial 20 years of the contract, so the two different scenarios represent two possible scenarios but not a full outlook in terms of what could potentially happen.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
To complement Jason's point, we didn't look at market conditions per se; we just looked at two scenarios for the pipeline, because market conditions could vary due to the oil production level. It could also vary if there was another way of transporting Canadian oil.
We saw with the U.S. elections that Keystone XL could be back on the drawing board or could become a possibility. Even in the absence of changes in oil production levels, that could affect the profitability or the utilization rate of TMX.
Liberal
Viviane LaPointe Liberal Sudbury, ON
Are you able to comment on energy security and how that can contribute to national security and national economic resilience?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It's hard for me to comment on that, because we didn't look at the energy picture as a whole and energy security as a whole when we looked at one pipeline.
Liberal
Viviane LaPointe Liberal Sudbury, ON
You ended the report by saying, “a profit or a loss on the eventual sale of the Trans Mountain Pipeline system will depend on...a wide range of factors”. Can you expand on the variables you listed and can you tell us what the factors would need to look like for a profit scenario?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Sure. There could be a scenario in which, for example, a prospective buyer believes that the discount rate, the value it attaches to flows of money in the future, is higher than what CDEV, the Crown corporation that currently owns the pipeline, puts on these future flows. CDEV discounts these future flows at a rate of 8%. A prospective buyer could say, “No, it's too high. We think that a dollar next year is not to be discounted by 8% but by 6% or 5%”, and then that would increase the value that a buyer attaches to buying the pipeline.
Similarly, there could be buyers with lower costs of capital. We can think about Crown corporations or state entities from other countries that decide to buy. If they can't finance themselves at very low rates, they could say it's worth buying because their cost of capital is quite low.
These are two examples of factors that could make such a sale profitable for the Government of Canada.
Liberal
The Chair Liberal George Chahal
Thank you, Mr. Giroux.
We'll now go to Mr. Simard.
Mr. Simard, you have two and a half minutes.
Bloc
Mario Simard Bloc Jonquière, QC
Mr. Giroux, I'm going to ask you a question that you might consider annoying.
I'd like you to speak plainly, like I do when I ask my parents over the phone whether they need help updating their computer. I have to keep my explanations very short and simple.
How much are the sunk costs? The $4 billion used to purchase the pipeline is money that will never be recovered.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We call them sunk costs because they're amounts invested in immovable assets. We purchased an old pipeline that was already in operation at a cost of $4.5 billion and undertook its expansion. Consequently, that pipeline was essentially doubled in length to increase capacity. That cost $34 billion, plus a few million more. If we add those amounts together, it's $38 billion plus a few hundred million dollars. Those amounts were invested to acquire an asset and double or significantly increase that asset's capacity. Such assets cannot be easily transferred elsewhere. Simply speaking, it's essentially a giant steel hose snaking through the Rocky Mountains. That steel hose transports oil along a well-defined route.
Bloc
Mario Simard Bloc Jonquière, QC
In short, if I tell my parents that, collectively, we've lost $4 billion, that would be pretty accurate.
That's what I'd like to hear you say.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It depends on how much the pipeline sells for.
Bloc
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It'd be a bit lower, because profits have already been paid to the Crown corporation. The old line has been transporting oil for some time, and the new line has been operational since May 1. Therefore, it's been making money for several years.
Bloc
Mario Simard Bloc Jonquière, QC
Understood.
Earlier, my colleague Mr. McLean, whom I quite like, but with whom I rarely agree, said that there was no scenario for reducing oil production. And yet, there is, such as the scenario put forward by the Intergovernmental Panel on Climate Change, or IPCC, according to which limiting global warming to 1.5° implies a 62% reduction by 2050. If no carbon sequestration or capture strategy is applied, that figure rises to 70%.
I find it quite strange that the government, through its environment minister, is saying that it wants to hit the IPCC's targets, but that, at the same time, infrastructure is making us dependent on oil, if we want it to be profitable for the next 40 years.
If that's the case, in my opinion, the chances of that infrastructure being profitable are very low if you hit the targets, and high if you don't hit any of them.
Liberal
The Chair Liberal George Chahal
Mr. Simard, unfortunately, your time is up. I apologize. I didn't want to cut you off in mid-sentence.
Bloc
Mario Simard Bloc Jonquière, QC
I'd like to point out that Mr. Giroux was nodding. I believe he's confirming my statement.
Liberal
The Chair Liberal George Chahal
You'll have an opportunity to get a response in your next round of questioning.
Ms. Blaney, you have two and a half minutes. The floor is yours.