Shell changes course in Alberta

Gary Park

For Petroleum News

Royal Dutch Shell is doing what it promised earlier this year — scaling back its once-grand ambitions to produce 750,000 barrels per day of bitumen from the Alberta oil sands.

Chief Executive Officer Peter Voser set the ball rolling when he announced the supermajor would shift its focus to conventional oil exploitation in other parts of the world, complaining that capital costs in Canada had remained too high.

The first clear evidence that the policy is being implemented occurred Oct. 8 when Shell’s Canadian division scrapped a three-year regulatory process to build a 400,000 bpd plant near Edmonton to turn bitumen into synthetic crude.

The project would have given Shell a second upgrader at its Scotford refinery complex.

But John Abbott, executive vice president for heavy oil, was adamant the decision had nothing to do with activist and shareholder pressure on Europe’s biggest firms — Shell, BP, Total and Statoil — that have major stakes in the oil sands.

“We just concluded that we didn’t need this approval at this point in time,” he said. “It’s a purely business decision. It makes sound economic sense. It actually makes environmental sense as well.”

As part of the oil sands retreat, Shell will put its emphasis on improvements to its oil sands operations that will allow it to add 85,000 bpd to mining and upgrading capacity over the next year — starting with an expected decision in 2011 or 2012 to spend C$2 billion on a 35,000 bpd phase.

The planning then involves phases of 15,000 bpd and 35,000 bpd, although the costs of those stages won’t be known until final engineering is completed.

Shell will also take advantage of its regulatory approvals to blend up to 400,000 bpd of bitumen with 30 percent diluents to produce dilbit, which can flow more easily through pipelines to refineries in the United States than raw bitumen.

Abbott said these plans will improve Shell’s existing upgrader to the point where a second facility would have been redundant.

While saving cash — a 400,000 bpd upgrader, based on recent construction costs, could have run up a bill of C$30 billion — Shell’s downsizing will also reduce greenhouse gas emissions from its oil sands operations, he said.

Bob Dunbar, president of the oil sands consulting firm Strategy West, said upgraders also face challenging economics because of the narrowing price differential between light and heavy crudes that are “expected to be with us for a while.”

Shell has approval to mine 470,000 bpd of bitumen. It currently can produce 155,000 bpd from its Muskeg River mine, while its Jackpine Mine, which is just coming on stream, has capacity of 100,000 bpd.