The response to Teck’s decision to shelve its oilsands mine is predictable. According to Alberta Premier Jason Kenney, Teck’s decision is just another example of the federal government’s anti-investment policies. If only Ottawa would change its ways, all would be well in the oil sector again.
This response misses the fact that the oil sector is in the midst of a structural change driven by international market forces and climate policies that are curtailing demand and making future growth in Alberta’s oil sector increasingly unlikely.
The trend began with the decline in oil prices from about $100 per barrel in 2014 to an average of $60 in 2019. Alberta is among the highest-cost producers of oil in the world and, not surprisingly, this price reduction dampened investment significantly.
The International Energy Agency’s 2019 forecasts suggest that markets for oil will continue to be weak for the next several decades. One IEA forecast based on implementation of current and proposed policies forecasts relatively slow growth in oil demand from 2018 to 2030 followed by virtually no growth from 2030 onward.
Under this scenario, the IEA forecasts little growth in Canadian production from 2018 to 2040, beyond completion of existing projects under construction.
A second and more relevant IEA forecast that is based on sustainable development policies to meet the Paris climate-change objectives predicts a significant decline in oil demand from 2018 to 2030 of 10 per cent and a further decline of 23 per cent to 2040.
In a report released in January this year, the IEA discusses the consequences of these structural changes on the energy sector and warns about the risks of the energy sector losing more than $900 billion in wasted investment in new projects based on erroneous assumptions of perpetual growth in oil demand.
The IEA cautions that if energy companies want to prosper, they will need to diversify away from fossil fuels and embrace the transition to a cleaner-energy world. Companies will need to continue to supply fossil fuels during this transition and Canadian companies will continue to supply oil to world markets, but the companies that make the transition to clean energy will be the ones that survive.
Teck no doubt is aware of these trends, and that is the principal reason why it shelved what is a high-risk project. Teck realized that its price forecast of $95 per barrel used in its application was no longer valid when other agencies are forecasting prices of $71 per barrel. Teck just wrote off $900 million in one of its operating projects due to weak oil markets.
Kinder Morgan also realized that their proposed Trans Mountain pipeline was a high-risk investment because of the more than doubling of capital costs, weakening oil production forecasts and the emergence of lower-cost pipeline options such as Enbridge’s Line 3.
Hopefully, Canadian governments will also recognize these structural changes in energy markets and avoid promoting high-risk investments in fossil-fuel infrastructure that will leave a legacy of uneconomic investments and public debt.
Despite these structural changes, the energy sector will remain an important part of the Canadian economy and some initiatives to address concerns in the oil sector are warranted. For example, some new pipeline capacity being built by Enbridge is required to meet the needs of the industry and avoid price discounts.
But the federal government’s decision to double down by investing in projects such as the Kinder Morgan pipeline in the face of declining demand is a recipe for economic decline.
The private sector is beginning to realize the need for alternative strategies not based on unrealistic fossil-fuel growth assumptions, and Canadian governments need to do the same.
The oil boom is over, and it is time to manage a transition to another strategy that does not assume the boom will return if only we build another few pipelines or weaken our climate-change policies.
Thomas Gunton is director of the Resource and Environmental Planning Program at Simon Fraser University, and former deputy minister of environment for B.C.