Any day now the federal Liberals could approve a massive new oilsands mine that by several key metrics makes little business sense.
“You don’t have to be a financial genius,” said Kathy Hipple, an analyst with the Institute for Energy Economics and Financial Analysis, a New York-based research group. “This is an extraordinarily risky project.”
Vancouver’s Teck Resources is basing the viability of its Frontier mine on the assumption that oil prices will average about $95 per barrel until the 2060s, despite the current price of oil being less than $60 per barrel and even Canada’s National Energy Board predicting that a long-term price of $75 is more likely.
Then there is the fact that Teck, whose entire market capitalization is under $10 billion, is proposing a project that will cost $20 billion to build during a time when many investors and other financial players are questioning the future of the oilsands.
This hasn’t stopped Alberta Premier Jason Kenney from claiming that a rejection of Frontier by Justin Trudeau’s Liberals would cause “devastating impacts” on Alberta’s economy. But Calgary analysts, the Globe and Mail editorial board and even the CEO of Teck Resources are unsure whether a mine two times the size of Vancouver would ever be profitable enough to build.
So why is the company moving forward on the project at all? Experts contacted by The Tyee had several possible explanations.
Theory one: Teck wants an approval now to keep its options open for the future.
The Frontier mine was first proposed in 2011, a time when the oilsands seemed to be in much healthier financial shape. Production was growing quickly, the disastrous oil price crash of 2014 was years away and the industry had staunch political advocates in the Stephen Harper administration.
“They’ve been working on it for a lot of years,” said David Hughes, an Earth scientist and energy researcher with the Corporate Mapping Project, an initiative led by the University of Victoria, the Canadian Centre for Policy Alternatives and the Parkland Institute.
Despite organizations like the International Energy Agency now saying that growth prospects for the oilsands have “significantly deteriorated,” Teck presented an extremely rosy outlook to regulators at Canada’s Joint Review Panel, claiming that oil prices in excess of $110 by the 2040s justify one of the largest bitumen projects ever proposed.
By signing off on Frontier, the Joint Review Panel accepted an estimate that even other oil companies don’t see as likely. A recent report suggested that nine oil and gas majors including BP, Shell and Total foresee a long-term price in the range of $55 to $80 per barrel. Teck itself told investors a scenario of oil prices being as low as $60 “for decades to come” is possible.
“I don’t think [Frontier] makes any economic sense now,” Hughes said.
But if Teck gets a go-ahead from the federal government, a decision expected before the end of the month, it could always hold off on construction and wait for signs that oil prices will recover above and beyond their pre-2014 highs. (Yet even that may not be enough to resuscitate an industry to which financial giants like the Hartford and BlackRock are cutting ties.)
“If it gets approved then they’ve got that in the bag and they can pull the project out later,” Hughes said.
Theory two: Teck, like other Chinese-owned firms, is playing an oilsands long game.
Though Teck is a Canadian company based in Vancouver, it is also 10.32 per cent owned by the People’s Republic of China, while another 6.74 per cent is owned by Fullbloom Investment Corp., which is closely tied to China. Several years ago it appointed a Chinese government official to its board.
Why does this matter for Frontier? Nobody The Tyee spoke with would speculate on how Teck’s links to China might influence its investment decisions. But what is clear is that other Chinese-owned firms in the oilsands have taken a longer view on the industry than their American or European counterparts.
“Chinese companies are a latecomer when it comes to oilsands development,” said Jia Wang, deputy director of the China Institute at the University of Alberta. “When you look at these large Chinese oil companies... even some loss in Canada would not impact in any major way their global business, so for them there’s not a rush to get out of the market.”
Wang is referring to the fact that even though companies like Shell, Total, BP, Koch Industries and many others have exited from the oilsands in recent years, Chinese oil giants such as CNOOC, PetroChina and Sinopec have stayed, producing relatively small amounts of oil for the global market even though they spent tens of billions of dollars acquiring projects.
“The assets they bought may not be the most profitable or may require more capital intensive development... [but] these are large Chinese companies, they’re not likely to become bankrupt,” Wang told Global News last year.
To be clear, Teck is primarily a Canadian-owned mining company. But it’s possible that Teck’s Chinese government shareholders are more comfortable employing “patient capital” than your average publicly traded oil company.
Theory three: Teck is hoping Trudeau eventually buys Frontier, just like his government did with Kinder Morgan’s Trans Mountain pipeline.
At a recent investment conference in Banff, Teck CEO Don Lindsay said the company is unlikely to proceed alone in building Frontier. “We need a partner. We need a price. So we will just wait to see how that unfolds,” he explained.
Observers like Hipple found it revealing that Suncor hasn’t offered to be a partner, despite jointly owning the financially challenged Fort Hills oilsands project with Teck. “Suncor just took a big write-down on Fort Hills,” she said. “Suncor is not jumping in to say, ‘We’ll be your partner in this new venture,’ which to me, the way we look at things, that’s a market signal.”
Others agree that Teck finding an industry partner could be tough. “With the exodus of foreign firms from the oilsands in recent years, the potential number of interested parties would be limited,” wrote Calgary Herald columnist Chris Varcoe.
But there is still one major potential partner remaining: the federal Liberal government, which has already shown its willingness to spend $12.6 billion purchasing and building Kinder Morgan’s Trans Mountain pipeline.
“If Teck Resources finds that it cannot complete the Frontier Project, the Canadian government will face the same difficult choice it made in the Trans Mountain case,” IEEFA wrote in a report last month.
Hipple said it’s not out of the question Trudeau could take over Frontier should the economics become too challenging for Teck. “There’s precedent for the Canadian government to say it’s in the national interest to become a buyer basically of last resort,” she explained. “It’s not a complete leap.”
Whatever Teck’s motivation or game-plan, Frontier at this stage is extremely unlikely to be “the wealth bomb ready to detonate” that Kenney claims.
Just ask the experts at CIBC World Markets, who are pretty much the opposite of foreign-funded environmental radicals. “I believe the likelihood is low, and I think that the feedback the company has been getting from investors on oilsands is not very positive,” analyst Oscar Cabrera told the Calgary Herald. “I don’t think there’s an appetite, at this point at least, to develop the project.”