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Financial Times: Lex column: Shell

Published: October 24 2006 03:00 | Last updated: October 24 2006 03:00

Gently does it. Since its reserves scandal in 2004, the rumour mill has linked Royal Dutch Shell with big, bold deals involving everyone from supermajor BP to minnow Premier Oil.

In contrast, its C$7.7bn offer to buy out the minorities in Shell Canada is unlikely to have either hedge funds or Shell’s own shareholders jumping up and down. For a company still rebuilding credibility, that is no bad thing. Shell is committed to developing oil sands, the heavy source of crude that makes up half of Shell Canada’s production. Given the complexity and costs involved in these projects, it makes sense to streamline operations.

There is also an opportunistic element. Until yesterday, Shell Canada’s shares had fallen by almost a fifth in 2006, compared with a 10 per cent rise in global oil stocks. Cost inflation at its key Athabasca development project is the main worry – a problem with which its main shareholder, struggling to contain costs at Sakhalin-2 in Russia, can no doubt sympathise.

Shell still has to convince investors that owning all of Shell Canada, rather than 78 per cent, makes a big difference at the operating level. And the fact that Shell, which has negligible gearing and is already buying back its own shares, has chosen to do this deal highlights the paucity of other reasonably priced investment opportunities.

Canada’s oil sands developers, including Shell Canada, trade at big premiums to net asset value. Their projects are expensive to develop, subject to overruns, and highly sensitive to long-term oil price assumptions. In other words, any supermajor that could pursue production and reserves growth elsewhere – such as conventional oil fields in Russia and the Middle East – would surely do so. Safe housekeeping, perhaps, but Shell’s Canadian deal serves to highlight the dilemma facing the entire industry.

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