Canada's Trans Mountain sale faces uncertain value, with cost overruns and toll disputes at play
The sale of the Trans Mountain pipeline could lead to substantial taxpayer losses, as the Parliamentary Budget Officer (PBO) estimates its value falls short of its asset total.
According to BNN Bloomberg, the PBO values the pipeline between $29.6bn and $33.4bn, depending on assumptions about contract renewals post-20 years.
Yet, its assets are currently valued at $35.2bn, with liabilities of $26.9bn and shareholder equity at $8.3bn as of December 2023. A sale at these estimated values would not cover the government’s equity, leading to a potential shortfall.
PBO analyst Jason Stanton explained that after repaying liabilities, any remaining amount would be insufficient to cover the shareholder's equity, forcing Trans Mountain Corp. to “write off the balance of the equity and record a loss.”
This shortfall could range from $1.8bn to $5.6bn, with this estimate based on a best-case scenario, noted Tom Gunton, a resource and environmental management professor at Simon Fraser University.
Gunton expressed doubts about the pipeline’s ability to reach full capacity and noted that the PBO’s smaller discount rate is more optimistic than what buyers might use.
Under more conservative assumptions, such as 80 percent capacity use and a higher discount rate, losses could increase to $15.2bn.
This aligns with Gunton’s own September estimates, which projected losses between $8.7bn and $18.8bn under “more realistic” assumptions.
Finance Minister Chrystia Freeland recently stated confidence in securing a “good deal” on the pipeline, aiming to cover public spending on the project.
However, the PBO emphasized that the final sale price depends on market conditions, potential buyer interest, financing costs, and the transaction structure.
The difference in PBO’s headline values of $29.2bn versus $33.4bn stems from two scenarios: the lower figure reflects a shift to a cost-of-service model after 20 years, while the higher figure assumes contract renewals.
However, the PBO warned that scenarios by the Canada Energy Regulator indicate the pipeline could have spare capacity by the 2040s, depending on climate policies.
Originally estimated to cost $7.4bn in 2017, the Trans Mountain expansion, completed in May 2024, reached a final price of $34.2bn.
The expansion tripled the pipeline’s capacity, adding 590,000 barrels per day, which has alleviated transportation bottlenecks and spurred record Canadian oil production.
Economists project a positive GDP impact for both Alberta and Canada.
The government, while seeking to exit ownership, has initiated a two-phase divestment. Phase one involves discussions with over 120 Indigenous nations along the pipeline route to explore potential equity stakes.
Phase two, yet to be scheduled, will open consideration to commercial offers.
However, a dispute over tolls complicates the sale. Trans Mountain Corp. seeks to raise tolls to offset project cost overruns, a proposal opposed by oil companies unwilling to bear these costs.
The Canada Energy Regulator will hold a hearing on the tolling issue next spring. Observers suggest that if the CER sides with the oil industry, taxpayers could be responsible for the overruns.
