Why is this theme important?
Energy is critical for human development, including the provision of shelter, transportation, lighting, cooking, heating and refrigeration. Around the world, people depend on access to affordable energy to improve their quality of life. Global demand for energy is increasing, driven by population growth, increasing urbanization and economic development. This can result in potentially higher energy costs and, in some areas, a lack of supply. Fossil fuel combustion, which accounts for the majority of the world’s energy consumption, represents the largest human-generated source of GHG emissions.
Mining operations require large amounts of energy to produce and transport products. Energy powers mine sites by providing the electricity to run plants and equipment, producing heat and lighting for buildings, and providing the gasoline and diesel that vehicles need.
What does it mean for Teck?
Energy costs are one of Teck’s most significant operational expenditures. As mineral resources become scarcer, it is also likely that new projects will be in remote locations, with lower grade ore that is more challenging to extract and process. These factors all suggest that mining is likely to become more energy intensive. This will make it increasingly challenging to reduce our energy intensity and GHG emissions.
The effects of climate change also have the potential to impact our business and the communities where we operate. We believe that industries have an important role to play in taking steps to reduce greenhouse gas emissions and supporting efforts to find solutions to this global challenge.
In addition, the rising cost of carbon presents a key risk for us to monitor and manage. New policies and regulations aimed at reducing GHG emissions may impact our production costs and introduce other business risks. As a result, we are continually working to improve our energy efficiency and reduce our GHG emissions. We have the opportunity to optimize our use of energy and to promote the use of renewable energies.
Why is this important to our communities of interest?
We recognize that the impacts of climate change pose a major challenge and a significant concern for many of our COIs, who are interested in knowing about how Teck is managing emissions and improving energy efficiency. In addition, the majority of our operations are located in jurisdictions that are heavily regulated with regards to GHG emissions, energy supply and transportation.
The security and reliability of energy can affect us as well as our energy suppliers. We work with our suppliers to consider alternative energy sources, investments in renewable energy projects or power purchase agreements. Other COIs are looking for us to manage our energy efficiency and reduce our GHG emissions, from both a cost reduction perspective for our shareholders and a perceived environmental impacts perspective for non-governmental organizations and special interest groups.
External Developments in 2014
Impact of Lower Oil Prices
Over the course of 2014, oil prices declined significantly from around US$105 a barrel mid-year to around US$50 a barrel at the end of the year. The changing price environment for oil had a number of impacts on the resource industry. Lower oil prices can impact the economic viability of marginal projects that face high costs of production and, as a result, there has been a sharp decline in drilling activity. At the same time, mining operations require large amounts of energy to produce and transport products, and a decline in oil prices can reduce operational costs for diesel and gasoline.
At Teck, we are building an energy business unit that builds on our core mining competencies and will further diversify our resource portfolio in stable jurisdictions to generate significant long-term value. We have a 20% share in the Fort Hills oil sands project in Alberta, which is under construction. In 2013, we committed $2.9 billion for our 20% share to complete the project, of which approximately $680 million has already been spent to the end of 2014. The project has proved and probable reserves attributable to Teck of 614 million barrels of bitumen before deduction of royalties, and is forecast to produce around 180,000 barrels of bitumen per day (100% basis) over a 50-year life.
The Fort Hills oil sands project enjoys strong economics and it is forecast to generate significant free cash flow over a range of oil prices and exchange rate scenarios. Unlike shale oil projects, oil sands projects tend to have a relatively long life and can therefore generate returns over several commodity price cycles. Fort Hills’ operating costs, including sustaining capital, are expected to average under $25 per barrel of bitumen over the life of the project.
We believe that the long-term fundamentals for oil remain positive, with demand growing each year. The International Energy Agency predicts that world energy consumption will grow by one-third by 2035. Current forecasts also indicate that 75% of this demand will be met in 2040 by fossil fuels, with the remaining 25% met by low-carbon or renewable energy sources(6).
The current construction phase at Fort Hills has been somewhat assisted by the current market downturn, due to the increased availability of skilled labour and contractors, as well as the increased availability of fabricators for major equipment.
In addition, the lower oil price positively impacts operating costs across three other business units at our existing operations. In 2014, we saw an approximate $5 million increase in EBITDA for every US$1 decrease per barrel in the price of oil.
Climate and Carbon Regulation
In 2014, there was further strengthening of long-term carbon regulation in a number of jurisdictions, which impacts our operations and products beyond our energy business.
Canada is aiming to reduce its emissions to 611 million tonnes a year by 2020, but is currently forecast to emit 727 million tonnes(7). This may drive further national and/or provincial carbon regulation – new national restrictions on coal-fired power plants in Canada are already due to come into effect in mid-2015.
China has committed to stopping the growth of its carbon emissions by 2030. Beijing has already started closing or overhauling small coal-fired power plants as part of its efforts to reduce its emissions. This is happening in parallel with government efforts to rationalize its high-emission steelmaking plants. Furthermore, China is in the process of drawing up its 13th Five-Year Plan, covering the years 2016–2020, and it is widely expected that the plan will place particular emphasis on improving the country’s carbon emissions performance.
Similarly, in September 2014, Chile became the first country in South America to enact a carbon tax. The new tax is targeted at non-biomass thermal power plants with a generation capacity of 50 megawatts or more. Each of these power plants will be required to pay US$5 for every tonne of carbon dioxide-equivalent (CO2e) they emit, which will ultimately raise the cost of power from these plants for consumers. The tax forms part of the Chilean government’s broader efforts to meet its voluntary target of cutting its carbon emissions by 20% by 2020 (against a 2007 baseline).
We recognize that current and future regulations may affect our business by placing direct costs on our operations, and increase the costs of production. We already incur carbon costs in Canada as a result of provincial regulations in B.C. and Alberta. It is likely that such costs, both in Canada and in other jurisdictions, will increase over time.
While the transition to a low-carbon economy is necessary, it will likely take a substantial period of time. The impacts of an increased focus on greenhouse gas reductions will impact our business in a variety of ways over time, extending beyond the anticipated increasing costs associated with carbon and with changing supply and demand fundamentals for our products. This belief is now being factored into our long-term business forecasting and sustainability planning.
(6) International Energy Agency – IEA World Energy Outlook, 2014.
(7) Environment Canada, Progress Toward Canada’s Greenhouse Gas Emissions Reduction Target