Shell Begins Divestment From Canadian Oil Sands

Last week Royal Dutch Shell agreed to sell most of its Athabasca oil sands investment to a Canadian exploration company for $8.5 billion. To many, this was anything but a surprise. In 2015, the world’s second largest publicly-traded oil company put the brakes on its Pierre River development, suggesting it wasn’t the right time for Shell to enter what was at the time the largest oil sands development in Canada.

But Shell’s latest move signals a strategic shift for the company, which admits it’s been under investor pressure to address climate change impacts.

Shell’s chief executive, Ben van Beurden, said the decision to sell its share of the Athabasca development to Canadian Natural Resources comes after careful thought about the sustainability of the carbon fuel market and Shell’s economic future.

"We have to acknowledge that oil demand will peak and it could already be in the next decade,” van Beurden told the CERAWeek energy forum in Houston, Texas, last week. He said the public response to high-carbon emissions development is just as significant.

“Social acceptance is just disappearing,” Beurden said, acknowledging that the company is under significant scrutiny and pressure to make sound environmental decisions, an offshoot of eroding public trust. “[It] is becoming a serious issue for our long-term future."

His viewpoint isn’t shared by everyone, however. Saudi Arabia’s energy minister, Kahlid al-Falih, reportedly called the comment dangerous -- warning that it could scare off investors before other energy alternatives are fully in play. Other companies, like Chevron, called the analysis premature.

In its home city of Calgary, Canadian Natural's purchase is being called a “steal” of an opportunity by analysts. Its 70 percent stock in Athabasca, which also includes the purchase of some of the assets from Marathon Oil (a total of $12.7 billion), is projected to shoot the company’s output to more than 1 million barrels a day. In a province that now commands the highest unemployment rate in Canada, the news has made Canadian Natural a kind of folk hero. Only 17 public companies in the world currently maintain that rate of output, and most are located in the Middle East.

But the company may still have an uphill climb make the deal a success. On Monday debt rater DBRS put Canadian Natural under review. While the rater "notes that the acquisition further strengthens and broadens [Canadian Natural’s] position as a top-tier producer and developer of oil sands in Canada,” DBRS said. But it could still impose a negative rating action “if the pricing outlook and/or debt repayments are significantly lower than currently expected and the recovery of the key credit metrics is pushed materially beyond 2018.”

For Shell, the sale opens the door to further developing its renewable energy investments and its interest in natural gas in the highly competitive Texas Permian Basin development. The company feels this energy sector affords opportunities and can be better managed. On Thursday, it announced that 10 percent of directors’ bonuses will now be linked to how they manage greenhouse gases in their respective operations.

It’s clearly meant as a long-range forecast as Shell moves to divest itself of about $30 billion in assets acquired when it merged with BG Group last year and position itself as a hopeful leader in renewable energy development.

Image credit: Flickr/Shell