Shell completes exit from Canadian oil sands

VANCOUVER (miningweekly.com) – The world’s second largest publicly traded oil company, Royal Dutch Shell, is exiting Canada’s oil sands sector after announcing that subsidiaries Shell Canada Energy, Shell Canada Limited and Shell Canada Resources signed two agreements that will transform its Canadian business.

Under the two accords, first announced in March, Shell will sell all its in situ and undeveloped oil sands interests in Canada and reduce its share in the Athabasca oil sands project (AOSP) from 60% to 10%.

"This announcement is a significant step in re-shaping Shell's portfolio in line with our long-term strategy. We are strengthening Shell's world-class investment case by focusing on free cash flow and higher returns on capital, and prioritising businesses where we have global scale and a competitive advantage such as integrated gas and deep water. The proceeds will accelerate free cash flow and reduce gearing and make a meaningful contribution to Shell's $30-billion divestment programme,” Shell CEO Ben van Beurden said in a statement on Wednesday.

Van Beurden has previously stated that Shell favours investment in renewable energy and will increase yearly investment despite oil and gas still accounting for the majority of its capital budget.

Under the first agreement, Shell will sell to a subsidiary of Canadian Natural Resources its entire 60% interest in AOSP, its 100% interest in the Peace River Complex in situ assets, including Carmon Creek, and several undeveloped oil sands leases in Alberta. Canadian Natural will pay Shell about $8.5-billion in cash and scrip.

Canadian Natural is one of Canada's largest oil sands energy companies, with a market capitalisation of about $35-billion.

Separately and under the second agreement, Shell and Canadian Natural will jointly acquire and own equal stakes in Marathon Oil Canada (MOCC), which holds a 20% interest in AOSP, from an affiliate of Marathon Oil for $1.25-billion each, to be settled in cash.

The combination of these transactions will result in a net payment of $7.25-billion to Shell.

On completion of all transactions, Calgary-based Canadian Natural will be the operator of the AOSP upstream mining assets, and Shell will continue as operator of the Scotford upgrader and Quest carbon capture and storage (CCS) project, located next to the 100% Shell-affiliate owned Scotford refinery and chemicals plants, in Alberta.

Canadian Natural will become the owner of the 126 000 bbl/d Jackpine mine, the 154 000 bbl/d Muskeg River mine, and have rights to the Jackpine mine expansion, which has regulatory approvals for 100 000 bbl/d, as well as several oil sands leases and pipelines in the basin. Canadian Natural will also take ownership of the Quest CCS project, capable of isolating 1.1-million tonnes a year of carbon emissions, and have a 70% stake in the 204 000 barrels of oil equivalent Scotford upgrader.

This arrangement is expected to allow Shell to focus on its competitive Canadian downstream business and leverage proprietary technology. The transactions are expected to close mid-2017, subject to customary closing conditions, adjustments and regulatory approvals.

In addition to the cash proceeds and Canadian Natural shares, the divestment includes further intellectual property agreements valued at up to $285-million and a long-term supply agreement for the Scotford refinery. The transactions will potentially allow for further cost reductions and continued value chain optimisation for Shell.

In 2016, the assets being divested to Canadian Natural recorded a loss before tax of $22-million, with upstream production averaging around 160 000 bbl/d. For the year ended December 31, reserves associated with the assets being divested to Canadian Natural were two-billion barrels and the gross assets at that date were about $12-billion.

The transactions are estimated to result in an after-tax impairment of $1.3-billion to $1.5-billion, subject to adjustments. Shell's share position in Canadian Natural will be managed for value realisation over time.

Shell and Canadian Natural have also agreed that, subject to closing of the transactions and other conditions, Shell may swap its 50% purchased interest of MOCC for a 20% interest in assets of the Scotford upgrader and Quest CCS project. If the swap were to occur, Shell would fully exit AOSP's mining operations and hold a 20% interest in the Scotford upgrader and Quest CCS project.

Shell retains significant operations in Canada that are not impacted by these transactions, including in upstream shales with a large Duvernay and Montney acreage position; downstream through chemicals, refining and marketing; and in integrated gas with the proposed liquid natural gas Canada project.