Shell Puts Oil Sands Expansion Plans On Hold

Posted By on April 29, 2010

Nathan VanderKlippe and David Ebner

Thursday, Apr. 29, 2010

Costs to build in the oil sands have grown so high that one of the world’s largest energy companies plans to wait at least five years – perhaps much longer – to expand its presence there.

The oil sands have become one of the most costly places on earth to pursue oil projects, said Marvin Odum, the Americas head for Shell As a result, the company will delay any decisions on expanding its Athabasca Oil Sands Project (AOSP) until at least the second half of this decade, and will focus instead on wringing more production out of its existing facilities.

That process could increase its production, which will hit 255,000 barrels a day later this year, by a further 30,000 to 80,000 barrels per day, Mr. Odum said.

“We certainly have seen the cost environment in Alberta go up considerably,” he said in an interview with The Globe and Mail editorial board on Wednesday. “We see the ability for lower investment levels to bring more production online over the next four, five, six years.”

It is Shell’s most definitive declaration that it is retreating from one of the grandest growth schemes in the business. In 2007, as its current 100,000-barrel-a-day expansion began, Shell talked about eventually mining almost 800,000 barrels of bitumen a day. Now, the oil sands are very much a next-decade resource, as Shell instead chases offshore oil in Alaska, the Gulf of Mexico and Brazil.

The company’s expansion, which will enter production this year, has been far more costly. Shell was one of the few companies to continue oil sands construction – both through the height of the boom and the subsequent crash – and saw expansion costs climb from $9.4- to $12-billion in 2006 to $14.3-billion earlier this year.

The expansion will now require an oil price of $70 to $75 to turn a profit, making it “some of the most expensive production that we have,” Mr. Odum said.

Shell internally forecasts future oil prices between $50 and $90 – a range that potentially excludes the oil sands, and makes other global projects more attractive unless the company can find a way to beat back costs.

Shell will only commit “to watch the market and see when is the next time to commit to the next major expansion of the oil sands,” Mr. Odum said.

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