Remember that leaky pipeline you bought from a bunch of Texans in 2018?
You know the one. The pipeline with big expansion plans that were supposed to cost $7.4 billion? But once you bought it, the costs soared to $21.4 billion and counting?
Ring a bell yet?
Prime Minister Justin Trudeau, of course, promised it would make huge profits and that Canadians would all get rich and fight climate change at the same time by shipping bitumen to China.
That’s right, you got it — the Trans Mountain pipeline.
Anyway, you own the sucker, lock, stock and barrel, with the federal government paying $4.5 billion to Kinder Morgan for the privilege.
Have I got news for you — and it’s not great news. So sit down and grab a drink, which Health Canada says is not good for you either. Just saying.
I’m sorry to report this, but Robyn Allan, a crackerjack of an economist with the gift of candour, has just reviewed the state of your investment.
For six months she pored through documents and sifted through the numbers to put together a hard-nosed 32-page report for taxpayers.
Allan, the former CEO of ICBC, did so because the government is not releasing much information on its totally bad investment. To be honest, taxpayers haven’t been paying much attention either.
In a world run by cockwobbles, it’s easy to get distracted by all kinds of tomfoolery.
Here’s what she found in the report released by West Coast Environmental Law: the $21.4-billion expansion megaproject, intended to carry more bitumen from the oilsands to Burnaby, is not profitable. Or viable. And never will be.
You invested in a dead turkey. A good-for-nothing dud.
It gets worse. Not even the existing pipeline is making money. It must borrow to pay interest on its loans.
There are two baked-in reasons why the pipeline will never make taxpayers big bucks, or any bucks, says Allan.
The first has to do with pipeline tolls, the fees charged shippers. The way the Canadian Energy Regulator sets tolls now for the existing pipeline is different than the way they will be determined for both pipelines once the expansion starts operating.
Right now, oil shippers pay a toll to move their bitumen and other products through the old line based largely on the cost of providing the service.
The tolls were set pretty low because the existing pipeline is only valued at $1 billion. (That’s right, you paid $3 billion for an old pipeline worth $1 billion, plus another $1.5 billion for work on the partially completed expansion.)
But when you, the taxpayer, bought the rusty pipe and its big expansion plans at a higher price, the regulator decided the tolls shouldn’t change to cover the “the fees incurred by the GOC [Government of Canada]; interest expense, principal repayment and administrative fees on the purchase of Trans Mountain.”
Incredible, eh? The regulator didn’t think it would be fair to have Big Oil pay tolls based on the cost of its own pipeline. Honest, that’s a fact.
“That would not be appropriate,” said the regulator. It’s on page 14 of Allan’s report.
The whole boondoggle gets uglier. So you might want to take another drink now, and remember what Health Canada says about that kind of behaviour.
Here it is: the shippers signed a smart deal for the expanded pipeline that says shippers will only have to pay 22 per cent of the actual cost of overruns beyond the original $7.4-billion budget. (These guys are slick and that’s why they are rich and we are taxpayers.)
There have been, of course, no end of overruns and the budget is now $21.4 billion. It has no effective cost controls and you the taxpayer, are liable, at this point, for 78 per cent of the overruns. Congratulations.
The other reason the pipeline expansion will never make a nickel for the good people of Canada boils down to cost.
Trans Mountain, just like the Site C dam, celebrates the Iron Law of megaprojects. This law states that these crazy engineering schemes go over budget, take longer than planned and deliver fewer benefits than promised over and over again.
Back in 2013 even the Texans (Kinder Morgan) reckoned that their proposed $5.4-billion expansion wouldn’t be viable or profitable if it cost more to operate than the tolls would cover, says Allan. They even told the regulator that.
When costs for the expansion project rose to $7.4 billion by 2017 Kinder Morgan knew its contracts meant it would begin to bear more than three-quarters of every dollar in increased cost. At that point the viability of the project started to erode faster than the unstable banks of the Peace River.
And so when the cost rose above $9.3 billion in 2018, the Texans could see their pockets being picked. That’s why they sold the unprofitable mess to the gullible Trudeau government. Then they blamed everything on those damned environmentalists. Good ol’ Texans.
Now your pocket is being picked. There is no way in hell that the pipeline expansion will ever make enough money to pay off the $17 billion borrowed from you, the taxpayers, to cover its ballooning costs.
The good news is that you don’t have to worry about getting rich as Trudeau promised. The bad news is that you can kiss $17 billion worth of tax dollars goodbye.
Actually, it will be much more than that, calculates Allan.
If project costs exceed $21.4 billion — and that’s likely — you’re on the hook for it. Ottawa just unconditionally guaranteed a new $10-billion loan from a number of Canadian banks.
Some federal sleight of hand explains why you are in the dark about this, adds Allan.
She checked the books (remember she’s been analyzing this project for 10 years). And one set of books — for TMC — says Trans Mountain is making money.
But that money comes from another company set up by the government called TMP Finance. It owns TMC, has its own set of books and no employees. And it’s losing money.
TMP Finance gets all its money from the Canada Account, a fancy fund mostly supported by taxpayers.
How nifty is that: TMC can say it is profitable while TMP Finance posts the project’s losses.
Now here’s something you need to know to understand all this — the principle of “unlevered discounted cash flow analysis.”
An unlevered discount cash flow analysis tells you how much cash will be generated over a certain time frame and whether or not there is enough to pay all the monthly bills.
But it excludes the important stuff like paying debt and interest.
Yet that’s what every taxpayer wants to know: will the project generate a surplus and pay back the interest and debt?
But the analyses the government cites to justify continuing with are based on unlevered discounted cash flow analysis and don’t include the cost of interest or repaying the massive debt.
“Most people don’t realize what an unlevered discounted cash flow is,” Allan said in an interview.
Now you do. The unlevered bit means the project won’t be paying taxpayers any of their money back.
Allan, of course, isn’t the only one parsing the rotten economics.
The Office of the Parliamentary Budget Officer did its own analysis on Trans Mountain this year.
At a cost of $21.4 billion, with a rate of return of 7.8 per cent over 40 years, it calculated that the project actually had a negative net value of $600 million.
No such candour has come from Finance Minister Chrystia Freeland, says Allan, and that’s another problem.
Freeland claims that two big Canadian banks, TD and BMO, recently did a cash flow analysis that shows the pipeline will probably be commercially viable — over a 100-year timeframe, that is. (Both banks, by the way, loaned money to the project.)
That means taxpayers might have to live a century or more to see a return on a pipeline that could well be a battered iron carcass thanks to the floods and flames of climate change.
And taxpayers can’t see these rosy bank reports for “confidentiality” reasons.
Allan thinks that’s wrong and that the timeframe for a return on investment is laughable, stupid and wildly misleading.
“Relying on a 100-year time horizon is professionally irresponsible,” Allan writes.
I told you the news wasn’t good. The government has misled you. And you have lost a bundle. You now own an unlevered boondoggle.
And here’s the sad part. You never did invest in a commercially viable project. And now you are about to owe to the tune of at least $17 billion dollars.
Without so much as a squeak, Trudeau has arranged a massive transfer of wealth from ordinary Canadians struggling with inflation to a bunch of rich oil companies making obscene profits.
Allan has a simple solution and she’s said it before: cancel the expansion, unless Big Oil wants to pay for it.
“As long as they don’t pay, they are in good shape and getting a free ride,” she told The Tyee.
There is nothing like subsidizing the oily rich and a business designed to bring on biblical weather to make a taxpayer’s day.
And one more thing: you best cancel those retirement plans.
Teaser photo credit: By William Chen – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=62555725