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The Wall Street Journal: Price of Crude Convinces the U.S. Oil Shale Is Now Worth Pursuing

By MATT CHAMBERS
August 28, 2006; Page C3

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 seeking to extract oil from stone in the Rocky Mountains — a venture that previously has been polluting and prohibitively expensive.

The prize for success for energy majors Royal Dutch Shell PLC and Chevron Corp. 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 this month said Shell’s and Chevron’s plans to test oil and gas production from oil shale in Colorado won’t have significant environmental impacts. It put assessments up for public comment before issuing research leases. 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. 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 currently being exploited, mostly in Estonia.

But so-called unconventional oil, such as that from Canada’s bituminous sands, has recently come back into the spotlight as fears of supply restrictions in the Middle East, Nigeria and Venezuela have escalated. These fears have helped to make expensive technologies more viable and reignited the appeal of such labor-intensive extraction of oil. It is these concerns that led the 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 known as the Green River Formation. The research and development plots are in Northwest Colorado in the Piceance Basin.

A Department of Energy study last year estimated that 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 improved. 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, 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, 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 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 Mr. Neff. Still, he pointed out, Exxon Mobil Corp.’s 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 that has produced shale oil. 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,” said John 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 Ms. Davis.

Chevron’s plan, which so far exists only on paper, is to break the rock underground using carbon dioxide, and possibly propellants and explosives, and then to pump in heated carbon-dioxide gas to release oil.

Write to Matt Chambers at [email protected]

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