Royal Dutch Shell Group .com

THE GLOBE & MAIL (CANADA): Suicidal Shell's best hopes lie in slow-growth oil sands: “It looks like the Royal Dutch/Shell Group is committing suicide in slow motion. It vastly overestimated how much oil it has in the ground. It pumps more oil than it finds.” ( 8 Feb 05



Tuesday, February 8, 2005 - Page B2


It looks like the Royal Dutch/Shell Group is committing suicide in slow motion. It vastly overestimated how much oil it has in the ground. It pumps more oil than it finds. It has to do something about it, which means finding a lot of reserves in a hurry. This is where Alberta could get lucky. The province's oil sands represent one of the planet's last great energy resources.


Last week, Shell dropped a bombshell with the announcement of another reduction in its proven reserves tally -- the fifth in a little more than a year. The latest downgrade means Shell has eliminated the equivalent of 5.8 billion barrels of oil from its books, equivalent to four years' of its own production or more than six years of Canada's total crude production. Shell's proven reserves now stand one-third lower than the level reported at the end of 2002.


Of course, Shell won't die in our lifetimes (though extinction is the assured outcome of any oil company). This is because some of the oil that was eliminated to satisfy the strict U.S. regulatory definition of reserves will inevitably get pushed back into the "proven" category, and because Shell has obscene amounts of money to spend on exploration, development and acquisitions. Thanks to high oil prices and refining margins, Shell, the world's third-largest oil company, reported record profit of £9.8-billion ($22.8-billion) in 2004.


In the 1980s and 1990s, when oil prices were much lower than they are today -- they went as high as $55 (U.S.) a barrel last autumn and are now at about $46 -- big oil companies were obsessed with financial and corporate engineering. There were mergers and share buybacks, then more mergers. Chevron and Texaco came together, as did Exxon and Mobil. The grubby business of punching holes in the ground was an afterthought. As a result, oil companies did not invest enough capital to sustain their reserves. This is another way of saying what came out of the warehouse exceeded what was put into the warehouse. Shell is guiltier than most of its rivals in this little oversight. Last year, all its new oil discoveries matched only half the amount of oil it sucked out of the ground.


In the meantime, oil demand is rising far faster than any oil company predicted. The International Energy Agency says daily global demand will be 84 million barrels a day this year. Only five years ago, it was 76 million barrels.


You get the idea; Shell and its major rivals have to find lots of oil and can't waste time. The math is staggering. More than a few big oil companies produce one million barrels or more a day. Shell produced 3.8 million barrels a day last year. That means it must find almost 1.4 billion barrels a year to offset production. That's roughly the equivalent of two of Newfoundland's Hibernia discoveries.


Drilling a hole here and there or buying a junior name on the TSX's Venture Exchange won't fix the problem. Shell, with all its financial firepower, might be tempted to buy a company that got extraordinarily lucky on the discovery front, as First Calgary Petroleums did in Algeria's natural gas fields. (First Calgary, in fact, is for sale and the rumours indicate Shell is among the potential bidders.) For the most part, though, it means betting big on non-traditional energy plays. Liquefied natural gas, known as LNG, is one area the biggies are rushing into. Another is Alberta's oil sands. Depending on how you measure the oil sands deposits -- the issue is how much of the resource is commercially viable at today's prices and technology -- Alberta may be second only to Saudi Arabia in terms of reserves.


The beauty of the oil sands is that their production profile is exactly the opposite of a traditional field's. In the latter, the oil is drawn from the reservoir like pop is drawn from a can with a straw. Production (and cash flow) is initially high, then declines rapidly as the straw starts to suck air. In the former, production is meagre at first and ramps up slowly as the bitumen-mining process expands, infrastructure such as pipelines and refineries are built and technology improves. Bitumen from the oil sands is extracted from the ground with monster shovels. If the reserve is too deep for shovels, the bitumen is heated underground with steam and pumped to the surface. Because the oil sands are so extensive, rising production over decades is pretty much assured. This is any big oil company's dream.


Shell already has a significant presence in the oil sands through Shell Canada's Athabasca mining operations in northern Alberta, where daily production is 150,000 barrels or more. At the Syncrude development, whose partners include Exxon Mobil's Imperial Oil unit and Canadian Oils Sands Limited Partnership, production this year is expected to be 80 million barrels. Syncrude is the world's largest oil sands mining business. Imperial, meanwhile, is planning to develop its promising Albertan Kearl Lake oil sands leases.


Alberta can expect tens of billions of dollars of investment in the oil sands as companies like Shell wake up to the fact that they've spent too much time fiddling and not enough time finding and developing. Shell's pain will be Alberta's gain. You can count on it.

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