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Shell exits upstream oil sands operations, but keeps its refineries

Royal Dutch Shell (ticker: RDSA) announced Thursday the signing of two agreements that will see all of the company’s in-situ and undeveloped oil sands interest in Canada old and reduce its share in the Athabasca Oil Sands Project (AOSP) from 60% to 10%, according to a press release put out by the company. The combination of the two transactions will net Shell $7.3 billion.

Under the first agreement, Shell will sell to a subsidiary of Canadian Natural Resources (ticker: CNQ) s entire 60% interest in AOSP, its 100% interest in the Peace River Complex in-situ assets, and a number of undeveloped oil sands leases in Alberta, Canada. Consideration from Canadian Natural is approximately $8.5 billion, comprised of $5.4 billion in cash plus around 98 million CNQ shares currently valued at $3.1 billion.

Separately and under the second agreement, Shell and Canadian Natural will jointly acquire and own equally Marathon Oil Canada Corporation (ticker: MRO), which holds a 20% interest in AOSP, from an affiliate of Marathon Oil Corporation for $1.25 billion each, to be settled in cash.

Once the two deals are completed, 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. Shell and Canadian Natural have also agreed that RDSA may swap its 50% purchased interest in the Marathon assets for a 20% interest in the Scotford upgrader and Quest CCS project. The transactions are expected to close mid-2017.

“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 prioritizing businesses where we have global scale and a competitive advantage such as Integrated Gas and deep water,” said Shell CEO Ben van Beurden.

In addition to the cash proceeds and Canadian Natural shares, the divestment includes additional intellectual property agreements valued at up to $285 million and a long-term supply agreement for the Scotford refinery.

The divestiture is part of Shell’s ongoing program to lower debt by $30 billion following its $54 billion acquisition of BG Group. Thursday’s deal puts Shell about two-thirds of the way to that goal.

Shell ties 10% of executive bonuses to carbon emissions

Along with the news that the company would be exiting the oil sands, Shell also said that it would amend its pay policy to better reflect incentives to control emissions. Investors are putting increasing pressure on companies to manage environmental impact from operations, and Shell has now tied 10% of executives’ bonuses to carbon emissions. This portion of the payout was previously based on a range of environmental measures including controlling oil spills and water use, reports Bloomberg.

Lower reserves and lower costs

The sale of the companies oil sands assets will mean the company will remove 85% of the proved 2 billion barrels of oil sands reserves it had on its books. Shell will also take a $1.3-$1.5 billion post-tax impairment charge after the completion of the deal.

Shell’s share of output from the Athabasca project before the divestment was about 150,000 barrels a day, with another 14,800 barrels a day from Peace River. Total oil and gas production in 2016 averaged 3.7 million barrels of oil equivalent a day, according to the company’s annual report.

Oil sands production is very costly compared to other forms of crude extraction, however, and the sale of high-cost assets while oil remains in the $40-$50 range could be viewed as a positive by the market.

“It takes away some very high-cost production and will help reduce Shell’s operating costs, which were already among the highest in its group,” said Ahmed Ben Salem, an analyst at Oddo Securities. “Oil sands was losing money and the sale will help the company focus on projects that have lower break-even prices.”

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