The climate risk calculus of Teck’s cancellation of Frontier

Teck Resources stock fell 5% Monday morning, following Sunday night’s announcement that the Vancouver-headquartered mining company was pulling the plug on its $20 billion Frontier oil sands project.

By the end of the day, the Vancouver company's stock had recovered somewhat. But Canada’s stock as a place to invest in fossil fuel projects may have a harder time recovering.

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Sunday night, Teck CEO Don Lindsay released a letter to federal Environment Minister Jonathan Wilkinson, announcing his company was withdrawing its Frontier oil sands project in Alberta from the federal environmental assessment process.

That saves Wilkinson and the Trudeau government from a decision that would have angered half of the country, regardless of whether it approved it or rejected the project.

But it brings the value of large energy projects killed or cancelled under Prime Minister Justin Trudeau's watch to about $120 billion. (The C.D. Howe Institute estimated $100 billion worth of projects died or were killed since 2015). The $20 billion Frontier project joins Northern Gateway, Energy East, and Pacific NorthWest LNG in a growing list of major energy projects that have died just in the last few years.

And even a project that enjoys wide support among First Nations, and aims to have one of the lowest emissions profile in the world – the $40 billion LNG Canada project and associated Coastal GasLink pipeline – has prompted a literal paralysis in the form of railway blockades by First Nations across Canada.

First Nations in Alberta that supported the Frontier project expressed dismay over the project's cancellation.

"Revenue from Teck-related enterprise would have helped to support our on-reserve Elder’s long-term care centre and the new K-9 school on which we hope to break ground in 2020," Mel Grandjamb, chief of the Fort McKay First Nation, said in a press release.

Alberta Premier Jason Kenney blamed the Trudeau government for the decision.

“Weeks of federal indecision on the regulatory approval process and inaction in the face of illegal blockades have created more uncertainty for investors looking at Canada," Kenney said. "Teck’s predicament shows that even when a company spends more than $1 billion over a decade to satisfy every regulatory requirement, a regulatory process that values politics over evidence and the erosion of the rule of law will be fatal to investor confidence."

But some are reading Lindsay's letter to Wilkinson as a subtle rebuke of Jason Kenney's watered down climate change policies.

“We support strong actions to enable the transition to a low carbon future,” Lindsay writes. “We are also strong supporters of Canada’s action on carbon pricing and other climate policies such as legislated caps for oil sands emissions.”

There has been some wrangling over the question of whether the Frontier project would fit within Alberta’s 100 megatonne cap on oil sands emissions, and how it might fit into Canada's GHG emission reduction targets. It would have produced 4 million tonnes of CO2 annually.

There are also questions about whether the project made economic sense anymore, given how low oil prices have been since 2014.

Frontier’s cancellation appears to be, at least in part, the result of Canada’s indecision on the question of whether it can – or wants to – continue developing and exporting fossil fuels, while implementing strong climate change policies and addressing First Nations reconciliation, and Teck does not want the Frontier project to be caught in that indecision.

In making the announcement, Lindsay suggested that Canada needs to sort out how to develop fossil fuel projects that are aligned with its climate change objectives.

“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,” Lindsay writes in his letter to Wilkinson.

“Without clarity on this critical question, the situation that has faced Frontier will be faced by future projects and it will be very difficult to attract future investment, either domestic or foreign.”

The company noted that global capital markets “are increasingly looking for jurisdictions to have a framework in place that reconciles resource development and climate change, in order to produce the cleanest possible products.

“This does not yet exist here today and, unfortunately, the growing debate around this issue has placed Frontier and our company squarely at the nexus of much broader issues that need to be resolved.

“In that context, it is now evident that there is no constructive path forward for the project.”

In recent weeks, Mark Carney – the former head of the Bank of Canada and – more recently, the former head of the Bank of England – has said that half of the world’s oil reserves could be stranded assets and warned financial institutions that they need to take into account climate risk.

And the CEO of the world’s largest asset managers – BlackRock – recently warned of a “significant reallocation of capital” to avoid climate risk. That warning follows a number of pension funds, universities and financial institutes that have announced plans to divest from fossil fuels, particularly Alberta's oil sands.

A number of environmental groups say Teck is simply acknowledging that fossil fuel investments are no longer a smart long-term investment.

The Institute for Energy Economics and Financial Analysis (IEEFA) pointed out that when the project was approved by a joint review panel, it projected global oil prices of US$95 per barrel.

The U.S. Energy Information Administration (EIA) projects an average price of US$61 per barrel in 2020. By 2025, it projects oil to sell in the US$81 per barrel range and US$93 by 2030.

Pedro Antunes, chief economist for the Conference Board of Canada, said investment in Alberta's oil patch declined significantly since 2014, with a plunge in oil prices.

"We had Alberta doing a little bit better going forward, because we expected some investment to come back to the province," he said. "This puts some risk to that forecast."

Marvin Shaffer, a public policy professor at Simon Fraser, said the Kenney and Trudeau governments probably both share in some of the blame for Teck's decision: Kenney for watering down climate change policies, and Trudeau for not being clear enough on just how projects like Frontier might fit within Canada's carbon budget. But he also thinks economics had something to do with Teck's decision.

"And, while Teck clearly didn’t want to get caught up in the climate wars battering other major projects, it seems clear that their project was on shaky economic ground, and a decision to withdraw was substantively not much different from what would likely have been a decision not to proceed in the foreseeable future in any event," he said.

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