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Higher costs force Shell to delay investments


Royal Dutch Shell is delaying a decision on whether to expand its vast Canadian tar sands project as rising costs and tumbling crude prices raise questions about the economic viability of this fast-growing but controversial sector of the oil industry. 

Higher costs force Shell to delay investments

Higher costs force Shell to delay investments Photo: BLOOMBERG

The Anglo-Dutch firm is the latest company to scale back or defer investment in Canada, where extracting the heavy crude from the sand and clay is technologically challenging and expensive process – and one which environmentalists say produces huge carbon emissions.

A final decision on investing in the second phase of Athabasca in Alberta was due next year, but Shell chief executive Jeroen van der Veer said yesterday that approval had been delayed indefinitely. “We wait for costs to cool down before any new investment decisions,” he said.

Shell’s move into Canada’s tar sands is part of the company’s development of so-called “unconventional” projects, designed to plug a shortfall in production from traditional oil and gas fields. In recent weeks Suncor Energy, PetroCanada and Nexen and its partner Opti Canada have postponed decisions on expanding similar schemes. The break-even costs of such projects require a higher oil price, although energy firms do not reveal the exact financial details.

Mr Van der Veer said Shell was proceeding with the previously approved first expansion phase of Athabasca, which should add 100,000 barrels a day of production. The second expansion phase was intended to add another 100,000 barrels a day. Shell has a 60pc stake in Athabasca, with Marathon Oil and Chevron each holding 20pc.

Shell’s need to bolster its reserves of oil and gas were underlined yesterday, when the company posted third-quarter profit figures. Although earnings soared 71pc to $10.9bn (£6.61bn), Shell’s shares slipped as investors focused on the company’s 6.6pc drop in oil and gas production.

Overall oil and gas output fell to 2.93m barrels a day in the third quarter, the first time production has fallen below 3m barrels since 1991. However, Peter Voser, Shell’s chief executive-designate, dismissed concerns about resource levels. The company plans to add 250,000 barrels of daily oil production by the end of 2009, part of its plans to increase daily production by 1m barrels a day.

These undertakings will “bring on stream” 10bn barrels of resources, Mr Voser said. “There is sufficient [oil and gas] in our pipeline to go through in the next few years, in order to achieve our long-term growth aspiration of 2pc to 3pc,” he said.

Shell’s key division, Exploration & Production, increased profit 65pc to $5.5bn, largely because of the record increase in oil prices during the quarter.

The quarterly dividend rises 11pc, with sterling investors receiving 24.54p and euro-based investors 31.13 cents. The share price closed down 4pc to £16.35

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