With no financial benefits from Trans Mountain, it’s time to press the pause button on the expansion

18 March 2020


Even the $500 million a year in tax revenue Trudeau promises is fabricated

Canadians know Finance Minister Morneau paid way too much for Trans Mountain’s 67-year old pipeline and the company’s been losing money ever since Ottawa took over. We were also misinformed about the cost to expand it.

Two years ago Ottawa said the expansion came with a $7.4 billion price tag, while Finance always knew the project’s cost would be much higher. After promising for more than two years to come clean on the project’s likely cost, Trans Mountain finally admitted last month the budget has skyrocketed to $13.2 billion.

The press statement said the project budget increased to $12.6 billion, but when you read it, it becomes apparent the crown corporation is being cagey. There’s a $600 million contingency reserve which is part of the cost tally. Finance Minister Morneau knows this. Last month in Calgary, speaking to the Economic Club of Canada he said Trans Mountain’s “new estimate of construction costs (is)...$13.2 billion which includes contingencies and reserves.”

A $13.2 billion project cost might not be a problem if Trans Mountain could pass the increased cost on in the tolls it charges oil companies for capacity on the system. According to Trans Mountain’s contract with oil companies, it could have done just that. The problem is, it didn’t.

Trans Mountain is passing on to oil companies only about 25 percent of the increased project cost. The $4.4 billion cost that isn’t being passed on will be paid by Trans Mountain, which means—well—us. Add that to the $3.4 billion in toll subsidies for the existing line and big oil has been given a $7.8 billion toll subsidy no one in Ottawa wants to talk about.

There are no profits from the existing line, taxpayers are on the hook for a growing share of the spiraling capital cost, but what about the additional corporate tax revenue of over $500 million a year Trudeau promised would be invested in Canada’s ‘clean energy transition? That’s false too.

That $500 million a year figure began propagating last June when Trudeau approved Trans Mountain’s expansion for a second time. Then, last October, the Liberals’ election platform incorporated the $500-million projection, and Morneau re-iterated the figure right after his party won its minority mandate. In Calgary last month Morneau said, “Canada will be using the revenues we get from this project, from additional taxes estimated at about $500 million a year…to fund Canada’s transition to a cleaner economy.”

For months Ottawa refused to explain where it got the number. Morneau finally confirmed the source by letter. He wrote, “The Finance Canada estimate is based on a study referenced by the Conference Board of Canada which estimated the Project will raise oil producer profits revenues by $73 billion over 20 years.”

The study in question was undertaken five years ago by Kinder Morgan’s Texas-based consultant, Neil Earnest of Muse Stancil.

Now that we know where Ottawa got its profit/revenue projection from, it is relatively straightforward to show that the $500-million tax-revenue estimate is nonsense.

First of all, it’s important to see that the figure does not represent additional tax revenue expected from Trans Mountain, as implied by Trudeau’s, the Liberal Platform and Morneau’s public statements. It represents additional tax revenue expected to come from tar sands producers such as Suncor, Cenovus, Husky, and Canadian Natural Resources.

Ottawa concludes that Earnest’s prediction of $73 billion in producer revenue over twenty years will flow through producers’ financial statements as pure profit (and why Morneau says that “the Project will raise oil producer profit revenues”). After deducting royalties, Morneau explains, Finance estimates 15 percent of that profit/revenues will flow to the federal treasury as tax revenue. That’s how the $500 million a year in additional corporate tax revenue figure is derived.

We don’t have to determine if Finance’s transformation of revenues to pure profit is appropriate—which, by the way it isn’t. If Earnest’s producer revenue prediction is without merit, then so too is Finance’s tax revenue estimate based on it. So, let’s review the Earnest study.

In 2015, Earnest projected Alberta’s benchmark heavy crude Western Canadian Select (WCS) would trade at about $63 US a barrel in 2019. As things turned out, the 2019 price averaged $45 US meaning Earnest’s short run price projection error is 40 percent off the mark. What’s more, Earnest has the price for WCS increasing by even more each year, all the way out to 2038.

Another assumption in the study is that it predicts Western Canadian oil supply would expand by three million barrels a day between 2015 and 2038. As Earnest prepared the supply forecast, tar sands producers were busy cancelling the projects that could have provided this increased supply. Market conditions and global warming realities tell us those planned projects are never coming back.

If seriously missing the mark on future price and supply isn’t enough to discredit Earnest’s producer revenue lift, there’s more. The revenue increase to producers is not just because he estimates an increase in price of oil for the 540 thousand barrels a day shipped on the pipeline. The producer revenue increase Earnest postulates is based on a price increase for every barrel supplied in Western Canada. So, for example, Earnest applies the price lift to 4.8 million barrels a day for the first full year of Trans Mountain’s operation, not 540 thousand.

Not only are the supply and price projections in Earnest’s study egregiously overstated, a per barrel price lift because of Trans Mountain’s expansion is applied to every barrel supplied, even if those barrels are used as feedstock in refineries in Alberta, the US mid-west or the Gulf Coast. This is a serious error. Earnest’s study models a market reality that does not exist.

Even if those errors weren’t enough to completely negate the notion of enhanced producer revenues from Trans Mountain’s expansion, Trans Mountain’s mounting capital costs most certainly would be.

Earnest arrived at his producer-revenue projection by first subtracting estimated Trans Mountain toll rates—that is, the fees levied on producers to pay the cost of expanding the pipeline. Earnest’s toll estimate is based on a project cost of $5.4 billion while the expansion’s expected cost is now $13.2 billion. Even considering that only 25 percent of the cost beyond $7.4 billion will be passed on in toll rates, toll rates are at least $2.50 per barrel more than those Earnest used.

What we find is that the toll increase arising from the construction-cost increase is higher than the per barrel price lift Earnest calculated. This means that even if there were a potential for improved producer revenues because of Trans Mountain’s expansion—which there is not—it disappears. Transportation costs eat them up, along with any potential tax revenues. Ottawa’s claim of an additional $500 million a year in corporate tax revenue once Trans Mountain is operational is fabricated.

The likelihood of any financial benefits from Trans Mountain’s purchase and expansion disappeared before COVID-19 hit, stock markets crashed, and the Oil Petroleum Exporting Countries (OPEC) embarked on a price war with Russia.

Recent events mean it is only a matter of time before we hear that one, or more, of the oil producers Trans Mountain is counting on to pay a portion of the project’s cost have gone under, taking their long term contracts with them. As Trans Mountain’s shippers go under, taxpayers will pick up even more of the cost of building the expansion than we are already on the hook for.

Ottawa must stop misleading the public with false promises of financial benefits that have no basis in economic fact or market reality. It’s time to press the pause button on Trans Mountain’s expansion.