Shell Shuns New Oil Sands as Low Crude Prices Force Cost Control

(Bloomberg) - Royal Dutch Shell Plc is unlikely to take on new oil-sands projects as it maintains a grip on costs after crude’s crash forced competitors to write down Canadian reserves.

While Shell’s existing oil-sands operations generate strong cash flows, the expense of developing new projects discourages additional investments, Chief Executive Officer Ben Van Beurden said in an interview.

Oil sands, the reserves of heavy crude found primarily in northern Alberta, lured investors in the past decade as oil’s surge above $100 a barrel made the difficult extraction process economic. But they’ve fallen out of favor following the subsequent market collapse as companies dump expensive projects amid fears that competition from low-cost crude could strand costlier assets.

“All of those are reasons we are unlikely to develop new oil-sands projects,” Van Beurden said in London. “There are no plans for growth capital to be invested in oil sands.”

Exxon Mobil Corp. slashed reserves after removing the $16 billion Kearl oil-sands project in Athabasca from its books last week. A day earlier, ConocoPhillips said that erasing oil-sands barrels had reduced its reserves to a 15-year low. In 2015, Shell itself took a $2 billion charge as it shelved an oil-sands project in Alberta, and last year sold other assets in the area for about $1 billion.

The oil-sand mines in the region are among the costliest petroleum projects because the raw bitumen extracted must be processed and converted to a synthetic crude before being transported to refineries, mainly in the U.S. In addition, Canadian oil sells for less than benchmark U.S. crude because of the cost to ship it and an abundance of competing supplies from shale fields.

BP Plc said last month that there’s enough oil in the world to meet demand to 2050 twice over and this may prompt producers of low-cost crude, like those in the Middle East, to bring production forward.

While oil prices have recovered from the sub-$30 lows of early 2016, they’re still far below the levels of 2012 and 2013. Shell has promised investors it’ll keep annual spending between $25 billion and $30 billion for the rest of this decade - and at the lower end of that range this year - following its $54 billion acquisition of BG Group Plc in 2016.

That purchase drove up debt near to $80 billion last year, the highest in the industry after Brazil’s Petroleo Brasileiro SA. Shell has been selling assets to pare borrowings and Canadian oil-sands have been part of that plan.

Shell  told investors in a presentation last June that although oil sands were among its “cash engines,” future growth would be focused on deep-water, chemical and shale projects. The company said the return on average capital employed in oil sands from 2013 to 2015 was 1 percent at an average oil price of $90 a barrel; it expects that to rise to about 5 percent from 2019 to 2021 at $60 crude, according to the presentation.

Shell holds a 60 percent stake in Canada’s Athabasca Oil Sands Project, and also runs a bitumen processing plant and a carbon-capture facility.

To contact the reporter on this story: Rakteem Katakey in London at rkatakey@bloomberg.net To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net Amanda Jordan

Copyright 2017 Bloomberg News.

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