This week, the largest proposed tar sands project on the horizon--Teck Resources' Frontier Mine--was delayed by at least five years, with production pegged to begin in 2026 instead of 2021. According to the company, the $20.6 billion, 260,000 barrel per day (bpd) mine fell victim to the industry's ongoing economic troubles. With benchmark oil prices persisting near $50 per barrel, the tar sands industry is facing a double punch to the gut as the pipelines it needs to expand face increasingly long odds of ever being built. With transport bottlenecks now expected to continue much farther into the future, it was not today's low oil prices that pushed this project down the road (afterall, the Frontier Mine had a start-up date six years from now), but rather ongoing infrastructure challenges that will continue to diminish the tar sands industry's returns well into the future. Indeed, as pressure to address the industry's climate pollution mounts and international efforts to cut carbon emissions become increasingly aggressive, we may be witnessing a turning point where dirty fuel projects like Teck's simply never get built. And this is great news for the climate. As a large group of world-renowned scientists recently pointed out in an open letter, tar sands is one the highest carbon crudes in the world and a moratorium on the industry's expansion is more necessary than ever if climate change is to be held in check.
The news about Teck's delayed plans follows close on the heels of the Canadian Association of Petroleum Producer's (CAPP) 2015 production forecast, which slashes their 2030 tar sands production forecast by nearly 1 million barrels below the 2014 forecast. This is big news given that in 2014, CAPP had already cut their annual forecast for 2030 tar sands production by more than 400,000 bpd compared to 2013's forecast. Through 2030, CAPP now expects tar sands production[i] to rise from 2.6 million bpd in 2014 to 5 million bpd. This is an astonishing revision given that in 2008 (now two "busts" ago), CAPP saw tar sands production close to 4.5 million bpd by 2020. In this current era of low oil prices, mass mobilization against new tar sands transport infrastructure, and a groundswell of international calls to confront climate change, future growth of the tar sands industry continues to look less and less likely.
A year ago, well before oil prices gave any indication of their impending 60% decline, cracks in the tar sands industry's rosy outlook had already begun to appear. Major mine cancellations and delays were announced by Total E&P, then Shell and Statoil. The reason most often cited for these early cancellations? Lack of pipeline takeaway capacity, not low oil prices. In the months that followed, numerous other projects were cancelled, suspended, or put on hold. Today, with Teck's latest announcement, project cancellations and holds exceed 1.5 million bpd.[ii] The lack of transport capacity is now a constant talking point for the tar sands industry and is nicely summed up in CAPP's latest report:
Even with this lower growth forecast, an expansion of the existing transportation infrastructure is needed to connect growing crude oil supply from Western Canada to new markets. Pipelines are the primary mode of transportation for long term movements of crude oil but the protracted regulatory processes continues to present a number of challenges.
Perhaps even more telling is recent analysis from Wood Mackenzie, a Canadian energy research firm with close ties to the tar sands industry. In their analysis, delays in constructing pipelines to connect Alberta to international markets may cost the tar sands industry $100 billion over the next 15 years. And none of this is a surprise--lack of pipelines already lowers the value of tar sands in the market, discounting a barrel by at least $10 due to already-high transport costs.
While world oil prices are also a major driver behind the industry's sudden deep freeze, a number of problems plague its profitability and will contribute to longer-term growth challenges. These include declines in investor confidence and capital investment, rising labor costs, and high production costs. Taken together, the challenges dogging the tar sands industry are great news for the climate and the vast stores of carbon that will stay in the ground as tar sands expansion continues to slow. For the Alberta government the current economic climate provides an extraordinarily compelling rationale for transitioning to a far more diversified economy that weans the province off of its oil addiction.
In the U.S., following the State Department's analysis of the proposed Keystone XL tar sands pipeline, many have claimed that if Keystone XL isn't built, little will change in Alberta's tar sands industry and its growth will continue unimpeded, largely due to the possibility of rail as a substitute form of transport. However, new data from the U.S. Energy Information Agency shows that only a very small percentage of tar sands oil is moving into the U.S. by rail. The big reason for this is that rail is a much more expensive option than pipelines, especially to the Gulf Coast--industry's prime target--which costs at least twice as much to reach by rail versus pipelines. This month's CAPP forecast provides yet another indication that rail is not a viable alternative to pipelines and will continue only as a last resort capacity gap filler for industry. Meanwhile, in Canada, proposals for at least three new pipelines have continued to stall, while the public outcry against them has grown louder and louder.
CAPP's latest forecast may also signal new problems on the horizon for some of the proposed pipelines the tar sands industry so desperately needs to continue its growth. In a graph indicating existing versus proposed takeaway capacity, 2030's forecast production levels no longer require nearly 1 million bpd of proposed pipeline capacity. As environmentalists, scientists, and economists have been pointing out for years, the endless parade of proposed tar sands infrastructure projects only make sense to support expanded tar sands production. Indeed, today there is basically a production and transport equilibrium--if the industry held steady at current production levels, transport constraints wouldn't be an issue and the need for new pipelines would disappear.
Economic and logistical realities are continuing to prove that expanded development of the tar sands is not inevitable. As global carbon emissions continue to rise, calls for climate action--many focused on eliminating production of marginal resources like the tar sands and other dirty, high cost, low quality oils--will make tar sands expansion an ever more risky investment. Meanwhile, gains in renewable energy, increased energy efficiency, and rapid transitions toward a low-carbon world economy will likely continue to place downward pressure on global oil demand and force the Alberta economy to face 21st Century realities. This pressure opens the door for Canada to invest in a different kind of energy future, a future that will allow it to become a clean energy leader instead of a dirty energy pariah.
[i] "Production," as used here, includes additions of diluent and lighter oils, some of which are imported into Canada or are produced outside of the tar sands region.
[ii] There is no one source that compiles all cancellations. This number is derived from the following sources: http://www.onearth.org/earthwire/tar-sands-cancellations; https://albertacanada.com/files/albertacanada/AOSID_QuarterlyUpdate_Spring2015.pdf; http://business.financialpost.com/news/energy/oil-price-war-hitting-canada-hard-but-just-how-hard-remains-to-be-seen; http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/teck-resources-delays-frontier-oil-sands-project-by-five-years/article25407239/?cmpid=rss1&click=sf_rob.