|Shell Canada’s oil sands portfolio in Alberta.|
Shell Canada has formally proposed to its joint owner partners in the Athabasca Oil Sands Project (AOSP) proceeding with a 100,000-bpd (barrel per day) expansion of the oil sands mining operation—Expansion 1—despite surging costs.
The company used the issuing of the proposal as a backdrop to discuss its larger oil sands strategy: the continued aggressive investment in a fully integrated approach that will take an eventual 500,000 bpd output all the way through upgrading to final refined products.
Expansion 1 is a fully integrated expansion of the existing AOSP facilities, with both new oil sands mining operations and associated additional bitumen upgrading. It also includes construction of common infrastructure that will be sized to support future expansions.
The proposed expansion would increase AOSP production to 255,000 bpd, up from the current 155,000 bpd.
Shell now estimates the cost of the expansion to range between C$10 billion and C$12.8 billion (US$8.8 billion and US$11.3 billion)—an increase ranging from 42% to 83% over the company’s estimate last year of C$7 billion.
Western Oil Sands, which owns 20% of AOSP, warned earlier in July that the cost of the expansion could be 50% higher than originally thought.
|The capital intensity of oil sands projects is increasing.|
The C$7-billion figure itself was an increase of 83% from a projection of $C4 billion earlier in 2005. Costs for all oil sands projects have been rising rapidly, driven in part by shortages of labor and material.
Despite the increased capital cost for the project, estimated at between C$275 and C$350 per annual flowing barrel, Shell insists that the expansion project remains viable.
We have received our Board’s support to take the next step on this important growth project. Issuing this proposal to the other owners is a key milestone in our strategy to grow mining production from the Athabasca region to 550,000 barrels per day (bpd) [Shell’s share would be 330,000 bpd)].—Clive Mather, President and CEO, Shell Canada Limited
|Design of the Expansion 1 project. Click to enlarge.|
A previously announced solvent de-asphalting plant is not included in Expansion 1 because the technology is not yet ready for integration into the upgrading process.
Shell Canada intends to make a final investment decision for this project in the fourth quarter of 2006 pending regulatory approvals. First bitumen production is expected in late 2009 followed by upgrader production in late 2010.
The AOSP partners have 90 days to respond. The proposal is a legal formality driven by the structure of the joint venture, according to Mather. However, he noted, that if for some reason the partners decided not to participate, then Shell would proceed on its own, despite the additional capital burden.
The existing Athabasca Oil Sands Project is a joint venture among Shell Canada Limited (60%), Chevron Canada Limited (20%) and Western Oil Sands L.P. (20%).
Shell projects that its oil-sands mining work eventually will account for upwards of 330,000 barrels per day of production. The remainder of the 500,000 bpd target, the company expects, will come from its in-situ production work outside of the Athabasca partnership.
Earlier this year, Shell Canada acquired Canadian oil sands company BlackRock Ventures for approximately C$2.4 billion (US$2.2 billion). (Earlier post.)
As part of its continuing review of the BlackRock assets following the acquisition, the company estimated that its total in situ oil-in-place is more than 25 billion barrels. Shell has estimated its mineable oil-in-place at 10 billion barrels—but this figure excludes 69,000 acres of new leaseholdings acquired in 2005 that Shell has yet to assess.
The in-situ estimate includes the resources in the BlackRock leases of the Peace River, Cold Lake and Athabasca oil sands regions, along with approximately seven billion barrels of oil-in-place in Shell Canada’s Peace River leases.
Over the next two years, Shell Canada will expand in-situ production to nearly 50,000 bpd predominately from the base operations at Peace River, the newly acquired Seal and Chipmunk assets, and the initial phase of the Orion SAGD project in the Cold Lake region.
Shell is working with a portfolio of technologies, including its own work with Steam-Assisted Gravity Drainage (SAGD), Cyclic Steam Stimulation (CSS) and enhanced recovery techniques such as waterflood, miscible flood and steam-injection. In addition, with its acquitting of BlackRock, Shell picked up the company’s considerable experience with cold production technologies.
Ultimately, Shell Canada expects to reach 150,000 bpd from its current in-situ holdings.
Following Expansion 1, Shell Canada will build a new upgrader that will be dedicated to Shell-only production, including the in-situ production. Currently the other AOSP partners have access to the Shell upgrader.
Despite improvements in the relative carbon intensity of oil-sands production, the sheer volume of expansion is causing a rapid increase in Canada’s greenhouse gas emissions. (Earlier post.)
If I deal with the specific design components of Expansion 1, we have built in at every stage the cost of carbon, and in doing so we challenged ourselves to create as much efficiency as we can around energy usage and process optimization. All of that will deliver incremental reductions in greenhouse gases, specifically, of course, CO2.
...The second thing I would say is, yes, we are looking at a number of very specific projects...we will continue to investigate investment opportunities associated with further CO2 reduction and indeed sequestration. There are some very specific projects that we are promoting, both with our partners and with the provincial and federal governments.
We report annually on progress against the targets that we’ve already made, and we are looking very carefully at the implications for that in terms of our future expansions.
We’ll be coming back on our whole greenhouse gas management program over the months and years ahead... We have some technologies in the making [for capture and sequestration] and we certainly have some opportunities for projects, but we’re not ready to announce.—Clive Mather
Shell is currently involved with a number of high-cost, unconventional and alternative projects. Together with Qatar Petroleum, Shell also just launched the Pearl GTL project—the largest Gas-to-Liquids project to date. (Earlier post.)
The cost of the Pearl GTL project could be as much as $18 billion—triple what Shell had originally estimated. The project will cost $4 to $6 per barrel of oil equivalent to produce.
Although Shell’s second-quarter 2006 earnings jumped to $6.3 billion—a 36% increase from the same period the prior year—its crude oil production in the quarter dropped 13% to 1.897 million barrels per day, driven down by lingering impact from the hurricanes of 2005 and unrest in Nigeria, in addition to field depletion.