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Energy

Approve the Teck Mine. Teach Alberta the Law of Holes

Let Kenney and his province shoulder the risk. With no bailouts or industry subsidies.

Andrew Nikiforuk 14 Feb 2020 | TheTyee.ca

Andrew Nikiforuk is an award-winning journalist who has been writing about the energy industry for two decades and is a contributing editor to The Tyee. Find his previous stories here.

Alberta Premier Jason Kenney wants to dig another massive bitumen hole in northern Alberta in order to extract another 240,000 barrels of oil a day.

Let him do it. Let Albertans learn the hard way.

Kenney recently told a group of businessmen that Canada’s government can’t say no to the proposed Teck open pit oilsands mine because denying a permit for the $20-billion hole in the ground "would send a devastating message" for "investor confidence at a time when we are struggling to attract foreign direct investment to the Canadian economy."

Doesn’t Ottawa understand that more holes in the ground equal prosperity?

The Teck mine and associated tailing ponds, just 30 kilometres from the Wood Buffalo National Park, a World Heritage Site, will destroy 292 square kilometres of fens, peatlands and old growth forest.

Yet Alberta’s Environment Minister Jason Nixon echoed Kenney, telling Ottawa to get out of the way and let Alberta do what they do best, which is dig deeper holes.

As Kenney put it to Prime Minister Justin Trudeau, saying no would raise "western alienation to a boiling point."

Given Alberta’s belligerent confidence in holes, let’s agree. Canada’s federal cabinet should rubber stamp the permit for Teck’s oilsands mine.

At the same time, it must also declare that Canada will quantify and phase out $43 billion in annual fossil fuel subsidies as identified by the International Monetary Fund.

That means if the Teck mine fails, Canadian taxpayers will not support the boondoggle in any shape or form.

Alberta says it doesn’t want any federal handouts, so that shouldn’t be a problem. So give the province what it wants. Let Nixon and Kenney defy the reality of low global oil prices and the commodity’s increasing volatility, and dig themselves a deeper hole to hell, unemployment and debt.

Every petrostate should have the freedom to build its own financial scaffold, knot its own fiscal noose and hang itself economically. It is what they do best.

Oil makes blind its dependents, regardless of their political hue. It encourages governments to overspend and undersave. It centralizes political power. It widens inequality. It replaces domestic taxes with hydrocarbon revenues, thereby breaking the bonds of representation. It erodes statecraft and rewards profligate government. The commodity’s busts and booms produce a vicious circle of bad policies that cement the state’s addiction to oil. It discourages diversification. In the end, it aggressively puts the needs of the oil and gas industry above everything else.

If Albertans wanted to regain their self-determination, they would not make digging the Teck mine their litmus test. But Kenney and company, despite the punishing downturn in prices, still don’t understand the Law of Holes.

The Law of Holes is elegant, proverbial and over a century old. It goes like this: If you find yourself in a moral and fiscal hole, you should stop digging.

What the blame game covers up

For years now the Alberta government, whether composed of Tories or the NDP, have supported the incredible notion that environmentalists and the federal government have thwarted the province’s ability to dig more holes.

This well-orchestrated blame game allows Alberta to deny any responsibility for its predicament, let alone acknowledge oil’s extreme market volatility, which is justifiably scaring away investors.

Prior to the 2014 price collapse, the commodity’s price volatility would influence profitability and project costs, but rarely cause a project to be uneconomic.

But that’s now changed. After the 2014 collapse, all fossil fuel projects, whether big or small, know they will have to endure prices below investment levels, observed a recent Financial Times column. 

And that’s why investors are leaving Alberta and Texas, and the fracking industry is imploding. It also explains why oil and gas firms finished last in the S&P Dow Jones indices last year.

But Alberta’s blame game serves a purpose. It prevents Albertans from asking questions about the role it played in the 2014 price collapse, and why Alberta’s politicians keep putting the province into a deeper and deeper hole.

When Moody’s Investors Service last downgraded the province’s credit rating in 2019, it described this hole as "a structural weakness in the provincial economy that remains concentrated and dependent on non-renewable resources."

The blame game, however, covers up persistent digging:

A low-royalty program has encouraged the overproduction of bitumen.

A scandal-plagued regulator has never said no to an oilsands project.

An incompetent one-party Tory state willfully neglected the basics: go slow, collect your fair share and save the money.

The mirage of $95-a-barrel oil

The blame game also allows the province to ignore the whole problem of overproduction in a world hobbled by greater oil price volatility.

According to respected Houston analyst Art Berman, who is no ideologue, Alberta played a key role in precipitating that event with a surge in bitumen production combined with frenzied U.S. tight oil output.

In 2015, Berman wrote, on a site Kenney and Nixon might want to visit, that the oil-price collapse happened because "of expensive tight and other unconventional oil and the market’s inability to support its cost. $90 per barrel West Texas Intermediate (WTI) price appears to be the empirical threshold for demand destruction."

Berman also makes another good point. Albertans like to boast about rising bitumen production while Texans cheer about fracked oil, but no politician wants to talk about the high-cost technologies needed to extract these difficult resources and their impact on price.

Last year, Canada’s joint review panel ignored Berman’s analysis and recommended that Ottawa approve another $20-billion bitumen hole on the crazy and irresponsible assumption that the Teck mine would be economically viable at $95 a barrel.

Without that fanciful $95-a-barrel price, the Teck mine doesn’t create 7,000 construction jobs or generate $54 billion in royalties and taxes, or another $11.8 billion in federal corporate taxes over the 41-year life of the mine.

During Teck’s public hearing, a lot of folks questioned that $95-a-barrel assumption as pie in the sky. But the two-person assessment panel sided with Teck and agreed that depressed oil prices were just a temporary glitch. A petrostate always looks on the bright side of life.

Well, that temporary glitch has lasted five years now and shows no signs of disappearing, due to continued overproduction in the United States combined with a real decline in Chinese economic growth.

No credible analyst expects oil prices to jump into the $95-a-barrel range anytime soon. The Institute for Energy Economics and Financial Analysis recently noted most major oil and gas companies forecast long-term prices in the $55 to $80 range.

Trapped in a global energy paradox

The majors, which aren’t making much money these days, understand the new volatility. Equinor, Total, Shell, ConocoPhillips, Koch Industries, and Kinder Morgan walked away from investments in Canadian oilsands because bitumen crude experiences more price volatility than lighter oils. They understand the Law of Holes and could see their profits sinking.  

Then there’s the greater global energy paradox to consider. The world’s high-tech industrial complex can’t afford $100-a-barrel oil. Whenever it briefly hits such highs, the world economy sinks into a deep recession.

But whenever oil dips below $45 a barrel, the industry that provides the master resource for the economy goes bankrupt or asks for bailouts. And that is why Alberta is ailing.

Expensive oil kills the messianic religion of economic growth, while cheap oil prices slaughter any hope for an ordered transition to consuming fewer fossil fuels. Trudeau, Kenney and Nixon are blind to these facts.

Teck Resources isn’t so dumb. It now says that a federal approval for the Frontier Mine doesn’t mean it will actually dig a bitumen hole.

CEO Don Lindsay says the project won’t happen unless the price is right, a partner with deep pockets is found, and the Trans Mountain pipeline is expanded.

That over-budget $12.6-billion megaproject, by the way, suffers from the same dismal economics as the proposed Teck mine. Incredibly, Kinder Morgan did only one benefit analysis on that pipeline expansion, and it found that the project wasn’t really viable without oil at $100 a barrel.

Not surprisingly, Kinder Morgan couldn’t raise the money it needed to start the project given current market conditions. It astutely blamed its fiscal woes on environmental protestors.

The Canadian government bought that baloney, and now taxpayers will be milked for decades.

But back to the Teck mine project. The Joint Panel Review clearly ignored oil’s new volatile economics by recommending that the project be approved.

In fact, the Institute for Energy Economics & Financial Analysis even accused the review’s panel members of "displaying reckless disregard of the fact that the $95 is misleading as an indicator of likely market performance in Canada."

The perverse argument for Teck approval

If the Trudeau government shrugs and approves the Teck Frontier mine anyway, it puts the project in Kenney’s court.

Then, when Teck Resources tells Kenney that the price isn’t right, he won’t have any feds or enviros to blame for the fiscal hole that Alberta continues to dig for itself.

Kenney can’t lower royalties anymore because he’s already passed legislation freezing any changes for 10 years, guaranteeing that Albertans will always be the last to benefit from any oil and gas development.

Kenney, of course, might have a Soviet solution. He could solicit funds from the Alberta Investment Management Corporation (AIMCO), which manages assets for 31 government pension funds.

It has been done before. Together with a U.S. firm, AIMCO last year bought a 65-per-cent equity in the contentious Coastal GasLink, a fracked gas pipeline, from TC Energy (formerly TransCanada).

Punting the Teck Mine into Alberta’s court does not guarantee that Kenney or the province will face the reality of price volatility, the growing fragility of globalization or even embrace diversification.

But at least the province will no longer be able to blame Canada or anyone else for its petro mistakes.

At some point or another, we all must respect the Law of Holes. Or end up stuck in the pits we’ve dug for ourselves while the world moves on.  [Tyee]

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