CALGARY - European energy major Royal Dutch Shell PLC (NYSE:RDS) is slowing the pace of its investment in the oilsands even as many of its peers speed up theirs, but observers say the decision says more about Shell than the overall outlook for the oilsands sector.
Peter Voser, who took the helm of the Anglo-Dutch company in July, told a U.K. newspaper this week that Shell intends to focus on exploration for new resources around the world rather than exploit costly "unconventional" ones like the oilsands.
"Voser's comment is pretty much Shell-specific," Mark Gilman, an energy analyst with the Benchmark Company in New York, said Tuesday.
Shell is a 60 per cent owner of the Athabasca Oil Sands Project, which includes a massive mining operation north of Fort McMurray, Alta., as well as an upgrader near Edmonton to process the heavy oilsands crude into higher quality synthetic crude oil.
Chevron Corp. and Marathon Oil Corp. evenly split the remaining stake in Athabasca.
The companies are in the midst of increasing production from Athabasca to 255,000 barrels a day.
But Shell has "clearly scaled down" earlier plans to eventually ramp up to 700,000 barrels a day, Voser said in an interview with the Financial Times.
Athabasca "has a cost structure associated with it that is at the exceedingly high end of anything in the industry currently," said Gilman.
Not only does the expansion to its already gargantuan open-pit mining operation require legions of workers, but also its Scotford upgrader near Edmonton uses a technology that differs from many of its peers in terms of cost, Gilman said.
In fact, oilsands players like Imperial Oil Ltd. (TSX:IMO) and Suncor Energy Inc. (TSX:SU) have signalled they plan to do away with building new upgraders in Alberta altogether, and are instead thinking about sending their bitumen by pipeline to U.S. refineries that have been retrofitted to handle heavy crude.
A handful of companies - Canadian Natural Resources Ltd. (TSX:CNQ), Husky Energy Inc. (TSX:HSE), Total SA (NYSE:TOT), ConocoPhillips (NYSE:COP) and Cenovus Energy Inc. (TSX:CVE) - have said recently they plan to start up new projects or expand existing ones.
Gilman said he does not foresee a return to the untenable inflationary environment the oilsands experienced up until late 2008, where numerous players clamoured for labour and materials as they built their projects simultaneously.
"I think the cost structure has kind of flattened out a little bit," he said.
It's notable that the majority of projects starting up use steam-assisted gravity drainage, or SAGD, technology to extract bitumen rather than the traditional open-pit mining technique.
In SAGD, oil producers inject steam via pipeline to melt tar-like bitumen underground, which is then drawn to the surface in a second pipeline.
"The cost structures of the two are entirely different, both in terms of the overall level of cost and the components," Gilman said.
The low price of natural gas - which SAGD producers use in huge quantities to create steam - is another factor in favour of that method versus mining.
Shell also differs from many of its cohorts in that it continued work on its current expansion, set to start up later this year, throughout the downturn, notes portfolio manager John Stephenson of First Asset Investment Management.
"In a sense, most of the others are playing catch up," he said.
"Maybe Shell is doing the prudent thing by waiting - letting other people chase after these projects and just harvesting what they have."
Environmental issues surrounding the oilsands have also weighed on Shell, whose oilsands operations in Alberta were the scene of high-profile Greenpeace protests in the fall.
Pension funds have said they intend to take up the environmental issue at Shell's annual meeting in May.
"The environmental factor probably played a relatively small role in Shell's decision to slow down development of its oilsands properties," said Vincent Lauerman, president of Geopolitics Central.
It's more a case of Shell "rebalancing" its portfolio toward lower cost and lower risk investments around the world.
"They got awfully heavy into oilsands relatively speaking and the thing about oilsands is it's an extremely high cost to develop," said Lauerman.
"If there is another major drop in oil prices, of course oilsands projects that come on line like these ... just aren't making a profit."
On the flip side, Shell has signed contracts in Iraq that guarantee a certain price per barrel regardless of what global crude prices are at any given time.
"There's really very little risk in that sort of a contract, whereas with the oilsands companies take a lot of risk when they invest billions upon billions of dollars for a relatively small amount of incremental production," Lauerman said.