Brian Zinchuk: Shell was interested in the big plays. Now its reaping what it had sown in Russia

 

Back in 2009 or 10, I attended a small oil conference in Regina that had run for a few years. While there, I met with a guy who worked with Shell.

It was probably the only time I ever ran into a Shell representative.

This was at a time when the Bakken boom was still in its early stages. There had been a short-term downturn, but things were about to pick up in a big way, which they eventually did. It was also at a time when Saskatchewan oil production still far exceeded North Dakota’s, just before their own Bakken boom exploded.

Shell was the original developer of the CO₂ flood at Midale, for instance. That field was originally developed by Shell in 1953, and they operated it for close to 50 years before selling to Apache Canada in 1999, which has since sold it to Cardinal Energy in 2017.

I said to him, “I’ve talked to a lot of old-timers around here, and they’ve told me about how big companies like Shell and Imperial Oil used to be active in southeast Saskatchewan. But now you’ve all gone. Why is that?”

He responded that Saskatchewan was essentially small potatoes. Shell needed big plays, 100,000 to 250,000 barrels per day or more, and that’s where they were putting their money.

And that was the last I heard from Shell.

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Step forward to Feb. 28, 2022. Shell announced it was exiting its Russian plays. You know, the big ones that the guy alluded to in 2009.

In reaction to the Russian invasion of Ukraine, Shell stated:

The Board of Shell plc (“Shell”) today announced its intention to exit its joint ventures with Gazprom and related entities, including its 27.5 percent stake in the Sakhalin-II liquefied natural gas facility, its 50 percent stake in the Salym Petroleum Development and the Gydan energy venture. Shell also intends to end its involvement in the Nord Stream 2 pipeline project.

“We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security,” said Shell’s chief executive officer, Ben van Beurden.

Shell’s staff in Ukraine and other countries has been working together to manage the company’s response to the crisis locally. Shell will also work with aid partners and humanitarian agencies to help in the relief effort.

“Our decision to exit is one we take with conviction,” said van Beurden. “We cannot – and we will not – stand by. Our immediate focus is the safety of our people in Ukraine and supporting our people in Russia. In discussion with governments around the world, we will also work through the detailed business implications, including the importance of secure energy supplies to Europe and other markets, in compliance with relevant sanctions.”

At the end of 2021, Shell had around $3 billion in non-current assets in these ventures in Russia. We expect that the decision to start the process of exiting joint ventures with Gazprom and related entities will impact the book value of Shell’s Russia assets and lead to impairments.

So, how did those big projects work out for you, Shell? Have fun, getting in bed with the Devil?

Here’s their list, included in the above release:

In 2021, Shell share adjusted earnings from Sakhalin Energy JV and Salym JV were $0.7 billion.

Sakhalin-2

Shell has a 27.5 per cent interest in Sakhalin-2, the joint venture with Gazprom, an integrated oil and gas project located on Sakhalin island. Other ownership interests are Gazprom 50 per cent, Mitsui 12.5 per cent, Mitsubishi 10 per cent.

Salym

Shell has a 50 per cent interest in Salym Petroleum Development N.V., a joint venture with Gazprom Neft that is developing the Salym fields in the Khanty Mansiysk Autonomous District of western Siberia.

Nord Stream 2

Shell is one of five energy companies which have each committed to provide financing and guarantees for up to 10 per cent of the estimated €9.5 billion total cost of the project.

Gydan

A joint venture With Gazprom Neft (Shell interest 50 per cent) to explore and develop blocks in the Gydan peninsula, in north-western Siberia. The project is in the exploration phase, with no production.

Here’s a nice feel good video about Sakhalin-2 that doesn’t feel so good anymore. Watch it before they take it down:

 

That’s a lot of bucks. And a lot of projects. Good on them for showing real spine in cutting ties with Russia.

Last year they did sell off their Alberta Kaybob Duvernay assets to Crescent Point, which then paid off their debt to buy those properties in less than a year.

But I can’t help but think how it’s funny how they didn’t have to walk away from any projects in Saskatchewan due to our initiation of any wars.

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It turns out, they haven’t yet been able to walk completely away, either. They’re still buying Russian oil.

And as it says in Proverbs 26:11, “As a dog returns to his vomit, so a fool repeats his folly.”

On March 5, Shell issued this statement:

We are appalled by the war in Ukraine and have already made clear our intention to exit joint ventures with Gazprom – which is majority-owned by the Russian government – and related entities, as well as intending to end our involvement with a significant project to pipe gas from Russia to Europe.

We have been in constant discussion with governments about the consequences of the war on the security of energy supplies. We have acted throughout in accordance with what we have understood was the intent to allow energy flows from Russia for the time being in order to provide security of energy supply.

Yesterday we made the difficult decision to purchase a cargo of Russian crude oil. Our refineries produce petrol and diesel as well as other products that people rely on every day. To be clear, without an uninterrupted supply of crude oil to refineries, the energy industry cannot assure continued provision of essential products to people across Europe over the weeks ahead. Cargoes from alternative sources would not have arrived in time to avoid disruptions to market supply.

We didn’t take this decision lightly and we understand the strength of feeling around it.

We will continue to choose alternatives to Russian oil wherever possible, but this cannot happen overnight because of how significant Russia is to global supply. We have been in intense talks with governments and continue to follow their guidance around this issue of security of supply, and are acutely aware we have to navigate this dilemma with the utmost care. We welcome any direction or insights from governments and policymakers as we try to keep Europe moving and in business.

We will commit profits from the limited amount of Russian oil we have to purchase to a dedicated fund. We will work with aid partners and humanitarian agencies over the coming days and weeks to determine where the monies from this fund are best placed to alleviate the terrible consequences that this war is having on the people of Ukraine.

As seen on Twitter:

 

There’s a few things apparent from the Feb. 28 press release and Mar. 5 statement.

Shell seriously took it on the chin, and is walking away from billions of dollars of investments in Russia.

It’s also become readily apparent that even if there is no formal boycott of Russian energy, it appears, at least to Shell, that an informal one is well on the way. That they would issue a statement of shame about them doing what, until two weeks ago, was just normal business, is very telling. But in the meantime, Shell points out that they simply did not have other alternatives.

And this is where I, too, return like a dog, not to its vomit, but to the bone I’ve been chewing on for years. If Canada had built Energy East, we could have been one of those alternatives. Perhaps it might have been only a half million barrels per day, but it would have indeed been an alternative. And it’s less than half the distance sailing from St. John, New Brunswick to Rotterdam than is from Kuwait (roughly 5,700 kilometres compared to 12,400 kilometres via the Suez Canal).

But inexcusably, a Canadian project that is much closer was just in the past few days slow-walked by our Environment and Climate Change Minister Steven Guilbeault. Last Friday his office announced he would be making Newfoundland and Labrador wait another 40 days for a federal decision on the Bay du Nord project.

More environmental consideration apparently. But no war consideration.

 

That offshore project, which would use a floating production, storage and offloading unit (FPSO) is literally in the middle of the ocean, on the way to Europe. The project’s webpage, already out of date, notes, “It is currently expected that an investment decision could be made in 2021, with first oil to be produced in 2025.”

Now, to be clear, Husky, before it was purchased by Cenovus, delayed Bay du Nord due to the COVID-19 pandemic, when the oil world was falling apart due to the end of the world as we knew it. But those days appear to be over now.

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Surely someone in the federal government must note there is now an imperative to get Canadian oil production to Europe as quickly as possible. Even if this war is resolved in weeks, the world has learned it cannot trust Russia in its current form, for anything.

In the case of this project, the FPSO would be loading product onto shuttle tankers, which would then load full-sized tankers to go to market. No pipeline involved!

The distance from Bay du Nord is just 3,900 kilometres to Rotterdam, one third the distance from Kuwait. By running those shuttle tankers to Placentia Bay for transfer to larger tankers, and out again would add about 1,400 kilometres total, there and back. No big deal.

A little over a week ago I had a conversation with both the president of the Canadian Association of Petroleum Producers and their vice president for oilsands. I implored them to talk to their members about looking at how we, as a nation, can ramp up our production as soon as possible. We need to stop thinking like Can’tada, where we can’t get anything done, and start thinking like our grandparents did 80 years ago during the Second World War. We need to look at getting projects done in months, not years. The original Trans Mountain Pipeline was built in 19 months, with equipment and technology far inferior to what we have now. And the first “Big Inch” pipeline of its type in the world, called the Big Inch Pipeline, was built from Texas to the mid-Atlantic coast because tankers from Texas were being sunk by U-boats. It was built in 14 months, not a decade.

We can provide Canadian oil for Shell’s refineries. First, it might mean using crude-by-rail. If they can receive oil at Montreal, it shouldn’t take too much plumbing to be able to load tankers there. So get our western crude to Montreal by train.

As you’re doing that, build Energy East. Use the long-lead items that were ordered and ready to go for Keystone XL for the pumping stations. That could get oil as far as Kingston, from which rail could be used to Montreal while the pipeline is built from Kingston to St. John, New Brunswick.

Revive and build the Cacouna tanker export terminal on the St. Lawrence. That’s the one that was so threatening to whales, but the same whales weren’t threatened by tankers bringing oil into Canada.

Built the export terminal at the Irving Refinery at Saint John, New Brunswick.

There you go. Do all that, and Shell can tell the Russians to pound sand. And along the way, Canada can become energy independent. The oil we don’t import here could go to supply Europe, again displacing Russian oil.

This can happen. We just need to make it happen. That starts with the sacking of Steven Guilbeault.

 

Brian Zinchuk is the editor and owner of Pipeline Online. He can be reached at brian.zinchuk@pipelineonline.ca.

 

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