Shell cuts debt with US$7.25b sale of Canada Oil Sands

[LONDON] Royal Dutch Shell Plc will sell almost all of its production assets in Canada's oil sands in a US$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 per cent 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 Anglo-Dutch producer is almost two-thirds of the way through a US$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 US refining partnership with with Saudi Arabian Oil Co and earlier this year sold a collection of oilfields in the UK North Sea.

"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 US$30 billion divestment program."

The deal also marks another step toward van Beurden's goal of reshaping 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 US$100 made the difficult extraction process economic. They've since fallen out of favour amid a two-year price slump.

Shell took a US$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 projects. Exxon Mobil Corp slashed reserves in February after removing the US$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.

Deposits in the region 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 US 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."

The sale will result in Shell taking a US$1.3 billion to US$1.5 billion post-tax impairment charge after completion, according to the statement. It will also remove 2 billion barrels of proven oil reserves from its books.

Shell will sell to a unit of Canadian Natural its entire 60 per cent 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 US$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 per cent interest in the Athabasca project, from an affiliate of Marathon Oil Corp for US$1.25 billion each, to be settled in cash.

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.

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

BLOOMBERG