Trudeau Paid ‘Sticker Price’ for Pipeline, Budget Watchdog Says

(Bloomberg) -- Canada’s government purchased Kinder Morgan Inc.’s Trans Mountain pipeline at the higher range of its valuation, according to the nation’s budget watchdog.

The Parliamentary Budget Office, in a report published Thursday in Ottawa, estimated that the 710-mile pipeline and proposed expansion had a combined value of between C$3.6 billion ($2.7 billion) and C$4.6 billion. It warned, however, that regulatory delays could further erode the value of the project.

Justin Trudeau’s government bought the pipeline last year for C$4.4 billion as Kinder Morgan threatened to abandon the expansion project. The purchase price also included related assets, like terminals, that the budget watchdog didn’t include in its valuation, because it considered their value to be almost entirely tied to whether the expansion is completed or not.

“If it was a car, we’d say they paid sticker price,’’ Parliamentary Budget Officer Yves Giroux said. If there is a delay that raises the cost and reduces potential revenues, he said it would then be “quite clear to us the government will have overpaid.’’

The watchdog estimated that baseline total construction costs for the expansion will be C$9.3 billion. Regulatory and political hurdles, however, hurt the value of the project. A one-year delay in construction completion would reduce the value by about C$700 million, the PBO projects.

Construction Timeline

Kinder Morgan, when the sale was finalized to the government, estimated an in-service date of Dec. 31, 2021. But a court ruling in August sent the government back to the drawing board on the project. The PBO used that date as its baseline, but there’s ample downside risk to the construction timeline, meaning most signs point to added costs from construction, Giroux said.

Canadian oil producers have been coping with a roller-coaster of prices -- the benchmark rate for heavy Alberta crude plummeted late last year. Building the pipeline could shrink the difference between benchmark U.S. West Texas Intermediate prices and the lower Canadian price, the PBO said.

A $5 increase in the Canadian price would lead to a 0.1 percent increase in real gross domestic product and a 0.3 percent increase in nominal GDP, the budget watchdog estimated. That would raise GDP by C$6 billion, the PBO projected.

The current pipeline -- not the controversial expansion project -- is valued between C$1.8 billion and C$2.8 billion, the PBO said.

The budget watchdog was granted access to confidential government financial figures related to the project, but didn’t publish those in its analysis, which is based on publicly available numbers.

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