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The Guardian: The next big thing or a risky gamble: Shell looks to turn sand into oil

Canada’s energy reserves: It only makes sense if the oil price is high – yet it needs lots of cheap energy

Terry Macalister
Friday June 2, 2006

A recent decision by Shell to pay $2.2bn (£1.18bn) for a Canadian oil company with only 22 employees and no reserves recognised by the US financial regulator has surprised some in the business.

Is it another wrong turn from a group that “mis-stated” 25% of its reserves in 2004 or a smart move that allows Shell to steal a march on competitors by taking a dominant position in “unconventional” oil production?

BlackRock Ventures owns three properties containing estimated “reserves” of 209m barrels of tar-like bitumen that saturate the sands a relatively small way below the surface. These unusual oil assets are extensive but the costs of extraction are very high at a time when Shell says it is postponing some of its projects worldwide because of the rising equipment, staffing and other costs.

If prices remain high, which Shell clearly believes they will, BlackRock could be a good investment. Ironically, though, the economics of this business are particularly vulnerable to rising energy costs. A huge amount of power is needed for the various processes to turn the sand to petrol – an issue that worries analysts as well as environmentalists concerned about the carbon-intensive nature of the operations.

There is also divergence among professionals, with Shell’s major rival, BP, led by its astute chief executive, Lord Browne, steering clear of oil sands for now.

Meanwhile, the US securities & exchange commission, which regulates the New York stock listings of Shell and other major oil companies, does not recognise oil sands in its calculations of reserves. Neither do many industry experts when they are assessing the world oil order.

If this bitumen is counted like other “normal” oil assets then Canada holds either the second-biggest reserves in the world behind Saudi Arabia or possibly the biggest. In fact, says Shell, the Canadian government believes its reserves have now reached a massive 1.6 trillion barrels. The problem is that the company needs a minimum oil price of $25 a barrel to make Canada’s huge Athabasca project, where it is the majority shareholder, profitable.

While current highs of about $70 a barrel make these oil sands look highly attractive, some believe the oil price could fall precipitously in the future.

Bruce Evers, oil analyst with Investec Securities in London, believes the “jury is still out” about oil sands. “Clearly, Shell and others are making money at this point with oil prices so high but if they drop back to $40 one wonders what kind of [financial] returns they will get,” he says.


The Anglo-Dutch group bought BlackRock Ventures at a 27% premium to its share price and more than three times the price paid by Total recently for a similar oil sands company, Deer Creek Energy. Shell has been attracted by the fact that BlackRock holds land and production interests adjacent to one of its existing oil sands sites at Peace River in north-east Alberta.

BlackRock was not a one-off purchase. In March, Shell paid more than $400m for other undeveloped oil sands properties in northern Alberta and is betting on bitumen for its future.

The company is already the operator and 60% owner of Athabasca, the biggest oil sands project in the world, and a range of other schemes, which it now vows will be a big driver of future earnings growth.

When the Athabasca project began production in April 2003 with 155,000 barrels a day being produced, it added about 2% to the company’s worldwide output. Now there are plans to raise production to 300,000 by 2010 and 500,000 beyond that. The complex extraction process at Athabasca’s Muskeg River Mine, 50 miles north of Fort McMurray, starts with the biggest electric shovels in the world – large enough to pick up a yellow school bus – scraping up the oil sands and loading it into 400-ton lorries.

For 24 hours a day, all year, these vehicles carry the “ore” to an extractor where the oil is separated, cleaned and diluted with solvent and then pumped 300 miles through a pipeline. At the other end the highly viscous and heavy “crude” is put into an upgrader at Shell’s Scotford refinery near Edmonton, where it is converted into synthetic oil before being made into refined products such as aviation fuel and petrol.

Although oil sands is seen as the big new thing in the oil industry, it is in fact very old. Local aboriginal people used the bitumen for waterproofing canoes 300 years ago.

A man called Alfred von Hammerstein first drilled for oil near Fort McMurray in 1906 and although the potential of the oil sands was discovered soon after that, attempts to commercialise it did not get going until the 1960s. Now it is believed that the total invested by a variety of companies in oil sands in Canada has been $23bn, with a further $7bn more planned to be spent by 2012.

But the local aboriginals have not gone away. The Fort McKay First Nation, the closest indigenous community to the Muskeg River Mine, has been fighting to assert its rights under land treaty settlements. Shell has just agreed with the First Nation to facilitate its entry into the oil sands business through an option to acquire and work with Shell on Lease 90 at Athabasca.

Chief Boucher, head of the First Nation people made up of Cree and Dene people who have traditionally fished and hunted on the Athabasca river, accepts that this type of mining took its toll on the land and the local way of life. But he too is willing to stake a bet on oil sands: “Development is occurring and … this is our opportunity to participate fully and build a long-term economic vision for Fort McKay.”

Power from rocks

Shell and a number of other companies have been investing heavily in a range of “unconventional” schemes including oil shale, coal bed methane and gas-to-liquids, as well as oil sands. Such projects promise to increase the world’s energy supplies, but their production is itself energy-intensive and expensive. That is not so much a financial problem in a world of $70-a-barrel oil, but these alternative fuels produce far more greenhouse gases.

There is no shortage of oil shale, much of it in the US and Canada, but it must be dug out by strip mining and heated to 450-500°C before being enriched with hydrogen from steam to separate the oil. The resulting sludge, which has increased in volume by 30%, must then be disposed of. The process is said to emit four times as much CO2 as traditional oil production. It also requires large amounts of water.

In Colorado, USA, Shell is testing a process to unlock very large oil shale deposits by conversion in the ground, using electric heaters to warm the rock formation to release light oil and gas. It is also working at coal-to-methane, where natural gas is extracted by depressurising coal seams, and has invested billions in various gas-to-liquids schemes, where natural gas is converted into a more easily transported form.

A major scheme in Qatar is likely to get the go-ahead from Shell later this year although rising costs across the industry have worried officials.

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