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What The Oilsands Sell-Off Actually Means

The last few months have been marked by some massive shifts in the oilsands.

In December, there was the $830 million Statoil sale to Athabasca Oil, followed in January and February by the writing down of billions of barrels of reserves by Imperial Oil, ConocoPhillips and ExxonMobil.

On March 9, Shell sold a majority of its oilsands assets to Canadian Natural Resources Limited (CNRL) in a huge $7.25 billion sale, while Marathon Oil split its Canadian subsidiary between Shell and CNRL for a total of $2.5 billion.

The question is: why are all of these companies selling their oilsands assets? While some celebrate the moves as successes for the climate movement, others blame the Alberta NDP for the exodus of internationals.

But experts say the reality has more to do with a broader economic shift that’s made oilsands uneconomical — for the time being at least.

“The reason that Shell, Total and Statoil are pulling out, and the reason that Exxon has had to write down much of its Kearl Lake reserves, isn’t because of the emissions profile of the oilsands bitumen,” Jeff Rubin, senior fellow of Centre for International Governance Innovation, told DeSmog Canada. “It’s rather because it doesn’t make any economic sense, before we even look at emissions pricing.”

Canadian Companies Have ‘Bullish Long-Run View’ on Oilsands

Global oil prices have been extremely low for years. West Texas Intermediate is selling under $50/barrel. Meanwhile, Western Canadian Select — the benchmark for Alberta’s heavy oil — is currently priced at $35/barrel, about half of what’s required to build new “greenfield” production.

Such prices certainly are largely the result of the U.S. being flooded with oil thanks to the “shale revolution” that’s taken place in North Dakota’s Bakken Formation and Texas’ Permian Basin and Eagle Ford Group in recent years.

Of course, no company with oilsands assets likes the situation or prices. But some — especially those that have long specialized in heavy oil production, such as Suncor and Cenovus — have more of what energy economist Andrew Leach describes as a “bullish long-run view on oilsands” compared to international companies.

He says that their buying up of other companies and projects means they see some compatibility with existing assets, allowing for reduced costs in the long run by combining operations and maximizing economies of scale.

In addition, it’s far cheaper to acquire existing projects in the current market context than building new projects; Rubin says the likes of CNRL would argue the economics of oilsands projects span decades and that business-as-usual growth will eventually bring them online, even if they don’t look particularly viable at the moment.

“If you look at it from the buyers’ perspective, these are companies that see more value in the assets than the sellers do. It’s basic sales dynamics,” Leach, who teaches at the University of Alberta and chaired Alberta’s climate advisory team, told DeSmog Canada.

Shale Oil Increasing in Prominence for International Companies

After all, the oilsands still has the capacity to produce more than two million barrels per day of oil, even if production doesn’t grow in the next few years.

ARC Financial’s Peter Tertzakian recently told a Vancouver audience that the oilsands are “going to supply three per cent of the world’s oil needs over the next many decades, but that’s not where the growth is.” He emphasized the potential of the Montney Formation in northeast B.C. and northwest Alberta.

Mark Oberstoetter, lead analyst at the consultancy firm Wood Mackenzie, told DeSmog Canada in an interview: “It’s not so much that companies are exiting the oilsands, it’s the Canadians looking to take an opportunistic strategy on low oil prices and acquiring some pretty rare assets that you couldn’t normally get in normal times. You could almost say its aggressiveness from the Canadians.”

Take Shell for example. The Dutch company has played an increasingly prominent role in the oilsands in recent years, including publicly backing Alberta’s climate plan, constructing the Scotford upgrader and building the Quest carbon capture and storage (CCS) project.

But Oberstoetter says that Shell is now focusing on assets such as integrated gas, liquified natural gas, pre-salt Brazil, Gulf of Mexico deepwater and Permian tight oil assets. It’s about “shifting their portfolio down the cost curve into the assets they’re good at.”

And the oilsands just don’t make the cut for them.

“Tight oil has increased in importance for a lot of these companies,” Oberstoetter says. “They’re just refocusing their portfolios, at the end of the day. I don’t think they would have made these exits if they didn’t get a price that was attractive to them.”

Some Companies Reference ‘Decarbonization’ While Still Focusing on Fossil Fuels

To be fair, some such companies have predicted “peak oil demand” arriving earlier than other major companies, as well as received what Leach calls “significant shareholder pressure relating to their oilsands holdings.”

“The interesting thing is if you look at Shell, Statoil and Total, who have all exited the tarsands, they’re the three companies that are saying, ‘we think a peak in oil demand is going to come in the next 10 to 15 years,’ ” says Keith Stewart, climate and energy campaigner at Greenpeace Canada. “It’s the Exxons of the world who are saying ‘oil demand will continue to grow for at least another 40 years’ who are doubling down on the oilsands.”

Recently, Shell announced it was tying executive packages to decarbonization. Leach notes the company has long had lower greenhouse gas emissions as a corporate priority, and has specifically carved out oilsands emissions in its annual sustainability report.

In addition, the company’s scrapping of the 80,000 bpd Carmon Creek project in October 2015 was reportedly tied to concerns about pipeline access, a problem arguably tied to activism by environmental groups. But it’s not like Shell is divesting from fossil fuels anytime soon.

While it has announced plans to increase annual spending on renewables up to $1 billion, there’s another $25 billion or so that will go to other non-renewable investments. Same goes for Statoil: while it operates in Norway, a country that’s had carbon pricing since 1991, and has indicated a desire to increase investments in renewables up to 20 per cent by 2030, the company’s speciality is still very much in offshore and deepwater oil extraction.

Writing Down Reserves Merely Reflects Last Year’s Prices

The writing down of reserves in filings to the Securities and Exchange Commission (SEC) simply indicates that oil prices were especially low, and that they wouldn’t be commercially viable if oil markets continue to look like they did on average last year.

If prices rebound, those reserves can and very likely will be added back.

What’s effectively happened over the last few months is the rearranging of corporate portfolios to get costs down and maximize strategic focuses, combined with some obligatory filings under SEC formulas.

Millions of barrels per day will continue to be pumped from Alberta’s oilsands. It will just be by different companies.

Photo: Syncrude Canada via Flickr

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We hear it time and time again:
“These are the stories that need to be told and you are some of the only ones telling them,” John, a new member of The Narwhal, wrote in to say.

Investigating stories others aren’t. Diving deep to find solutions to the climate crisis. Sending journalists to report from remote locations for days and sometimes weeks on end. These are the core tenets of what we do here at The Narwhal. It’s also the kind of work that takes time and resources to pull off.

That might sound obvious, but it’s far from reality in many shrinking and cash-strapped Canadian newsrooms. So what’s The Narwhal’s secret sauce? Thousands of members like John who support our non-profit, ad-free journalism by giving whatever they can afford each month (or year).

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