Shell bids £3.7bn to buy out Canadian oil sands operation

Shell underlined its commitment to unconventional sources of oil yesterday with a C$7.7bn (£3.7bn) offer to buy out minority investors in a Canadian subsidiary that is extracting hydro-carbons from oil sands.

The transaction is also a further move to simplify the corporate structure at Shell, which last year unified its UK and Dutch boards. The group already owns 78 per cent of Shell Canada and it offered to buy out the remaining 22 per cent.

In contrast to BP, Shell is putting a big bet on extracting oil from unconventional sources, such as the tar sands of Canada. Shell is struggling to rebuild its oil and gas reserves base after a more-than 30 per cent write-down in 2004 and poor exploration success in 2005. This year Shell paid £1.2bn to acquire Black-Rock Ventures, another Canadian oil sands company.

Shell Canada's biggest project, the Athabasca Oil Sands, which is 60 per cent owned by Shell Canada, requires the oil to be "mined" rather than drilled. Yesterday's buyout proposal comes ahead of a planned ramp-up in production at Athabasca, where costs have already trebled. Shell and its partners at Athabasca reckon the project's first stage, to add 100,000 barrels per day to output, will cost $10.4bn (£5.8bn).

Athabasca is thought to hold 6.5 billion barrels of oil in the ground. Production is currently 155,000 barrels per day. There is a plan to eventually increase output to 550,000bpd. At the smaller Peace River project, also in the Alberta region of Canada, Shell hopes to raise production from the current 12,000bpd to 100,000bpd.

"Heavy" oil is typically much more expensive to extract than conventional sources but as the price of oil has been trading at historically high levels, unconventional projects become attractive. Shell has said that its Canadian projects are viable at oil prices of above $30 a barrel.

The world's biggest reserves are in the Middle East but much of these are inaccessible to Western companies for political reasons. Russia, which holds the next biggest resources, has an uncertain investment climate - Shell's giant Sakhalin scheme is embroiled in a dispute with the Kremlin over the costs of the project.

One major advantage of operating in Canada is that it is politically very low-risk.

Shell said: "Bringing Shell Canada fully into the group will allow a unified technology plan between Shell Canada and the group and full access to the group's financing capabilities."

Separately, the price of crude oil tumbled yesterday as traders doubted all Opec members would follow Saudi Arabia's lead to curb output under an agreement reached last week. US crude dropped $1.12 to $58.21 a barrel. Saudi Arabia informed its Asian and US customers over the weekend it would cut supplies next month, making good on Opec's pledge to implement its first formal output cut since 2004.