Shell cuts debt with $7.25 billion sale of Canada oil sands

Royal Dutch Shell Plc will sell almost all of its production assets in Canada’s oil sands in a $7.25 billion deal that cuts debt and reduces involvement in one of the most environmentally damaging forms of fossil-fuel extraction.

All of the company’s oil-sands interests apart from a 10 percent stake in the Athabasca mining project will be sold to Canadian Natural Resources Ltd., Shell said Thursday. The Hague-based company will continue as operator of the Scotford upgrader, which converts heavy oil to lighter liquids for easier transport, and the Quest carbon capture and storage project.

The deal puts the Anglo-Dutch producer almost two-thirds of the way through a $30 billion divestment program to reduce debt, which soared following its biggest-ever acquisition of BG Group Plc last year. The company this week ended an almost two-decade old U.S. refining partnership with Saudi Arabian Oil Co. and earlier this year sold a collection of oil fields in the U.K. North Sea. Canadian Natural said the transaction will make its operations more efficient.

“This announcement is a significant step in re-shaping Shell’s portfolio,” Chief Executive Officer Ben Van Beurden said in a statement. “The proceeds will accelerate free cash flow and reduce gearing and make a meaningful contribution to Shell’s $30 billion divestment program.”

The sale marks another step toward Van Beurden’s goal of preparing Shell for a world of lower oil prices and tighter restrictions on carbon emissions. Oil sands — reserves of heavy crude found primarily in northern Alberta — lured investors in the past decade as the surge in crude prices above $100 made the difficult extraction process economic. They’ve since fallen out of favor amid a two-year price slump.

Shell on Thursday also amended its pay policy to better reflect incentives to control emissions. Progress in cutting greenhouse gases from its refineries, chemical plants and burning of natural gas at its fields will determine 10 percent of executives’ bonuses. This portion of the payout was previously based on a range of environmental measures including controlling oil spills and water use.

Abandoned Projects

Shell took a $2 billion charge in 2015 as it shelved the Carmon Creek oil-sands development and Van Beurden said last month that the company wouldn’t take on any new oil-sands projects. Exxon Mobil Corp. slashed reserves in February after removing the $16 billion Kearl project from its books. A day earlier, ConocoPhillips said that erasing oil-sands barrels had reduced its reserves to a 15-year low.

Oil-sands deposits are among the costliest petroleum projects because the raw bitumen extracted must be processed and converted to a synthetic crude before being transported to refineries, mainly in the U.S. This process also emits more carbon dioxide than production of conventional crude.

“It takes away some very high-cost production and will help reduce Shell’s operating costs, which were already among the highest in its group,” said Ahmed Ben Salem, a Paris-based analyst at Oddo Securities. “Oil sands was losing money and the sale will help the company focus on projects that have lower break-even prices.”

Production Hit

The sale will result in Shell taking a $1.3 billion to $1.5 billion post-tax impairment charge after completion, according to the statement. It will also remove about 85 percent of the proven 2 billion barrels of oil-sands reserves from its books. The company had 13.25 billion barrels of total oil and gas reserves at the end of 2016, according to its annual report.

Shell’s share of output from the Athabasca project before the divestment was about 150,000 barrels a day, with another 14,800 barrels a day from Peace River. Total oil and gas production in 2016 averaged 3.7 million barrels of oil equivalent a day, according to the company’s annual report.

Shell will sell to a unit of Canadian Natural its entire 60 percent interest in the Athabasca project, all of the Peace River Complex in-situ assets — which extract crude without mining — and a number of undeveloped leases in Alberta. Those disposals will fetch about $8.5 billion, comprising cash and shares.

Under a second agreement, Shell and Canadian Natural will jointly acquire and own Marathon Oil Canada Corp., which holds a 20 percent interest in the Athabasca project, from an affiliate of Marathon Oil Corp. for $1.25 billion each, to be settled in cash.

“This transaction is significant for Canadian Natural as it increases the reliability of underlying sustainable cash flows,” President Steve Laut said in a separate statement. “It allows focus on the key operating strengths.”

The company will issue about C$4 billion ($3 billion) of its shares to Shell in payment for the assets, according to the statement. It also secured about C$3 billion of loans and C$6 billion of bonds to fund the acquisition. Canada’s second-biggest oil and natural gas producer said this month profit quadrupled in the fourth quarter as production increased.

The transactions are expected to close in mid-2017, subject to regulatory approvals.

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us