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Glencore-Teck deal reveals the irony of coal: Profitable and vital, yet endlessly shunned

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From the MacDonald Laurier Institute

By Heather Exner-Pirot

Coal is not going anywhere, and while some countries will benefit, Canada will not be among them

In many ways, the US$8.9-billion deal Glencore has struck for Teck Resources’ coal assets represents an elegant split that plays to each company’s strengths.

Teck, the Canadian miner, can now focus on its core base metals business, in particular copper, as it bets on strong returns in the years to come. Swiss commodities giant Glencore can build up its coal empire, adding the steelmaking coal assets to its vast thermal coal trade.

But the deal also reveals how coal has its own set of rules. Despite how profitable and strategic Teck’s coal resources are, they will soon come under foreign control. It is hard to imagine this unfolding the same way for any other commodity.

Coal is an essential, ubiquitous material. It is the workhorse of the global power sector, accounting for more than a third of global electricity generation. And it is indispensable in steelmaking. The burning of coke, a coal-based fuel, produces the carbon monoxide needed to convert iron ore into a liquid, alongside high temperatures. The majority of steel in the world is made with coking coal, also known as metallurgical coal.

Owing to its carbon intensity, it has a terrible reputation. Investors and shareholders, not to mention Western governments, shun it. Teck’s intention to spin off its coal business is linked to shareholder desires to see a decoupling of its metals and coal businesses out of environmental concerns, which have weighed on its valuation. Even as it pursues Teck’s coal assets, Glencore is doing the same; it plans to separate its metals and coal businesses within two years and sought Teck’s premium steelmaking coal to make its other coal holdings more palatable.

But shareholder distaste for coal is increasingly divorced from its economics. Coal is still highly profitable. Last year witnessed high prices and record demand, in part owing to the fallout from the Russian invasion of Ukraine. Both Teck and Glencore benefited greatly. Teck earned record profits of $4.9-billion, with coal accounting for 75 per cent of that. Glencore’s core profit rose 60 per cent to a record US$34.1-billion, more than half of which came from coal production.

Teck’s steelmaking coal assets in B.C.’s Elk Valley are world-class – high-quality, with decades of reserves and a low carbon intensity relative to other deposits. Glencore’s deal for them will see it partnering with Japan’s Nippon Steel and South Korea’s PISCO, who will take minority stakes. The fact that the deal includes two of the world’s biggest steel producers is evidence that these coal assets have long-term customers. This deal is not about Teck unloading a bad asset; it is about removing the ESG noose around its neck.

That’s poor justification for letting such vital assets end up in foreign hands. Yet the federal government will likely let the deal happen.

Federal scrutiny of foreign investment and takeovers in our domestic mining sector has grown of late, as the need for friendly sources of critical minerals grows. As The Globe and Mail reported last month, Canadian firms have mainly been the targets, rather than pursuers, of acquisitions in the sector in the past decade. Canada has toughened the Investment Canada Act as a result.

While the Teck-Glencore deal will raise similar concerns, it has been designed to skirt them. Teck’s news release could have been written by Ottawa. It aligns with the federal government’s recent Critical Minerals Strategy and commits to remaining a Canadian-based miner focused on “future-oriented metals,” “an electric vehicle battery recycling facility” and support for “junior Canadian mining and exploration companies.” It also preserves B.C.’s coal mining jobs and revenues.

There’s a parallel universe where a G7 country protects its most exquisite metallurgical coal deposit, required to produce a critical material for any advanced economy, energy system or military. That introduces policy to reshore and build up its domestic steel industry in an era of growing geopolitical turbulence.

The world in 2023 is not this place. And Canada is not that G7 country. Indeed, the world view of the current federal and B.C. governments sees the decline of coal as both imminent and necessary. There is no way they will make the argument that the material is a strategic resource that must remain under Canadian ownership.

But coal is not going anywhere. Some countries will benefit, economically and strategically, from controlling it. Canada will not be among them.

Heather Exner-Pirot is the director of energy, natural resources and environment at the Macdonald-Laurier Institute.

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Alberta

Ottawa’s oil and gas emissions cap will hit Alberta with a wallop

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From the Fraser Institute

By Kenneth P. Green

Even if Canada eliminated all its GHG emissions expected in 2030 due to the federal cap, the emission reduction would equal only four-tenths of one per cent of global emissions—a reduction unlikely to have any impact on the trajectory of the climate in any detectable manner or produce any related environmental, health or safety benefits.

After considerable waiting, the Trudeau government released on Monday draft regulations to cap greenhouse gas (GHG) emissions from Canada’s oil and gas producers.

The proposed regulations would set a cap on GHG emissions equivalent to 35 per cent of the emissions produced in 2019 and create a GHG emissions “cap and trade” system to enable oil and gas producers (who cannot reduce emissions enough to avoid the cap) to buy credits from other producers able to meet the cap. Producers unable to meet the cap will also be able to obtain emission credits (of up to 20 per cent of their needed emission reductions) by investing in decarbonization programs or by buying emission “offsets” in Canada’s carbon markets.

According to the government, the cap will “cap pollution, drive innovation, and create jobs in the oil and gas industry.” But in reality, while the cap may well cap pollution and drive some innovation, according to several recent analyses it won’t create jobs in the oil and gas industry and will in fact kill many jobs.

For example, the Conference Board of Canada think-tank estimates that the cap would reduce Canada’s GDP by up to $1 trillion between 2030 and 2040, kill up to 151,300 jobs across Canada by 2030, and national economic growth from 2023 to 2030 would slow from 15.3 per cent to 14.3 per cent.

Not surprisingly, Alberta would be hardest hit. According to the Board, from 2023 to 2030, the province’s economic growth would fall from an estimated 17.8 per cent to 13.3 per cent and employment growth would fall from 15.8 per cent to 13.6 per cent over the same period. Alberta government revenues from the sector would decline by 4.5 per cent in 2030 compared to a scenario without the cap. As a result, Alberta government revenues would be $4.5 billion lower in nominal terms in fiscal year 2030/31. And between 54,000 to 91,500 of Canada’s job losses would occur in Alberta.

Another study by Deloitte estimates that, due to the federal cap, Alberta will see 3.6 per cent less investment, almost 70,000 fewer jobs, and a 4.5 per cent decrease in the province’s economic output (i.e. GDP) by 2040. Ontario would lose more than 15,000 jobs and $2.3 billion from its economy by 2040. And Quebec would lose more than 3,000 jobs and $0.4 billion from its economy during the same period.

Overall, according to Deloitte, Canada would experience an economic loss equivalent to 1.0 per cent of GDP, translating into lower wages, the loss of nearly 113,000 jobs and a 1.3 per cent reduction in government tax revenues. (For context, Canada’s economic growth in 2023 was only 1.1 per cent.)

And what will Canadians get for all that economic pain?

In my study published last year by the Fraser Institute, I found that, even if Canada eliminated all its GHG emissions expected in 2030 due to the federal cap, the emission reduction would equal only four-tenths of one per cent of global emissions—a reduction unlikely to have any impact on the trajectory of the climate in any detectable manner or produce any related environmental, health or safety benefits.

Clearly, the Trudeau government’s new proposed emissions cap on the oil and gas sector will impose significant harms on Canada’s economy, Canadian workers and our quality of life—and hit Alberta with a wallop. And yet, as a measure intended to avert harmful climate change, it’s purely performative (like many of the government’s other GHG regulations) and will generate too little emission reductions to have any meaningful impact on the climate.

In a world of rational policy development, where the benefits of government regulations are supposed to exceed their costs, policymakers would never consider this proposed cap. The Trudeau government will submit the plan to Parliament, and if the cap becomes law, it will await some other future government to undo the damage inflicted on Canadians and their families.

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Alberta

For second year in a row, Alberta oil and gas companies spend more than required on cleanup

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From the Canadian Energy Center

By Grady Semmens

$923 million spent cleaning up inactive wells, sites and pipelines in 2023

As a business owner, Ryan Smith values few things more than predictability when it comes to the oil and gas market and the demand for his company’s services.

That’s why knowing that next year in Alberta, the regulator requires at least $750 million worth of work cleaning up inactive oil and gas wells and other legacy energy infrastructure is tremendously helpful for the CEO of Calgary-based 360 Engineering & Environmental Consulting.

“Having a minimum spend in place for the province makes the market more predictable and consistent, which in turn helps our clients and our business plan for the future, which is a good thing,” says Smith, whose company has completed more than 5,000 site closure activities in Canada and internationally since 2015.

“Site closure has really emerged as a growth market over the last decade, especially in Western Canada where the regulatory systems for oil and gas are more advanced than anywhere else we are exposed to. It is an integral part of the energy lifecycle, and if it is done well it adds a lot of value to the industry.”

The Alberta Energy Regulator (AER) introduced an industry-wide minimum “closure” spending requirement in 2022, part of Alberta’s Inventory Reduction Program to accelerate the remediation of inactive oil and gas wells, facilities and pipelines across the province.

The mandatory quota determines the minimum level of work a company must conduct primarily to decommission and reclaim a proportion of its inactive inventory.

Inactive wells are defined as those that have not been used for six months or a year, depending on what they are being used for. When a company decides that they will not reactivate an inactive well they decommission it through a process called abandonment.

A well is considered successfully abandoned after it is cleaned, plugged with cement, cut to a minimum of one meter below the surface and covered with a vented cap. After abandonment comes remediation and reclamation, where the land around the well is returned to the equivalent of its original state.

The first two years under the new rules saw Alberta’s energy industry significantly exceed the minimum closure requirements.

In 2022, companies spent more than $696 million, about 65 per cent more than the initial threshold of $422 million. The AER increased the minimum spend to $700 million in 2023, which producers surpassed by 22 per cent with total expenditures of $923 million.

The 2024 minimum remains at $700 million, while in July the regulator announced that the minimum spend for 2025 was raised to $750 million.

This closure work does not include remediation of oil sands mining sites, which is handled under the Mine Financial Security Program, nor does it include the closure of orphan wells (wells without a legal owner) managed by the industry-funded Orphan Well Association.

Gurpreet Lail, CEO of Enserva, an industry association representing energy service companies, suppliers and manufacturers, says there was an initial rush of closure work when the quotas were first put in place, but activity has since become more even as companies develop long-term closure plans.

“A lot of the low-lying fruit has been taken care of, so now companies are working on more complex closure files that take more time and more money,” Lail says.

Facility owners say that Alberta’s rules provide direction for planning closure and remediation work, which in the past may have been put on hold due to the ups and downs of the oil and gas market.

“When commodity prices are up, everyone is focused on drilling more wells and when prices are down, budgets are strained for doing work that doesn’t bring in revenue. Having a minimum spend makes sure closure work happens every year and ensures there is longer-term progress,” says Deborah Borthwick, asset retirement coordinator for Birchcliff Energy, an oil and natural gas producer focused in Alberta.

Over the last few years, Birchcliff has budgeted more than $3 million for annual facility closure work, far above its required minimum spend.

The company completed 11 well abandonments and decommissioned 23 facilities and pipelines in 2022, according to its latest environmental, social and governance report.

Borthwick says having the closure quota for 2025 already set has allowed it to plan ahead and line up the necessary service companies well in advance for next year’s remediation work.

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