Shell to Wait for Right Econ to Move on Certain Projects

KUALA LUMPUR (Dow Jones Newswires), Jun. 8, 2009

Royal Dutch Shell will wait until the economics is right before advancing its oil sands and floating liquefied natural gas projects, its outgoing chief executive said Monday.

"If I feel that by waiting, costs will be lower, I prefer to wait," Chief Executive Jeroen van der Veer said in response to a question from Dow Jones Newswires. "Because oil sands are projects built for decades. Over time, I am convinced, the Canadians will have more capacity to build projects."

He said he wouldn't be surprised if the Cambridge Energy Resources Associates index, which measures construction costs in the energy industry, falls to 200 this year.

The index surged to 240 in the third quarter of 2008 from 110 in 2004 as the market overheated, he added.

This led the company to shelve some projects although the Anglo-Dutch major still has one of the biggest capital investment programs in the industry at $31 billion-$32 billion this year.

Projects that were shelved included Carmon Creek and the Athabasca oil sands expansion in Canada; Mars B, an oil project in the Gulf of Mexico; and the Pierce field in the U.K.

"The extent to which costs will fall further will be subjected to negotiations between ourselves and contractors," van der Veer said on the sidelines of the Asia Oil and Gas conference.

However, news that Petro-Canada (PCZ) may go ahead with its project could jeopardize Shell's wait for lower costs. "I think that is bad news...but that's how the world works."

Estimated costs for Petro-Canada's delayed Fort Hills oil sands mine have sunk 30% to below C$10 billion and the company expects to generate a double-digit return with oil prices at $60 a barrel, the company's chief executive, Ron Brenneman, said in late April.

Nymex crude futures have rebounded from their lows earlier this year to near $70 a barrel. They were trading at $67.47 a barrel at 0650 GMT.

Shell has also put on hold its plan for a floating LNG project in the Asia-Pacific region due to high construction costs.

The CEO said though there are many small gas fields far away from coasts, "these projects need to be economically viable."

Shell expects energy demand to double between now and 2050 and has targeted unconventional energy sources, including oil sands, gas-to-liquids and other alternative fuels, to account for about 15% of its total mix of oil and gas sales by around 2015.

van der Veer has also shrugged off resource nationalism which surfaces whenever oil and gas prices surge.

"If I look back at the last 20 years, we always have more investment opportunities than the capital to spend. So, I'm not concerned that we will run out of opportunities even if the government has the upper hand."  

Copyright (c) 2009 Dow Jones & Company, Inc.


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