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Shell forced into oil sands U-turn

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Created: 27 January 2010
Written by: Daniel O’Sullivan

Royal Dutch Shell chief executive Peter Voser cannily chose the safe ground of an exclusive interview with the Financial Times to finally admit the all-too-obvious – the Canadian oil sands development Shell has touted as a major growth driver is instead a costly distraction, on which time is now being called. Mr Voser said the massive expansion the company had previously planned for its Athabasca Oil Sands Project (AOSP) – envisioning growth from the current 155,000 barrels per day (bpd) capacity to an eventual 770,000bpd – was now ‘”clearly scaled down” and would be “very much slower”.

Over the past few years Shell has emphasised heavy investment in so-called ‘unconventional’ hydrocarbon sources, both Canadian oil sands and gas-to-liquids projects elsewhere, as a substitute for the new conventional oil and gas resources the company has been notably lacking since its reserves-booking scandal of 2004. But the relatively high costs of new oil sands developments in particular mean scant profits with oil prices anchored stubbornly in a $70-$80 a barrel trading range. As recently as November, Shell oil sands head John Abbott indicated the in-construction $14bn (£8.69bn) AOSP Expansion 1 project, coming onstream later this year to boost total AOSP output to 255,000bpd, needs oil prices around $60 per barrel just to break even. And new investments would require higher prices.

Two previously-slated medium-term expansions of 100,000bpd each are on ice indefinitely, and any serious AOSP growth beyond de-bottlenecking, which could add perhaps some 100,000bpd in small increments by 2020, seems moot. Mr Voser was not questioned on what this strategic U-turn means for Shell’s resource base, defined as its portfolio of hydrocarbon exploitation opportunities not yet migrated into developed reserves. But the effective scrapping of further large-scale AOSP growth will presumably have a material impact – while oil sands currently account for 8.4 per cent of proved Shell reserves, totalling 11.9bn barrels-of-oil-equivalent (boe), they were previously thought to account for perhaps a third of Shell’s total resource base, estimated at 66bn boe.

IC VIEW

We have been saying for years that the unconventionals strategy would come a cropper. Mr Voser said Shell would now concentrate again on conventional hydrocarbon development. But he played down the need for acquisitions to bolster the new direction, saying they were hard to justify ‘if you don’t have a strategic hole somewhere you want to fill’. But we think this is exactly Shell’s problem. High enough at 1714p.

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