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Financial Times: Shell Canada's oil sands gamble

Shell Canada's oil sands gambleBy Thomas Catan
Published: May 9 2006 03:00 | Last updated: May 9 2006 03:00

Royal Dutch Shell's Canadian unit yesterday published a C$2.4bn (£1.16bn) cash offer for BlackRock Ventures; its latest decision in a multi-billion dollar bet on Canada's oil sands.

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Shell Canada, 78 per cent owned by Shell, offered C$24 per share for the small Canadian oil sands producer – a 27 per cent premium over Friday's closing price of $18.88. The board of BlackRock unanimously approved the transaction and will recommend it to shareholders. “This acquisition will augment our overall oil sands portfolio,” said Clive Mather, president and chief executive of Shell Canada.

“It will add 12,000 to 14,000 barrels per day of heavy oil production and provide Shell Canada with access to significant additional resources.”

The company invests heavily in a C$7.3bn oil sands project at Athabasca, in Alberta. In March, Shell paid C$465m for rights to explore 220,000 acres in Alberta for oil sands. With the purchase of BlackRock, Shell Canada will acquire 268,000 acres of oil sands in the Peace River area containing 207m barrels of proved and probable reserves and an estimated 1bn barrels of oil in place. Shell will probably have to spend several billion dollars to develop the new acreage, which is close to some of its existing oil sands projects.

Shell was an early mover into Canada's oil sands and said the technology it has developed had made exploiting these projects increasingly competitive.

However, heavy oil and bitumen can often not be booked by Shell as “proved” reserves by strict guidelines set out by the US Securities and Exchange Commission.

Shell told investors last week it could no longer promise to replace 100 per cent of its reserves; a pledge made after it was forced to cut proved reserves by a third two years ago.

If its oil sands are included, Canada's reserves are second only to those of Saudi Arabia. But the process of extracting oil from the tar-like bitumen is expensive, energy-intensive and wasteful. The environmental impact is also considerable.

Not all oil majors agree that oil sands represent a lucrative opportunity.

BP reckons many such projects would become unprofitable at a lower oil price. Shell says its oil sands projects are competitive even at an oil price of about $25 a barrel.

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