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Petroleum News: They may be sticky, but they move: Royal Dutch Shell in Canada

Burst of activity around Alberta oil sands as more players enlarge their portfolios, but Talisman prepares to exit the scene

Gary Park
For Petroleum News

Royal Dutch Shell is in (big time), Petro-Canada is also in (adding to its landholdings), Chevron Canada is almost in (as an operator), Talisman Energy is out (in all likelihood) and EnCana is neither in nor out (when it comes to upgrading).

And that’s just one week of activities in the Alberta oil sands.

To better explain:

Shell

Shell — The global giant, dealing through subsidiaries, is fast taking on the role of a mega-player in northern Alberta. From its 60 percent base as operator of the 155,000 barrel-per-day Athabasca project (which could grow to 500,000 bpd over the next decade), Shell is spreading across all phases of the oil sands regions, laying some heavy bets that its Canadian future rests largely in the sticky bitumen deposits.

Through its newly created Sure Northern Energy (wholly owned by Shell Exploration & Production in the Americas), the company invested another C$101 million in an untested extension of the traditional oil sands mining and in-situ plays of northeastern Alberta.

That pushes its stake in the so-called carbonate formation to C$574 million this year.

The latest acquisition at an Alberta government land sale added five parcels to the 10 it bought in February which resulted in the formation of Sure to evaluate the prospect.

But, for now, Sure is remaining coy about its intentions, partly because it is venturing into limestone deposits, which do not lend themselves to the proven extraction methods. Bitumen encased in limestone is not easily mined and breaks down if water is used.

Shell EP Americas officials, beyond disclosing that they have started drilling a number of appraisal wells, are keeping tight-lipped about their eventual hopes.

However, they have indicated the new leases are a chance to test Royal Dutch Shell’s new and emerging enhanced and heavy oil technologies.

Sure President Steve Crane said there is potential in the five new parcels “that complements and strengthens the position we established earlier this year.”

He said that as Sure builds on its understanding of the resources and weighs development options it is “optimistic about the potential to produce unconventional oil from these parcels.”

It does no harm that the Shell organization is piling up new reserves in Alberta to lift some of the heat it has taken since a reserve reporting scandal in 2004 that gained the attention of securities regulators.

On top of its aggressive goals for the Athabasca operation it is about to decide whether to exercise an option and join Chevron Canada in the Ells River project that could reach 100,000 bpd by 2015 if the partners decide later this year to proceed with a full-scale development.

In addition, Shell’s Canadian unit (78 percent owned by Royal Dutch Shell) startled observers earlier this year when it acquired BlackRock Ventures for C$2.4 billion, expanding its holdings in the Peace River area of northwestern Alberta.

The smallest, least-advanced of Alberta’s three primary oil sands regions, Peace River is targeted by Shell Canada for a 35,000 bpd first stage of a possible 100,000 bpd operation.

Petro-Canada

Petro-Canada — Purchased 13 additional leases in the MacKay River area for C$30 million.

The 77,000 acres are immediately adjacent to its in-situ holding that is currently running at 25,000 bpd and is expected to reach 30,000 bpd by the end of 2006, with plans in the works for a 40,000 bpd expansion by 2010 as Petro-Canada rolls out spending of about C$810 million, over and above its 55 percent stake in the Fort Hills mine and upgrader that is due on stream in 2009 at 50,000 bpd and could multiply eight-fold by 2015.

Neil Carmata, Petro-Canada’s senior vice president, oil sands, said acquiring the extra leases was a “natural decision for us. … With over three years of operating experience under our belts at MacKay River, we have a good understanding of the top quality resource in the area. These new lands fit well with our growth plans.”

Petro-Canada is already strongly placed, with about 10 billion barrels of total resources in the oil sands.

Chevron Canada

Chevron Canada — Is drawing close to a pivotal decision on whether to move beyond the assessment phase with its Ells River project.
Western Oil Sands has already exercised its option to take 20 percent and Shell Canada is expected to decide this month whether to join or step aside.

Chevron Canada spokeswoman Sharon Murphy told Petroleum News that drilling will start this winter on 80 to 100 wells to “define the ultimate recovery potential” of leases estimated to have 7.5 billion barrels of oil in place, while work proceeds on engineering, processing and other technical aspects.

A final “go, no go” decision is likely to take place in late October or November, she said.

The Ells River leases cover a combined 75,000 acres and were purchased at Alberta government land sales over the past year for US75 million.

Murphy said the ownership composition for a project won’t be settled until Shell Canada makes its decision.

Until then, Chevron Canada is not ready to indicate whether the project will be developed in phases or set an initial target of 100,000 bpd, Murphy said.

Talisman Energy

Talisman Energy — Of all Canada’s leading E&P companies, Talisman, under Chief Executive Officer Jim Buckee, has given an outright cool reception to the oil sands and it looks like continuing along that path.
In March, Buckee said the independent would decide this year how to monetize its holdings.

The vote was released Sept. 5 as Talisman announced it had retained TD Securities to initiate a competitive auction process for “certain” assets in the Athabasca region.

The company said it believes this process will enable it to identify the best alternatives to extract value from the properties, including the possible sale for cash.

A company spokesman said Talisman does not have the expertise to take on a development role and, in any event, prefers to stick with traditional exploration.

To drive that point home, Talisman said the same day it had invested C$230 million to acquire about 260,000 acres in gas-prone lands along the Canadian Rockies in Alberta and expects to spend C$250 million in 2007 on development of the region.

Buckee had previously disclosed that Talisman hoped to sell non-core assets worth more than C$1 billion this year, although he did not indicate that oil sands would be in the package.

Observers are now betting that the various oil sands interests could yield up to C$2-$3 billion.

The list consists of:

• A 1.25 percent indirect interest in the Syncrude Canada consortium that accounts for about 4,375 bpd and is believed to be worth about C$850 million;

• A 100 percent working interest in a 6,800-acre undeveloped lease immediately north of the OPTI Canada/Nexen C$4.2 billion Long Lake project that is suited to in-situ development;

• A 75 percent working interest in 21,800-acre undeveloped lease just north of the Long Lake property; and

• A 2 percent gross overriding royalty on Suncor Energy’s undeveloped 36,500 acres lease immediately west of its Steepbank operations.

But Talisman has no intention of engaging in a fire sale; it might also be open to participating in development of the leases if a viable scheme was presented, officials said.

TD Securities Vice President Investment Banking Bill Roberts told the Financial Post that “broad interest” is anticipated now that the prime leases in the heart of the oil sands area have been taken up.

Prospective buyers could include international bidders now that companies from the United States, France, China and South Korea have staked their claims in the oil sands and India has declared its hopes of gaining a foothold.

EnCana

EnCana — When it comes to locating an upgrader to process bitumen from the oil sands, it’s never over ‘til it’s over for EnCana.
Although the Canadian independent would prefer to see others take on the job, Chief Executive Officer Randy Eresman said his company might eventually be forced to build a plant.

“One of the things we will be considering as part of our overall (downstream integration) solution is at least one longer-term upgrader solution in Western Canada,” he told a Lehman Bros investment conference in New York.

On the verge of taking the wraps off its oil sands strategy, EnCana is not ruling out an upgrader to handle 500,000 bpd of in-situ bitumen it expects to feed into the market by 2015.

Eresman said the plus side of having an upgrader in Western Canada is that less expensive condensate would be needed to move raw bitumen by pipeline to more distant facilities.

But he conceded the decision is not easy. “An Alberta-based upgrading solution is a tough one for us because it’s a highly competitive environment” and because of his own company’s lack of expertise.

Husky Energy and Imperial Oil, who do have refining experience, are just as uneasy about the rising costs of labor and materials in Alberta and are looking outside the province for answers.

But EnCana suggests that a Western Canada upgrader is one way to reduce the volatility associated with running a standalone in-situ project, leaving its raw bitumen production exposed to outside forces.

On the list of options, EnCana said it could exchange a stake in oil production for an interest in a refinery, with BP and Marathon seen as leading candidates because neither has positioned itself in the oil sands.

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