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Why Shell Withdrew Application For Pierre River Oil Sands Project

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Published: Feb 24, 2015 at 7:48 am EST

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) indicated on Monday that it has withdrawn the application to develop Pierre River Oil Sands in northern Alberta. The oil sands mine was first proposed by Shell Canada in 2007.

The Pierre River oil sands are estimated to produce around 200,000 barrels of oil per day. The company had earlier expected to finish the project’s construction by 2010 and production was expected to initiate by 2018. Last year, Shell specified that it had to reassess the development timeline of the project and asked the regulatory authorities to halt the review for the time being.

President of Shell Canada Lorraine Mitchelmore has indicated that the Pierre River project continues to remain a long-term opportunity for the company. She also indicated that the project is currently not the main priority of the company. Ms. Mitchelmore said: “Our current focus is on making our heavy oil business as economically and environmentally competitive as possible.”

According to the Wall Street Journal, Ms. Mitchelmore in August last year had indicated that the Canadian oil sands businesses could only be profitable when Brent crude was trading above $70 per barrel. However, Brent crude during the pre-market hours today, as of 5:23AM EST, was trading at $58.83 per barrel.

Crude oil price since the last six months has fallen more than 50%. The Canadian oil sands regions are considered as one of the costliest regions of the world. The lower crude oil price has forced the company to shy away from the project.

Shell, currently from its oil sands in Canada produces around 255,000 barrels of oil per day. The oil giant seeks to reduce costs and focus primarily on its existing operations in the country. Shell has indicated that it has the regulatory approval to double its existing oil sands production. Shell, along with Marathon Petroleum Corp (NYSE:MPC) and Chevron Corporation (NYSE:CVX) owns stakes in the Jackpine and Muskeg River surface mines. Shell owns a 60% stake, while the remaining stake is held by Chevron and Marathon, respectively.

Last month, Shell applied 300 job cuts at its oil sands operations. Shell is amongst the first companies to shed off workers after the more than 50% decline in crude oil price since the last six months. Ms. Mitchelmore has indicated that Shell CEO Ben van Beurden believes on maintaining adequate liquidity by cutting costs, capital spending, and by increasing productivity.

Since the decline of the crude oil price, many other energy companies have reduced their workforce and have taken a toll on their oil sands projects. Companies like Total SA (ADR) (NYSE:TOT), Cenovus Energy Inc (USA) (NYSE:CV), and Statoil ASA(ADR) (NYSE:STO) have all postponed spending in the Canadian oil sands regions.

Shell’s decision to back out from the Pierre River project is considered to be a huge blow to the Canadian oil sands industry. As reported by Reuters, the Government of Alberta expects a C$7 billion decline in revenue this year. However, the government remains optimistic over the production, believing it to grow at a much slower pace. The government believes that it is still viable to produce considering the lower oil price and Shell’s move being “a business decision”.


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