FIRST OF TWO PARTS: Industry, US government take new look at oil shale

April 18, 2005
The US Geological Survey estimates the world’s supply of oil shale at 2.6 trillion bbl, of which 2.1 trillion bbl is in the US, primarily in Colorado, Utah, and Wyoming. Oil produced from shale can be refined into high quality petroleum products.

The US Geological Survey estimates the world’s supply of oil shale at 2.6 trillion bbl, of which 2.1 trillion bbl is in the US, primarily in Colorado, Utah, and Wyoming. Oil produced from shale can be refined into high quality petroleum products.

But shale oil is difficult-and so far, too expensive-to recover. Kerogen in the rock must be converted to oil through pyrolysis, heated to 500° C. in the absence of air and separated out in a process called retorting. Of the 2.1 trillion bbl of US oil shale resources, government officials say, as much as 750 billion bbl “has a richness of 25 gal/ton or greater and could be produced with near-term adaptations of existing technology.”

Despite several previous attempts to discover an economical method of producing shale oil, an industry rule of thumb has been production requires a price at least $5/bbl above whatever conventional crude is selling for at that moment.

But Shell Exploration & Production Co. is working on a process that it says may be economical at roughly half the current price for conventional oil.

“Given what we know about our technology today and what it would cost to do, we think it can be economical [at an oil market price] in the mid-$20s[/bbl]. So this whole idea that you need $50 oil to make it economical, I don’t think Shell has ever hedged its bet that way, or any oil company,” said Shell representative Jill Davis.

“It’s taken a lot of work, and it’s not all perfect. We haven’t cracked the nut, or else we’d be running commercial,” she said. “That’s why we continue to research it. We want to solve the technical aspects and see if it’s viable for sustainable development, because that’s what Shell believes in, and we want it to be good for the people, we want it to be profitable, and we want it to be good for the environment. That’s what we’re working on now.”

The US Department of Energy and Department of Defense (DOD) also are studying the feasibility of oil from shale. “An objective look at the alternatives points to the nation’s untapped oil shale as a strategically located, long-term source of reliable, affordable, and secure oil,” said Anton Dammer, director, Naval Petroleum and Oil Shale Reserves, in a March 2004 DOE report.

“The world’s conventional oil resources total 2.7 trillion bbl, while North America’s unconventional resources total 3.7 trillion bbl [primarily in the form of US oil shale deposits and Canadian oil sands]. North America’s resource base of unconventional oil exceeds the world’s remaining conventional oil by nearly 40%,” DOE reported. “Oil shale, coupled with Alberta’s rapidly evolving [oil] sand industry, has the potential to provide a secure, steady base for North America’s energy needs for at least 100 years.”

Meanwhile, the Pentagon said it is developing plans to put a portion of its $5.5 billion fuel-purchasing budget into establishing a market for shale oil from Utah within 4 years. The US Department of the Interior (DOI) reportedly is poised to lease land “soon” in the western US for research and development of oil shale.

Government officials claim they’ve received positive comments on that plan from independent producers and two major oil and gas companies, ExxonMobil Corp. and Royal Dutch/Shell Group. Officials from ExxonMobil and Shell acknowledged that government officials have talked to them about earlier oil shale experiments. But one industry source told OGJ that news reports of the DOD proposal are “a little overstated.” The source said, “DOE is much more involved in understanding where we are and what we’ve done.”

Government optimistic

In its Roadmap for Federal Decision-Making issued in December, DOD noted that successful development of Canada’s oil sands “required a significant public-private partnership sustained over a long period of time.” The department said, “The essential government programs and policies needed to stimulate industry development of oil shale in the US are not now in place.”

It said, “It is now both prudent and timely for federal decision-makers to consider the strategic potential of oil shale to meet the nation’s energy needs and to stimulate the domestic economy.”

DOD’s vision was to stimulate private sector commercialization of the nation’s oil shale resources and development of an oil shale industry that would augment domestic fuel supplies by 2 million b/d by 2020 “and more than twice that amount by mid-century.”

Recognizing the long lead-times required for industry development and the urgency of the need to increase domestic fuels supplies, the roadmap provided an apparently too aggressive timeline for federal actions. It called for congressional authorization early in 2005, preparation of an oil shale strategy by March, a congressional assessment of oil shale feasibility by May, completion of program plans by June, and initial program activity by October. No action has been reported so far, however.

While DOD focused on quicker supply of shale oil, DOE emphasized potential economic benefits. “Without arguing the rate at which shortfalls may occur, and instead looking to what is possible with a coordinated industry-government effort, it is possible that an oil shale industry could be initiated by 2011, with an aggressive goal of 2 million b/d by 2020. Ultimate capacity could reach 10 million b/d, a comparable capacity to the long-term prospects for Alberta’s [oil] sands,” said the DOE report.

“While oil shale’s direct economic value to the nation may approach $1 trillion by 2020, other strategic and national security benefits may not be fully measurable in dollars. The benefits of oil shale development will continue well beyond the forecast period, as the resource base is capable of producing for more than 100 years.”

DOE’s analysis assumes continued pressure on the production capacities of members of the Organization of Petroleum Exporting Countries and consequent increases in the price of crude oil.

It also assumes that shale oil production begins in 2011, with initial production of 200,000 b/d and increases to 2 million b/d in 2020.

By reducing US needs for imported oil, the DOE analysis said, oil shale development could deliver “a direct positive value to the US economy of $800 billion over a 10-year period.”

Industry problems

Industry and government officials generally acknowledge that economic risks, technical and regulatory uncertainties, and absence of explicit government support, along with the lingering memory of billions of dollars of public and private investments lost when oil prices collapsed in the early 1980s, deter aggressive development of US oil shale.

Oil shale production is characterized by high front-end capital and operating costs and long lead times between capital investments and operating revenues. The dangers of changes in economic conditions, energy markets, capital markets, government leadership and policies, and public support for oil shale projects impose risks greater than faced by many other energy investments.

Oil shale development will require access to the resource, technology maturation, large capital investments, and stable and reliable government policies and-some say-incentives that create a receptive climate for industry investment and commitment.

“Options include an array of tax incentives, regulatory efforts, research and development, demonstrations, and commercialization efforts that may be considered depending on supply impact desired by policymakers, industry needs, and the scope of authority and funding available for the effort,” said the DOD report.

Nearly 80% of western US oil shale resources are owned and managed by federal and state government agencies. Industry and some government officials now agree new policies are needed to make these resources available on terms attractive to industry while ensuring efficient resource development.

The 1920 Mineral Leasing Act restricts the number and size of leases available to private entities for oil shale development, DOE noted. Moreover, a moratorium on oil shale leases has been in place since the 1980s. The Prototype Oil Shale Leasing Program, developed by DOI in 1973, provides a strong foundation for crafting a new leasing policy. However, it will require revision to reflect advances in mining, in situ conversion, and surface retorting technologies, new environmental practices, and regulatory changes, DOE said.

Next week: A look at past and current efforts to produce oil from shale.