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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Shell’s Scrapped Oil Sands Project Highlights Major Issue For Canada

It has been a brutal few weeks for Royal Dutch Shell.

On October 27, the Anglo-Dutch oil major announced that it was pulling the plug on its Carmon Creek oil sands project in Alberta, Canada. The project was expected to yield 80,000 barrels per day in oil sands production, which was originally greenlighted in 2013.

However, the markets have turned against Shell. In March, the company said that it would alter the design of the project to “take advantage of the market downturn to optimize design and retender certain contracts.” The logic was that low oil prices are forcing cost reductions up and down the supply chain, potentially allowing the company to lower construction costs. Related: Pain For Oilfield Services Will Continue Even If Oil Prices Rebound

Still, the company would need a rebound in oil prices to make the project viable, a rebound that never came. “After careful review of the potential design options, updated costs, and the company’s capital priorities, Shell’s view is that the project does not rank in its portfolio at this time,” the company said in a statement.

But that is not all. Shell also included a very intriguing justification for cancelling the project. They said that the decision to scrap Carmon Creek “reflects current uncertainties, including the lack of infrastructure to move Canadian crude oil to global commodity markets.” Related: Stop Blaming OPEC For Low Prices

In other words, the 80,000 barrel-per-day project will not be completed because Canada does not have enough pipelines. For years environmental groups have been protesting the Keystone XL pipeline under the premise that blocking infrastructure would force oil companies to keep their reserves in the ground. Such a strategy could also help stop greenhouse gas emissions from rising.

Supporters of the controversial pipeline, which would see Alberta oil sands travel to the U.S. Gulf Coast, argued that the project would have no effect on carbon emissions because the oil sands would be developed with or without Keystone XL. If the pipeline wasn’t built, the thinking goes, the oil sands would find another way to market. Related: Banks Give A Stay Of Execution On Oil And Gas Sector

By Shell’s own admission, whether one agrees with the tactics of environmental groups or not, there was a great deal of logic behind blocking the pipeline and other projects like it.

Canada’s oil industry agrees. The Canadian Association of Petroleum Producers (CAPP), an industry trade group, has made increasing pipeline infrastructure a high priority.

Of course, low oil prices made the problem a lot worse. Lack of pipeline capacity have forced Canadian oil producers to sell at a discount, a disadvantage that is magnified with low oil prices. “At $100 a barrel it was a big concern. At $45 a barrel, that is a far larger percentage (of revenue) and is likely the difference between profitable and unprofitable on many of the assets,” CAPP President Tim McMillan said in September, referring to the discount.

By Charles Kennedy of Oilprice.com

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