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How Shell and BP's Tar Sands Plans Went Wrong
Friday, 23 September 2016 00:00 By Louise Rouse, Energydesk | Op-Ed
Dozens of projects in the Canadian tar sands have been put on hold,
delayed, or cancelled in the last two years, according to a new report
by Greenpeace and Oil Change International.
Among these 42 projects is the Shell's cancelled Carmon Creek project,
and postponed phases of BP's Sunrise venture.
Amid the rubble of their once much greater plans for Canada's tar sands
and whatever else they may claim, BP and Shell can't say they weren't
In 2010 BP and Shell casually dismissed shareholder concerns about the
assumptions underpinning their Alberta ambitions about fundamental
issues such as long term oil price stability, Indigenous groups' and
local community opposition, and increasing regulation on GHG emissions.
Fast forward 6 years and such shareholder concerns have been vindicated.
After its balance sheet adjusting cancellation of Carmon Creek, Shell's
remaining plans for expanding its tar sands operations have moved into
the realm of mere "ideas" according to CEO Ben van Beurden.
And despite BP claiming as recently as December 2014 that all three of
its projects were growth opportunities to 2020 and beyond, Bob Dudley
stated in April 2016 that "[BP] have one oil sands project. It is very
questionable whether we'll have any more."
It would be easy to disregard BP's and Shell's stunted tar sands
ambitions as the temporary and manageable consequence of a volatile oil
But to do so would be to miss the worrying signposts this reversal of
fortune provides for the oil industry's future.
It's vital that the correct lessons are learned by the companies and
their investors, for they extend beyond the tar sands to the very heart
of the oil majors' high-cost, frontier driven growth model.
Not Just the Oil Price
Despite mainstream commentary, the swathe of cancellations and delays is
not solely due to the fall in oil price but also to a number of other
factors including lack of pipelines, increasing political action on
climate and Indigenous community opposition.
Of the 27 cancelled/postponed projects assessed, the report found that
14 -- including BP's Sunrise and Shell's Carmon Creek -- have been
rendered uneconomic by the combination of 2015 oil prices and the
additional cost of rail (arising from the absence of pipelines).
These projects are associated with over 60% of the reserves held in all
If no new pipelines are built there will be no pipeline space available
for tar sands production growth beyond that which arises from the
projects already under construction.
After the rejection of Keystone XL and Prime Minister Trudeau's
opposition to Northern Gateway there are only 2 remaining new pipeline
proposals: Kinder Morgan and Energy East -- both of which face
Energy East suffered a significant setback recently and some analysts
rate its chances of proceeding at only 25%:
Even with a pipeline, break-even prices BP's and Shell's potential
future projects are so high that while it is not implausible that oil
prices could reach such a range in the coming years the projects would
carry high risks of making losses if those prices do not persist:
Aside from the outliers of the cheaper Pike 1 and Terre de Grace pilot
and the expensive Jackpine projects, BP and Shell's future projects
generally have break-even prices in the range of $75- 85, even if the
Kinder Morgan pipeline is built.
This is significantly higher than the vast majority of the world's
proven oil reserves.
If forced to rely on rail, the projects' economics become even more stark.
Apart from Pike 1 and Terre de Grace pilot, the breakeven price range
increases to $95-110 -- around the levels reached during the high price
years of 2008-14.
Next Stop: The Bight
The tar sands are the poster child for all that is wrong with the oil
major's business model: High-cost, technically challenging, long-life,
vulnerable to climate policy, and vehemently and often physically
opposed by Indigenous people and local communities.
Investors need to urgently rein in capital allocation to high-cost
frontier projects or face the prospect of the current fate of the tar
sands becoming the template for the industry.
Yet BP's decision to head to the unexplored and ecologically significant
Great Australian Bight suggests that it has not learned any lessons from
the demise of its tar sands ambitions.
[On a similar theme, my posting on the economics of the tar sands as
investor trap from a few years ago.
Western Canada Select (WCS), the bitumen-based crude oil substitute was
priced yesterday at less than US$32 a barrel.]
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