The Mid-Week Essay: Trudeau's Teck dilemma allegedly "solved"

Published by MAC on 2020-02-26
Source: New York Times

Oil Sands market calls the shots

Canada Oil-Sands Plan Collapses Over Politics and Economics

A developer has abandoned a nine-year effort to extend mining, sparing
Justin Trudeau a choice between energy interests and environmental concerns.

By Clifford Krauss

New York Times

24 February 2020

A major effort to expand development of Canada’s oil sands has collapsed
shortly before a deadline for government approval, undone by investor
concerns over oil’s future and the political fault lines between
economic and environmental priorities.

Nine years in the planning, the project would have increased Canada’s
oil production by roughly 5 percent. But it would have also slashed
through 24,000 acres of boreal forest and released millions of tons of
climate-warming carbon dioxide every year.

Some Canadian oil executives had predicted that Prime Minister Justin
Trudeau and his cabinet would approve the project by a regulatory
deadline this week, though with burdensome conditions. But in a letter
released Sunday night, the Vancouver-based developer, Teck Resources,
declared that “there is no constructive path forward.”

The unexpected withdrawal relieves Mr. Trudeau of a choice that was sure
to anger environmentalists or energy interests, if not both.

Conservatives were quick to blame Mr. Trudeau for the loss of a project
that they said would have created thousands of jobs and given an
economic lift to the western province of Alberta, the hub of Canada’s
energy industry, which has suffered from low oil prices over the last
five years. They suggested that the government felt pressure from weeks
of protests by Indigenous groups opposing a natural gas pipeline, even
though some Indigenous groups supported the Alberta project, known as
the Frontier mine.

“It is what happens when governments lack the courage to defend the
interests of Canadians in the face of a militant minority,” Alberta’s
premier, Jason Kenney, said in a statement.

The chief executive of Teck Resources, Don Lindsay, said in a letter to
federal officials that global capital markets, investors and consumers
were looking to governments to put “a framework in place that reconciles
resource development and climate change, in order to produce the
cleanest products” — something that he said “does not yet exist here.”

While environmental concerns were part of government and company
calculations, there was no guarantee that the Frontier project would
have gone forward even if it gained final regulatory approval. Mr.
Lindsay had said the company needed a deep-pocketed partner to help pay
for the project, and higher oil prices.

Canada supplies nearly six million barrels of oil a day, making it the
world’s No. 4 producer and the biggest source of American imports. The
oil sands contribute over 60 percent of that output and are vital to the
west’s economy. Canadian output continues to grow because of investments
made when global supplies were tighter.

The oil sands are a watery mixture of sand and clay soaked with a dense,
viscous form of petroleum known as bitumen. But in addition to being a
fossil fuel, bitumen is difficult to extract and energy-intensive to
process.

And when Teck Resources proposed the Frontier project, the energy world
was very different. The American shale-drilling frenzy was in its
infancy, and the Keystone XL pipeline was seemingly going to deliver the
oil-sands output to the American market.

Now the United States has an abundance of relatively cheap oil,
prodigious deposits are being tapped in Brazil, Norway and Guyana, and
the Keystone project is still awaiting completion. Delays in pipeline
approvals have prompted the Alberta government to mandate production
cutbacks over the last two years to drain a glut of oil in storage.

Kevin Birn, a vice president and oil-sands expert at the consultancy IHS
Markit, estimated that for a project like Frontier to break even, the
price of West Texas intermediate oil, the North American benchmark,
would need to average $65 a barrel over a decade or more of operations.
That is roughly $15 above the current price, and other analysts put the
break-even figure at $80 to $85.

But until Sunday night, despite a regulatory review that cost it
hundreds of millions of dollars, Teck Resources refused to give up. The
company argued that its project, at a cost of 20.6 billion Canadian
dollars ($15.5 billion), would create 7,000 construction and 2,500
operational jobs and eventually generate more than 70 billion Canadian
dollars in local and national government revenue.

Andrew Leach, a professor of energy economics at the University of
Alberta, said some might read the project’s demise as a fatal blow to
oil-sands development, but he interpreted Teck Resources’ decision as a
pragmatic one.

“Teck was clear that it does not want a situation where one project has
to answer for all of Canada’s climate policies and climate commitments,”
he said. Moreover, he added, “global investors are not prepared to help
a company the size of Teck to build a multibillion-dollar project. The
global market was not prepared to be part of the political football.”

No new oil-sands mine has opened since 2018, but more than a dozen
proposals are awaiting regulatory approval or investment decisions. Mr.
Leach said some of those were economically and environmentally more
viable than the Frontier project.

But resistance to new pipelines and high production costs have steadily
reduced investments in oil-sands fields. There has been an exodus of
international oil companies, including ConocoPhillips, Royal Dutch Shell
and Equinor of Norway.

At the same time, there are questions about the market outlook. While
world demand is roughly 100 million barrels a day, a figure that
increases by 1 percent every year, the International Energy Agency
projects that growth will begin to slow considerably in 2025. The agency
says demand could fall to 67 million barrels a day in 2040, especially
if governments increase regulation and electric cars become commonplace.

Reduced demand would focus production on places where it is cheapest,
like Saudi Arabia.

“Companies like Teck are realizing that global capital markets are
changing rapidly,” said Simon Dyer, executive director of the Pembina
Institute, a leading Canadian environmental research organization.
“There was never an economic pathway for this project under global
demand scenarios consistent with the Paris climate agreement.”

A federal-provincial panel that reviewed the project, he said, “didn’t
properly assess the climate impacts.” The national parks agency also
raised concerns about the possible effect on a national park downstream
that is a UNESCO world heritage site.

The Alberta Energy Regulator wrote in July that “there will be
significant adverse project and cumulative effects on certain
environmental components and Indigenous communities.” Nevertheless, it
approved the project after finding it in the public interest.

Two federal officials — Environment Minister Jonathan Wilkinson and
Natural Resources Minister Seamus O’Regan — issued a joint statement
welcoming Teck’s decision. “A strong economy and clean environment must
go hand in hand,” they said.