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Petroleum News: Shell builds castles in the sands

Shell builds castles in the sands

Mega-major makes bid for junior BlackRock Ventures to expand interests in Alberta’s Peace River region

Gary Park

For Petroleum News

The North American progeny of Royal Dutch/Shell are thrusting their way to the forefront of Alberta’s oil sands.

Already rumored to be planning a C$17 billion investment over the next decade to boost output from their Athabasca project from 155,000 barrels per day (currently 77,400 bpd net to Shell) to as much as 600,000 bpd, the company has broadened its horizons even more this year.

Through SURE Northern Energy, a subsidiary of Shell Exploration & Production in the Americas, the global giant spent C$465 million locking up 220,000 acres of a possible new oil sands play outside the traditional Athabasca stronghold.

Now Shell Canada has bid C$2.4 billion for junior producer BlackRock Ventures, giving a bold lift to its Peace River operations in northwestern Alberta, setting a new standard for oil sands assets.

It is rated as easily the highest per-barrel acquisition in the past year that has seen Petro-Canada, France’s Total, China’s CNOOC and Sinpoec, and Chevron Canada join Shell in a frantic scramble to seize assets at a time when the industry is being spooked by moves from countries such as Venezuela and Bolivia to nationalize their petroleum industries.

Per-barrel not disclosed

Shell Canada did not disclose what it is prepared to pay BlackRock on a per-barrel basis, and Chief Executive Officer Clive Mather refused to say whether the deal would make sense even if oil fell to US$40 per barrel — the approximate calculation of how much the offer is worth.

He said BlackRock is “not about current production, it’s about what we can see in the future”; a spokeswoman conceded that “we did pay a premium.”

Even Jim Buckee, chief executive officer of Talisman Energy, came close May 9 to breaking the industry’s unwritten rule about not criticizing your competitors.

He expressed surprise to reporters about what Shell Canada paid for the properties, hesitantly adding: “They must know something we don’t.”

Earlier this year, Buckee said Talisman was looking at ways to monetize its oil sands holdings, but he said May 9 that the high cost of developing the resource and reservations about the technology available now may encourage his company to either sell the assets or look for a partner with mining and refining expertise.

Martin Pelletier, an analyst with Canaccord Adams, said it appears Shell Canada is digging deep to ward off any other contenders.

BlackRock holds 268,000 acres in the Peace River region and Cold Lake in the heart of oil sands/heavy oil activity, along with estimated recoverable proved reserves of 142 million barrels and 67 million barrels of probable reserves.

From quiet beginnings 10 years ago it is now producing 15,000 bpd, is targeting 30,000 bpd by the end of 2007 and 40,000 bpd by the end of the decade.

The acquisition, if it clears all shareholder and regulatory approvals, will initially give Shell Canada 14,500 bpd of heavy oil volumes from the Seal project in the Pace River, where

The Seal leases are adjacent to similar Shell Canada holdings that are currently flowing 12,000 bpd and are targeted for staged expansion to 30,000 bpd by 2009 on the way to a 100,000 bpd operation that could have an operating life of 30 years, drawing on a potential 7 billion barrels.

BlackRock recognized potential

Ian Kilgour, a company senior vice president, said last year that spending on the Shell leases alone could run to several million dollars, but was hesitant about being more specific given the inflationary pressures and cost uncertainties.

BlackRock President John Festival said his firm “recognized that the tremendous potential identified on our properties outstripped our financial and operational ability to develop them in a timely manner,” referring to a company that has only 22 employees, 55 contract personnel and limited cash flow, which yielded first quarter earnings of C$3.2 million. However, he said in a release that his company is on budget at C$225 million in total planned capital costs for the first phase of production at its Orion project for 10,000 bpd starting in late 2007.

The Seal area of the Peace River consists of heavy oil of 10-11 degrees API, which means it can be pumped.

Others with stakes in Seal include Koch Exploration Canada, Murphy Oil, Penn West Energy Trust and Baytex Energy Trust, with Penn West Chief Executive Officer Bill Andrew saying the Peace River could redefine his company by adding “multiple millions of barrels of reserves and very strong production.”

It has also attracted privately held PRO Upgrading, which has raised more than half of the C$800 million it has budgeted for a 25,000 bpd upgrader, growing to 100,000 bpd by 2020, turning raw bitumen into 28 degree API crude.


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