Okay, a rant on Frontier and, specifically, this piece by @DavidStaplesYEG. edmontonjournal.com/news/politics/… Treating Frontier like it's the only, best, or most likely new oil sands development on the table or pretending that the fed gov't is the only barrier to Frontier is wrong. 1/N
@DavidStaplesYEG Frontier is a big project: a $20 billion potential investment. It's also an expensive project. That capital investment is $76k per barrel per day of capacity: an option that gets you ~ 40 years of production 4 which you still have to pay op + maint costs, royalties, and taxes.
@DavidStaplesYEG The last time CERI looked at costs of an oil sands mine, they estimated capital costs at about $79k/bbl/d, a little before Fort Hills delivered costs of ~$84k/bbl/d. They wrapped some other assumptions around the prototypical mine project: 
@DavidStaplesYEG Taking those estimates, and assuming a 10% return on investment, which would be a fairly standard hurdle rate for taking this kind of commodity price risk over this kind of time horizon, you can calculate what oil price you'd need to see to make the project work.
@DavidStaplesYEG CERI runs those numbers, and they get a 'break-even' or supply cost of US $75/bbl WTI (i.e. accounting for transportation, quality differentials, etc., as well as taxes, royalties, op and maintenance costs, and providing a return to your equity and debt holders.)
@DavidStaplesYEG If you were to cut initial capital costs or operating costs by 25%, you could get your break-even down closer to $65 WTI. Those are real prices, so you'd need to see WTI at $65 plus inflation on average over the life of the project just to meet a minimum hurdle rate of return.
@DavidStaplesYEG So, mines are expensive. If you wanted to go to the market today and sell WTI oil for around the time the Frontier mine might see first oil, it would sell for about $50/bbl, about $30/bbl below the minimum you'd need to make that project work.
@DavidStaplesYEG So, what about the other part. Is this the project that is most likely to be adopted? No. There are plenty of other potential investments with lower costs than Frontier. Cenovus has several great SAGD assets, Imperial has Aspen, Carmon Creek is available in the Peace, etc.
@DavidStaplesYEG For example, in their 2019 assessment, CERI looked at new and expansion SAGD. These are smaller projects, with shorter life-spans, and with break-even oil prices that are attractive today. $45-55 WTI prices get you that same real rate of return on capital in an insitu project.
@DavidStaplesYEG Let's also remember why CERI doesn't even evaluate oil sands mines anymore. They are too expensive. In 2014, with oil at its post-2008 peak, Total shelved its investment in Joslyn. That project has an approval in hand, is closer to McMurray, etc.
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@DavidStaplesYEG There are huge issues to get over before Frontier gets built. Teck would love to have the approval in-hand, as it gives them an option that has value in a world with higher oil prices, but that's all it is. Many projects w approvals in hand are much more likely to be built.
@DavidStaplesYEG A fair point to make is that many world oil price forecasts show prices that would make Frontier work, in a vacuum. For example, here are EIA's real dollar WTI price forecasts from their Annual Energy Outlook. eia.gov/outlooks/aeo/d… The reference case average is ~$100/bbl.
@DavidStaplesYEG Why do I say in a vacuum? Because if oil prices follow these forecasts, than Frontier gets more expensive quickly because everybody else with a cheaper project is going to want to build too, and we'll be back in the world we were in circa 2014. Guess how much mines cost then?
@DavidStaplesYEG If you're going to frame Frontier as the last, best hope for AB, and frame Trudeau as the lone barrier, one has to wonder what you've done with all the other, cheaper projects out there and why you expect this project to be more likely to be built than earlier-approved mines.
