Feb 12, 2020
Trudeau in a bind over Teck Frontier mine, which may never be built
The economic and environmental concerns around Teck's Frontier mine
Canadian Prime Minister Justin Trudeau’s desire to be seen as a climate-change crusader is again butting up against the reality of the nation’s formidable oil industry.
This time the conflict is over Teck Resources Ltd.’s proposed Frontier oil-sands mine, which Trudeau’s cabinet is expected to approve or reject this month.
Approving the mine would hurt Trudeau’s standing among his environmentalist base, many of whom already are disappointed with his $4.5-billion purchase of the Trans Mountain pipeline and now sometimes refer to him as “Justin Crudeau.” Meanwhile, rejecting Frontier would cause an uproar in conservative Alberta, where recent struggles in the oil industry have given birth to a fringe separatist movement.
Yet for all the sound and fury around the Teck Frontier project, there is an uncomfortable truth hanging over the whole exercise: The mine may never actually be built.
That’s because the oil world is completely different than when Teck first proposed the mine in 2011. At that time, worries abounded that the world was running out of crude and prices regularly topped US$100 a barrel. Canada’s oil sands, which contain the world’s third-largest reserves, saw a boom of spending as companies and countries rushed to secure supplies.
Then, fracking techniques unlocked massive reserves in Texas’s Permian Basin, helping the U.S. surpass Russia and Saudi Arabia to become the world’s top oil producer, with output more than doubling in less than a decade to about 13 million barrels a day.
That flood of new supply has warped the global oil market and weighed on prices ever since. Teck’s application relied on long-term oil prices of US$95 per barrel during its operating life from 2026 to 2066, according to a government review of the project last year. Neither West Texas Intermediate nor Brent crude have hit that level since 2014, and they are both below US$60 now. Prices are even lower in Canada, where the Western Canadian Select benchmark is trading under US$40 a barrel.
“It’s not economically viable at these oil prices,” Laura Lau, who helps manage $2 billion in assets at Brompton Corp. in Toronto, said in an interview. She estimated Teck would need an extended period of US$70 to US$80 oil before moving ahead. “They’re not going to make a final investment decision in the current oil environment.”
The application also banked on increased pipeline shipping capacity out of Alberta, but two projects Teck expected would be built — Enbridge Inc.’s Northern Gateway and TC Energy Corp.’s Energy East — have since been canceled. Others, such as Enbridge’s Line 3 and TC Energy’s Keystone XL, have been delayed by years and still face uncertain futures.
In fact, the transportation situation has grown so restrictive that Alberta’s government implemented mandatory production cuts last year to prevent a glut of oil from overwhelming the province’s pipelines and storage facilities and crashing prices. The province had planned to lift those restrictions at the end of last year, but had to extend them through this year because of delays to Enbridge’s Line 3 expansion.
That prompted Exxon Mobil Corp.’s Canadian unit, Imperial Oil Ltd., to delay its $2.6 billion Aspen oil-sands project, which had been approved and was scheduled to start production in 2022. Imperial Chief Executive Officer Brad Corson said last month that the company is still waiting for the curtailment policy to lift and for market and shipping dynamics in Alberta to improve before moving ahead.
Teck still hasn’t committed to building Frontier if it’s approved. The Vancouver-based company’s current focus is on advancing the project through the regulatory process, and further decisions will depend on the outcome of that process, market conditions and other considerations, said Chris Stannell, a Teck spokesman.
Teck CEO Don Lindsay said at an investor conference in Banff, Alberta, last month that the company will need a partner to develop the project with, sufficient pipeline capacity and high enough oil prices to justify the investment.
For Trudeau, the question of whether to approve the mine is a particularly thorny test of his repeated slogan that environmental protection and economic growth go hand in hand.
The mine is projected to create 7,000 jobs during construction and as many as 2,500 operating positions during its four-decade life, while contributing about C$70 billion to federal, provincial and municipal governments, according to regulatory documents. The project also would include best-in-class technology that would produce oil with less greenhouse gas emissions per barrel than about half of all oil refined in the U.S., according to the documents.
Yet, the mine still would produce about 260,000 barrels of crude a day, more than the daily oil consumption of Norway, and emit the equivalent of about 4.1 million tons of carbon-dioxide a year. That would make it more difficult for Canada to meet its commitment to cut greenhouse gas emissions 30% below 2011 levels by 2030 and to reach net zero emissions by 2050.
Alberta’s conservative Premier Jason Kenney already is ratcheting up the pressure on Trudeau, saying in a letter to the prime minister there is “no reason specific to this project that would justify denying federal cabinet approval.”
“A decision to kill the project at this late hour, after all that Teck has done to satisfy regulators and social and environmental concerns, would echo in global markets like a slamming door,” Kenney said in the letter.
The project has broad support in Canada’s oil industry, with the CEOs of rival oil-sands firms saying rejecting Frontier would hurt investors’ confidence in Canada and put a chill on future projects. Brompton’s Lau also said canceling the project would hurt investors’ view of Canada.
As with any large energy project in Canada, Frontier would likely face fierce opposition, and possibly legal challenges, if approved. A number of environmental groups have already lined up against the project, including Indigenous Climate Action and Greenpeace Canada, which has a photo on its Twitter feed of actors Jane Fonda and Joaquin Phoenix holding signs bearing the hashtag “RejectTeck.”
While the project has the support of 14 affected Alberta First Nations and Metis communities, the project has faced some indigenous opposition as well. The Smith’s Landing First Nation, which is located in the Northwest Territories along a watershed that runs near Frontier, has called on the government of the territory to speak out against the project and is lobbying federal ministers to block it. The group would consider suing if the project is approved, Chief Gerry Cheezie said in an interview.
“The government makes promises to us, then breaks them and expects us to act as good little Indians,” Cheezie said. “That’s going to stop.”
Opposition to the project has been brewing since it was first proposed in 2011 and will continue even if it’s approved, said Eriel Deranger, a member of the Athabasca Chipewyan First Nation and executive director of Indigenous Climate Action.
“The viability of this project is becoming weaker the longer the debate goes on because of the economic constraints, because of the trends in the oil and gas sector,” Deranger said in an interview. “All sorts of different things are creating more risk for this project.”