Shell shuts down oil sands project

Royal Dutch Shell is abandoning a massive drilling project in the oil sands region of Western Canada. Shell said that low oil prices are to blame, but environmentalists believe their protests also played a role. John Dyer reports from Boston.

Shell is slimming down its North American operations, much to the joy of environmentalists. The oil company is shutting down an oil sands project in the western Canadian province of Alberta. (Photo credit: Urs Fitze)

Shell is slimming down its North American operations, much to the joy of environmentalists. The oil company is shutting down an oil sands project in the western Canadian province of Alberta. (Photo credit: Urs Fitze)

Pressure from environmentalists against mining oil or tar sands, the reluctance of the US government to approve new pipelines and the election win of Canada’s future Prime Minister Justin Trudeau, who is believed to be more environmentally friendly than his predecessor — these are some of the forces that have made Shell rethink its plans for the oil sands Carmon Creek project in the western Canadian province of Alberta. The low oil prices, which have made oil sands mining – already an expensive venture – unprofitable, also played a role in Shell’s decision to walk away from the project.

2 billion dollar loss

On Tuesday, the company announced that it would take a USD 2 billion charge to shut down the Carmon Creek oil field. The project in Alberta produces around 80,000 barrels of crude a day. By the time exploration at the site comes to an end, Shell will have removed 418 million barrels of oil from its reserves, or about 3 per cent of the worldwide total.

“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,” said Royal Dutch Shell Chief Executive Officer Ben van Beurden in a statement. “This is forcing tough choices at Shell.”

Shell’s decision comes as oil companies worldwide and the Canadian tar sands in particular are struggling to remain open amid low oil prices. When the company proposed the project in 2013, Texas oil prices were around USD 100 a barrel, more than double today’s price of USD 43 barrel.

Oil sands are no longer profitable

Last year, Shell Canada President Lorraine Mitchelmore said the company needed North Sea-quality Brent crude traded in Britain to cost more than USD 70 a barrel to be profitable. It is now trading at around USD 50 per barrel.

A few Canadian companies have discontinued extracting oil in the tar sands region. Last year, French oil giant Total and Norwegian energy company Statoil postponed tar sands exploration, too.

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

Tudor, Pickering, Holt & Company, a Texas-based energy investment firm, recently estimated that total worldwide spending in the oil sector would fall to around USD 25 billion next year, or half from their peak levels two years ago.

Frustration with politics

Shell is working especially hard to slim down in North America. In September it announced that it would cancel its plans to drill off the coast of Alaska after a drilling platform ran aground and offshore explorations showed that the oil fields were not as promising as once thought. The company had invested around USD 7 billion in the Alaska project. In February, the company opted not to develop an oil sands mine at Pierre River in northern Alberta and announced layoffs of 5 to 10 per cent of its 3,000 workers in Alberta.

Oil companies operating in North America like Shell have also expressed frustration with politicians and environmentalists who have delayed pipelines that would bring Canadian crude from the cold north to refineries in Texas on the Gulf of Mexico.

President Barack Obama has put the Keystone pipeline on hold, for example, as scientists conduct studies to determine the environmental impact of the pipeline. In Canada, First Nations – or indigenous groups – have slowed approval of the North Gateway pipeline that would bring tar sands energy to the country’s Pacific coast for shipment to China.

And just ten days ago, Canadians voted in a centre-left prime minister. While Justin Trudeau is not against the Keystone pipeline, he has pledged to be tougher on oil companies and more aggressive in reducing the country’s carbon emissions. Outgoing Prime Minister Stephen Harper, on the other hand, pushed for Canada, the world’s fifth-biggest oil producer, to become an energy superpower.

Environmentalists take credit

Shell executives declined to say whether their decision stemmed from Trudeau’s win and the prime minister-to-be has yet to unveil an official energy policy. But activists said their protests against the oil industry were crucial to the company quitting Carmon Creek.

“Public opposition to new tar sands pipelines is keeping the carbon in the ground, giving us time to develop the alternatives,” said Keith Stewart of Greenpeace Canada. “We hope our new federal government will put its weight behind building the green energy economy we need to stop climate change, rather than backing pipelines like the Harper government did.”

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