Shell’s Oil Sands Squeezed by Rising Costs

Shell’s Canadian oil sands business is suffering a profitability squeeze because of the soaring cost of energy needed to extract bitumen from sand.
The oil company’s annual report reveals that operating expenses at the Athabasca Oil Sands Project in Alberta have soared by almost 50 per cent in the two years since 2005, while output at the bitumen mining project has either remained static or declined.
Earnings from oil sands fell from $651 million in 2006 to $582 million last year. The net production of the oil sands business, after deducting royalty payments, fell from 95,000 barrels per day (bpd) in 2005 to 81,000 bpd in 2007.
However, Shell’s filing to the US Securities and Exchange Commission (SEC), published yesterday, also shows a massive surge in the operating cost of the Athabasca project. It rose from $664 million in 2005 to $722 million 2006 and $967 million in 2007.
Shell will not reveal the development cost of its oil sands projects, including an expansion that will add 100,000 barrels per day of output, but it is likely to be close to $20 per barrel, well above the average of between $6 and $7 per barrel for the company as a whole.

Oil sands represent about 10 per cent of Shell’s proven reserves of 11.9 billion barrels and are assessed separately by the SEC, which considers oil sands to be a mining business. So if the US stands firm against allowing oil sands imports, Shell could be in trouble.