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Canada's great IOC exodus

International oil companies are fleeing the oil sands for greener pastures elsewhere

After spending decades pumping billions of dollars into northern Alberta, the world's majors are quickly abandoning Canada's oil sands.

In two blockbuster deals worth almost C$30bn ($22.37bn) that came within a week of each other, Shell and ConocoPhillips became the latest to downsize their bitumen positions. Total and Statoil exited last year.

In doing so, it raises the question of whether one of the planet's largest oil deposits is as valuable as it once was in a new era of abundance brought on by cheaper supplies of tight oil.

What used to be the epicentre of the world's last big gold rush evidently now looks—to foreign investors, anyway—too rich. Shell's retreat, in particular, was a blow to the region. It was one of the oil sands' earliest backers, producing nearly 325,000 barrels a day from its Athabasca mines near Fort McMurray. It will keep its considerable downstream refining and retail chain in Canada.

But an era of carbon cutting and hydraulic fracturing have put oil sands megaprojects out of fashion. With exorbitant pay out times—sometimes 20 years or more—the price of expansion compares unfavourably with US shale basins. In a deal worth C$9.9bn ($7.38bn), Shell unloaded the mines for just 40% of what it cost to build them.

For the buyer, Canadian Natural Resources (CNRL), it gains two state-of-the-art mines that instantly triple its present oil sands output for less than half of what it would cost to build new mines from scratch. Plus it gains a long-term supply deal to feed Shell's existing Upgrader, to ensure a guaranteed outlet for the crude. It was able to largely fund the deal with cash, without having to raise excessive amounts of equity that would dilute its shares. Investors loved the deal, sending its shares sharply higher.

Cenovus effectively doubles in size. Given that it operated the assets, it now has full control over the pace and timing of future expansions. Unlike CNRL, however, it was forced to use debt and equity financing to fund the deal, sending its shares to a 52-week low. Nonetheless, a C$3bn share offering was oversubscribed within hours of its announcement. However, the company will be forced to sell non-core assets to keep debt within manageable levels.

An era of carbon cutting and hydraulic fracturing have put oil sands megaprojects out of fashion

ConocoPhillips' shareholders cheered the terms of its $13.2bn deal, sending the company's share price up nearly 9% on the day of the agreement. It has long been clear that oil sands no longer fit with a strategic decision to eschew megaprojects, and getting out on such good terms was a win for the company. It was essentially a passenger in its upstream partnership with Cenovus. It didn't operate any production and didn't have much inclination to do so.

Shell, ConocoPhillips and other majors sold off amid growing doubts about long-term demand and whether Canada's oil sands will be able to sell all its barrels in a carbon-constrained world. The International Energy Agency has warned that more than $1 trillion of oil assets could be stranded and abandoned by 2050 as demand for fossil fuels falls by half over the next 30 years to cleaner energy sources if the world is to meet agreed greenhouse gas reduction targets. The agency said in March that emissions from the energy sector needed to fall 70% by 2050 to keep warming under two degrees. Given that output from Canada's oil sands tends to yield more carbon dioxide than other forms of production, future growth could be constrained. Alberta has instituted a carbon cap on the oil sands and the national government has set up a carbon tax to help it meet its Paris Agreement commitments.

For many in Calgary, that view of the oil sands looks simplistic—and far too pessimistic. The doubling down on the plays by Cenovus and CNRL is more than a vote of confidence—it consolidates much of the projects in Canadian hands. Just four domestic players—Suncor, Cenovus, CNRL and Imperial Oil (ExxonMobil's Canadian subsidiary)—now control more than 70% of the output. After years of failed government policies to increase Canadian ownership in the oil industry—most notably the National Energy Program of the 1980s—the market has achieved what government edict could not.

Each becomes a huge producer. Cenovus doubles output to nearly 0.6m b/d without any operational risk. With the Shell deal, CNRL's production will jump to well over 1m b/d—almost all of it in Canada—joining an exclusive club of oil companies pumping in the seven figures. Scale, they will feel, will bring economic savings, priming the companies for a time when the market loves the oil sands again.

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