https://www.thestar.com/business/2020/02/24/lack-of-financing-likely-a-key-factor-in-shelving-frontier-oil-project-experts-say.html
[Dominoes are starting to fall.
It's about the profits and financial risk, not climate change.
But that doesn't explain the timing. Why pull the plug on your project
with $1.1 billion in sunk costs just 3 days before the federal Cabinet
was going to have to formally announce its approval, or not, of the
project. Getting the approval at least keeps the option open, in case
oil prices should rise again, even if no work would be done for years to
come.
Could it be that Fortress Fossil Fuel knew the decision would be
negative? If so, that announcement that a project which was unlikely to
happen anyway, would trigger the end of all future major fossil fuel
projects in Canada, as the government would actually have officially
stepped up to their own rhetoric on climate change action? No, better
for Fortress Fossil Fuel that such a decision not be make public and
official government policy.]
Lack of financing likely a key factor in shelving Frontier oil project,
experts say
Josh Rubin
Mon., Feb. 24, 2020
Teck Resources is blaming politics and a lengthy approvals process for
its decision to pull out of the $20-billion Frontier oilsands project —
but industry analysts say a lack of financing likely played a greater role.
With the price of crude oil hovering just over $53 per barrel — a drop
of 16 per cent this year — the economics of the project just don’t make
sense like they would have when Teck first applied for approval nine
years ago, says James L. Williams of WTRG Economics, an Arkansas-based
oil and gas research firm.
“When they started this, the price of crude was roughly double what it
is now,” said Williams. The current low price for crude would make any
capital-intensive project unappealing to investors and lenders,
particularly the hedge funds and pension funds that would supply the cash.
“You don’t want to start out on an investment where you’re not going to
be able to service your debt,” Williams said.
At a mining conference in Florida on Monday, Teck CEO Don Lindsay said
tensions over Indigenous rights, climate change and resource development
helped push the company to shelve its massive oilsands project.
“Literally over the past few days, it has become increasingly clear that
there is no constructive path forward,” Lindsay said.
But others say that the project was likely shelved in large part because
it no longer makes financial sense.
“The financing just isn’t available, or not at a reasonable cost,”
Williams said.
Investors and lenders have been particularly skittish about investing in
the oilpatch since several bankruptcies in the wake of falling crude
prices in 2016 and 2017, Williams explained. The money which once flowed
as freely as a gushing well is simply no longer around.
“There’s been a shift in investor and lender mentality. Until then, they
valued oil companies by looking at how many barrels of oil they had in
reserve. Cash flow wasn’t really the measure — they were looking at
potential.”
Now, though, more conventional measures — such as cash flow and ability
to service debt — are used by investors and lenders looking at oil and
natural gas, Williams said.
And for a lot of projects, which are typically financed by borrowing
from institutional investors, the numbers don’t look good.
Shane Nagle, an investment analyst with National Bank Financial said in
a note to investors Monday that institutional investors are generally
growing more reluctant to put money into projects that could harm the
environment.
“Like all companies in the resource sector, an increased focus from
funds on reducing the impact of operations on climate change is becoming
increasingly important,” said Nagle.
Adam Fremeth, an associate professor at Western University’s Ivey School
of Business, agreed that the market price of crude oil likely played a
role in Teck’s decision to put Frontier on hold. That could also mean
the company eventually tries to get the project going again,
particularly when production of “tight” oil from fracking in North
Dakota slows down.
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