Living Up to Our Economic Commitments

Peace River Well-pad Project Keeps Operation Full and Efficient

BlackRock Ventures

Commodity Customer Satisfaction Survey Shows ‘Excellent’ Rating

Basin-Centred Gas Part of Our Growth Strategy

Shell files regulatory application for Peace River expansion

In 2006, our Peace River heavy oil plant in northern Alberta added two new well pads – safely, ahead of schedule and under budget. The biggest challenge was ever-increasing costs for labour, materials and services in the hot Alberta economy, and competition for skilled labour and trades.

The two pads were our biggest investment in our 25-year-old Peace River business over the past four years. Each pad represents 16 production wells where heavy oil, or bitumen is recovered using cyclic steam stimulation technology. Bitumen is thick and heavy, somewhat like chocolate syrup. Steam injected at high pressure into a well for between one and two months makes the warmed-up bitumen – residing about 500 metres below the surface – flow more easily so it can be pumped out. Eventually it cools down and thickens again, and the process is repeated.

Completing the pads helps keep the current operation full and efficient. It's important to have a full plant because using steam to produce bitumen is expensive.

Steam began flowing to the two pads more than a month ahead of schedule, and the cost came in under the budgeted $106 million.

In 2006, Shell Canada acquired BlackRock Ventures, a Canadian company with heavy oil assets in the Peace River and Cold Lake regions of northern Alberta. The acquisition is consistent with our growth plan as it augments our overall oil sands portfolio, and BlackRock’s resources are a good fit with our Peace River in situ* assets.

The acquisition adds 12,000 to 14,000 barrels per day of heavy oil production, which has the potential to increase to 30,000 to 50,000 barrels per day by 2010. BlackRock’s assets also provide us with access to significant additional resources.

With the acquisition, our estimated in situ oil-in-place now stands at more than 25 billion barrels of heavy oil and bitumen which includes resources in our leases in the Peace River, Cold Lake and Athabasca oil sands regions.
 

We plan to incorporate in situ production growth into future upgrading plans.

In situ* - in addition to surface oil sands deposits that are mined with trucks and shovels at the Athabasca Oil Sands Project, we develop deeper ‘in situ’ oil sands deposits at Peace River and Cold Lake. Wells are drilled to extract the bitumen. In thermal or enhanced oil recovery, steam is injected into the reservoir to warm the thick, heavy bitumen to allow it to be pumped to surface. Our Peace River operation uses horizontal cyclic steam well technology to increase the efficiency of in situ bitumen production, while Cold Lake uses steam-assisted gravity drainage (SAGD) technology. Cold production techniques are also used at our Peace River leases in areas where the bitumen is mobile enough to be pumped to the surface unaided by steam.

Our 2006 exploration and production commodity customer survey shows we again earned an ‘excellent’ rating in four key marketing and transport areas.

We survey a variety of our customers each year to strengthen our performance and competitiveness. Our retail customers buy gasoline at the pumps while commodity customers buy our sulphur, natural gas, liquefied petroleum gas and condensate.

Approximately 150 commodity customers, both domestic and international, participated in this annual survey. They were asked to assess our performance as excellent, good, fair or poor in four key areas:

• ease of doing business
• supply and delivery
• staff professionalism
• billing and invoicing

Because our products often cross mountain ranges and oceans, factors such as weather, labour disputes and transportation breakdowns might delay shipments, and are beyond our immediate control. However, our major customers gave us a high rating in all four areas. In the category of 'ease of doing business,' our rating went up.

The survey, our 11th since 1996, was again conducted by Synovate, an independent company. Synovate compares our results with a database of similar service and product providers across North America.

We continue to intensify our basin-centred gas (BCG) program in western Canada. A significant domestic source of clean-burning ‘sweet’ natural gas, BCG is also known as ‘tight’ gas because it’s trapped in deep sandstone formations that can be difficult to develop.

We have a strong land position on both sides of the Alberta and B.C. border south of Grande Prairie and Dawson Creek as well as around Hinton. We started producing BCG from the Chinook Ridge field near Grande Prairie in late 2005. In its first full year of production, our BCG business averaged 20 million cubic feet of natural gas a day. We currently produce about 23 million cubic feet from our BCG fields each day and we’re targeting to deliver 100 million cubic feet a day by the end of 2007.

Due to the low permeability of the geological formations, multiple wells are frequently needed to recover the gas efficiently and economically.

In late 2006 we submitted a regulatory application for a 100,000 barrel-per-day expansion of our Peace River oil sands business, which we have operated for four decades. The regulatory review process could take from one to two years.

Since we acquired the Peace River leases in the 1950s, we've known that the size of the prize is potentially huge. The challenge was how to produce the bitumen economically. We now think we have a good roadmap on how to proceed.

Over the years, we developed steam technology to increase bitumen recovery and reduce energy requirements per barrel of bitumen produced.

But the success of other oil sands operators in the area using cold (primary) recovery methods made us consider the possibility of using cold recovery techniques in our Peace River expansion.

Originally, we focused on a two-phase expansion plan involving steam recovery to increase production. Now we think the optimal plan involves a combination of both thermal (steam) and cold recovery. Where viable, we’ll develop the leases with primary recovery and follow up with thermal recovery to maximize efficiency.

Over 2007, we will drill appraisal wells to determine which areas we can produce with cold recovery methods first. Our drilling program is underway and we’re optimistic that we can boost cold production in the shorter term.