As fiscal concerns mount for Trans Mountain Expansion pipeline, Canada should take note
When the private sector won’t bear construction costs for an oil pipeline, making public loans or guarantees is risky
Key Takeaways:
Using public money to underwrite oil pipelines could exacerbate Canada’s public debt. The Trans Mountain Pipeline Expansion’s track record of high costs and government bailouts is a red flag.
The direct funding Canada provided for TMX totals $35.6 billion—roughly $1.4 billion more than typically reported. The indirect financial subsidies raise government exposure to over $40 billion.
More than $25 billion of the funding is ineligible for recovery via proposed shipping tolls. Canada’s ability to recoup the remainder of the investment is limited by toll-setting issues. Taxpayers will likely take a large hit.
Vigorous scrutiny of the impact of TMX—and any new publicly subsidized oil pipeline proposals—on Canada’s fiscal condition is needed and should consider China’s likely weakening oil demand.
Today, as some private interests and public officials call for government funding to construct more pipelines across Canada to enhance oil exports, it is worth taking a closer look at the financial quagmire of the Trans Mountain Expansion pipeline (TMX). The project has already been bailed out by the Canadian government once but still faces significant economic hurdles, according to the latest report from the Institute for Energy Economics and Financial Analysis (IEEFA).
Construction costs and government financial support have escalated significantly since 2018, when the Canadian government first purchased the financially troubled pipeline. The project benefited from an influx of additional government cash just last year to pay off its private loans.
In total, the Canadian government has provided $35.6 billion of direct funding to the pipeline project—which is roughly $1.4 billion more than typically reported. When taking into account indirect financial subsidies, total government exposure rises to over $40 billion.
The chances for recouping public funds that have been sunk into the TMX are slim. The high cost of the pipeline—which runs from Edmonton, Alberta, to Burnaby, British Columbia—has put enormous pressure on the pipeline toll-setting process, resulting in strenuous objections from the pipeline’s shippers. More than $25 billion of the funding provided is ineligible for recovery via proposed shipper tolls. Meanwhile, the oil market is increasingly beset by uncertainties that pose risks to TMX’s long-term profit margin.
“Oil infrastructure development, once seen as a financial boon, is beset by rising costs and lower price trends,” said Mark Kalegha, IEEFA energy finance analyst and co-author of the report. “As the Canadian government experiences pressure to pay industry infrastructure costs from public coffers, it’s time to step back and take a hard look at the energy questions Canada faces.”
A rigorous analysis is needed and should include a realistic examination of the potential consequences for Canadian national debt of a massive, taxpayer-subsidized pipeline buildout. The lessons of the Transmountain project should be learned—not forgotten—and the missteps should not be repeated.
