Doomed oilsands project shows risk of false assumptions

Anti-oil activists cheered the announcement by Teck Resources that it was pulling its application to build a monster oilsands project.

I’m suspecting that the only people more relieved than the activists are the senior management and board of Teck, which now don’t have to keep stumbling around with that stinking albatross around their necks, acting like they’re super-excited about its prospects to fly.

Like many products of the commodity boom, the Teck idea looked great when there were predictions of long-term prices for oil of plus-$100 per barrel. Today that seems like a pipe dream.

Farmers can probably relate to the Teck situation. How many of you thought crop prices had reached a permanently high plateau back in the early 2010s? Certainly, at the kind of crop and agriculture conferences I cover, predictions that commodity prices were going to stay high and get higher were commonplace.

That’s just a sadness if your farm didn’t make bold moves to buy lots of farmland in the mid-2010s and pile up the debt. It’s a bigger management challenge if you bought a bunch of high or overpriced land in the mid-2010s and have had to accept that crop prices probably aren’t just temporarily down but are now in a long-term range that isn’t anything as nice as it was in 2012.

At times in its development, the Teck oilsands project quoted $95 per barrel oil as a profitable level. Good luck getting back to that level any time soon.

I’ve made a small hobby of studying long-term commodity and stock market cycles. What we’re experiencing today is no surprise, and reasonable expectations now should favour a continuation of post-2014 commodity market price ranges for years to come, if the theories to which I adhere are valid. (I’ve been following this since 2004.)

Especially in crops, there can be spikes that occur in the midst of long-term commodity bear markets, but those usually only last a year and are provoked by weather (1996-97, for example).

So, Teck appears to have been in the position of a farmer wanting to buy a whole bunch of farmland at today’s prices on the assumption that $14 per bushel canola was a reasonable guess at long-term average prices.

That’s why I imagine the management and board of Teck are relieved to walk away from the project, at least for now.

With the extreme actions of anti-pipeline activists, the inability of this country to get crucial infrastructure built, the lukewarm and questionable support from the federal government and the flip-flopping of Alberta governments on carbon taxes, it’s easy to say things are just too uncertain to proceed.

Underneath it all is a deeper truth: commodity prices suck, and it’s hard to imagine them getting better any time soon.

By the end of this decade, the outlook should be much better. We should be on the cusp of a long-term bull market in commodity prices. That would be a better time to build a mega-project in the oilsands or to buy a bunch of farmland.

But of course, by then, everybody will be so pessimistic about commodity prices that nobody will be wanting to build any oilsands projects or to buy any farmland.

Note to self: buy lots of shares in oilsands producers and buy some farmland in 2029.

About the author

Markets at a glance


Stories from our other publications