March 9, 2022 (IEEFA) – Three years and an estimated $17.3 billion* into the controversial Trans Mountain pipeline expansion (TMX) project, the Canadian government has declared that no more national tax dollars will be used to complete it. A new report by the Institute for Energy Economics and Financial Analysis (IEEFA), however, finds that additional cost overruns cannot be financed without government backing.
In the wake of a disclosure that project costs have soared by 70% in just two years, Canadian Finance Minister Chrystia Freeland pledged no more public funding would be invested in the troubled pipeline. The government promises to rely on banks and public debt markets to raise the estimated $8.8 billion that would be necessary to complete the project. IEEFA’s analysis concludes the no-more-tax-dollars pledge is a promise the government can’t keep.
“Finance Minister Freeland’s assertion that Canada will invest no more public money in TMX is grossly misleading to the public. Any new money poured into the pipeline will be backed by the Canadian taxpayer,” said Tom Sanzillo, IEEFA’s director of financial analysis. “Private money cannot be raised without a government guarantee.”
The Canadian government took possession of the partially built, financially distressed Trans Mountain pipeline from energy infrastructure company Kinder Morgan (KM) in June 2018. To support the desire of Canadian oil producers to reduce the costs of oil transport for export, the government overpaid for the asset and effectively signed a blank check to complete construction.
“Kinder Morgan quit the project because it was a bad bet for investors,“ Sanzillo explained. “On its own, this project is not profitable. No amount of fiscal gimmickry can hide the fact that Canadian taxpayers must stand behind another estimated $8.8 billion. Investors won’t finance it without a guarantee.”
“We have carefully reviewed the Trans Mountain project’s balance sheet,” said Omar Mawji, IEEFA’s energy finance analyst for Canada. “The project is unbankable. To make a go of it, TMX would need to hike shipping tolls by 100%, raising the price of Canadian oil way beyond the level it needs to compete in the global market. Without substantial governmental support, the pipeline is unsustainable.”
Now, Canadian taxpayers face steep losses unless the government can make good on its promise to sell the pipeline for more than it paid to buy it and ultimately, to build it. IEEFA’s report finds that scenario improbable.
The report finds:
“From the start, the Canadian government has not been forthcoming with the details of this project,” Sanzillo said.
(*NB: All dollar amounts are in Canadian dollars. The construction costs cited by IEEFA were reported by the government of Canada and TMX but have not been verified by an independent third party).
Tom Sanzillo ([email protected]) is IEEFA’s director of financial analysis.
Omar Mawji ([email protected]) is IEEFA’s energy finance analyst, Canada.
Media contact: Vivienne Heston ([email protected]) tel: +1 (914) 439-8921
The Institute for Energy Economics and Financial Analysis (IEEFA) explores issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.