BL/Shell, Exxon Face Higher Costs on Carbon Limits (Update2)
By Fred Pals
April 20 (Bloomberg) -- Royal Dutch Shell Plc, Exxon Mobil Corp. and the rest of the oil industry may face higher costs to exploit Canada's tar sands, the biggest deposit outside of Saudi Arabia, because of efforts to rein in climate change.
A Canadian mandate to bury carbon dioxide emitted during the process of extracting the oil may add between $2 and $13 a barrel to production costs, according to Pembina, an Alberta-based environmental group. Mining crude from the area now costs around $60 a barrel.
The additional costs are likely to feed through to consumers, leading to higher energy bills and contributing to inflation. Oil prices two days ago reached a record near $117 a barrel in New York, led by increasing demand from emerging markets, threats to supply in Nigeria and a U.K. refinery strike.
Canada's increasing costs ``are important in how the market looks to the world,'' said Michael Wittner, Societe Generale SA's head of oil research in London. ``One way or another it will push up prices for Canadian oil sands,'' he said.
The European Union, Canada, Norway and Australia are among nations setting rules to force industries that use or produce energy to store carbon dioxide underground, instead of venting it into the atmosphere. The accumulation of carbon because of burning fossil fuels is blamed for global warming.
`Long-Term View'
``It is not only about oil prices, you have to take a long- term view on CO2 regulation, royalties and taxation and then see how unique your technology is,'' Jeroen van der Veer, the chief executive officer of Shell, told reporters while attending the International Energy Forum in Rome today. ``We hope to produce there for decades,'' he added in an interview with Bloomberg Television.
Saudi Arabian Oil Minister Ali al-Naimi said last month that oil is unlikely to fall below $60 to $70 a barrel because alternatives like Canadian tar sands and renewable sources have become viable at those levels. The rising cost of exploration means $70 to $80 a barrel is a ``new floor'' for prices, Total SA Chief Executive Officer Christophe de Margerie said in Paris on April 10.
De Margerie and al-Naimi are among more than 40 company chiefs and 90 energy ministers attending the energy forum in Rome that started today. Issues to be discussed include managing the move toward a low-carbon economy and curbing record energy costs.
Several energy ministers, including Qatar's Abdullah bin Hamad al-Attiyah, and the U.K.'s Malcolm Wicks met today to discuss carbon capture at the forum in Rome.
Should Contribute More
Oil producers and consumers have a ``common understanding'' to collaborate on such projects, al-Attiyah said after the meeting. ``Industrialized nations should contribute more than oil producers to the effort because they are the main users of oil.''
``The costs of carbon capture and storage will likely have to be absorbed by the oil companies,'' Jeff Chapman, chairman of the U.K. Carbon Capture and Storage Association, said in an April 15 telephone interview. He declined to give an estimate of the costs. ``Capture and storage enables the exploration of unconventional oil resources because without it, it simply would not be possible,'' he added.
After 2012, the miners of oil-encrusted sand buried under the swamps of northern Alberta will have to store carbon emissions rather than releasing them. The emissions come from the fuels used to power machinery to strip the land, process the tar sands and transport the end product.
Alberta, Canada's biggest carbon dioxide-emitting province, last year passed regulations forcing companies like Shell to cut greenhouse emissions per unit of output.
Meeting Alberta's Targets
Companies that fail to meet the targets must pay C$15 ($15) per metric ton into a fund that will use the money to develop new environmental technologies. The Hague-based Shell, Saudi Aramco and Marathon Oil Corp. of Houston have about $15 billion worth of refinery expansions planned in the U.S. to process more heavy oil from Canada.
Refineries are already required under EU rules to limit carbon dioxide emissions to comply with caps, along with other industries including coal and natural-gas power stations and metal smelters.
The European Commission is overhauling its emissions trading program to meet its goal of reducing greenhouse gases by 20 percent in 2020, compared with 1990.
Taking Responsibility
``The trouble of course is that the technology of carbon capture isn't commercial,'' Norwegian Oil Minister Aaslaug Marie Haga told Bloomberg Television today while attending the Rome forum. ``That is why governments have to take responsibility and be strong on research and development and Norway has a particular responsibility as we have become very rich from oil and gas.''
``With companies planning their investments at a minimum price of $60 barrel, adding on the carbon element could become significant,'' Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking, said in an April 16 telephone interview. Policies to limit carbon may deter investment because companies are already dealing with windfall taxes, royalties and rising industry costs, Kenney added.
Europe's three largest oil companies, Shell, BP Plc and Total, are betting on Canada's oil sands to offset declining production from conventional oil projects. On Dec. 5, BP formed a partnership with Calgary-based Husky Energy Inc. that will spend about $5.5 billion through 2015 to bring oil from Alberta's tar deposits to market.
Canada's oil sands hold about 177 billion barrels of oil that can be recovered using current technology, which is about the same as all the oil reserves of Iran and Libya combined. The process is one of Canada's biggest sources of greenhouse-gas emissions, which may more than double by 2015 as production rises, a United Nations report said last year.
To contact the reporter on this story: Fred Pals in Amsterdam at fpals@bloomberg.net
Last Updated: April 20, 2008 14:49 EDT
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