The Numbers Didn’t Work

Economics, not environmentalists, killed Teck Resources’ Frontier mine

Feature  by Gregory Beatty

Suncor Energy, Canadian Natural Resources Ltd, Cenovus Energy, Imperial Oil and Husky Energy are the major players in Alberta’s oil sands industry. The five produce about 80 per cent of the province’s bitumen.

Teck Resources aspired to join them. But on Feb. 23, just days before the Feb. 29 deadline for the federal government to make a final decision on Teck’s proposed Frontier mine in northern Alberta, the Vancouver-based company withdrew its application, with CEO Don Lindsay lamenting the project had become ensnared in the broader political battle between pro-fossil fuel forces and those demanding action on climate change.

Teck’s core business is mining coal, copper and zinc. But lately, it’s been moving into bitumen. Teck owns a 20 per cent stake in Suncor’s Fort Hills facility which opened in 2017, and had Frontier gone ahead, it would’ve produced an additional 260,000 barrels of bitumen a day.

Now that dream, if not dead, is definitely on hold.

Bitumen Vs. Climate

Teck’s decision, which came on the heels of a bizarro “Buffalo declaration” that four Alberta Conservative MPs released on Feb. 21 that was blatantly calculated to fan Wexit anger to pressure Ottawa to approve Frontier, was met with predictable outrage in Alberta.

For months, Jason’s Kenney’s UCP government had portrayed the federal government’s impending decision on Frontier as a litmus test of Ottawa’s willingness to work with Alberta to promote national unity (as though it’s solely the federal government that’s undermining it).

The stage for that showdown was set last July when a three-person review panel gave preliminary approval to Frontier. The panel acknowledged the mine was near Wood Buffalo National Park and would have significant adverse environmental effects. But those effects were outweighed, it concluded, by the economic benefits to Alberta and Canada.

Since first being elected in 2015, that’s a tight-rope the federal Liberals have tried to walk, arguing that Canada can reach its climate goals while still developing the resource sector and growing the economy.

But with Frontier, that argument falls flat, says Peter Prebble of the Saskatchewan Environmental Society.

During construction, Prebble notes, 30,000 acres of wetlands and 6000 acres of old growth forest would’ve been destroyed, hurting caribou and other species at risk in the region.

“With the wetlands, 3,000 acres are peat lands,” Prebble says. “If destroyed, those could never really be replicated. With a lot of work and investment, you can restore wetlands. But I doubt the peat lands could be restored in our lifetime. And they’re an important source of carbon sequestration.”

The schedule Teck had set for Frontier would’ve seen it open in 2026 and run until 2066. The mine’s greenhouse gas emissions, it was estimated, would’ve been between 4.1 and six million tons a year over its 41-year lifespan.

Currently, Alberta’s oilsands produce around 87 million tons of GHGs annually, Prebble says.

“To put that in perspective, it’s bigger than Saskatchewan’s annual GHG emissions from all sources which, as of 2017, were 77.9 million tons.”

Frontier wasn’t the only oilsands project in the, ahem, “pipeline”, either. Other projects have been approved but are stalled because of low oil prices.

“If those projects were to go ahead, GHGs from the oilsands would rise to 130 million tons per year,” says Prebble. “This is at a time when Canada is struggling to meet its commitment under the Paris agreement, which is a 30 per cent reduction from 2005 levels by 2030.”

So yeah, from an environmental perspective further oilsands expansion is a nightmare.

The current economics of the industry aren’t exactly a dream either, says Ian Hussey, research manager at Parkland Institute in Edmonton.

“When Suncor completed the Fort Hills mine, CEO Steve Williams said he believed oilsands investment was done for at least a decade,” says Hussey. “That was a pretty bold statement for the CEO of the largest bitumen producer in Canada.”

Two days before Teck’s Feb. 23 bombshell, the company announced a $1.1 billion drop in earnings from $5.4 billion in 2018 to $4.3 billion in 2019. Included was a $910 million “impairment charge” for its 20 per cent stake in Suncor’s Fort Hills operation, which it attributed to lower market expectations for future oil prices.

When discussing Frontier in the past, says Hussey, Teck CEO Don Lindsay said the company needed three “Ps” to make the project viable. “They were oil price, a new pipeline and a financial partner.”

Frontier’s projected cost was $20 billion. To recoup that investment and earn a 10 per cent return, analysts calculated, Teck needed an oil price of US$75 to $85 a barrel.

“Right now, oil is languishing in the $50 to $55 per barrel range,” says Hussey. “If you think about the trajectory of world oil demand and prices over the next few decades under the Paris agreement, what it would mean, according to the International Energy Agency, is we would go from current global demand of 100 million barrels a day to 68 million barrels a day by 2050.”

Fed by a glut of oil from conventional sources, prices have been stagnant since 2014. Existing oil sands operations, especially those owned by companies with downstream interests in pipelines, refineries and gas stations, are profitable at current prices. But Teck is strictly a mining company.

That’s not the only financial hurdle Teck faced with Frontier, says Hussey.

“Every bitumen mine is not the same,” he says. “The actual ore that Teck would mine to turn into bitumen, and ultimately crude oil, is of lower quality than some of the basins that are being exploited now so we’re not even looking at a top-quality asset.”

Suncor, Teck’s partner on Fort Hills, had already said “no thanks” to a proposed partnership on Frontier. As for the other big players, as Prebble noted, they’re already sitting on oilsands projects that have been stalled because of poor market conditions. So the odds of them being interested in partnering with Teck were low.

And while major international banks and investment firms are still interested in the fossil fuel sector, they’ve been signalling their intention to move away from high cost/high GHG-emitting production sources such as coal and oilsands. Teck would’ve likely struck out there, too.

Reality Bites

Before Teck’s surprise announcement, the idea had been floated that the federal Liberals might give conditional approval to Frontier, allowing it to proceed, but only if Teck and Alberta committed to firm targets to reduce and cap GHG emissions to help Canada meet its Paris target.

Given the uphill struggle Teck faced to get its needed “Ps” to build Frontier (price, pipeline and partner), it would’ve enabled the government to claim it was showing good environmental leadership, while insulating it somewhat from ever escalating criticism from prairie conservatives upset about, well… pretty much everything.

Such is the nature of politics today. Reasonable people accept that climate change poses a serious threat to human well-being, and we are running out of time to act. That’s a message that’s spreading world-wide, and no amount of magical thinking by prairie conservatives about the future of the oilsands is going to change that reality.

That’s true both from an environmental and economic perspective.

“The projected end for Frontier, if had gone ahead, would’ve been 2066,” says Prebble. “That’s 16 years past the 2050 deadline for Canada to become carbon neutral. It’s just another example of how the project ran counter to the commitments Canada’s made under the Paris agreement.”

“The main thing Teck needed was higher oil prices, and ultimately a partner,” says Hussey. “But if that potential partner doesn’t see a future price projection for oil that’s much higher than it is now, from $50–$55 a barrel to $75–$85 a barrel, who would pull the trigger on that?”

Next issue: why Alberta (and Saskatchewan) need to kick the fossil fuel habit.