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News and Media Release
Report on Royal Dutch Shell plc & oil sands
Development of Canadian oil sands resources has received increasing attention from shareholders, the media and non-governmental organisations. This has included a resolution tabled at our 2010 Annual General Meeting by certain shareholders, requesting that the company produce a report for our 2011 Annual Report regarding the context and assumptions behind Shell’s investments in oil sands.
We wish to emphasise that we share many of the same environmental and economic concerns raised by the group of shareholders who submitted the resolution. We are committed to ongoing dialogue with all stakeholders concerning the development of the oil sands.
Given these shareholder concerns, we are disclosing all relevant information here, subject to appropriate competition sensitive considerations on oil sands, rather than waiting until the publication of next year’s Annual Report, and a year earlier than the proposal in this oil sands resolution.
Oil sands in Shell’s portfolio
Shell has a 60% stake in the Athabasca Oil Sands Project (AOSP), a mining operation, with partners Chevron and Marathon. Shell also has acreage covering in-situ oil sands reservoirs, with production and potential from wells and future drilling.
Shell’s oil sands mining produced 78,000 barrels per day in 2009, or 2.5% of our production. Shell’s oil sands mining production should increase to around 150,000 barrels per day, or about 4% of production in the next few years, as a new expansion project comes on stream. In 2009, our production from oil sands through in-situ recovery was some 20,000 barrels per day, or 0.6% of our total oil & gas production.
There is potential to expand production from both in-situ and mining activities for the benefit of Canada and Shell’s shareholders, subject to future investment decisions by Shell. The timing of new development, such as lower capital intensive mining and upgrading debottleneck opportunities, will be driven by economic and environmental factors in Alberta, and the ranking of these opportunities in Shell’s world-wide portfolio.
All aspects of oil price outlook, oil demand, regulatory framework, cost of CO2 and industry cost structure will be taken into account when such investment decisions are considered. Potential future investments in oil sands are subject to the same rigorous screening as all of our investments worldwide.
Demand outlook, oil price volatility, future carbon prices
Demand for energy, including oil, is expected to grow significantly in the next decades as a result of population and wealth growth. The world will need many sources of supply, including coal, oil, gas, nuclear and alternative energies, to meet this energy demand. The International Energy Agency (IEA) expects significantly higher nominal oil prices over the long term under all its scenarios, taking into account climate change.
Canada’s oil sands are one of the world’s largest accumulations of crude oil, and should be an important part of the global energy supply equation. Oil sands mining activities require high upfront capital investment to build long-term positions that then produce for several decades. Shell expects the cash-flows from oil sands to cover these up-front capital costs and to create returns for shareholders for many years. Short term volatility of oil prices is less important to Shell than long term trends.
In 2007, the Alberta Government introduced legislation (Alberta Specified Gas Emitters Regulation managed by the Climate Change & Emissions Management Act) for all facilities emitting more than 100 kilo tonnes per annum of specified gases (on a CO2 equivalent basis) to reduce their emissions. The legislation mandates a payment of C$15 per tonne for every tonne emitted above a set reduction target. This legislation applies to most of our large facilities in Alberta and is set to expire on September 1st 2014 for the purpose of ensuring that it is reviewed for ongoing relevancy and necessity. 2009 compliance cost for Shell is expected to be US$2 million to US$3 million, subject to final review and approval. Potential future legislation is under discussion by the governments of Alberta and Canada, however the outcome of this is not certain. Shell actively monitors developments and provides input to regulators. Shell includes an expected price of CO2 in its economic assessments which is higher than the current CO2 price in Alberta, anticipating that potential future greenhouse gas regulation could lead to a higher CO2 price.
Oil sands economics
Shell expects oil prices in the range US$50- US$90/barrel, and screens the economics of all its projects, including oil sands, inside this range.
Oil sands mining projects are designed to produce around 40 years, and this very long asset life provides cash flows for returns to shareholders, and to recoup the up front development cost, the on-going operating cost, and the cost of environmental remediation throughout and at the end of the project life. Shell believes that its oil sands mining activities provide an attractive return for shareholders.
The initial capital investment in our mining operation on stream was recovered in less than 5 years after start-up. During this period oil prices averaged around US$54/barrel. Oil sands earnings per barrel are typically higher than Shell Upstream averages. Over the period 2005-2009 average earnings for oil sands mining were around US$20/barrel, compared to Shell upstream (excluding oil sands) averages of around US$12/barrel. Over the same period, oil sands mining contributed US$3.1 billion to Shell’s earnings and US$5.6 billion to cash flow from operations.
Shell has a new oil sands expansion project under construction. Despite cost inflation in Alberta, a new royalty framework and a new tailings directive, the economic outlook for this project remains attractive with oil prices higher than US$70/barrel to US$75/barrel over the life of the project.
Actively managing environmental & social impacts
The Board of Royal Dutch Shell plc requires that the company adheres to strict Business Principles, which include our contribution to sustainable development. Performance on sustainable development is a key feature of management targets and remuneration.
Oil sands mining and extraction operations are strictly regulated by Alberta Environment under the Environmental Protection and Enhancement Act and the Alberta Water Act as well as by the Canadian Federal Department of Fisheries and Oceans. We report regularly on our environmental progress to regulators, our Aboriginal neighbours and other stakeholders through meetings, monitoring bodies and company publications available below.
Since our oil sands development started, we have actively taken steps to predict, manage, mitigate and monitor the environmental, socio-economic and cultural effects of our oil sands projects in consultation with our Aboriginal neighbours and other local stakeholders. We believe these measures are key to the success of our operations.
Shell is committed to starting large-scale reclamation of our mined areas within 20 years from the day of first land disturbance, allowing progressive reclamation over the life of the mine rather than waiting until all mining has been completed. Shell believes in rigorous environmental evaluation and is working toward creating a landscape that shares similar landforms, topography, drainage and biodiverse vegetation as land that has not been disturbed. Recently-introduced legislation, in the form of a tailings directive, also serves to drive a higher pace of reclamation by operators.
Shell does not return any process water to the Athabasca River, and 85% of all water needs are met with recycled water. Shell has permits to withdraw 0.6% of the total annual water flow from the Athabasca River for oil sands mining, and about a quarter of this allowance is actually taken up.
Whilst greenhouse gas emissions from oil & gas production are an important issue, when greenhouse gas emissions (GHG) are viewed on a life-cycle basis, the emissions released during the combustion of refined products by automobiles and other customers make up 70% to 80% of total emissions. On a life-cycle basis, oil sands-based fuels are around 5% to 15% more CO2 intensive than fuel from the average barrel of oil consumed in the United States. On this life-cycle basis oil sands based fuels are not the most CO2 intensive fuels.
Shell seeks to reduce the emissions profile of our oil sands operations further through energy efficiency projects such as the Shell EnhanceTM high temperature froth treatment process being implemented at our expansion project under construction. This project and others will help to reduce or even close the gap with fuel produced by competing ‘conventional’ oil on a life-cycle basis. Shell has taken a number of initiatives from the start of our oil sands activities, including technology selection, design optimization, energy efficiency investments and exploring the potential for carbon capture and storage. As a result of our actions, Shell is one of the lowest CO2 intensity operators among all mineable oil sands projects.
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