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Shell’s retreat from Alberta signals divergent views on future of oil sands

An excavator loading a truck with oil sands at the Shell Albian mine near the town of Fort McMurray in Alberta on October 23, 2009.

MARK RALSTON/AFP/Getty Images

Royal Dutch Shell PLC is selling the bulk of its oil sands business in a multibillion-dollar retreat from a sector it says no longer fits with its global growth ambitions.

The Anglo-Dutch giant, pressured by high debt, on Thursday said Canadian Natural Resources Ltd. would pay $8.5-billion (U.S.) in cash and shares for a controlling stake in the Athabasca oil sands project, a major bitumen mine and upgrading development with capacity of about 255,000 barrels a day. Shell is also jettisoning undeveloped oil sands leases and assets pumping around 15,000 barrels a day near Peace River, Alta.

Meanwhile, the two companies also agreed to pay $1.25-billion each for Marathon Oil Corp.'s 20-per-cent interest in the oil sands venture, giving Canadian Natural a 70-per-cent stake in the project. Canadian Natural shares soared almost 10 per cent in Thursday trading on the Toronto Stock Exchange, closing at $43.31 (Canadian), up $3.88.

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Shell's retreat from Northern Alberta points to a split between European energy firms and their Canadian and U.S. rivals on the viability of oil sands development with crude prices hovering at about half the triple-digit levels of recent years. The company joins Norway's Statoil ASA and Total SA of France in cutting exposure to the high-cost region in preference for shale prospects and other opportunities that offer better returns more quickly.

By contrast, Canadian Natural and Suncor Energy Inc., which already have extensive holdings, have expanded aggressively. The hope is increased heft will help tame notoriously high costs and bolster profits even if oil prices remain subdued around $50 (U.S.) a barrel.

Such consolidation makes sense, but U.S. shale plays such as the Permian in Texas still offer faster returns at a much lower oil price, said Martin Pelletier, portfolio manager with TriVest Wealth Counsel in Calgary.

"That's important, because there's 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 by phone. "If you have a longer-term oil sands project that requires more capital, there's a lot of risk there."

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Canadian Natural's deal with Shell marks the richest yet in the oil sands, topping the $6.6-billion Marathon paid for Western Oil Sands when it originally bought into the Athabasca partnership back in 2007.

Though it sold its Canadian business for a fraction of that on Thursday, Houston-based Marathon described the move as "transformative" as it announced a $1.1-billion deal to boost its foothold in the Permian. Chief executive officer Lee Tillman said the oil sands represented about one-third of the company's operating and production expenses, yet only about 12 per cent of its production volumes.

For Shell, the three-way deal adds to a string of divestments from its Canadian holdings, part of a $30-billion program geared toward paring debt.

This past fall, the company sold natural-gas assets in Alberta and British Columbia in a $1.4-billion (Canadian) cash-and-stock deal. It had already suspended work on its Carmon Creek oil sands project, citing shaky economics.

Shell executives stressed on Thursday that the company was not leaving Canada altogether, and that more stringent environmental policies in Alberta, including carbon pricing, did not factor into its decision.

Under the deal, the company will retain a 10-per-cent interest in the Athabasca project plus ownership of its Scotford refining and upgrading complex near Edmonton. It also has substantial natural gas holdings in British Columbia, with an eye toward future exports to Pacific markets.

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However, chief executive officer Ben van Beurden said the sale fits with the company's long-term strategy to reduce its exposure to high-carbon assets. It reflects "how we continue to drive to be a world-class investment," he said at IHS Markit's CERAWeek conference in Houston. Still, it was not the driving factor, he later told reporters.

"We felt the position we had in oil sands mining was not material and we were not advantaged enough for it to really fit in our long-term portfolio design," he said. Instead, the company will focus on natural gas, offshore oil and downstream operations such as refining and chemical manufacturing.

Greg Stringham, an industry consultant and former vice-president at the Canadian Association of Petroleum Producers, said there is an irony that European companies are the biggest proponents in the industry of carbon pricing, and yet are shifting their investments from one of the few oil and gas jurisdictions in the world that has a carbon price.

He noted the International Energy Agency this week indicated the oil sands will be an important source of crude in the world's effort to meet growing demand and replace declining fields.

Canadian Natural said it would gain 3,100 employees as a result of the transaction. The company pointed out that it is buying new capacity for 40 per cent cheaper than development costs at its expanding Horizon mine, with the benefit of immediate cash flow.

The industry stands to benefit further from fewer competitors jockeying in a tight labour market, company president Steve Laut said in an interview. "You get more orderly and more disciplined operations."

With a file from Jeffrey Jones in Calgary.

Video: Take an aerial tour of Fort Hills, the latest oil sands megaproject
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