U.S. Coal Bankruptcies Reveal The Future Of Alberta Tar Sands

The U.S. coal industry is in big trouble. This year alone, eight companies have filed for bankruptcy protection, Murray Energy is the latest one. Bob Murray’s friendship with President Trump could not save the company. After all, the death of coal is due to fracking, not regulation.

While these bankruptcies might be good news for climate change, they have caused havoc for coal miners and coal communities. Typically, bankrupt coal companies renege on their pension and healthcare obligations. Miners and pensioners are virtually left penniless. Just follow any story on Appalachia to get a sense of the social and economic chaos that collapsing coal inflicts on local communities.

Coal implosion should hold important lessons for Alberta’s oil sands economy. After all, both coal and oil contribute to climate change. Both are vulnerable to regulatory and market challenges. It seems that Canada’s Prime Minister Justin Trudeau does not see the decline of oil to be inevitable. In 2018, courts blocked the construction of Kinder Morgan’s Trans Mountain Pipeline, which would carry Alberta’s oil to the Pacific Ocean. Trudeau’s government intervened and purchased the pipeline for $4.5 billion (and has committed additional billions of dollars for its expansion).

But Albertans remain suspicious of Trudeau and Ottawa. Some even want to secede from Canada! In 2019 election, his Liberal party drew blank in Alberta. So how does he win over Albertans? At his first Press conference after the 2019 reelection, Trudeau declared that his government is committed to fighting climate change and building the Trans Mountain Pipeline. 

This is where a leadership deficit is showing. Instead of pandering to Alberta, Trudeau should have shown tough love. The reason is simple: the pipeline provides a false sense of economic security and discourages Alberta from diversifying away from the tar sands.

The Trudeau Syndrome: Real Climate Champions Love Oil Sands

Alberta tar sands are an important economic resource for Canada. Natural Resources Canada, a government body, notes: “The oil sands comprise 167.2 billion barrels of crude oil – 97 percent of Canada’s 172.5 billion barrels of proven oil reserves—and are a vital part of the Canadian economy. The industry is one of Canada’s largest employers, with more than 400,000 people deriving direct, indirect and induced employment from the oil sands and supporting sectors.”

To justify his support for the pipeline to his pro-climate base, Trudeau is playing the nationalist card, which for Canadians means a dose of Anti-Americanism. Trudeau said: "For too long we have been selling our natural resources to the United States at a discount ... Getting our resources to markets other than the United States and getting that done as quickly as possible remains a priority.”

The Stranded Asset Problem

Trudeau might support the pipeline pointing to the projected growth in energy demand. There are over 1 billion cars in the world, and an additional 70 million are added every year. If there are cars, the logic goes, there will be a demand for oil, not to mention the increasing demand for petrochemicals. It is not surprising that almost every country (Norway probably being the only exception) continues to explore for new oil reserves.

In the short run (10-20 years), this argument probably makes sense. But in the medium term (20-40 years), the auto industry might look different and the demand for oil will probably begin to soften. This is when Alberta will begin facing the problem of stranded oil sands assets.

An asset is stranded when it becomes nonperforming during its useful economic life. The reasons include technological innovations that render it obsolete, shifts in consumer preferences, or changes in the regulatory structure.

Faced with extreme weather events, governments may enact even more stringent laws to discourage combustion-engine automobiles. Second, courts may announce large verdicts against major oil firms for imposing harms on individuals, cities, and other actors. As a part of the settlement, oil firms may accept penalties such as a large dose of a carbon tax in exchange for immunity. This sort of carbon tax could reduce demand for oil. Third, increased energy-efficiency of gasoline cars and the rapid expansion of electric cars and trucks might dampen the demand for oil. Alongside, there could be a “drive shame” movement encouraging individuals to take public transportation (or simply walk) as opposed to driving. Indeed, millennials are less interested in car ownership than the previous generations.

With oil demand softening, only the most efficient oil producers will survive. By some estimates, “the price of oil could permanently plummet to $25 a barrel by the mid-2020s. Only the cheapest oil in places like Saudi Arabia could be economically produced. Canada's oil sands, where most projects need an oil price of $60 to $80 a barrel just to break even, would cease to make financial sense.”

Will Alberta Become the New Appalachia?

An investment of more than $200 billion is at risk. What if oil sands industry becomes uncompetitive and these assets become nonperforming? Mass bankruptcies will follow. Governmental revenue will plummet and local communities dependent on oil jobs will be devastated.

Just see how the bankruptcy of the coal industry is playing out in Appalachia and the Powder River Basin regions of the United States. David Roberts notes: “Coal mines have shut down, hundreds of people are out of work, unemployment offices are overwhelmed, and there appears to be worse to come. The coal industry, long seen as a friend and economic linchpin in the state, is falling apart, and the very communities that have supported it most are getting screwed over in the process.”

Labor unions are worried that a bankrupt coal sector will not be able to fulfill its pension and healthcare obligations. Further, bankrupt coal firms tend to renege on mine clean up obligations as well.

Preparing for a Soft Landing

Trudeau wants to become another Trump who promised to bring coal back. One might argue that the decline of oil will be delayed by rolling back climate laws or massive government funding for carbon removal technologies. The reality is that coal jobs have not come back and probably never will. Oil could follow a similar trajectory.

Generating false hopes for the revival of oil is irresponsible because it is making Alberta, a high-cost oil producer, even more vulnerable to oil downturns. The wise policy is to start preparing Alberta for a soft landing. The basic idea is to invest in creating non fossil-fuel jobs. At minimum, Trudeau’s government should not throw a lifeline to the Trans Mountain Pipeline because it is creating an even bigger stock of stranded assets.

The Trudeau syndrome reveals the perils of democracy where leaders embrace policies to secure short term political gains. Trudeau’s false populism did not fetch him votes in Alberta. Maybe it is time for him to reverse course on the pipeline and guide Alberta towards a more diversified economy with a sustainable economic trajectory.

Nives Dolsak is Professor and Director of the School of Marine & Environmental Affairs. Aseem Prakash is the Walker Family Professor and the Director of the Center for Environmental Politics. Both are at the University of Washington, Seattle.

[Top photo: London on April 18, 2018, as they protest against the Trans Mountain oil pipeline from Alberta's oil sands to the Pacific Ocean. In 2016, Canada's Prime Minister Justin Trudeau's government approved tripling the 1,150-kilometer (715-mile) Trans Mountain pipeline's capacity to carry 890,000 barrels of oil for shipping overseas from landlocked Alberta's oil sands to the port of Vancouver. / AFP PHOTO / Tolga AKMEN (Photo credit should read TOLGA AKMEN/AFP/Getty Images)]