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January 2010

Vol. 15, No. 5 Week of January 31, 2010

All — well, most — aboard!

Shell switches from oil sands to conventional prospects to build reserves, shelving 515,000 bpd; Nexen also takes cautious route

Gary Park

For Petroleum News

Not everyone wants a seat on the oil sands bandwagon at a time when eight key players are again cranking up their spending plans.

Just when it seemed a corner had been turned for the northern Alberta resource, after 18 months in the doldrums, Royal Dutch Shell has put an indefinite hold on its once-grand dream of producing 770,000 barrels per day of bitumen and Canadian independent Nexen has deferred making a go-ahead decision to double the size of its Long Lake project.

Shell’s recently installed Chief Executive Officer Peter Voser delivered the heaviest setback to the suddenly buoyant oil sands mood when he told London’s Financial Times Jan. 25 that future oil sands development would be “very much slower.”

That trailed by only a few days a hint by Shell’s Canadian unit of the revised strategy, when the company filed a regulatory application for its existing 12,500 bpd Carmon Creek project in northwestern Alberta. In that proposal, it lowered the expansion target to 80,000 bpd from 100,000 bpd.

The company’s estimated oil sands base of 20 billion barrels — about 8.4 percent of its total proven holdings — was seen as the key to halting its declining reserves, which hit a low point in 2004 when the global giant admitted it had overstated reserves by 23 percent between 1997 and 2002, resulting in a fine.

But Voser said the company will stall expansion of its Athabasca operations once its current US$14 billion expansion from 155,000 bpd to 255,000 bpd is completed in 2011.

Upgrading also slowed

Also caught in the slowdown is Shell’s plan to increase bitumen upgrading at its Scotford refinery complex near Edmonton to 690,000 bpd from 290,000 bpd.

“Over the past two years and certainly over the past six to eight months, I’ve taken the pace out of that, because we have enough other growth opportunities,” Voser said.

Shell will instead shift its focus to conventional oil and gas for future growth, he said, claiming that Shell has improved its record of discovering new oil and gas after investing heavily in exploration.

That’s in sharp contrast to Shell’s performance under Voser’s predecessor, Jeroen van der Veer, who shifted the corporate focus to unconventional resources such as the oil sands after the reserves scandal.

What has surprised many observers is Voser’s statement that rising development costs in the oil sands have made investment there less attractive — a claim that places him at odds with the majority of players who say the costs of labor and materials have dropped sharply during the recession.

Environmental heat

But Shell, as much as any company involved in the oil sands, is feeling the heat from environmental groups.

When Shell holds its annual meeting on May 18, a coalition of 142 shareholders known as FairPersons will make its case for a review of the risks associated with oil sands involvement, including the likely increase in carbon costs and the potential degradation of the land, water and air.

The coalition, although representing only 0.15 percent of Shell’s outstanding shares, is insisting the company report back by the annual meeting in 2011.

Voser told a Calgary business audience in September that the oil sands emit only 5 to 15 percent more carbon dioxide than conventional oil projects, but has not said publicly whether environmental resistance is changing his thinking.

Nexen expects carbon tax

Nexen, already dealing with operational hiccups as it strives to reach its Long Lake Phase 1 goal of 72,000 bpd, won’t make any moves on Phase 2 until it has more confidence in the economic recovery and what carbon costs it might face.

Nexen, as 65 percent operator, and its partner OPTI Canada, have budgeted C$100 million this year to advance engineering work on Phase 2, but late in 2009 they postponed sanctioning of the expansion until 2011.

Chief Executive Officer Marvin Romanow told an investors’ conference he believes a carbon tax is “fundamentally necessary” and expects the United States will implement such a tax in 2011.

The shaky outlook for Long Lake only heightens speculation that the project could be in the takeover sights of several Asian energy powers that are anxious to increase their supply sources.

Korea National Oil Corp., which has two stakes in the oil sands through its takeovers of Newmont Mining Corp. and Harvest Energy Trust in the past four years, added to that speculation earlier in January when it included Canada among its leading targets when it said it would spend US$6.5 billion on mergers and acquisitions this year.

UBS Securities said assets being offered by Suncor Energy, EnCana and Talisman Energy could also be on KNOC’s shopping list. But it will likely face stiff competition from PetroChina, Malaysia’s Petronas and India’s ONGC.






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