Canada's government negotiated a price to buy the controversial Trans Mountain Pipeline at the higher end of estimates, while further delays in the expansion project would reduce the final price that the federal government can obtain when it re-sells it, Canada's Parliamentary Budget Officer (PBO) said in a report on Thursday.
The Trans Mountain expansion has become one of the most controversial pipeline projects in North America as it pitted two provinces-Alberta and British Columbia-against each other. Alberta's heavy oil producers need more pipeline capacity as their production grows, but pipeline capacity has stayed the same. British Columbia, however, is against any new oil pipelines. The fierce opposition in British Columbia has forced Kinder Morgan to reconsider its commitment to expand the Trans Mountain pipeline, and to sell the project to the Canadian government in August 2018.
Canada bought Trans Mountain Pipeline (TMP), the Trans Mountain Expansion Project (TMEP), and related assets for US$3.35 billion (C$4.4 billion), while PBO estimates that the TMP and TMEP have a value of between US$2.74 billion (C$3.6 billion) and US$3.5 billion (C$4.6 billion), assuming that the pipeline is built on time and on budget. PBO's valuation could be understated, if all related assets are included, the watchdog for Canada's public finances noted.
Yet, PBO underlined that "One significant finding of this study is that delays in pipeline construction, an increase in construction costs and/or changes in the risk profile of the TMEP (reflected by the discount rate) can negatively influence the final sale price that the Government can negotiate for the TMP, TMEP and related assets."
The PBO calculates that completing the project one year behind schedule would reduce the value of the TMEP by US$528 million (C$693 million), while a 10-percent rise in construction costs would lower its value by US$345 million (C$453 million).
As it stands, the Trans Mountain expansion project faces an uphill battle with environmentalists and appeals at courts to be completed "on time and on budget."
In August, a Federal Court of Appeal quashed the federal government's approval of the project, saying that the National Energy Board's (NEB) review was fraught with flaws that made it unsuitable as a basis for the government's approval. The following month, Canada's federal government instructed the NEB to review the project again, this time also taking into account the impact of the expected higher oil tanker traffic off the British Columbia coast.
"As of January 2019, construction activities on the TMEP continue to be suspended, pending the NEB's reconsideration of the project in light of the FCA's ruling. The Government directed the NEB to complete the reconsideration process and its resulting report by February 22, 2019," PBO said on Thursday.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More
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