Shell Takes $2 Billion Charge to Quit Oil-Sands Project

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Royal Dutch Shell Plc made its second major strategic change in as many months, announcing it will take a $2 billion charge as it shelves an oil-sands project in Alberta after walking away from an Arctic drilling program.

Shell is halting work on the 80,000 barrel-a-day Carmon Creek drilling development after deciding the project couldn’t compete in its portfolio, the company said in a statement Tuesday. The charge will be recorded in third-quarter earnings results, which are due to be released Thursday.

Energy producers are canceling or delaying projects as a crude price slump forces them to prioritize spending. The company last month abandoned drilling offshore Alaska indefinitely after it failed to find enough oil or gas in the Chukchi Sea. Earlier this year, Shell withdrew an application to develop the Pierre River oil-sands mine in northern Alberta.

“We are making changes to Shell’s portfolio mix by reviewing our longer-term upstream options world-wide, and managing affordability and exposure in the current world of lower oil prices,” Ben van Beurden, the company’s chief executive officer, said in the statement. “This is forcing tough choices at Shell.”

DEFERRING INVESTMENT

Shell joins Suncor Energy Inc. and Cenovus Energy Inc. in deferring investment this year in the oil sands, one of the most expensive places to extract crude. The decision reflects uncertainties including the lack of transportation infrastructure to move Canadian crude to global markets, Shell said. All four proposals for new large-scale oil pipelines to ship Alberta crude to the continent’s coasts have been delayed by environmental opposition and regulatory scrutiny, including the Keystone XL line that’s in its eighth year of U.S. review.

“With this new Shell announcement, 18 future oil-sands announcements have been delayed this year,” Jackie Forrest, vice-president of Calgary-based ARC Financial Corp., said in a phone interview. “Many of the other ones were not as expensive to cancel because not as much had been spent on them.”

Oil-sands projects were struggling to compete against lower-cost U.S. shale and offshore developments even before the price of crude plunged. Total SA shelved a C$11 billion ($8.3 billion) plan to build the 160,000 barrel-a-day Joslyn mine in May 2014, citing high costs.

It’s getting even tougher for the world’s third-largest reserves in Canada to attract investment with prices for West Texas Intermediate and Brent crudes both hovering below $50 a barrel. Non-producing oil sands projects require a Brent price of $80 to be profitable, the highest of any major upstream sector, according to a Rystad Energy AS analysis released earlier this month. Offshore fields, including in the Middle East, Brazil and Norway, are among the cheapest to develop, according to the oil and gas consultant.

HEAVY CRUDE

Heavy crude from Alberta’s oil sands also trades at a discount to the global benchmarks, making it even more important to bring down costs, find efficiencies and focus on reliability, van Beurden said on a July conference call with analysts.

Carmon Creek was sanctioned by Shell in October 2013 and in May the company said it would defer the project by two years to try to take advantage of the price slump and cut costs. In Alaska, Shell had spent $7 billion searching for oil before making the decision to pull out.

The company said it will retain the Carmon Creek leases and hold onto some equipment while it decides what to do with the asset, and will reclassify the 418 million barrels of proved bitumen reserves tied to the project, as of the end of 2014, as contingent resources.

Spending and output growth in the oil sands will slow as a result of the delays and cancellations, Forrest said. “There’s going to be a flattening of supply post-2020.”

 

 

 

 

 

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