How will CNRL Shell Deal Impact the Oil Sands Industry?

Recapping the CNRL Shell Deal

Canadian Natural Resources Ltd. (CNRL) finalized a deal last week to buy nearly all of Royal Dutch Shell’s (Shell)Canadian oil sand holdings for the price of US$7.25 billion. The deal is Shell’s latest effort to divest their holdings in the extraction-heavy method of oil production.

Shell will sell all their holdings in Canadian oil sands except for a 10% share in the Athabasca mining project. The Netherlands-U.S. company will also retain control of the Quest carbon capture and storage project along with the Scotsford upgrader, a refining-adjacent plant that upgrades heavy oil to a lighter substance, making it less expensive to transplant.

Limited Immediate Impact

This will likely not have a heavy effect on Shell Canada’s oil sand employees or the oil sands industry. The vast majority of the roughly 3,000 workers stationed at the Jackpine Mine, the Muskeg River Mine, and the various oil sand leases scattered through central and western Alberta, although there could be some layoffs in upper-level management.

For those remaining with Shell, the company has said that they will change their pay policy to incentivize lowering their emissions. The company plans to invest US$ 1 billion in renewable energy by the end of the decade. This is a small figure in the grand scheme of things; Shell’s annual investment totals US$ 25 billion.

CNRL will soon be licensed to produce over 1 million barrels of oil per day.

CNRL have also acquired a 20% share in the Athabasca mining project from Marathon Oil, giving them control of the operation. Roughly 100 more employees from Marathon will now be receiving their paychecks from the Canadian company.
Mining truck CNRL Shell Deal
While a variety of shake ups have occurred at the corporate level in oil sands production over the past few years, oil and gas workers should be fine for the short- to medium-term. Built-in expansion in the Alberta oil fields will continue past 2020, at which time the region will produce over 3 million barrels per day.

Long-Term Outlook

For the long term, however, security seems less certain. While business was booming throughout the last decade, international energy companies have been selling off their assets to Canadian groups in recent years. With fewer players in the game, growth is likely to become more static. Click To Tweet

“You’re going to have less [sic] ponies in the race, so to speak, to build,” said director of oil sands at IHS Energy Kevin Birn, according to The Calgary Herald, “so the overall activity levels will be a little bit more modest.”

Canadian Prime Minister Justin Trudeau has made it clear that, while his government intends to incentivize business in renewable resources, he does not intend to place sanctions against conventional energy any time soon.

“The one thing I’ve heard consistently from leaders in the energy industry is the need for clarity in terms of what the frame regulations and pricing is going to be,” Trudeau said, according to Rigzone. “[I]nvestments in Canada are sound investments, not just for short term, but for the long term. We’re going to see many people interested in partnering in drawing on Canadians’ great natural resources.”

“Anything that creates extra barriers and impediments to the smooth flow of goods will hurt our business,” Trudeau continued,” and hurt our workers and limit our capacity to be competitive.”

Oil pipelines that former U.S. President Barack Obama vetoed appear to be back on the table, and energy partnerships between the two country are likely to continue and solidify so long as the present political situations in both countries remains unchanged.

Prince Rupert LNGShell Canada has already put their Carmon Creek development on hold and they will not be embarking on any new ventures in the region. The company has also shelved their Prince Rupert LNG project, which they took on as part of their 2015 acquisition of BG Plastics Group.

“The Prince Rupert LNG project has been part of a global portfolio review of combined assets, which resulted in the decision to discontinue further development,” Shell said in a press release last week, according to The Globe and Mail.

Pressing the pause button on their Ridley Island (off the coast of British Columbia) natural gas project comes as a surprise; the company has sought to prioritize natural gas.

They will, however, continue their LNG Canada venture by building an export terminal in Kitimat, B.C. “This project continues to be actively progressed by Shell and the joint venture participants as an opportunity to bring Canadian gas resources to the growing global gas markets,” the press release said.

Over the past few years, the company has begun to acknowledge the role that oil sands oil extraction plays in climate change and have sought to divest themselves of oil holdings and reinvest in natural gas. “We believe climate change is real,” Van Beurden told The Guardian. “We believe action is going to be needed. We believe we are in the middle of an energy transition that is unstoppable.”

The sale is part of a U.S. divestment program that totals $30 billion in scope and works to reduce the company’s debt, which has sharply accelerated after Shell acquired BG Group Plc in 2016. Shell has also ended a twenty year partnership with Saudi Arabian Oil Co. and sold an array of oil fields in the North Sea off the U.K. coast.

“This announcement is a significant step in re-shaping Shell’s portfolio,” said Shell CEO Ben Van Beurden in a press release. “The proceeds will accelerate free cash flow and reduce gearing and make a meaningful contribution to Shell’s US$30 billion divestment program.”

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