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A Canadian government-owned energy company is defending paying over $32 million to a controversial global consulting firm to help it save money on the Trans Mountain pipeline expansion project, which was already billions of dollars over budget.

U.S.-based McKinsey & Company won the hefty contract — singled out in a recent federal audit — without any competition in October 2022. A spokesperson for the Trans Mountain company told The Narwhal it paid McKinsey the money to reduce costs and improve productivity.

McKinsey accepted the contract despite also doing consulting work for at least three oil companies that pay tolls to ship fuels on Trans Mountain infrastructure and are currently involved in a legal dispute with the pipeline operator over its proposal to increase rates.

The cost of the Trans Mountain pipeline expansion project — which ballooned from $5.4 billion to $34 billion between 2013 and 2024 — has generated significant criticism. Environmental groups have framed the project as a massive subsidy for the fossil fuel industry that runs counter to Canada’s international climate change goals and commitments.

Meanwhile, a group of oil companies have demanded more information about the escalating costs and objected to proposed toll increases meant to cover some of the overruns. 

If producers don’t pay substantially higher tolls to use the pipeline, it could leave Canadian taxpayers holding the bag — for as much as $18.8 billion, according to recent research by the Winnipeg-based International Institute for Sustainable Development.

Suncor, Cenovus and Canadian Natural Resources Limited are among the companies protesting the prospect of higher tolls. All three are on a list of McKinsey clients disclosed by the firm in unrelated court proceedings in the U.S. None responded to The Narwhal’s requests for comment.

Negar Haghighat, a consultant who advises clients about ethics and governance, said she believes Trans Mountain should have sought advice from another firm to avoid any appearance of a conflict of interest.

“There’s no reason why [McKinsey consultants] were the only option to help them with their cost reduction efforts and ideas,” she told The Narwhal in an interview. “They could have easily gone to someone who didn’t have any conflicts, perceived or otherwise.”

She added that it wasn’t a sound business practice to award the contract without any competition.

“Whether you’re buying printer paper or whether you’re looking at a multimillion-dollar consulting agreement, one way or another, you don’t want it to go out without a proper evaluation of who could do the best job for the best price,” she said.

Auditor General said Trans Mountain skipped open competition with McKinsey contract

Trans Mountain’s 2022 contract with McKinsey was among hundreds of millions of dollars worth of deals between Canada and the consulting firm that came under scrutiny in a June federal audit, which noted how public servants often failed to screen for conflicts of interest. The audit also questioned whether some of the contracts were actually needed or delivered value for money.

Canada’s auditor general said Trans Mountain skipped an open competition on the contract without clear justification, contrary to its own procurement policies.

A McKinsey spokesperson said the firm has a policy of disclosing conflicts of interest, but did not directly answer when asked if the company had disclosed any conflicts prior to accepting the Trans Mountain contract. 

“McKinsey & Company, consistent with our policies, proactively discloses both perceived and actual conflicts and follows strict protocols and have these policies to ensure we have followed the law,” spokesperson Alley Adams told The Narwhal in an email. The consulting firm previously told The Narwhal it disclosed conflicts in relation to another contract highlighted in the audit — $1.35 million to give the federal government advice about clean technology policies. That contract was awarded by the Canada Development Investment Corporation, a Crown corporation that owns Trans Mountain.

“With respect to your other questions, we would direct you to Trans Mountain for further comment,” McKinsey said about the pipeline consulting contract.

Trans Mountain declined to comment on whether McKinsey disclosed any potential conflicts or whether it was aware the firm was also representing fossil fuel clients disputing its proposed toll increases.

“Trans Mountain cannot comment on McKinsey business,” its email reply to The Narwhal said. “Please reach out to McKinsey directly for questions.”

In regards to its own staff, the pipeline operator said it was unaware of conflicts between any Trans Mountain director or officer and McKinsey.

But Trans Mountain said it agreed with the auditor general’s recommendation that it needed to improve its procurement policies to proactively search for potential conflicts.

Trans Mountain said McKinsey helped save hundreds of millions of dollars

The Canadian government purchased the existing Trans Mountain pipeline and other assets from Texas-based energy company Kinder Morgan for $4.5 billion in 2017. At the time, Kinder Morgan was threatening to cancel the project due to public opposition. Prime Minister Justin Trudeau’s government said it needed to buy the assets to ensure the completion of the pipeline expansion, which started operations earlier this year and allows oil producers in Western Canada to export more crude oil to the Pacific Coast and markets in Asia.

Trans Mountain was under fire over the mounting costs of its pipeline expansion project in 2022 shortly before it brought in McKinsey to help. A few months earlier, CBC News reported costs had ballooned to $21.4 billion, up from the previous estimate of $12.6 billion.

Although the final price tag is likely above $34 billion, Trans Mountain told The Narwhal advice from McKinsey helped save hundreds of millions of dollars, including in specific segments of the pipeline going through mountainous terrain such as Spread 3/4A in the Rocky Mountains and North Thompson region of B.C.

McKinsey has operated in Canada and globally for decades, offering advice to businesses and governments alike. It has also found itself in the middle of scandals, such as one over its role advising Purdue Pharma about its OxyContin painkiller. McKinsey reached a US$573-million settlement with attorneys general from across the U.S. as a result of its actions. At the time, the company said it deeply regretted not adequately acknowledging the tragic consequences of the epidemic, saying it was hoping to be part of the solution to the crisis going forward.

After this article was published, Adams emailed The Narwhal to say that the Trans Mountain contract was signed with McKinsey & Company Canada, which has headquarters in Toronto.

When asked whether its own staff and executives could have recommended ways to reduce project costs, Trans Mountain said its own employees initiated some of the measures that led to cost savings. The external consultants, it said, helped save significantly more than three times what Trans Mountain spent on the McKinsey contract.

“McKinsey advised of hundreds of cost and productivity initiatives that were logged over the course of the program,” Trans Mountain said in a statement to The Narwhal. “Executives and managers could have, and did, devise many of the cost savings, however, facilitation and analysis by a consultant allowed us to maximize our benefits.”

Every Canadian household on the hook for up to $1,225 to cover Trans Mountain costs: report

Research published this month by the International Institute for Sustainable Development notes that even Trans Mountain’s current proposal to hike tolls won’t ensure oil companies, instead of taxpayers, are paying for the pipeline. 

The report was written by Thomas Gunton, a professor of resource and environmental planning at Simon Fraser University and a former senior official in the B.C. and Manitoba governments. He told The Narwhal the current hike proposal still isn’t high enough to cover the true costs of shipping oil. 

“Burdening Canadian taxpayers with the cost of providing a large subsidy to the oil sector to cover transportation costs is … contrary to basic principles of public equity,” his report reads. 

Unless Trans Mountain significantly increases the tolls charged to oil companies, the report says, cost overruns on the pipeline could result in Canadian taxpayers shelling out up to $18.8 billion in fossil fuel subsidies. This would be equivalent to every Canadian household paying up to $1,255 to subsidize pipeline use for oil companies that earn billions of dollars in profits.

Updated Sept. 25, 2024, at 4:10 p.m. ET: This article was updated to add a new comment from McKinsey about how its Canadian operations have headquarters in Toronto.

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