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December 2008

Vol. 13, No. 49 Week of December 07, 2008

Shell puts sands in limbo

Once on track for a million bpd, supermajor is slowing research and expansion plans in favor of cost cutting and higher profits

Gary Park

For Petroleum News

It might be time for the Alberta oil sands industry to quietly put aside forecasts of production growth from 1.4 million barrels per day to 3.5 million bpd by 2015 and 5 million bpd by 2030.

Royal Dutch Shell is the latest to join a list of companies scaling back once-ambitious goals that would have seen gross volumes from its various projects climb above 1 million bpd within two decades.

Instead, its Canadian divisions are rethinking plans in its three core areas, including the Athabasca project (with Chevron Canada and Marathon Oil each holding 20 percent), the largely unexploited Peace River region of northwestern Alberta and the highly prospective, but untapped Grosmont carbonate formation in northern Alberta.

The anchor Athabasca operation is close to adding 100,000 bpd to its existing 155,000 bpd and was moving towards another 100,000 bpd until Shell stalled progress.

Jeroen van der Veer, chief executive officer at Shell’s head office, said the company would “wait for costs (in Alberta’s overheated construction sector) to cool down before we make any new investment decisions.”

In quick succession, Shell has taken an indefinite time out on a pilot test of the 300,000 acre Grosmont leases that were accumulated in 2006 for C$590 million.

And finally, on Nov. 26, it announced that a regulatory application for the Carmon Creek project in the Pace River area had been abandoned while it searched for ways to “reduce costs and improve profitability” by reworking plans.

Shell applies to Alberta board for 8-year confidential status

In the midst of these developments, Shell has applied to the Alberta Energy Resources Conservation Board for confidential status lasting at least eight years while it develops technology it hopes can extract billions of barrels of bitumen trapped in carbonate rock.

No known technology exists for recovering what is estimated to be one-quarter of Alberta’s bitumen resource, but taking that step would open the doors to a new geological and technological frontier.

Shell has an application pending before the regulator to keep the wraps on its scheme to test electric heaters for bitumen recovery and in-situ upgrading — a process it does not expect will allow a decision on commercial development before 2015.

In the meantime, Husky Energy, Laricina Energy and Athabasca Oil Sands Corp. have taken stakes in the carbonates.

Shell wants its Grosmont pilot to be granted experimental and confidential status for a five-year project term and three more years after completion, noting it may seek a further extension as it evaluates the pilot’s performance and ponders a commercial project.

“Given that there are other similar experimental schemes in progress … public disclosure of the information obtained from this research project prior to finalization and review of the test data (along with a commercial decision) may significantly jeopardize the applicant’s competitive position and result in undue economic hardship,” Shell said in its filing.

In response to the board’s request for further justification of its application, noting its recent practice has been to grant confidentiality for the duration of a test alone, Shell said it needed to protect the “sensitive nature of this type of technology” and its intellectual property.

“It is anticipated that the results from this project will help inform the design for a potential commercial project,” the company wrote.

“Having proprietary information publicly available before a successful commercial startup could jeopardize Shell’s position.”

Advantages of heaters

Shell’s regulatory filing said electric heaters could have several advantages over existing in-situ bitumen recovery methods, including a “significantly higher” recovery of hydrocarbons and a “side benefit” of upgrading bitumen into light liquid and gas hydrocarbons.

It said the gas generated by in-situ upgrading could supply much of the energy needed for a commercial undertaking and because the upgrading process would not require steam injection, water consumption would be lower than for conventional thermal oil sands projects.

In addition, there would be benefits from improved energy efficiency and lower greenhouse gas emissions, Shell said.

The company has not so far declined to provide a cost estimate for its pilot work, nor has it set a new timetable for its pilot test since announcing it will indefinitely delay that work.

A Shell spokesman said the intention now is to proceed at a “more modest pace,” with no ideas when an actual test — originally expected to last 12 to 24 months following one year for construction and one year to heat the reservoir — will occur.

He said Shell has now decided the planned Grosmont pilot test is not the best way to proceed, but would not say whether the application will be withdrawn.

For this winter, Shell has budgeted for up to 18 oil sands core holes and 28 square kilometers of seismic data on the Grosmont property, down from an early 35 appraisal wells and 120 square kilometers of 3-D seismic.

The spokesman said another two years to settle on the right approach to a pilot test is not that long, given that Shell has spent 25 years conducting lab work on carbonate formations.

Peace River setback

The other setback is in the Peace River area, where the company had indicated it planned to add two 50,000 bpd phases to a 12,000 bpd pilot project. Corporate sanctioning had previously been expected in 2010 once final costs estimates were available.

A Shell spokeswoman said the company is now turning its efforts to drilling vertical steam wells to recover bitumen rather than horizontal cyclic steam wells.

In an e-mailed statement, the company said that in the “prevailing high cost environment, Shell is also conducting a review to come up with recommendations to improve the project economics by reducing costs and increase project revenue.”

For now, the company has not set a schedule to submit a new application, but the spokeswoman said that such a step will not involve making a fresh start.

Rather than being put on hold, Carmon Creek will “continue to move forward to achieve long-term efficient development of this resource and expand production in the most cost-efficient and profitable way.”






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