Shell Canada in C$2.4bn oil sands bid

Shell Canada in C$2.4bn oil sands bid
By Thomas Catan in London
Financial Times
Updated: 9:10 p.m. ET May 8, 2006

Royal Dutch Shell's Canadian unit on Monday unveiled a C$2.4bn ($2.2bn, €1.7bn, £1.2bn) cash offer for BlackRock Ventures, its latest move in a multi-billion dollar bet on Canada's oil sands.

Shell Canada, 78 per cent owned by Shell, offered C$24 per share for the small Canadian oil sands producer, a 27 per cent premium over Friday's closing price of $18.88. The board of BlackRock unanimously approved the transaction and will recommend it to shareholders. "This acquisition will augment our overall oil sands portfolio," said Clive Mather, president and chief executive of Shell Canada.

"It will add 12,000 to 14,000 barrels per day of heavy oil production and provide Shell Canada with access to significant additional resources."

The company is already investing heavily in a C$7.3bn oil sands project at Athabasca, in Alberta. In March, Shell also paid C$465m for the rights to explore some 220,000 acres in Alberta for more oil sands.

With the purchase of BlackRock, Shell Canada will acquire 268,000 acres of oil sands in the Peace River area containing 207m barrels of proved and probable reserves and an estimated 1bn barrels of oil in place. Shell will probably have to spend several billion dollars developing the new acreage, which is located close to some of its existing oil sands projects.

"We recognised that the tremendous potential identified on our properties outstripped our financial and operational ability to develop them in a timely manner," said John Festival, BlackRock's president.

Shell was an early mover into Canada's oil sands and said the technology it has developed had made developing them increasingly competitive.

However, heavy oil and bitumen can often not be booked by Shell as "proved" reserves under the strict guidelines set out by the US Securities and Exchange Commission.

Partly because of that, Shell told investors last week that it could no longer promise to replace 100 per cent of its reserves, a pledge made after it was forced to cut its proved reserves by about a third two years ago.

If its oil sands are included, Canada's reserves are second only to that of Saudi Arabia. But the process of extracting oil from the tar-like bitumen is expensive, energy-intensive and wasteful. The environmental impact is also far greater than for conventional oil projects.

Not all oil majors agree that oil sands represent a lucrative opportunity. BP, for example, has avoided investing in it, believing that many such projects would become unprofitable at a lower oil price.

Shell maintains that its Canadian oil sands projects are competitive even at an oil price of about $25 a barrel. But given the huge costs involved in producing oil sands, many analysts question whether such projects can be profitable at less than $40 a barrel.

Shell Canada has also suffered from soaring costs, a shortage of skilled labour and scarce materials, raising further questions about the profitability of its oil sands projects.
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