Teck’s $20.6 billion Frontier Oil Sands Mine Project, now before the Canadian Environmental Assessment Agency Joint Review Panel, faces an extraordinary and alarming combination of risks. The project will face financial distress for its entire 41-year life cycle. According to our report, Significant Financial Risks Confront Teck’s Frontier Oil Sands Mine Project, neither oil price increases nor production cost declines for the project are likely to be sufficient to improve its financial prospects.
Teck Resources Limited is ill-equipped and ill-prepared to take on such a mega-project due to its relative inexperience in oil sands, limited bandwidth for such a project, and the sheer scale of the project itself relative to Teck’s market capitalization and capital investment budget. The Frontier project represents an investment ($CAD21 billion) far in excess of its total market capitalization (US$13.4; CAD$17.7 billion) of Teck, which is the sole owner of the project. (Suncor and ExxonMobil have, respectively, market capitalizations of US$66 billion and US$330 billion.) Teck’s recent filings suggest it is ill-prepared to begin the capital-intensive mega-project, as it would need to find a partner or raise funds – neither of which it appears to have done.
Beyond Teck’s own internal issues, the broader market factors affecting Canadian oil sands production add financial headwinds, including high costs to produce oil sands and pressure on revenues, as described below:
A selling point for the project has been economic benefits to the people of Alberta. But faced with these market realities, Teck has already had to reduce its estimates of economic benefits and royalty revenues that the project will generate in Alberta. Projected benefits to Alberta household incomes have declined by more than 60% from the initial filing of the project. And even this lower level may be optimistic.
Beyond traditional market forces, the Frontier project faces mounting public opposition. The depth of popular opposition to fossil fuel projects has surprised corporate leaders in Canada. Projects once thought to be in compliance with regulatory standards and part of a political consensus are being cancelled or delayed as citizen opposition mounts.
Another surprising outcome of citizen activism is that companies like Kinder Morgan, which sold its unfinished Trans Mountain pipeline and related assets to the Canadian government for $4.5 billion, find that their credit rating improves when they rid their balance sheets of financially distressed new projects. That provides a strong incentive to drop uneconomic projects.
Now the question is when will Teck and the project’s supporters accept reality.
Tom Sanzillo is IEEFA’s director of finance and Kathy Hipple is an IEEFA financial analyst.