Royal Dutch Shell plc has announced the signing of two agreements by Shell Canada Energy, Shell Canada Limited and Shell Canada Resources that will see Shell sell all of its in-situ and undeveloped oil sands interests in Canada and reduce its share in the Athabasca Oil Sands Project (AOSP) from 60% to 10%. Shell will remain as operator of AOSP’s Scotford upgrader and Quest carbon capture and storage (CCS) project.
Under the first agreement, Shell will sell to a subsidiary of Canadian Natural Resources Limited its entire 60% interest in AOSP, its 100% interest in the Peace River Complex in-situ assets, including Carmon Creek, and a number of undeveloped oil sands leases in Alberta, Canada. The consideration to Shell from Canadian Natural is approximately USD 8.5 billion (CAD 11.1 billion), comprised of USD 5.4 billion in cash plus around 98 million Canadian Natural shares currently valued at USD 3.1 billion. Canadian Natural is one of Canada’s largest energy companies and a leader in the oil sands, with a market capitalisation of approximately USD 35 billion (CAD 46 billion).
Separately and under the second agreement, Shell and Canadian Natural will jointly acquire and own equally Marathon Oil Canada Corporation (MOCC), which holds a 20% interest in AOSP, from an affiliate of Marathon Oil Corporation for USD 1.25 billion each, to be settled in cash.
The combination of these transactions will result in a net consideration of USD 7.25 billion to Shell.
On completion of all transactions listed above, it is envisaged that Canadian Natural will be the operator of the AOSP upstream mining assets, and Shell will continue as operator of the Scotford upgrader and Quest CCS project, located next to the 100% Shell-affiliate owned Scotford refinery and chemicals plants. This arrangement is expected to allow Shell to maximise value in its competitive Canadian Downstream business and leverage proprietary technology. The transactions are expected to close mid-2017, subject to customary closing conditions and adjustments and regulatory approvals.
Shell Chief Executive Officer Ben van Beurden says, “This announcement is a significant step in re-shaping Shell’s portfolio in line with our long-term strategy. We are strengthening Shell’s world-class investment case by focusing on free cash flow and higher returns on capital, and prioritising businesses where we have global scale and a competitive advantage such as Integrated Gas and deep water. The proceeds will accelerate free cash flow and reduce gearing and make a meaningful contribution to Shell’s USD 30 billion divestment programme.”
Shell Canada President and Country Chair Michael Crothers says, “We are very proud of the oil sands and in-situ operations that our people have grown in Alberta over the past several decades. These assets are an excellent fit for Canadian Natural, a highly experienced oil sands developer.”
“Shell has been in Canada for more than 100 years and we plan to continue our presence as one of the country’s largest integrated energy companies. We are enhancing returns in our important Downstream business and leveraging our world-class manufacturing capabilities through the integration opportunities that come with continuing to operate the Scotford upgrader and Quest CCS project, located next to the Shell Scotford refinery and chemicals plants.”
In addition to the cash proceeds and Canadian Natural shares, the divestment includes additional intellectual property agreements valued at up to USD 285 million and a long-term supply agreement for the Scotford refinery. The transactions will potentially allow for additional cost reductions and continued value chain optimisation for Shell.
The transactions constitute a Class 2 transaction for the purposes of the UK Financial Conduct Authority’s Listing Rules. The net cash proceeds received from these transactions will be used to pay down debt. In the full year 2016, the assets being divested to Canadian Natural recorded profits before tax of negative USD 22 million with upstream production averaging around 160 thousand barrels per day. For the year ended 31 December 2016, reserves associated with the assets being divested to Canadian Natural were 2 billion barrels and the gross assets at that date were approximately USD 12 billion. The transactions are estimated to result in a post-tax impairment of USD 1.3 to USD 1.5 billion, subject to adjustments. Shell’s share position in Canadian Natural will be managed for value realisation over time.
Shell and Canadian Natural have agreed that, subject to closing of the transactions and additional further conditions, Shell may swap its 50% purchased interest of MOCC for a 20% interest in assets of the Scotford upgrader and Quest CCS project. If the swap were to occur, Shell would fully exit AOSP’s mining operations and hold a 20% interest in the Scotford upgrader and Quest CCS project.
Shell retains significant operations in Canada that are not impacted by these transactions, including in Upstream shales with a large Duvernay and Montney acreage position; Downstream through chemicals, refining and marketing; and in Integrated Gas with the proposed LNG Canada project.