Royal Dutch Shell, committed to unloading assets worth US$30 billion, has made a bold move in the Alberta oil sands - towards the exit door.
The Anglo-Dutch giant announced an US$8.5 billion cash-and-shares deal with Canadian Natural Resources on March 9 to reduce its stake in the Athabasca Oil Sands Project to 10 percent from 60 percent.
Although the two companies also agreed to pay US$1.25 billion each for Houston-based Marathon Oil’s 20 percent interest in the venture, there was an unmistakable message from Shell: The oil sands no longer fit its global growth plans, regardless of its claims that the Alberta government’s carbon pricing regime was not a factor.
For Shell the scale back affects its 154,000 barrels per day Muskeg River mine, its 126,000 bpd Jackpine mine, rights to the Jackpine expansion which has regulatory approvals for 100,000 bpd and its wholly owned stake in the shelved Carmon Creek development in northwestern Alberta’s Peace River region.
Long-term strategyShell’s Chief Executive Officer Ben van Beurden said the transaction, which is due to close around mid-year, fits with the company’s long-term strategy to reduce its exposure to high-carbon assets and reflects “how we continue to drive to be a world-class investment.
“We felt the position we had in oil sands mining was not material and we were not advantaged enough for it to fit in our long-term portfolio design,” he told reporters at IHS Markit’s CERA Week conference in Houston, adding Shell had now been freed to concentrate on natural gas, offshore oil and downstream operations such as refining and chemical manufacturing.
The deal excludes Shell’s interests in the Scotford Refinery near Edmonton and a chemicals plant, but turns over to CNR its 70 percent stake in the 204,000 bpd Scotford Upgrader (which converts oil sands bitumen into synthetic crude for refining) and its ownership of the Quest Carbon Capture and Storage project that can sequester 1.1 million metric tons a year of carbon emissions.
In other circumstances the shuffle of assets might have been seen a clear case of the inevitable winding down of the oil sands sector.
But that is never the case when Canadian National Resources is involved. The Calgary-based independent, after decades under the astute guidance of chairman Murray Edwards, has consistently marched to its down drumbeat, snapping up oil and gas assets when they were out of favor and shutting in gas production when others were frantically scrambling to pump their reserves at all costs.
Mindful of that history, investors gave a sharp vote of confidence to the deals, boosting CNR shares by 10 percent on March 10.
GMP FirstEnergy analyst Michael Dunn said the purchase “is a few billion (dollars) less than historical costs,” while Morningstar analyst Joe Gemino said it was a very favorable valuation for CNR.
Calgary-based investment banker Peters & Co. estimated the original cost/capital that was invested in the Shell assets was likely more than C$20 billion, implying that CNR acquired the assets for the equivalent of about 60 percent of book value
Two bitumen minesCNR President Steve Laut said the purchase, the largest in his company’s history, will allow it to operate two bitumen mines - the 255,000 bpd Athabasca operation and CNR’s own Horizon, which has found its stride after a bumpy initial run, noting that the acquisition “cost us less than it cost to build Horizon.”
CNR entered the oil sands in the late 1990s through a C$1.6 billion purchase of BP holdings.
Once the deal closes, CNR, Suncor Energy and Imperial Oil (69.6 percent owned by ExxonMobil) will dominate mining operations, with Teck, France’s Total, Chevron and China National Offshore Oil Corp. subsidiary (which it bought to US$15.1 billion in 2012), will be marginal players in northern Alberta.
Different strategiesHowever, Total and Norway’s Statoil, buckling under pressure from environmentally conscious European stakeholders, have been cutting their exposure to the high-cost oil sands, opting instead for shale prospects and other ventures that offer quicker returns.
CNR and Suncor have taken a more aggressive stance by adding to their oil sands assets, betting that a large presence will improve their chances of negotiating cheaper operating costs and boost profits even if oil remains stuck around US$50 a barrel.
Some are less certain about this strategy, with Martin Pelletier, portfolio manager at TriVest Wealth Counsel in Calgary, telling the Globe and Mail that U.S. shale plays such as the Permian in Texas will continue to yield faster returns than the oil sands.
“That’s important, because there is so much uncertainty with oil prices that the quicker you get your return on capital the better and the less risky it is,” he said.