Climate policy could lower TMX pipeline value

Yet government purchase viewed as net positive

OTTAWA • The Trans Mountain pipeline has increased in value since it was nationalized in mid-2018, but that could begin to decline if global oil demand tapers off, a new report says.

A study by the Parliamentary Budget Officer (PBO) on Tuesday estimates the “net present value” of the existing oil pipeline has increased by $ 600 million to $ 5 billion. The government under Prime Minster Justin Trudeau purchased the pipeline for $ 4.4 billion in the summer of 2018, after previous owner Kinder Morgan threatened to shelve the project. It is expected to cost another $ 12.6 billion to expand Trans Mountain, according to the company’s most recent estimates.

However, the PBO said on Tuesday the value of the project is “highly contingent on the climate policy stance of the federal government,” which could in turn limit pipeline usage.

In its recent long- term outlook for oil demand, the Canada Energy Regulator considered one scenario in which current climate change policies remain in place, and another where more stringent efforts to limit greenhouse gas emissions are enforced. Under current policies, the Canadian oil industry would require 90 per cent of its expected pipeline capacity in 2040 to meet demand. But that would fall to 75 per cent under tighter climate policies, which would in turn crimp cash flows for Trans Mountain.

“Consistent with modelling from the Canada Energy Regulator ( CER), if policy action on climate change continues to become more stringent, it is possible for the Trans Mountain assets to have a negative net present value,” the report said.

The profitability of Trans Mountain represents a wider debate in Canada and elsewhere over the role of fossil fuels in the economy. The Trudeau government has long claimed that voters need not choose between the natural resources industry and the environment, and has sought to introduce policies that could straddle both sides of the debate.

Global oil demand is expected to continue growing for many years, according to the International Energy Agency, as the adoption of electric vehicles has yet to make a dent in the international vehicle fleet. Some observers also point out that a shift to EVS would only heighten electricity demand, which would likely need to be filled by other hydrocarbons like natural gas.

But a sharper shift toward emissions reduction policies, like pledges to reach net- zero emissions by 2050, could bring about peak demand sooner than current estimates, the IEA says.

Pipeline companies generate cash flows based on how much capacity they utilize, similar to tolls on roadways. The majority of that pipeline capacity is typically taken up via long- term contracts, but the remaining volume, known as spot capacity, is apportioned based on shorter-term demand.

“There is uncertainty around how much of the remaining 20 per cent capacity of the expanded pipeline system will be used,” the PBO said in its Tuesday report. “The tolls charged for this ‘ spot’ capacity are higher than for the committed contracts, but shippers have no obligation to use it.”

Still, the PBO said the decision by the Trudeau government to purchase the asset remains positive on the basis of future cash flows.

The report found the decision in 2018 to “acquire, expand, operate, and eventually divest of the Trans Mountain assets continues to have been profitable for the federal government, given the current climate policy framework."

The Liberal government re- approved Trans Mountain for expansion in 2019, subject to 156 conditions. It is expected to come into service in December 2022.

Expanding Trans Mountain would nearly triple capacity on the 1,150- kilometre line leading from northern Alberta to Burnaby, British Columbia, up to 890,000 barrels per day.