Shell puts oil sands expansion plans on hold

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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 first 155,000-barrel stage of AOSP was hugely profitable for Shell, spinning out a per-barrel profit 66-per-cent higher than its other producing assets and paying back its capital costs in just five years at oil prices in the mid-$50s (U.S.).

But 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.

In the meantime, it is looking for ways to beat back costs, both through project design and through securing longer-term contracts with suppliers and construction firms.

Chevron Corp. and Marathon Oil Corp. each own 20 per cent of AOSP - one of several major oil sands operations that have come under assault for their environmental record, which includes scarring the landscape and using large quantities of water and energy.

Mr. Odum defended the industry's record on greenhouse gas emissions, which he called "not ridiculously high," but said companies have done a poor job of making that point.

"Industry needs to do a lot more in terms of getting out and being more transparent and very clear about what is truly involved in these operations," he said.

In the meantime, Shell supports the idea of building a West Coast pipeline that would open access to Asian markets, a project proposed by both Enbridge Inc. and Kinder Morgan Canada.

"Typically the more options you have for distribution of your product, the better," Mr. Odum said.

And the company has research teams across the continent looking at ways to refine extraction techniques, he said, even holding out the possibility that bitumen could become a relatively green source of energy.

Mr. Odum said he has challenged his research teams to make oil sands crude less greenhouse gas-intensive than conventional oil, making it "a preferred [resource]from a CO2 and water standpoint."