16 fair questions for Trans Mountain’s AGM: an economic update

It has been a busy few months in the ongoing Trans Mountain saga.

As the world economy sputtered due to disruptions caused by COVID-19, major changes started to emerge that make it clear that the post-pandemic world will not look like the pre-pandemic world.

Trans Mountain is not immune to these changes. The International Energy Agency (IEA) observed that demand for oil experienced an unprecedented drop due to COVID-19. International oil majors like Shell and BP stated that they do not expect a full recovery.

Indeed, in April, global oil futures traded below $0 and while oil prices have rebounded somewhat, they are still nowhere near the $80 per barrel assumed in Trans Mountain’s economic evidence before the National Energy Board.

Those same oil price assumptions were adopted in a report which informed Canada’s purchase of the Trans Mountain system after Kinder Morgan decided to walk away from the project in 2018. It is worth noting that the author of both Kinder Morgan’s report and Canada’s pre-purchase assessment was the same guy: Neil Earnest of Texas based Oil and Gas consultants Muse Stancil.

While construction inched forward at various points along the route, some challenges have caused further delays. For example, in Secwepemc territory, the drilling under the Thompson River hit a snag and will have to be re-started.

In the meantime, the Canadian Energy Regulator (the CER, formerly the NEB) continues through the specific route hearings (where they can change the final route based on statements of opposition); while also making decisions that will impact the Coldwater Indian Band and Sema:th First Nation.

In addition, the CER has opened a comment period for landowners within 300 m of the Burnaby Terminal regarding Trans Mountain's plans for night work. Landowners will have till December 1 to comment.

Source: WTI Crude Oil Prices - 10 Year Daily Chart (emphasis added)

Morneau’s legacy

Former Finance Minister Bill Morneau was a central architect of the $4.5 billion Trans Mountain expansion (TMX) bailout in 2018. Morneau stated publicly that he believed that TMX was in Canada’s economic interest, and then proceeded to negotiate a $1 billion overpayment for the Trans Mountain system and expansion, according to analysis by the Parliamentary Budget Office.

Since then, the construction cost of the project has skyrocketed to $12.6 billion (and counting), while court cases have delayed construction. Morneau was frequently criticized for misleading statements and the general lack of transparency related to TMX finances, so when he suddenly resigned from his role in August, Trans Mountain almost immediately became Morneau’s primary (and most costly) legacy.

Newly minted Finance Minister Chrystia Freeland inherits a troubled project that continues to face construction delays, deep opposition, and ongoing changes in the financial sector.

Major financial institutions continue to flee the oil sands and its related infrastructure, like TMX. In the summer of 2019, major international insurers Talanx, Munich Re, and Zurich all dropped Trans Mountain as a customer. This trend is expected to continue, as the insurance sector – a cornerstone of financial markets – simply cannot afford to deny the climate crisis as they are already paying for it. Former governor of the Bank of Canada, and current United Nations Special Envoy on Climate Action and Finance Mark Carney are attempting to transform the financial sector by providing better tools to assess climate risk.

It’s time for an updated Public Cost-Benefit Analysis of Trans Mountain

With these changes to the world and oil markets in mind, and time remaining to save billions of dollars, over 100 economists sent an open letter to Minister Freeland, Prime Minister Trudeau and other cabinet ministers urging them to pause TMX spending and engage in an independent benefit-cost analysis. The letter says:

At the same time that oil markets are weakening, and the private sector is cutting investment, your government is increasing investments in the oil sector by continuing construction of the Trans Mountain Expansion Project (TMX). The cost of the project has more than doubled to $12.6 billion and the tolls approved by the Canadian Energy Regulator have not been adjusted to cover this higher capital cost. The taxpayer will therefore end up subsidizing a large proportion of the cost overruns. Meanwhile, other private sector companies such as Enbridge are completing major pipeline expansions that will meet the future transportation needs of the Canadian oil sector without government subsidies.

The letter’s 100+ signatories included Simon Fraser University’s Resource and Environmental Planning director Thomas Gunton, University of Ottawa’s Canada 150 Research Chair in Climate Economics, Innovation and Policy, Carolyn Fischer, and David Wheeler, the former chair of Business and Sustainability at York University. These three wrote a further op-ed published in the Globe and Mail stating:

Surprisingly, the government has never provided a public cost-benefit analysis of Trans Mountain to justify its investment of taxpayer funds, even though this project is among the largest single public investments that it has made. […] as former Bank of Canada governor Mark Carney and others have warned, continuing to build fossil-fuel capacity in a world transitioning to a low-carbon economy will only create stranded assets that threaten global financial stability.

The lack of an updated and public cost-benefit analysis of TMX means that public dollars are being spent based on out-of-date forecasts and data that have not aged well and are now at risk of becoming a stranded asset.

Fortunately, David Hughes, an expert on energy resources in Canada and the US who worked with the Geological Survey of Canada, published a new report based on updated forecasts from the IEA, the Alberta Energy Regulator, and the Canadian Association of Petroleum Producers. Hughes also considered expansions and optimizations of existing pipelines, as well as Canada’s 2020 emissions report and Alberta’s 2020 Oil Sands Emissions Limit Act, concluding:

  1. Updated production forecasts can be easily accommodated for the next decade with existing pipelines, without TMX or the Keystone XL pipeline (KXL).
  2. The claim that producers will be able to access higher oil prices in Asia is a myth, with producers regularly selling at a discount in Asia, not a premium. (which we have also written about)
  3. After transportation costs are taken into account, Hughes calculates a loss of US$4-6 per barrel sold to Asia compared to the US.
  4. Emissions from the oil and gas sector alone are on track to exceed Canada’s emission reduction target in 2050 by 81 per cent, even with Alberta’s 100Mt cap on emissions.

Source: Reassessment of Need for the Trans Mountain Pipeline Expansion Project

Unsurprisingly, Alberta’s beleaguered Energy War Room did not enjoy the Hughes’ report, and published a rebuttal. David Hughes’ reply can be found here.

As more and more economic experts cast doubt on the need for the project, and with so many competing priorities for government funds during a global pandemic, many are asking – isn’t it time to pull the plug on TMX?

16 fair questions about TMX for the upcoming AGM

I have travelled to Kinder Morgan’s Annual Meeting on three occasions to speak about TMX. I won’t be sad if I never attend another Kinder Morgan annual meeting in my lifetime. However, I do miss the regular financial updates that Kinder Morgan made available under securities law.

What is astonishing to me is that reliable, up-to-date and credible financial information is less available to the public, now that the Trans Mountain Corporation (TMC) is publicly owned.

TMC is one of several Trans Mountain Crown Corporations housed under the Canadian Development Investment Corporation (CDEV), and CDEV’s interim and annual reports are the only source of public information on Trans Mountain.

When I learned that CDEV’s Annual Public Meeting was coming up on November 17th to be broadcast on its website, I was ready. This is an important opportunity for Canadians to demand answers about how public money is being spent on the project, and about the financial risks we face as taxpayers.

West Coast Environmental Law Association submitted the following fair questions to CDEV on November 3, 2020. Please pardon the jargon.

  1. Please provide an updated construction cost estimate, since the last $12.6 billion estimate was made public before the COVID-19 pandemic. If an updated estimate is not possible, please provide a timeline for future cost updates.
  2. Is the ‘in-service’ date still December 2022?
  3. What are the cost implications of construction delays resulting from the original planned in service date of 2017 Q4?
  4. The Minister of Finance has repeatedly stated that the Trans Mountain pipeline system would be built and operated on a commercial basis. How will TMC recover the full cost of construction (including overruns) when the current tolls are based on a $7.4 billion construction cost?
  5. What would TMC’s annual revenue be if the company obtained approval for tolls to cover the estimated $12.6 billion costs versus the current tolls based on the $7.4 billion cost?
  6. Why has TMC not requested a toll increase to cover the higher capital costs?
  7. What assumptions is TMC making for the volume of spot shipments per year and what risk assessment has TMC done of spot shipments? [spot shipments are the per-use shipments usually paid at a one-time rate, as compared to contracted shipments. Spot shipments are more sensitive to oil price changes]
  8. When do the shippers’ contracts expire (what years) and what assumptions is TMC making regarding the renewal of these long-term contracts in their financial analysis?
  9. Has TMC assessed the impact of the Enbridge Mainline converting to long term contracts on the volumes to be shipped on TMX? If so, what are those impacts?
  10. What are TMC assumptions regarding the destination and type of oil shipments in its financial forecasts?
  11. What tolls are TMC assuming for shipments by destination and type of oil during the first year of operations? Please provide contract and spot shipment tolls.
  12. In the 2019 CDEV Annual Report, TMC states at p.51 that it completed a number of alternative financial scenarios to test alternative assumptions to determine if an impairment charge is warranted. Please provide the financial analysis, assumptions and results as described below and the net present value estimates for each scenario. Does the analysis show that the net present value of the TMX is higher than the government investment (including purchase of assets and construction of TMX) under all scenarios tested?
  13. Please provide an up to date forecast of the supply and demand for Western Canadian Sedimentary Basin (WCSB) pipeline space over the next 15 years.
  14. Have you done an analysis of the costs to Canada in terms of lost corporate income taxes and costs to other pipeline operators of redundant capacity created on other WCSB pipelines (eg. Enbridge) resulting from construction of TMX?
  15. What liability insurance does TMX hold for oil spills and how does this compare to the estimated worst case spill cost scenario and the amount required by the CER in their conditions attached to approval of TMX?
  16. The Union of BC Indian Chiefs has conducted research and identified approximately 400 Specific Claims by First Nations related to the original pipeline route. The expansion project will likely result in additional Specific Claims. Has TMC done any analysis of potential liabilities related to historic and future Specific Claims along the pipeline route? If so, please provide the total number of claims and the dollar value they represent.

Will Trans Mountain answer these questions? Tune in to the CDEV Annual Public Meeting on November 17th to find out!

[UPDATE: We received a response from CDEV on November 18th regarding some of the questions that we submitted  however, most of the questions were not answered publicly during the AGM.]

Eugene Kung - Staff Lawyer