NEW YORK (Dow Jones)--Driven by a growing desire to lower dependence on foreign oil, the U.S. is set to help two of the world's biggest energy companies revisit extracting oil from stone in the Rocky Mountains - a venture
that has previously been polluting and prohibitively expensive.
The prize for success for energy majors Royal Dutch Shell PLC (RD) and Chevron Corp. (CVX) is commercial access to U.S. oil shale resources, which the Bureau of Land Management says could total more than twice Saudi Arabia's oil reserves.
The government last week said both Shell's and Chevron's plans to test oil and gas production from oil shale in Colorado won't have significant environmental impacts and has put assessments up for public comment before issuing research leases. On Friday, the Bureau of Land Management started its first steps for having a national oil shale lease sale, inviting public comment for proposed rule making on commercial leases.
The logistical challenges are significant. Oil is extracted from shale at high temperatures, often at more than 700 degrees Fahrenheit, but the process has previously been inefficient and environmentally damaging. It has mostly involved mining the rock and crushing it before heating, using huge amounts of energy. This has led to just a few deposits being currently exploited, mostly in Estonia.
But so called unconventional oil, such as that from Canada's bituminoussands, has recently come back into the spotlight as fears of supply restrictions in major oil producers in the Middle East, Nigeria and Venezuela have escalated. These fears have helped make expensive technologies more viable and re-ignited the appeal of suchlabor-intensive extraction of oil. It is these concerns that led the U.S. Department of the Interior to form an oil shale development program in 2003 and call for applications for research leases last year.
"Looking at the current oil market, oil shale is a lot more technologically feasible at today's prices of around $70 a barrel than it was when oil was $30 a barrel," said Andrew Neff, senior energy analyst at consultancy Global Insight in Washington. "The risks to the environment from shale oil production is another matter" and could lead to opposition from locals in Colorado, he said.
More than 70% of the U.S.'s oil shale is found on Federal Land, mostly in Colorado, Utah and Wyoming in what's know as the Green River Formation. The research and development plots are in Northwest Colorado in the iceanceBasin.
Long And Traveled Road
A Department of Energy study last year estimated crude prices would have to stay at $70 to $95 a barrel for a first-of-kind shale oil operation to be profitable, though costs would come down as technology improves. This isn't a view shared by Shell, which with 20 years of research under its belt believes it will be able to make money at crude prices of $30.
While Shell is upbeat about its chances of producing oil without taking shale out of the ground, previous attempts by others, dating back from early last century, have generally ended in failure. In the 1960s, one never-implemented plan, part of a broader study into the use of atomic energy, even proposed an underground nuclear explosion to recover the oil. High oil prices in the 1970s led Congress under President Carter to create the Synthetic Fuels Corp., to find new, domestic sources of crude. Entire towns in Colorado were created and all but abandoned after oil prices bottomed out in the 1980s.
Despite oil shale's dubious history, Shell and Chevron's participation could again bring the unfashionable energy source back to the mainstream's attention.
"When the super majors get involved in a niche area, it is almost like giving it a stamp of approval and people tend to stand up and take notice," said Global Insight's Neff. Still, he pointed out, ExxonMobil Corp.'s (XOM) 1982 abandonment of its $3 billion Colorado oil shale project will leave some people wary.
Shell already has a well-advanced U.S. test site which has produced shale oil and Jill Davis, a spokeswoman for Shell's oil shale project, said the government's research lease will give it a chance to demonstrate and improve its technology as well as tap into future commercial leases. "It will be the end of the decade before we get clearance to go forward," saidJohn Hofmeister, President of Shell's U.S. operations. "It won't be developed before 2015."
Shell's plan is to drill holes and fill them with heaters, gradually warming the rock to release organic matter, or kerogen, in the shale as oil and gas. "We can make high quality products straight out of the ground," with little processing to turn into diesel, jet fuel and naphtha, said Davis.
Chevron Plan Less Advanced
Chevron's scheme, which also doesn't involve mining and so far exists only on paper, is to break the rock underground using carbon dioxide, and possibly propellents and explosives, then to pump in heated carbon dioxide gas to release oil. Independent Texan group EGL Resources Inc. has also been given a lease, while the government rejected an application from former oil shale proponent Exxon because it had no plans for production in the next decade.
Shell, by far the most advanced of the three participants, has been given three 160-acre development plots and Chevron and EGL have both each been given a single plot of the same size. If the pilot plants are successful, the applicants will be granted 8 square mile commercial leases for each of their test plots. For Shell, that would be 24 square miles in total.
With the Department of Energy estimating the U.S. has 800 billion barrels of recoverable oil over 16,000 square miles, Shell's plots could contain a total 1.2 billion barrels of oil. While the Anglo-Dutch giant is hoping have the green light to produce commercially within four years, the Bureau of Land Management is allowing the proponents much more time to shore up their technology. If the leases are granted, the companies will have 10 years to show they can produce oil from the shale in an economically viable and environmentally sound way, with an option to extend for five more years.
With 800 billion barrels of estimated recoverable oil, the U.S. could have more than three times Saudi Arabia's proven oil reserves of about 260 billion, and according to the BLM, enough to meet U.S. demand for oil at current levels for 110 years.
Unlike the U.S. oil shale resources though, Saudi Arabia's reserves have by definition undergone strenuous studies to show they are economically viable to extract.
Steve Smith, assistant regional director for The Wilderness Society, last week told the Associated Press he believes the experimental programs will be worthwhile because they'll show whether the technology is workable and what the impacts might be.
Source: Matt Chambers, Dow Jones Newswires; 201-938-2062;
matt.chambers@dowjones.com.