Why Shell Has All But Given Up on Canada's Oil Sands

SMITH BRAIN TRUST — Are Canada’s oil sands losing their luster? More than a decade ago, big multinational energy companies were flocking to the Western province of Alberta in droves, lured by a wealth of heavy crude in its bitumen-rich sands when oil was trading north of $100 a barrel.

But when prices headed south and stayed there, some international energy giants began leaving, minimizing their involvement with what is among the most expensive and environmentally damaging methods of fossil-fuel extraction. While the shift has benefitted some regional oil companies, it has also ignited fresh worries about development prospects in Canada, the third-largest holder of oil reserves, behind Venezuela and Saudi Arabia.

Last week, Royal Dutch Shell pulled up its stakes in Alberta, selling most of its oil sands assets to Canadian Natural Resources in a $7.25 billion deal that will help the Anglo-Dutch conglomerate reduce its debt load and hone its image as primarily a natural gas company.

"With the price of oil where it is and with fracking being where it is, companies are finding that further development of the oil sands is just not cost effective," says Charles E. Olson, professor of the practice in logistics, business and public policy at the University of Maryland’s Robert H. Smith School of Business. "More and more, it’s also environmentally pretty messy," Olson says.

Shell’s production is now roughly half-and-half, gas and oil, and the company has taken a bolder stance against global warming than some competitors. And Shell CEO Ben van Beurden has said he wants Shell to lead a transition to cleaner fuels, telling investors recently, “We believe climate change is real.”

And it doesn't hurt, Olson says, that fracking requires less capital investment, is less damaging to the environment and is comparatively "a sure thing." Those factors have other energy giants shifting into fracking too.

ExxonMobil, for example, recently announced that it was buying land in Texas, close to home, for a fracking project, and adding 45,000 jobs in the process. Such projects are short- to medium-term, unlike oil sands extraction projects, which can span decades, or offshore oil wells, the large-scale projects that require drilling thousands of feet below the surface of the water.

"I think, right now, Shell has had it with these big risky projects," Olson says. Shell was burned last year by an expensive drilling project in the Beaufort Sea north of Alaska, sinking a large investment into the project and finding little oil and gas.

"Fracking is where it's at," Olson says. "It's simpler and less risky. Oil companies just aren’t willing to take the risks they were willing to take in days gone by."

For Shell, the sale to Canadian Natural moves it a step closer to its $30 billion divestiture goal, set after its massive $52 billion acquisition of BG Group Plc in 2016. "They took on a lot of debt with that acquisition, and they've got to clean up their balance sheet," Olson says.

With the sale, Shell is poised to all but exit Canada, leaving behind just a 10 percent interest in Athabasca, an oil-sands joint venture with Canadian Natural. Shell this year also ended a long-held partnership with Saudi Arabian Oil Co. and sold a collection of oil fields in Britain’s North Sea.

"In days gone by they might have held onto assets like these undeveloped for future use, for a day when the price of oil has gone up and a lot of the others have been extracted," Olson says. "Now, they don't bother anymore. They are looking at the rest of their portfolio and saying 'What can we do without?' "

In December, Norway’s state-owned Statoil announced it would pull out of its oil-sands projects. Both Exxon Mobil and ConocoPhillips this year reduced its reserves of oil-sands barrels. Exxon Mobil has declared oil sands projects to be unprofitable at today's prices.

London-based consultancy firm IHS Markit estimates that, to be profitable in the oil sands, companies need oil prices at $85 per barrel or higher.

U.S. shale producers are producing oil at roughly half the price.

That's marked a stark change in the pace of investment in the tar sands. With oil prices now in a two-year slump, Olson says, new projects in Canada have become "far more improbable."