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Oil giants hit by concerns over tar sands

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Fiona Bond
26.02.10 11:50

Tar sands are shaping up to be the thorn in BP (BP-) and Shell‘s (RDSB) sides as concerns over potential expense prove almost as rife as worries over the environmental impact.

Lobby group Fair Pensions, which is funded by charities, trade unions and non-governmental organisations, has recently demanded more financial disclosure about the oil sands business.

It wants answers about just how costly these activities will turn out to be as oil majors move in on the world’s largest tar sand deposits which contain up to 3.6 trillion barrels of oil between them. This is big business when compared to 1.75 trillion barrels of conventional oil worldwide.

Fair Pensions’ business-like approach, focussing on shareholder risk and return rather than the environmental damage which it is also concerned about, is paying off.

By raising questions over the long-term profitability of tar sands, specifically the very high operating costs and oil price volatility, it succeeded in getting the backing of 142 Shell shareholders and 120 BP shareholders. In January it forced Shell to include a resolution to provide more details on financial costs at its forthcoming AGM and filed a resolution with BP in February.

Duncan Exley, director of campaigns at Fair Pensions, said: “Tar sands are problematic for profitability and investors are growing increasingly concerned that there’s wishful thinking occurring on behalf of these companies.

“Investors working with Fair Pensions think that BP and Shell’s financial assumptions may be too optimistic and there has been a great reaction to the AGM resolutions.”

Fair Pensions scored a minor victory when Shell staged a U-turn in which it declared it would slow down its expansion plans.

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Peter Voser, who took to the helm of the Anglo-Dutch group in July 2009, said the focus would remain on conventional oil and gas reserves. The change in heart signals a departure from previous chief executive Jereon van der Veer, who targeted a steep rise in the company’s unconventional resources.

Tony Shepard, oil analyst at Charles Stanley, commented: “The oil sands are very expensive so you require a high oil price in order to make a profit. Its worth remembering that a great deal of interest in Canadian tar sands originated when oil was at a peak of $150 a barrel.

“Shell has stepped back from further investment because costs have gone up considerably and the fundamentals are not looking robust enough to justify further activity for the time being.”

A spokeswoman for Shell maintained that the decision was taken as a result of economic factors and a reaction to lower oil prices, rather than the mounting pressure by investors.

“We have many growth options within our conventional portfolio so our future sustainability does not depend upon oil sands,” she added.

However, Shell will continue to ramp up production at its Athabasca Oil Sands Project to 255,000 barrels per day, albeit lower than the previously touted 700,000 barrels of oil per day. Once completed, oil sands will account for just 4% of the group’s total portfolio.

The oil titan hasn’t ruled out further involvement in Canada and the spokeswoman was keen to point out that the tar sands remain long-term projects which span 30-40 years.

Fellow giant BP also failed to rule out further investment in Alberta’s tar sands, citing the growing need for additional energy resources.

Spokesman for BP Robert Vine said: “There is huge and growing demand for energy across the world, not least the US and Asia. The US is very keen on securing its supplies and as Canada remains a friendly neighbour, it makes sense to tap into the huge market on offer.”

The group has one project under its belt at present, although it is yet to take a final investment decision. The sunrise project would produce up to 200,000 barrels of oil per day, of which BP would stand to benefit from half in what it hailed as its “first and fairly small foray” into the tar sands business.

In response to fears the project is environmentally damaging, Vine said the deposits were situated underground rather than on the surface and the extraction process called steam-assisted gravity drainage creates a “much smaller footprint at the surface.”

Lawrence Poole, North American analyst at IHS Global Insight, believes it makes no sense for the pair to bow to public perception.

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“The future of the industry is in unconventionals, from tar sands to shale gas, and North America is really the world leader for this at the moment.

“Despite disgruntlement on the part of some shareholders, it makes no business sense for either Shell or BP to exit from this space. That isn’t to say that more could be done in terms of environmental stewardship, but this is a debate that continues to evolve.”

Indeed, the future of conventional oil is a hotly contested subject amid growing fears that peak oil could be approaching faster than anticipated. Virgin tycoon Richard Branson was the latest public figure to wade into the debate, when he declared that oil could spike as soon as 2015.

Demand is expected to increase by 10% over the same period, according to the Bank of America, while non-Opec output is thought to be declining by close to 5% a year, meaning the world is becoming increasingly anxious to secure new means of energy.

And with oil prices set to fetch over $100 a barrel within the next year, the argument surrounding unconventionals shows no signs of abating.

The World Development Movement said: “Exploitation of tar sands by companies, which are in some cases financed by the UK taxpayer, due to our ownership of the Royal Bank of Scotland, is likely to cause a stir.

“Tar sands are among some of the world’s dirtiest fuels to produce. Their extraction is having a hugely detrimental impact on the lives and human rights of indigenous communities in Canada. And their extraction produces on average three times the greenhouse gases of conventional oil, which means their contribution to climate injustice is particularly high.”

All eyes will now be on BP and Shell’s upcoming April and May annual general meetings to shed futher light on their stance on tar sands.


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