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Shell, Exxon Face Higher Oil Production Costs on Carbon Limits

Bloomberg: Shell, Exxon Face Higher Oil Production Costs on Carbon Limits

By Fred Pals

April 20 (Bloomberg) — Royal Dutch Shell Plc, Exxon Mobil Corp. and the rest of the oil industry may face higher costs to exploit Canada’s tar sands, the biggest deposit outside of Saudi Arabia, because of efforts to rein in climate change.

A Canadian mandate to bury carbon dioxide when producing the oil may add between $2 and $13 a barrel to the cost of production, according to Pembina, an Alberta-based environmental group. Mining crude from the area now costs around $60 a barrel.

The additional costs are likely to feed through to consumers, leading to higher energy bills and contributing to inflation. Oil prices two days ago reached a record near $117 a barrel in New York, led by increasing demand from emerging markets, threats to supply in Nigeria and a U.K. refinery strike.

Canada’s increasing costs “are important in how the market looks to the world,” said Michael Wittner, Societe Generale SA’s head of oil research in London. “One way or another it will push up prices for Canadian oil sands,” he said.

The European Union, Canada, Norway and Australia are among nations setting rules to force industries that use or produce energy to store carbon dioxide underground, instead of venting it into the atmosphere. The accumulation of carbon because of burning fossil fuels is blamed for global warming.

`New Floor’

Saudi Arabian Oil Minister Ali al-Naimi said last month that oil is unlikely to fall below $60 to $70 a barrel because alternatives like Canadian tar sands and renewable sources have become viable at those levels. The rising cost of exploration means $70 to $80 a barrel is a “new floor” for prices, Total SA Chief Executive Officer Christophe de Margerie said in Paris on April 10.

De Margerie and al-Naimi are among more than 40 company chiefs and 90 energy ministers attending the International Energy Forum in Rome that started today. Issues to be discussed include managing the move toward a low-carbon economy and curbing record energy costs.

“The costs of carbon capture and storage will likely have to be absorbed by the oil companies,” Jeff Chapman, chairman of the U.K. Carbon Capture and Storage Association, said in an April 15 telephone interview. He declined to give an estimate of the costs. “Capture and storage enables the exploration of unconventional oil resources because without it, it simply would not be possible,” he added.

Stripping the Land

After 2012, the miners of oil-encrusted sand buried under the swamps of northern Alberta will have to store carbon emissions rather than releasing them. The emissions come from the fuels used to power machinery to strip the land, process the tar sands and transport the end product.

Alberta, Canada’s biggest carbon dioxide-emitting province, last year passed regulations forcing companies like Shell to cut greenhouse emissions per unit of output.

Companies that fail to meet the targets must pay C$15 ($15) per metric ton into a fund that will use the money to develop new environmental technologies. The Hague-based Shell, Saudi Aramco and Marathon Oil Corp. of Houston have about $15 billion worth of refinery expansions planned in the U.S. to process more heavy oil from Canada.

Refineries are already required under EU rules to limit carbon dioxide emissions to comply with caps, along with other industries including coal and natural-gas power stations and metal smelters.

The European Commission is overhauling its emissions trading program to meet its goal of reducing greenhouse gases by 20 percent in 2020, compared with 1990.

Adding Carbon Costs

“With companies planning their investments at a minimum price of $60 barrel, adding on the carbon element could become significant,” Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking, said in an April 16 telephone interview. Policies to limit carbon may deter investment because companies are already dealing with windfall taxes, royalties and rising industry costs, Kenney added.

Europe’s three largest oil companies, Shell, BP Plc and Total, are betting on Canada’s oil sands to offset declining production from conventional oil projects. On Dec. 5, BP formed a partnership with Calgary-based Husky Energy Inc. that will spend about $5.5 billion through 2015 to bring oil from Alberta’s tar deposits to market.

Canada’s oil sands hold about 177 billion barrels of oil that can be recovered using current technology, which is about the same as all the oil reserves of Iran and Libya combined. The process is one of Canada’s biggest sources of greenhouse-gas emissions, which may more than double by 2015 as production rises, a United Nations report said last year.

To contact the reporter on this story: Fred Pals in Amsterdam at [email protected]

Last Updated: April 20, 2008 04:02 EDT

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