Federal government faces potential loss if Trans Mountain pipeline sold: budget watchdog

The federal government may face a financial loss from the sale of the Trans Mountain pipeline, as its current estimated value falls below its construction cost, according to the Parliamentary Budget Office (PBO).

The pipeline’s value is projected to range between $29.6 billion and $33.4 billion, depending on future developments after the initial 20-year contracts end, the PBO stated in its updated financial assessment.

However, the cost of building the pipeline, which became operational in May, was $34.2 billion—far exceeding the initial $7.4 billion estimate made in 2017.

The PBO's estimate does not include sunk costs, such as the $4.5 billion the federal government paid to acquire the project in 2018, or earlier capital expenditures.

The potential outcome for the government, whether a profit or loss, depends largely on the sale price, which hinges on various factors. The PBO noted that the potential sale price would be influenced by the number of buyers, their ability to raise capital, the timing and method of the sale, market conditions, and whether the transaction would be at arm’s length.

If sold within the PBO's estimated range, the government would face a loss. According to Trans Mountain Corp.’s year-end financials as of December 31, 2023, the corporation had $35.2 billion in assets, $26.9 billion in liabilities, and $8.3 billion in shareholder equity.

"If the Trans Mountain Pipeline system was sold in 2024 at either of the present values calculated by PBO, after repaying outstanding liabilities, the remaining amount would be less than the shareholder's equity. TMC would have to write off the balance of the equity and record a loss," the report stated.

The PBO’s valuation ranges include a higher estimate if the current contracts are extended after 20 years and a lower estimate if the pipeline shifts to a cost-of-service model. It also highlighted potential spare capacity in the pipeline by the early 2040s, depending on climate action and other factors, according to projections by the Canada Energy Regulator.

The Trans Mountain pipeline, which transports crude oil from Alberta to the British Columbia coast, was expanded to triple the original capacity, now allowing for 890,000 barrels per day to be shipped. This expansion has alleviated transportation bottlenecks, enabling Canadian oil production to break records and boosting GDP for both Alberta and Canada this year.

The federal government has expressed its intention not to retain long-term ownership of the pipeline and has initiated a two-phase divestment plan. The first phase involves discussions with over 120 Indigenous nations along the pipeline’s route to gauge interest in an equity stake. The second phase, with an unspecified timeline, will focus on considering commercial offers.

However, a potential sale is complicated by ongoing disputes between Trans Mountain Corp. and oil companies over the tolls to be charged for pipeline use. Trans Mountain has proposed higher tolls to help cover the project’s cost overruns, but oil companies argue that they should not be responsible for construction-related expenses.

The Canada Energy Regulator is expected to hold an oral hearing on this tolling dispute next spring. Critics warn that if the regulator decides that oil companies should not bear the majority of the cost overruns, taxpayers may ultimately shoulder the burden.