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3 lessons from the demise of Teck’s Frontier Mine

March 17, 2020

To say that Teck’s Frontier Mine was controversial is an understatement. For some, the open pit oil sands mine was a litmus test of Canada’s commitment to real climate action – not to mention stripping over 20,000 hectares of wetlands, old-growth forest and peatland and creating massive toxic tailings ponds. For others, it was the source of future prosperity and jobs for Alberta’s flagging economy.

Indigenous Climate Action’s #RejectTeck campaign did an incredible job in putting federal politicians in the hot seat. The project had reportedly divided Canada’s governing Liberal party, but Alberta Premier Jason Kenney warned that rejection of the project could “raise roiling Western alienation to a boiling point.”

It was anyone’s guess whether the federal cabinet would approve the mine, but everyone expected an imminent decision.

Many people were surprised when Teck withdrew its application at the last minute. Keith Stewart, Greenpeace Canada’s Senior Energy Strategist, had mapped out many scenarios that could lead to the project being approved or blocked. But, as he told CBC, the withdrawal was “not on the table.”

With the dust settling, we’d like to draw out three lessons to be learned from the mine and Teck’s last-minute dropout.
 

1. Canada needs climate accountability laws

Teck CEO Don Lindsay attributed the decision to withdraw the Frontier Mine application to the fundamental unanswered questions about the relationship between Canada’s long-promised climate action and its aspirations to increase oil and gas production. In his letter to the federal Minister of Environment and Climate Change, he wrote:

Frontier … has surfaced a broader debate over climate change and Canada’s role in addressing it. It is our hope that withdrawing from the process will allow Canadians to shift to a larger and more positive discussion about the path forward. Ultimately, that should take place without a looming regulatory deadline. …

The promise of Canada’s potential will not be realized until governments can reach agreement around how climate policy considerations will be addressed in the context of future responsible energy sector development.

Canada has been really bad at delivering on our promises to reduce greenhouse gas emissions. We missed our 2012 Kyoto target and will miss our 2020 Copenhagen target. Our current climate plans do not show a path to achieving our 2030 Paris commitments either, despite that target being widely regarded as inadequate and inconsistent with climate science.

Our climate-laggard status is largely due to the fact that Canadian politicians (as well as many ordinary Canadians) have preferred to avoid tough questions about how we need to retool our economy to operate in a way that doesn’t pollute our atmosphere. In particular, Canada has pretended that we can expand oil and gas development and do our part to fight climate change at the same time.

The reality is that the production of fossil fuels (especially in the energy-intensive oil sands) is a major and growing source of Canada’s greenhouse gas emissions. The National Observer has pointed out that while Ontario and other provinces have reduced their GHG emissions, Alberta and Saskatchewan have ramped up their emissions. Without these emissions increases from the oil sands, Canada might have met its 2020 Copenhagen target (a 17% reduction from 2005 levels). But now these two provinces, with about 15% of Canada’s population, represent almost 50% of the country’s emissions.

The implications for Canada’s contribution to climate change is clear, but as Mr. Lindsay points out, the country’s lack of clarity on the relationship between climate action and fossil fuel development has an economic cost as well. Right wing politicians may blame environmentalists for the industry’s woes, but the climate movement has been asking for a credible plan to address climate change for decades.

It’s unfortunately not surprising that politicians will duck difficult issues, which is why West Coast Environmental Law, along with our allies, have been pressing for new climate laws in BC and in Canada that require credible climate planning.

In 2015 we released a groundbreaking report, A Carbon Budget for Canada, which challenged Canada to draw on examples in the U.K. and other Canadian laws to develop climate legislation that would force governments to plan for greenhouse gas emissions reductions with the same rigour that they use in financial planning.

It’s taken a while, but momentum is building for such legislation. By the end of 2018, we were one of 33 organizations reiterating many of the demands from our 2015 report, telling the Canadian government that its laws must:

  • Require 5-year carbon budgets and/or targets as a focus for expert comment and public consultation;
  • Create an independent, expert climate change committee which will focus on assessing government progress; and
  • Require the government to prepare plans to achieve the budgets and to respond to climate change committee reports on an ongoing basis.

Since then, BC has amended its Climate Change Accountability Act, 2018 to deliver on some of these recommendations.

Canada’s 2019 “climate election” saw most federal parties promising at least some of the above elements. We are actively working with Climate Action Network and other organizations to press the Canadian government to deliver on these promises and to enact a world-class climate accountability law. This law would put scientific experts front and centre in identifying the questions that Canadian politicians and the public need to answer about how Canada can do its part to address climate change.

As Mr. Lindsay says, until those questions are answered, inconvenient truths will continue to be raised in the oil sands.
 

2. Canada’s economic modelling for oil and gas is out of date

In addition to issues around climate change, market conditions were a major reason for Teck’s withdrawal.

“I think [Teck’s withdrawal is] a huge market signal for the oilsands,” said Kathy Hipple, an analyst with the New York-based Institute for Energy Economics and Financial Analysis. “There’s a very real risk of stranded assets for oilsands projects and there’s a huge risk even for other oil and gas projects going forward, they’re not needed.”

The economic feasibility of the project was based on $95/barrel oil prices (with a $65/barrel break-even point according to this report). However, at the time of Teck’s decision the price of oil was at $56/barrel (and it’s dropped further since).

Significantly, the panel that conducted the environmental assessment of the Frontier Mine – and which was charged with evaluating whether the project would be in the public interest – did not question the $95/barrel figure.

If we are to make smart decisions about Canada’s energy future, we need to have a realistic appraisal of the economic prospects for the industry, in addition to thinking about what those decisions mean for Canada’s role in fighting climate change.

The same economic realities facing Teck have resulted in major oil and gas companies selling their oil sands operations and investments. The CEO of one company said:

Reducing our exposure to Canada’s oilsands by selling this asset is in line with our global strategy to focus our oil investments on low-break-even resources and develop a resilient portfolio in the mid and long term.

Yes, the world is not going to quit using oil and gas overnight, even if governments started aggressively transitioning their economies away from fossil fuels. However, once oil and gas demand peaks, the cost per barrel of oil will drop dramatically, meaning that projects that depend upon high oil prices – such as oil sands projects – will no longer be economically viable. One group of researchers has noted that “the niche for the oil sands industry seems fairly narrow and mostly involves hoping that climate policy will fail.”

While environmentalists and some economic modellers have been making predictions like these for years, in the past few months, mainstream investment companies and advisors have been shifting their investments away from fossil fuels – partly due to concern about their reputation but also warning that these projects are no longer good long-term investments.

Mark Carney, former Governor of the Banks of Canada and England, alarmed Canadian oil and gas companies with his warnings that with efforts to fight climate change, “up to 80% of coal assets will be stranded, [and] up to half of developed oil reserves.”

Meanwhile, Jim Cramer, Financial Investment Analyst and host of CNBC’s “Mad Money,” was perhaps clearest – warning his viewers that he's "done with fossil fuels" and that the industry is "in the death knell phase."

JP Morgan, Goldman Sachs and Wells Fargo have all stopped investing in Arctic drilling and other climate-unfriendly projects. JP Morgan has also highlighted its own potential vulnerability from overinvesting in fossil fuel projects (and its economists have separately warned of the risks of climate change for human civilization).

The investment firm Blackrock is warning companies and countries that continue to invest in fossil fuels that there is an imminent global shift in resources:

Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.

With global oil prices being driven down even further, it will be tempting to blame Canada’s oil woes on the Coronavirus and trade wars between Russia and OPEC. However, the above warnings and Teck’s withdrawal occurred before those events sent oil prices spiralling.

In short, the Teck decision demonstrates how far a project can get in Canada on the basis of overly optimistic assumptions about global energy markets, and the extent to which Canadian institutions ignore the vulnerability of Canada’s oil sands to future shifts in the global economy. In addition to the many environmental reasons to shift Canada’s economy away from oil and gas, it’s also economically a wise choice.
 

3. TMX is looking increasingly economically risky

Canada’s oil-tinted glasses also extend to the government’s purchase of the Trans Mountain pipeline and its plans to expand it.

At least some of the bitumen that was supposed to flow through the Trans Mountain expansion (TMX) was going to come from the Teck Frontier mine. Of course, the failure of one oil sands mine does not necessarily mean that there will not be a demand for pipeline.

But even before oil prices started tumbling, the government of Canada was taking a gamble in purchasing the Trans Mountain pipeline. Canada’s Parliamentary Budget Officer, Yves Giroux, suggested that the purchase price was on the high end for a challenging project, noting that “it's a very risky project to have bought something that nobody else in the private sector wanted to acquire.”

At least one economist has warned that the purchase was uneconomic even on its own terms. And that was before the government recently confirmed that the price of the expansion has risen to $12.6 billion (up from an initial estimate of $5.4 billion, which had already risen to $7.4 billion when Canada purchased the pipeline).

Despite those risks, a pipeline has historically been viewed as a low risk, low return investment – with the assumption that oil consumption will continue to rise indefinitely and that the economics will always justify transporting more oil through the pipeline.

As we have seen, the economic case for more oil is sometimes overstated.

Moreover, there is a real possibility that – whether through international climate action or through changing technology – consumer demand for oil will peak and start to decline in the near future. When that happens, high-cost oil sources like the oil sands will not be able to compete against lower cost conventional oil.

Similarly, the economic case for Trans Mountain assumes that oil prices will stay reasonably high (to build production of bitumen) but also that expanded pipeline capacity will continue to be needed over the lifetime of the project. In its review of TMX, the National Energy Board (NEB) used 2015 data that assumed a price of over $100 per barrel of oil, and refused to revisit the economic need when asked by intervenors.

TMX is a high risk, low return investment, with the risk being borne by Canadian taxpayers.

Rueben George, spokesperson for the Tsleil-Waututh Nation’s Sacred Trust, has warned First Nations considering purchasing a share in the Trans Mountain pipeline to look at these long-term risks very carefully, arguing that they are being offered the equivalent of “a new smallpox blanket”:

If these First Nations do their due diligence they would not invest. Kinder Morgan understood it’s a bad deal and would not be built. So Trudeau is selling economic smallpox.

Even the International Energy Agency – which members of the environmental community have viewed as underestimating the potential for renewable energy – now believes that oil consumption will slow as early as 2025, plateauing in the 2030s due to the uptake of electric vehicles.

Maintaining a healthy climate and a healthy economy

Decisions being made in Canada today affect both our atmospheric and our financial health. The withdrawal of the Teck Frontier mine reminds us that our financial health ultimately requires coming to grips with what we need to do for the health of our planet. Learning those lessons will help us move forward towards a healthier, more sustainable future.

 

Top photo credit: Kris Krug

Author: 
Andrew Gage - Staff Lawyer