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Houston Chronicle: As oil prices stay up, tar sands gain cachet:  It's not cheap to extract crude, but majors find cost is worth it: “Shell reserve slump: Shell, based in London and The Hague, reported Feb. 3 that reserves fell in 2004 because it found enough oil to replace just 15 percent to 25 percent of what the company pumped.” ( Posted 20 Feb 05



Bloomberg News


Shell Canada Ltd. Chief Executive Officer Clive Mather says oil from his Athabasca project, where tar sands are boiled to produce crude, can cost twice as much as drilling in the North Sea. And it's worth every cent, he says.


"If we had access to unlimited conventional oil, I guess the interest in Athabasca would diminish quite quickly, but that isn't the case," Mather said in an interview this month in London. "This is high-cost oil, there's no question about that. At current prices, it's still very good business."


A 15-year decline in oil reserves is prompting companies such as Royal Dutch-Shell Group of Companies, Exxon Mobil Corp. and ChevronTexaco Corp. to spend $76 billion in the next decade to boost supplies of oil from tar sands and diesel fuel from Qatari natural gas. Oil executives say they have no choice but to try alternatives to drilling because there is not much more crude to be found in their current fields.


"We're damn close" to the peak in conventional oil production, Boone Pickens, who oversees more than $1 billion in energy-related investments at his Dallas hedge fund firm, said in an interview in New York last week. "I think we're there." Suncor Energy, the world's second-biggest oil-sands miner, is his largest holding.


Production on the rise


Companies will produce 10.1 million barrels of oil a day by 2030 from projects in Canada and Qatar, more than Saudi Arabia does today, according to forecasts by the International Energy Agency in Paris. That's 8 percent of the world's total.


Shell is spending $13.70 per barrel at its Athabasca project in Canada, higher than drilling projects, Mather said. Oil executives say that crude prices near $45 a barrel more than offset the extra cost.


The oil industry needs to spend $3 trillion by 2030, or $105 billion a year, to meet an expected surge in demand, the International Energy Agency estimates.


"Pressure on supply will become sufficient for more money to be put into nonconventional oil," said Peter Odell, an oil politics and economics professor emeritus at the Erasmus University in Rotterdam.


Exxon Mobil, BP, Shell, ChevronTexaco and Total, the five largest publicly traded oil companies, last year reported net income of about $85 billion, equal to the economic output of Venezuela, a nation of 25 million and the third-largest member of the Organization of the Petroleum Exporting Countries.


Falling reserves, returns


Oil-sand mining projects offer a rate of return of 13.6 percent, less than half the 33.4 percent at a deep-water Gulf of Mexico field such as BP's Mad Dog project, said Scott Mitchell, an analyst at energy consultant Wood Mackenzie in Edinburgh. West Africa's deep waters offer an 18.2 percent return, he said. The estimates are based on an average price of $21 per barrel.


Shell and BP, Europe's two largest oil companies, this month reported that oil and natural gas reserves declined in 2004, based on U.S. rules. It was the first drop in more than six years for London-based BP, whose only investment in nonconventional oil sources is in Venezuelan heavy crude. BP acquired the stake when it bought the Veba Oel German oil-refining business from E.ON.


Shell reserve slump


Shell, based in London and The Hague, reported Feb. 3 that reserves fell in 2004 because it found enough oil to replace just 15 percent to 25 percent of what the company pumped. BP replaced 89 percent of production, the company said Feb. 8.


BP forecasts it can expand oil and gas output by 5 percent a year using existing deposits and doesn't need to turn to nonconventional projects. BP's growth comes from Russia, where it spent $7.7 billion on the TNK-BP joint venture.


"To renew our exploration business, we only need to rely on the exploration for and development of primarily conventional oil and gas resources," Chief Executive John Browne said recently.


Oil futures show crude prices will stay close to $40 a barrel until 2011 because of rising demand, spurring investment in projects once considered to be marginal. Futures contracts are a promise to deliver a commodity at a specified price at an agreed-upon date in the future.


Supply pressure


Canada's tar sands may get $48 billion of investment by 2012, according to Canada's National Energy Board, double the amount spent in the decade ending in 2003. Imperial Oil Ltd., controlled by Exxon Mobil, said it may pay $6.5 billion to double its capacity to produce oil from tar sands.


For investors, oil sands have been a better bet than the best-known oil companies. Canadian Oil Sands Trust, which invests only in the Alberta mining projects, is up 67 percent in the past year. BP shares during that time are up 34 percent, and Exxon Mobil gained 39 percent.


Current spending plans show Canada's oil sands may produce 2 million barrels a day by 2015, more than Iraq today, worth $29.2 billion in revenue a year at oil prices of $40 a barrel. 

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