Financial Post: Shell to pump $12.8b into oilsands

100,000 B/D expansion 
Claudia Cattaneo,
Published: Thursday, November 02, 2006

CALGARY – Shell Canada Ltd., which is evaluating a $7.7-billion bid by parent Royal Dutch Shell PLC to buy minority shareholders, gave formal approval yesterday to a costly expansion of its oilsands project in northern Alberta.

The project is going ahead as planned even after the Anglo Dutch oil giant suggested last week it has plans of its own for Shell Canada’s vast oilsands operation, such as greater integration into its North American operation.

There is also speculation the Canadian business will be run from Shell’s Houston offices if the buyout of the 22% of the stock it doesn’t own is successful.

For now, Shell Canada chief executive Clive Mather said it’s business as usual for his company and the 100,000 barrel-a-day expansion.

He wouldn’t discuss what its parent may have in store if the bid, which is being evaluated by a committee of Shell Canada’s board of directors, is successful.

“It is a proposed bid at this stage,” Mr. Mather said. “As far as we are concerned, the executives of the company, our focus is clearly on running the business at its best, and that is what we are doing.”

Shell Canada said the expansion will boost output for its Athabasca oil sands project to about 255,000 barrels a day by 2010 at a cost of up to $12.8-billion, or $100,000 to $128,000 per flowing barrel, a measure of capital intensity.

Mr. Mather said the firm will try to meet or beat those cost estimates, the highest so far in the overheated industry, through strategies like more workplace planning, more modularization, and better contracting strategies.

Already, he said 30% of engineering work has been done, and 30% of equipment has been purchased.

Shell Canada’s partners, Western Oil Sands and Chevron Corp., each with a 20% stake, have also approved the expansion.

Mr. Mather said his firm has tested the project against various oil price scenarios and is confident it will be profitable.

The expansion involves an expansion of its mine near Fort McMurray and of its upgrading refinery near Edmonton.

Longer term, the partners plan to produce 550,000 barrels a day from the project.

“It is our view that world demand for energy is going to continue to increase,” Mr. Mather said.

Meanwhile, the company said its Tay River natural gas discovery in Alberta’s foothills region is smaller than originally anticipated.

After drilling an appraisal well, Shell Canada downgraded its estimate of raw gas to 220 billion cubic feet, from 500 to 800 billion cubic feet.

Shell Canada will continue to produce gas from its discovery well at a rate of 90 million cubic feet per day. No other wells are planned targeting the Tay River structure.

“We found the gas, but it wasn’t the thickness that we had hoped.” Mr. Mather said.

“That is the nature of our industry. No matter how smart we are around the seismic and the interpretation, we can still be caught out by mother nature.”

SHELL CANADA LTD.

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