These giants bet on the oilsands, but now they're cashing out

Justin Trudeau had just received an award.

The prime minister of Canada was attending a high-powered energy summit in Houston, Texas on March 9, where he was toasted for his global leadership on energy and the environment. He told the crowd of executives and politicians that he would be treating them to “a little family history.”

His father, former prime minister Pierre Trudeau, introduced a National Energy Program that was a failure, he said.

“The NEP introduced a level of state control over energy that hurt growth and jobs,” said the prime minister, referring to the 1980 plan which critics said shifted wealth and control from Alberta to Ottawa.

Not only that, it made his family hugely unpopular in the Western Canadian province, he said. He knew he couldn’t make the same mistake. “All Canadians,” Trudeau declared, “get the importance of energy.” Pipeline projects, he vowed, are “progress.”

No country, argued Trudeau, “would find 173 billion barrels of oil in the ground and just leave them there.”

No country, perhaps, but a number of the world’s energy giants are indeed deciding to walk away from Alberta, home of the world's third largest reserves of crude oil after Saudi Arabia and Venezuela, or taking billions of barrels off their books, indicating they consider it uneconomical to produce. Meanwhile, the price of oil continues to stagnate since a 2014 crash. The trend is leading industry watchers to ask: what does the future hold for the region?

Trudeau and the Canadian Association of Petroleum Producers (CAPP) are confident that the country’s oil patch will continue to be developed, and analysts note that U.S. accounting regulations often obscure the reality on the ground. One company at the centre of it all defended its divestment of billions of dollars of oilsands assets by saying it still retains an important stake in the region’s success.

But some see a blockbuster deal this month by that company, Royal Dutch Shell plc, as a kind of confirmation that everything has changed.

Shell has a long, storied history boosting oilsands development. Yet on the same day Trudeau was saying he’d never make the same mistake as his father, Shell announced it was divesting $7.25 billion USD of its oilsands interests, staying on only as an operator of an oil upgrader, and of a carbon capture and storage project.

“Shell was betting its future on the oilsands,” said Lorne Stockman, a senior research analyst at Oil Change International in Washington, D.C., in an interview.

At one point, he said, the firm was one of the most bullish companies in the region, with some of the biggest investments. “That’s just not the case anymore,” he said. “They’ve sold out. That’s a massive signal. The future of the oilsands is nowhere near as rosy as was generally thought five to 10 years ago.”

CAPP sees things differently. The Shell decision, said president and CEO Tim McMillan in an emailed statement, “signals a strong, long-term view of the value of Canada’s oilsands to be the energy of tomorrow.”

“The global energy market is extremely competitive and that means Canada must be more competitive, whether we are competing for customers, being mindful of government costs, or continuing to lead on innovations and environmental performance,” McMillan said.

CAPP cites an International Energy Agency forecast suggesting that the country will see the fourth-largest growth in global oil supply after Iraq, Brazil and Iran, 2015-2040.

Yet the Shell step-back comes just weeks after it was reported that ExxonMobil Corp. and ConocoPhillips were removing billions of dollars and billions of barrels of oil off their books, at least for the time being. Other companies like Total SA and Nexen, a subsidiary of a Chinese national oil firm, have stepped away from projects or assets in recent years.

As a result of low prices in 2016, Exxon's entire 3.5 billion barrels of bitumen at the Kearl Oil Sands Project no longer qualified as proved reserves under U.S. Securities and Exchange Commission (SEC) guidelines, said spokeswoman Lauren Kerr. "These revisions are not expected to affect the operation of the underlying projects or to alter the company’s outlook for future production volumes," she said. A representative from Conoco declined to comment.

The oilsands require large amounts of energy to produce, making the industry Canada's fastest growing source of greenhouse gas emissions. This intensive environmental footprint also means that the industry would face serious challenges in a carbon-constrained world — at least based on projections by the same International Energy Agency, cited by CAPP.

The IEA has estimated nearly two-thirds of fossil fuels must be left in the ground to prevent global warming of more than two degrees Celsius above pre-industrial levels, a threshold that scientists have predicted could cause dramatic and irreversible changes to the planet's ecosystems.

“The direction of travel is really not going the way any of these companies would like, and certainly is not going the way they expected just a few years ago when the oilsands was the next big thing,” said Stockman.

Shell’s sellout, he said, “is unprecedented...for Shell to get out of the oilsands is a huge red flag for other companies.”

Shell ties bonuses to emissions

Shell’s decision also came soon after Norway oil giant Statoil ASA fled the scene in December. Statoil’s participation in the oilsands, said a senior vice-president at the time, bent "our cost and emission curves.”

It was reported the same month that Shell would be tying 10 per cent of its directors’ bonuses to reducing greenhouse gas emissions. That step was taken “to increase alignment with Shell’s refreshed strategy to be a world-class investment,” Shell spokeswoman Tara Lemay said in an emailed statement.

“As always, safety and environmental stewardship are central to all Shell does,” she wrote. “To support the efforts Shell is already making, and based on recommendations from the (company's) Corporate and Social Responsibility Committee, we have selected scorecard measures focused on three specific business areas: refining, chemical plants and flaring in upstream assets. This goes beyond carbon dioxide to include other GHGs such as methane.”

Companies and governments have faced public pressure for decades to abandon development of the oilsands over concerns it is too carbon-intensive a form of energy extraction.

In addition to continuing to operate the Scotford upgrader, Shell is maintaining its Quest carbon capture and storage project, which the company says will "capture more than one million tonnes of [carbon dioxide] emissions" from oilsands operations "and permanently store these emissions deep underground."

Lemay said these projects show that “we retain an important stake in the success of the Canadian oilsands and Alberta’s climate plan.”

The Alberta government introduced a carbon tax Jan. 1, while the federal government plans to introduce carbon pricing to all Canadian jurisdictions by 2018. Canada committed to the 2015 Paris Agreement on climate change, which requires cutting emissions by 30 per cent below 2005 levels by 2030.

Environmental Defence says a retreat by seven multinationals from the oilsands in recent months shows it is “time for Canada to plan for a managed decline of the industry and a just transition for workers and communities affected by the shift to a clean economy."

A costly price plunge

The oilsands are quite costly to develop. To profit, a company needs a relatively high break-even threshold. Production sometimes requires high upfront investments, while the bitumen that’s extracted needs extra steps for processing into oil, which then needs to be transported over far distances. Canadian oil also trades at a discount on world markets.

In boom times, with oil reaching over $100 USD a barrel, all this expense is worth it, at least in terms of corporate profits. But since 2014, the price of oil has remained stubbornly low. Canada's main stock index sank to its lowest point of 2017 early this week, dragged down by low oil prices.

Alberta’s crown corporation ATB Financial expects oil to stay around $55-$60 USD over this year and next. "This is bad news for Alberta and its producers," wrote ATB's economics and research team on March 15.

One reason the price has dropped so low is that the market became flooded with oil. In the United States, new technology generated a “revolution” in shale oil development, boosting that country’s domestic oil production by millions of barrels a day, according to the Financial Times, and triggering an expanse of oil production in Saudi Arabia as well, in a bid to compete with new US rivals.

The United States is Canada’s biggest oil customer, and Canada contributes more than 40 per cent of America’s imported crude, according to the prime minister.

"Not only is the U.S. our number one buyer of oil exports, increasing supply, but oil is also beginning to lose its valuable price gains,” wrote ATB. “Information available on oil field production and on rig counts suggests a supply glut could continue to persist.”

Down, but not out

In some cases, the low price obscures what's happening on the ground.

It's the price of oil, not production intent, that made Exxon and Conoco take resources off their books, argued Robert Skinner, an executive fellow at the University of Calgary's School of Public Policy.

The debooking, as it’s known, is part of a process designed to comply with U.S. securities rules, and revisions to proved reserves don't necessarily affect the firm's operations. The SEC requires a company to debook reserves if they’re not considered “economically producible,” calculated using a backward-looking price, explained Skinner. This process “happens all the time,” he said.

In fact, as Exxon spokeswoman Kerr pointed out, the company sees several entry points to rebooking its Kearl reserves. One, said Kerr, is a recovery in average price levels; another is a drop in costs or operating efficiencies.

"Under the terms of certain contractual arrangements or government royalty regimes, lower prices can also increase proved reserves attributable to ExxonMobil," she said.

"We do not expect the downward revision of reported proved reserves under SEC definitions to affect the operation of the underlying projects or to alter our outlook for future production volumes."

Andrew Leach, an energy and environmental economist and associate professor at the University of Alberta’s school of business, agreed those two announcements aren’t indicative of a larger shift to abandon oilsands assets indefinitely. “It’s more of a reflection of low prices last year for these particular projects than it is a reflection of whether these barrels are likely to stay in the ground,” he said.

Plus, the flip side to foreign oil giants pulling out of the oilsands is that Canadian producers are stepping in.

Canadian Natural Resources Ltd., for example, "gobbled up Shell’s oilsands operations at a bargain," wrote the Financial Post. That commanded attention in other corners of the industry for its "contrarian" approach. The Calgary Herald called it a "made-in-Canada evolution."

Meanwhile, it was reported in January that MEG Energy plans to spend $400 million over the next two years adding production in northern Alberta, including drilling new wells. And Cenovus Energy announced plans in December to revive an oilsands project.

So no one should count out the oilsands just yet; the future of the region is far from certain.

Editor's note: This story was updated at 21h28 ET on March 16, 2017 to include new comments from ExxonMobil.