On February 24th, Vancouver-based Teck Resources Ltd. (“Teck”) delivered an all too familiar message to Canadians. The Company announced that it had withdrawn its application for the C$20.6 billion, 260,000 barrel-per-day Frontier mine. In a letter to the Minster, Environment and Climate Change, Teck cited a lack of investor confidence and a need for “jurisdictions to have a framework in place that reconciles resource development and climate change…This does not yet exist here (in Canada)…”
The Frontier project first applied for regulatory approval back in 2011, and now joins a long list of casualties in the Canadian energy graveyard that spans from project delays to outright cancellations, including MEG’s Christina Lake Expansion, Imperial’s Aspen Project, Petronas’ Pacific NorthWest LNG facility, TC Energy’s Energy East pipeline, and Enbridge’s Northern Gateway pipeline, among numerous others. It shouldn’t come as a surprise that ESG considerations are paramount in regulatory decisions. However, it is important to note that, while our National unity falls further into disarray over resource development, the ravenous thirst for energy globally will continue to be satisfied - with or without Canadian energy. The pendulum has swung too far in the opposing direction and created an opening where high-emission producers can capture increasing market share, while disregarding the environmental standards that Canadians are so proud of.
While Teck acknowledged a deep need to address climate change and, Canada’s role to play in their decision, skeptics of the project suggest that doubts about the Frontier project’s economic viability were the primary catalyst for the decision. In January 2020, the Institute for Energy Economics and Financial Analysis released a report questioning Teck’s financial assumptions for the project which were highly dependent on oil prices in excess of US$95/bbl Brent for prolonged periods of the project (2026-2066). While there are inherent uncertainties in forecasting oil prices, average estimates from the National Energy Board of Canada and the World Bank Commodity Outlook were more bearish on Brent prices through 2030, with an average Brent price of US$72.50/bbl. A more conservative oil price outlook was further compounded by the quality and distance differentials that heavy crude producers in Canada must endure to competitively price their barrels with counter-parties in the United States.
While Canada continues to flounder with project approvals, depressed prices, and fleeting investor confidence, capital is being mobilized. From LNG projects in Mozambique to deep sea pipelines in the North Sea capital is flowing to increase energy security and prosperity in oil producing regions around the globe. Nowhere is this more prevalent than in the prolific Permian basin in west Texas, which has spurred a flurry of new pipelines to bring crude to Houston and multiple locations along the Texas Gulf Coast (See Figure 1.1). According to Bloomberg News, more than ten pipelines are slated to start-up in 2020/21, providing additional takeaway capacity of ~5.6MM boe/d.
Figure 1.1 – Permian Basin Pipeline Projects.
Midstream investment isn’t the only thing booming in the U.S. energy sector. According to the Gulf Coast Energy Outlook, new capital investment in downstream facilities in Louisiana, Texas, Alabama, and Mississippi is anticipated to reach up to US$308 billion by 2030 (See Figure 1.2). The gargantuan capital program dwarfs any such development in Canada, and will be allocated towards new LNG export terminals, petrochemical facilities, and refineries.
Figure 1.2 – Gulf Coast Energy Infrastructure Investment 2011 – 2030.
While resource development is thriving in the U.S. Lower 48, Teck’s decision to withdraw its application for the Frontier mine continues to cast doubt and uncertainty over resource development in Canada. Not only is Teck burdened with a C$1.1 billion write-down on the project, but the opportunity for prosperity for all Canadians has been damaged. The project was expected to create approximately 7,000 construction jobs, 2,500 permanent operating jobs, and generate C$54.0 billion in royalties and taxes, C$11.8 billion in federal corporate taxes, and C$68.0 million in local property taxes over the life of the project. Additionally, the financial ramifications echo throughout the Indigenous communities in northern Alberta. Fourteen Indigenous communities bordering the project site had signed agreements with Teck to participate in the economic benefits of the project. Due to Teck’s decision to withdraw its applications, the Indigenous communities that are in favour of the project are losing out on prosperity that is desired by many, if not all, of the constituents in the community.
Ron Quintal, President of the Fort McKay Métis, accurately summarized the decision as a black eye for Canada, and rightly so, as this is yet another blow to an industry trying to shake off its multi-year hangover.
Author
Michael Hebert, Viewpoint Research Team