Investors Applaud Shell's Newfound Caution about the Tar Sands

Shareholder Resolutions Highlight Environmental, Social and Economic Risks

Jan 26, 2010

With Royal Dutch Shell announcing Monday that it would scale back the pace at which it develops projects in the oil sands of Alberta, discussion has revolved around whether this decision is more a product of environmental pressure or economic realism — or both — and what this means for the industry's involvement in environmentally and economically costly projects more broadly.

Peter Voser, CEO of Shell, told the Financial Times in London that unconventional resources such as the oil sands will be "developed but at a much slower pace."

"Over the last two to three years, given the cost development in the Alberta region, we have clearly scaled down," he said, adding that "over the last two years and certainly over the last six to eight months I've taken the pace out of [oil sands development] because we have enough other growth opportunities."

He still expects Shell to increase the amount of oil it pumps from the Athabasca Oil Sands Project by 100,000 barrels per day this year, but he has scaled down the company's previous plans to eventually increase that output to 700,000 barrels per day. Currently, it pumps 150,000 barrels a day and has government approval to increase that number to 470,000. Shell holds a 60 percent interest in the Athabasca project; Chevron and Marathon own 20 percent each.

The news is welcome to those in the ethical and sustainable investment communities who have been pressuring Shell and other oil companies involved in oil sands development for years.

"We see it as a smart decision to reconsider their investment," says Emily Stone, shareholder advocate at Green Century Capital Management. She says she hopes other companies — Exxon Mobil in particular — will follow suit.

Exxon, like Shell and others, made a decision to focus on unconventional fuels several ago when crude prices were high, but high construction prices in the province and lower oil prices have led to a decrease in corporate interest in the resource in late 2008. In October of that year, Shell delayed an oil sands expansion project.

The Alberta oil sands contain the second largest oil reserve in the world, but the oil there is notoriously costly to extract, both in terms of the financial expense and the environmental and social damages. The oil sands feature an estimated 173 billion barrels of crude oil and stretch under about 54,000 square miles of Alberta, where producers raze boreal forest and foul water supplies as they work to extract it.

Bitumen, a thick, heavy form of petroleum with a tar-like consistency, lies underground where it is mixed with clay and sand. To separate the bitumen requires an energy-intensive process with significant long-term capital costs.

Chevron's website admits that "effectively retrieving oil from sand is a tough challenge." More than two tons of oil sands need to be extracted using "giant shovels" to produce one barrel (42 gallons) of oil, according to the site.

"Clearly there are many environmental, social and economic risks" to developing the oil sands, says Stone.

These risks have been highlighted by shareholder resolutions filed at Shell and other companies.

A resolution questioning the company's involvement in the oil sands will be on the table a Shell's annual shareholder meeting in May. Motivated by "concerns for the long-term success of the company," 142 institutional and individual shareholders signed on to the resolution.

Stone has helped investors file shareholders resolutions at other oil giants. Two resolutions filed with Chevron in different years eventually led, in June 2009, to the company placing an indefinite hold on its Ells River Project, in which the bitumen is buried deeper than elsewhere in Alberta and therefore even less cost-effective to extract.

Shell has said it would use technology like carbon capture and storage to reduce the environmental and health impacts of the projects, but if cost is already one of its main concerns about investments in the oil sands, it remains to be seen whether the company would be willing to take additional steps like CCS.

This would be clearer if government regulations required it, and, indeed, the costs of possible future regulations have been cited as a major concern companies should have when evaluating their investments in the oil sands. Oil sands extraction results in 20 to 30 percent more greenhouse gas emissions than more conventional oil extraction.

A December report from the Canada-based Northwest & Ethical Investments LP said companies involved in oil sands projects, including Shell, face "litigious, regulatory, policy and social license risks" stemming from this involvement. Water was one of the report's main concerns. Two to 4.5 barrels of water are needed to extract each barrel of oil from the clay and sand, and that water is disposed of in toxic ponds.

Voser says Shell will continue to expand its more conventional exploration and development projects, though. He says the company has become more adept at finding these reserves and will invest in regions like Australia, the Gulf of Mexico and Kazakhstan.

Other companies remain committed to the oil sands, however. Exxon, for example, is moving forward with its Kearl oil sands project. Stone hopes that will change.

"We encourage Exxon to do a thorough analysis of the risks and environmental impacts," she says, emphasizing that Exxon has an obligation to its investors.

 

See also:

Canadian Fund Warns of Sticky Risks in Tar Sands Investment

Tar Sands Studies Ignore Significant Environmental Costs

Dirty Oil Video: Canada's Tar Sands Explained

CCS Can't Make the Tar Sands Clean

(Photo: Rainforest Action Network)

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