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Bloomberg: Shell Says Oil Sands Expansion Would Remain Viable With $30 Oil

By Sonja Franklin

Oct. 19 (Bloomberg) — Shell Canada Ltd. Chief Executive Officer Clive Mather said the company’s planned expansion of its oil-sands operations in northeastern Alberta would remain viable should oil prices fall to $30 a barrel.

Soaring costs for the steel pipe, specialized equipment and labor needed for an oil-sands facility, along with a 27 percent drop in crude prices since July, have raised concern that some projects won’t be profitable. The estimated cost of the Shell project, a 65 percent expansion of the company’s operation, has already tripled.

“I stopped reading the daily oil price,” Mather, 59, said in an interview yesterday at the company’s Calgary headquarters. “Of course the lower you go, the less attractive the rates of return.” While short-term fluctuations in prices may affect a decision to drill more gas wells, he said, an investment as large as the oil-sands expansion is based on long-term trends.

His comments contrasted with remarks by Nexen Inc. Chief Executive Officer Charlie Fischer, who this week said new projects may need crude prices of $45 a barrel to break even because of the increased costs that have resulted from the rush to develop the oil sands.

Up to C$125 billion ($110 billion) may be invested in the next decade to almost triple production from Canada’s oil sands, according to the National Energy Board. Shell’s project is in a region known as the Athabasca in northeastern Alberta, where oil- laden sands are strip mined and then processed with heat and solvents to extract the tar-like crude.

Mather, who has run Shell Canada since August 2004, expects partners Chevron Corp. and Western Oil Sands Inc. to give final approval next week for the expansion. “There is no indication that we have at this stage other than that they are rock-solid with us.”

Rising Costs

Shell Canada, Canada’s fourth-largest oil company, said on July 28 that costs to expand the Athabasca project may surge 75 percent to as much as C$12.8 billion. The budget for the expansion had already risen to C$7.3 billion in August 2005 from an original estimate of C$4 billion.

Benchmark crude oil futures peaked at a record $78.40 a barrel on July 14. Oil for November delivery rose 70 cents to $58.35 at 12:30 p.m. today on the New York Mercantile Exchange.

Mather said that for Shell Canada to halt work on the project now would be “crazy” because of expenses the company has already incurred or committed to. Still, he hopes some competitors planning to produce heavy oil in Alberta may be discouraged by the cost outlook.

“I’d love everybody to back off,” he said. While it wasn’t pleasant in July to announce the higher cost estimates, he said, “I did sort of have this macabre thought that maybe one or two people would” drop their plans for competing projects based on Shell’s new estimates.

Eastern Refineries

Shell Canada plans to make a final investment decision this quarter on its planned expansion, which would add 100,000 barrels per day of capacity. The facility today can produce 155,000 barrels per day of bitumen, the sticky crude that is extracted from the sand. The site may eventually extract 550,000 barrels a day, according to Shell. Chevron and Western Oil Sands each own 20 percent of the venture.

First production of raw bitumen from the Athabasca expansion is expected in late 2009, Shell Canada said in July. The upgrader, which processes the bitumen into a product that can be shipped to refineries, is scheduled to start in late 2010. It’s being built on the site of Shell’s Scotford upgrader near Edmonton, Alberta.

Shell Canada has set up a team of about 40 people to assess the possibility of using its refineries in Montreal or Sarnia, Ontario, to process bitumen. That option is being considered for the output from any future expansion of the Athabasca project or from the properties Shell acquired when it bought BlackRock Ventures Inc. in July for C$2.43 billion.

“There is a clear economic case for this type of investment,” Mather said, referring to the possibility of sending unprocessed bitumen to the refineries in eastern Canada. A final decision is still “a few years” away, he said.

The advantages include proximity to markets in eastern Canada and the U.S. Northeast where gasoline prices are strong. Construction costs might also be lower because the demand for labor, equipment and contractors is less outside of Alberta, Mather said.

Shell Canada shares have fallen 24 percent this year, more than the stock of competitors such as Imperial Oil Ltd., which has declined 6.8 percent. Husky Energy Inc. has gained 16 percent and Petro-Canada has been little changed.

Imperial is Canada’s largest oil company by 2005 sales, followed by EnCana Corp. and Petro-Canada. Shell Canada is 78 percent owned by The Hague-based Royal Dutch Shell Plc.

To contact the reporter on this story: Sonja Franklin in Calgary at [email protected]

Last Updated: October 19, 2006 12:40 EDT

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