ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook

Transcription

1 ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook Updated July 2018 Coal Supply Production of subbituminous coal, which is the majority of coal produced in Alberta, decreased by 5.4 per cent to 21.0 megatonnes (Mt) in 2017 relative to It is projected to decline a further 58.6 per cent between 2017 and 2027 due to environmental regulations transitioning the province away from coal-fired power generation. Production of metallurgical bituminous coal, commonly referred to as coking coal, decreased by 29.4 per cent to 1.2 Mt in 2017 due to decreasing production at Teck Resources Limited s (Teck s) Cheviot mine, which is currently the sole metallurgical coal mine in the province. Despite the momentum of recent high market prices, production is projected to remain static over the forecast period without approval of additional projects and Teck focusing on other projects. Production of thermal bituminous coal, also known as steaming coal, decreased 9.1 per cent between 2016 and 2017, settling at 1.2 Mt. As Coal Valley is the only mine that currently produces thermal coal in Alberta, output is forecast to average 1.7 Mt per year through to the end of Westmoreland Coal Company, owner of Coal Valley, is currently discussing the sale of the mine and securing reclamation liabilities to pursue strategic alternatives. As shown in Table S8.1 and Figure S8.1, total production of marketable coal in 2017 decreased by 7.3 per cent from 2016, with subbituminous coal responsible for most of the decline in marketable clean coal production for the year. The current forecast is ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July

2 lower than in previous years because provincial environmental policies recommended by the Climate Change Advisory Panel in November 2015, and adopted by the provincial government in 2016, have advanced the retirement of coal-fired power plants in Alberta. The recent announcement of Carbon Competitiveness Incentives in December 2017 has further encouraged a number of power producers to accelerate the retirement of coalfired assets or the conversion to gas. In 2017, subbituminous coal production accounted for 86.8 per cent of all marketable coal production, thermal bituminous 8.3 per cent, and metallurgical bituminous 4.9 per cent. Three notable projects to extract and export the province s metallurgical coal are either currently pursuing drilling exploration programs or going through the regulatory approval process. Since none have yet been approved, they are currently not included in the forecast. ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July

3 Benga Mining Limited, a subsidiary of Australia s Riversdale Resources, has submitted an application for its Grassy Mountain mine, which would be located near Crowsnest Pass in southern Alberta and initially produce 4.5 Mt per year of metallurgical coal. The company plans to begin construction in 2019, pending regulatory approval, with operations beginning by Citing deteriorating market conditions for metallurgical coal, Grande Cache Coal (GCC) suspended operations at its surface mine in early 2015 and halted production from its underground mine in December GCC s parent company, China-based Up Energy Development Group Limited (Up Energy), planned to restart operations at the surface mine and processing plant in However, Up Energy defaulted on its debt payments and went into receivership at the beginning of In January 2018, Sonicfield Global received approval to purchase the Grande Cache mine and plans to restart operations in June after the deal closes. Teck closed its Coal Mountain project in southeastern British Columbia, with operations finishing at the end of Production will continue at its four other mines in British Columbia, and Teck has not indicated any plans for stoppage at its Alberta assets as the company plans to sustain 27 Mt of coal production as part of its five-year plan. Teck has announced it plans to improve ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July

4 marketing premium steelmaking coal, focusing on its traditional product mix in This could increase production at its Cardinal River (Cheviot) mine depending on how the company allocates capital between its coal and oil sands portfolios the latter being its partnership in the Fort Hills oil sands mine. In April 2017, Ram River Coal Corporation (Ram River) completed a technical evaluation of the in-place resource for its Aries metallurgical coal mine. A prefeasibility study was completed in August, revealing robust economics that could entice the company to move forward with the mine, pending regulatory approval. If developed, the mine could commercially produce an estimated 4 Mt per year. ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July

5 Coal Demand Subbituminous Based on the Government of Alberta s Climate Leadership Plan, all of the province s 18 coal-fired power generation stations will either be retired or converted to natural gas fuel by The coal demand forecast takes this and existing federal regulations into account. The retirement of coal-fired power plants will most significantly affect production from the Paintearth and Vesta, Highvale, and Sheerness subbituminous coal mines. More than 70 per cent of the current 6283 megawatts (MW) of coal-fired power generation is forecast to be removed by the end of Existing federal regulations require coal-fired power plants to comply with one of the following: retire after reaching 50 years of service, meet emissions performance standards matching highefficiency natural gas generation, or incorporate carbon capture and storage systems. In November 2016, as part of the Pan-Canadian Framework on Clean Growth and Climate Change, the federal government announced plans to accelerate the phase-out of coal-fired electricity across Canada by 2030; updated regulations are expected to be published in The new federal strategy allows provinces to implement their own retirement schedules which Alberta has done as long as they will achieve the federally set target. Building on the 2015 Paris Agreement, Canada and the United Kingdom cofounded the Powering Past Coal Alliance in The alliance seeks to build commitment and cooperation among governments and businesses towards a transition away from coal power internationally. The Alberta Climate Leadership Plan aims to phase out coal-fired power generation capacity by 2030, with renewable energy providing 30 per cent of the province s total power generation capacity. In response to expiring power purchase agreements (PPAs) and economics favouring lower emissions generation, a number of coal-fired facilities are planning to convert from coal to gas. In rationalizing these planned conversions, several companies have stated that the expenditures related to one-time conversions and supporting infrastructure would be offset by lower emissions compliance costs, reduced integrated operating expenses for less mining of coal, and extensions of the useful life of many assets. Based on assumptions from the Alberta Electric System Operator s (AESO) 2017 Long-term Outlook, demand for Alberta s subbituminous coal is forecast to decline through to the end of the forecast period due to the anticipated retirement of the following coal-fired electricity generators: ATCO Power s 149 MW Battle River Unit 3 is on schedule to retire by the end of 2019, but the company could retrofit its 155 MW Battle River Unit 4 to gas for 2020 instead of retiring it by ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July

6 TransAlta Corporation (TransAlta) announced in April 2017 that it will retire its 288 MW Sundance 1 unit in 2018, while its 288 MW Sundance 2 unit will be mothballed until at least With respect to further temporary retrofitting efforts by TransAlta, the company cited favourable economics for potential coal-to-gas conversions. TransAlta has notified the AESO of the following outages, during which TransAlta will convert the facilities from coal to gas and return to operation as market prices strengthen: o 368 MW Sundance Unit 3 up to two years beginning in April 2018 o 406 MW Sundance Unit 4 up to two years beginning in April 2019 o 406 MW Sundance Unit 5 up to one year beginning in April 2018 In December 2017, TransAlta also announced it plans to construct a gas pipeline from Tidewater Midstream and Infrastructure s Brazeau River Complex to its Sundance (Units 3 to 6) and Keephills (Units 1 and 2) facilities. The move is intended to support the conversion from coal to gas between 2021 and 2022 but will initially be able to handle fuel blending between coal and gas generation. Maxim Power s 144 MW HR Milner Generating Station is scheduled to retire by 2020 but appears to have already shut in due to economic conditions and constrained fuel supplies that would have been sourced from either the GCC or Coal Valley mines. Metallurgical Bituminous Metallurgical coal exports to China, Japan, and South Korea experienced the greatest declines in An overall year-over-year decrease of 32.7 per cent in metallurgical coal exports is attributed to lower manufacturing, particularly in the automotive sector, as well as environmental and economic policies that reduced production of metals and therefore demand for metallurgical bituminous coal. Despite the reduction in exports to these countries, they continued to be the leading importers of the province s metallurgical coal in Alberta s metallurgical coal and thermal coal were marketed to a wide variety of international customers in 2017 and benefited from the recent uptick in prices for both grades of coal. Asia remains Alberta s primary market for metallurgical coal, although the long distance required to transport coal from mine to market creates a competitive disadvantage for the province s export-coal producers. International spot prices rose to more than US$300 during 2016 but fell to about half of that in The sharp rise in 2016 was a result of global tightening in supply due to such factors as China s decision to limit the country s number of small-scale mines and reduce the producing days permitted (from 330 to 276). The Chinese government has since relaxed the producing day restrictions in response to the impacts of high coal prices on other sectors of its economy, such as steel production and heating. Prices through 2017 were strengthened by sustained Asian demand and by supply disruptions in Australia, the world s largest metallurgical coal exporter. Outages in Australia resulted from labour strikes that delayed deliveries and cyclones that damaged infrastructure. ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July

7 China s government continued to restrict imports and sales of lower-grade coal in These policies are expected to substantially affect the demand for Australian and Indonesian bituminous coal; however, Alberta s higher-quality metallurgical bituminous coal has managed to sustain some market share in China. Thermal Bituminous Annual thermal bituminous coal exports from the province decreased by 5.7 per cent from 2016 to Unlike 2016, in which thermal bituminous coal was exported to several destination, Japan and Egypt were the only reported countries receiving deliveries in Virtually all of Alberta s thermal bituminous coal was removed from the province in 2017 to be used overseas for power production. Alberta thermal bituminous coal demand is expected to remain steady throughout the forecast period due to an anticipated growing need for fuel overseas to generate low-cost electricity, especially in Asia. Asian demand is expected to increase over the forecast period because countries such as India, Indonesia, South Korea, Thailand, and Vietnam have shown increased commitments, through policies and investments in infrastructure, to rely on coal-fired power generation. Following the Fukushima Daiichi incident in March 2011, all 48 of Japan s nuclear reactors were shut down, and the country increased its reliance on fossil fuels, including imported thermal bituminous coal. As of December 2017, five plants have resumed operation, with twelve other reactors across six plants receiving approval to restart commercial operations. However, because of costs to meet enhanced safety requirements for existing nuclear plants, coal-fired generation, which is less expensive, is expected to remain in use in Japan over the next decade. Demand for Alberta s thermal bituminous coal in Japan is therefore expected to remain strong over the next decade. However, other Asian demand is assumed to be met largely by other international suppliers, thereby limiting export growth potential in these markets. Coal Methodology 2017 Estimates All values for 2017 demand have been estimated using data reported by industry up until the end of August Full-year estimates for 2017 were derived using these data, adjusting for seasonality. All other 2017 figures, namely production, have been revised with actuals in the July 2018 update. Forecasting Methodology In forecasting coal supply, the three grades of coal produced in the province subbituminous, metallurgical bituminous, and thermal bituminous are forecast separately. Supply and demand ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July

8 fundamentals for each type of coal are considered, with coal-fired electricity generation determining nearly all of the subbituminous coal production, and metal commodities and export markets influencing bituminous coal production. Production from each operating mine in the province is evaluated based on current market conditions and publicly available information. Projects considered in the forecast include those that have been approved by the AER but have not yet been completed. Unless otherwise indicated, announced projects are not included. The forecast recognizes that key factors such as commodity prices, the length of the construction period, and access to rail transportation affect project timing and estimated production. The Alberta Electric System Operator (AESO) has forecast the adequacy of electricity generation to meet provincial demand with respect to the scheduled retirement of all coal-fired power plants by 2030; as a result, the AER s current forecast has used the coal-fired power plant retirement assumptions included in the AESO 2017 Long-term Outlook. ST98: 2018 Alberta s Energy Reserves & Supply/Demand Outlook July