While some of Jason Kenney’s usual mouthpieces and apologists start agitating for the Teck Frontier oilsands mine, it seems we need yet more reality checks about the project – particularly the economics. Because we have seen on more than one occasion where a project that wasn’t economically viable still achieves mythology status because certain people who think the idea of it is great will lie about its fate in order to suit their narratives *cough*Energy East*cough*. Anyway, here’s Andrew Leach with more.
Frontier is a big project: a $20 billion potential investment. It's also an expensive project. That capital investment is $76k per barrel per day of capacity: an option that gets you ~ 40 years of production 4 which you still have to pay op + maint costs, royalties, and taxes.
— Andrew Leach (@andrew_leach) December 18, 2019
Taking those estimates, and assuming a 10% return on investment, which would be a fairly standard hurdle rate for taking this kind of commodity price risk over this kind of time horizon, you can calculate what oil price you'd need to see to make the project work.
— Andrew Leach (@andrew_leach) December 18, 2019
If you were to cut initial capital costs or operating costs by 25%, you could get your break-even down closer to $65 WTI. Those are real prices, so you'd need to see WTI at $65 plus inflation on average over the life of the project just to meet a minimum hurdle rate of return.
— Andrew Leach (@andrew_leach) December 18, 2019
So, what about the other part. Is this the project that is most likely to be adopted? No. There are plenty of other potential investments with lower costs than Frontier. Cenovus has several great SAGD assets, Imperial has Aspen, Carmon Creek is available in the Peace, etc.
— Andrew Leach (@andrew_leach) December 18, 2019
Let's also remember why CERI doesn't even evaluate oil sands mines anymore. They are too expensive. In 2014, with oil at its post-2008 peak, Total shelved its investment in Joslyn. That project has an approval in hand, is closer to McMurray, etc.https://t.co/Rx9miZ3EUv
— Andrew Leach (@andrew_leach) December 18, 2019
A fair point to make is that many world oil price forecasts show prices that would make Frontier work, in a vacuum. For example, here are EIA's real dollar WTI price forecasts from their Annual Energy Outlook. https://t.co/T7BPYwOcjK The reference case average is ~$100/bbl. pic.twitter.com/1079U2l0mY
— Andrew Leach (@andrew_leach) December 18, 2019
If you're going to frame Frontier as the last, best hope for AB, and frame Trudeau as the lone barrier, one has to wonder what you've done with all the other, cheaper projects out there and why you expect this project to be more likely to be built than earlier-approved mines.
— Andrew Leach (@andrew_leach) December 18, 2019