shale oil bloomberg article

Colorado, Utah Rival OPEC Reserves, Lure Chevron, Exxon, Shell
By Joe Carroll
May 29 (Bloomberg) -- Colorado and Utah have as much oil as Saudi Arabia, Iran, Iraq, Venezuela, Nigeria, Kuwait, Libya, Angola, Algeria, Indonesia, Qatar and the United Arab Emirates combined.
That's not science fiction. Trapped in limestone up to 200 feet (61 meters) thick in the two Rocky Mountain states is enough so-called shale oil to rival OPEC and supply the U.S. for a century.
Exxon Mobil Corp. and Chevron Corp., the two biggest U.S. energy companies, and Royal Dutch Shell Plc are spending $100 million a year testing new methods to separate the oil from the stone for as little as $30 a barrel. A growing number of industry executives and analysts say new technology and persistently high prices make the idea feasible.
``The breakthrough is that now the oil companies have a way of getting this oil out of the ground without the massive energy and manpower costs that killed these projects in the 1970s,'' said Pete Stark, an analyst at IHS Inc., an Englewood, Colorado, research firm. ``All the shale rocks in the world are going to be revisited now to see how much oil they contain.''
The U.S. imports two-thirds of its oil, spending $300 billion a year, or 40 percent of the record trade deficit. Every $10 increase in a barrel of crude costs an American household $700 a year, according to the Rand Corp., founded in 1946 to provide research for the U.S. military. Oil prices have risen 63 percent since 2004 and higher fuel costs have slowed growth in the world's largest economy to the lowest in four years.
The last effort to exploit the Colorado and Utah shale fields foundered in the 1980s after crude prices tumbled 72 percent, resulting in a multibillion dollar loss for Exxon. Techniques developed to coax crude from tar sands in Alberta, 1,600 miles (2,500 kilometers) to the north, may help the U.S. projects' engineers.
Cooking the Shale
``The potential for shale is large,'' said Joseph Stanislaw, senior energy adviser for Deloitte & Touche LLP and co-author with oil analyst Daniel Yergin of ``The Commanding Heights: The Battle for the World Economy'' (Simon & Schuster, 464 pages, $26). ``Assuming the technology proves out, the size and scale of the reserves are significant.''
Energy providers are investing in shale oil production because the reserves are large enough to generate higher returns than smaller fields in Oklahoma and Texas, where output is declining after eight decades.
Shale is also a more attractive investment than new U.S. refineries, which Shell and Chevron say may lose money as rising use of crop-based fuels such as ethanol lowers domestic gasoline demand. Exxon says it isn't interested in building new fuel plants in the U.S. because the company expects North American fuel consumption to peak by 2025.
``You're going to build refineries where demand is increasing, and that's the developing world,'' Scott Nauman, Exxon's manager of economics and energy planning, said in a May 18 presentation at a University of Chicago oil conference.
Shell's Project
In the high desert near Rifle, Colorado, Shell engineers are burying hundreds of steel rods 2,000 feet underground that will heat the shale to 700 degrees Fahrenheit (370 degrees Celsius), a temperature at which Teflon melts.
The heat will be applied for the next four years to convert the hydrocarbons from dead plants and plankton, once part of a prehistoric lake, into high-quality crude that is equal parts jet fuel, diesel and naphtha, the main ingredient in gasoline.
Chevron, which helped build the Saudi Arabian energy industry when it struck oil in the kingdom in 1938, plans to shatter 200-foot thick layers of shale deep underground, said Robert Lestz, the company's oil-shale technology manager.
Rather than using heat to transform the shale into crude, Chevron plans to saturate the rubble with chemicals to convert it. The method will reduce power needs and production costs, Lestz said in a May 24 interview. Using chemical reactions to get oil from shale also means fewer byproducts such as ash and fewer greenhouse gases, he said.
`Brute Force'
Chevron scientists are working with researchers at the Los Alamos National Laboratory in New Mexico to determine which chemicals work best for converting shale to crude oil. Shell's heating technique amounts to ``a brute-force approach,'' said Lestz, who is based in Houston.
Raytheon Co., the maker of Tomahawk missiles and the first microwave ovens, is developing a process that would use radio waves to cook the shale.
Irving, Texas-based Exxon Mobil plans to shoot particles of petroleum coke, a waste byproduct of oil refining, into cracks in the shale. The coke will be electrically charged to create a subterranean hot plate that will cook the shale until it turns into crude. The company declined to discuss the progress of its oil shale tests.
`Oil Is Here'
``These are quite remarkable technological approaches,'' said Jeremy Boak, a geologist at the Colorado School of Mines in Golden, Colorado, who spent 11 years cleaning up radioactive waste and disposing of weapons-grade plutonium at U.S. government sites. ``The oil companies don't have the exploration problem of finding resources to drill. We know the oil is here. It's just a matter of getting it out.''
U.S. oil shale deposits likely hold 1.5 trillion barrels of oil, according to Jack Dyni, a geologist emeritus at the U.S. Geological Survey. All 12 OPEC countries combined have proved crude oil reserves of about 911 billion barrels, led by Saudi Arabia, with 264.2 billion barrels, according to statistics compiled by BP Plc.
Skeptics of the potential for shale oil include Cathy Kay, an organizer for the environmental group Western Colorado Congress, who says the techniques will drain water supplies, scar the landscape and require so much power the skies will be choked with smoke from coal-fed generators.
Environmental Concern
``They are going to do absolutely massive environmental damage,'' said Kay, a South African native who's been spearheading the Grand Junction, Colorado, group's anti-shale campaign since September.
``Why don't these companies invest these giant sums of money developing the cheapest, cleverest solar panel or geothermal process, instead of chasing this elusive oil?'' Kay asked.
Shell, based in the Hague, estimates it can extract oil from Colorado shale for $30 a barrel, less than half today's price of $66 for benchmark New York futures.
Shell's process includes surrounding each shale field with an underground wall of ice. The so-called freeze walls are to prevent groundwater from swamping the heating rods and to protect the local water supply from contamination as the organic material in the rocks turns to oil, according to Terry O'Connor, the Shell vice president in charge of the company's Colorado shale project.
500,000 Barrels
``There's a lot of testing to be done,'' O'Connor said in a May 24 interview. ``We're proceeding cautiously.''
O'Connor declined to say how much oil Shell expects it could produce from shale. Stark at IHS and other analysts said Shell expects to get 500,000 barrels a day from its project, 25 percent more than comes from Alaska's Prudhoe Bay, the largest U.S. oil field.
``This is an amazing resource,'' said James Bartis, an oil analyst at Santa Monica, California-based Rand, whose researchers have included former Secretary of State Henry Kissinger and the Nobel Laureate economist Paul Samuelson. Bartis says that success in the Rockies could cut crude prices by 5 percent, saving American consumers $20 billion a year.
``It's been raised before as a panacea for impending shortages, but never before has it been shown to be competitive with conventional oil,'' Bartis said.
Equipment Demand
Drillers, pipe-makers and metal fabricators such as Nabors Industries Ltd. and closely-held UOP LLC will be the first to profit as Shell, Chevron and Exxon drill thousands of wells a half-mile underground by 2011.
The oil companies may begin pumping commercial quantities of oil from Colorado shale within a decade, about as long as Chevron will need to develop the 500 million-barrel Jack prospect in the deepwater Gulf of Mexico, according to Stark, who is a former Mobil Corp. geologist.
``Given the state of the oil market, more and more effort is being put into making shale a viable source,'' said Stanislaw. He estimated it will take six to eight years before oil companies perfect their extraction methods. ``The timeframe is very long,'' he said.
In the 1970s, oil shale efforts involved mile-wide strip mines and factory-sized cookers to boil giant limestone boulders. This time, no company expects to bring in front- loaders, heavy-duty dump trucks or thousands of miners to haul shale from open pits.
``The old technique required them to dig the equivalent of a new Panama Canal every month,'' said former Colorado Governor Richard Lamm, whose tenure from 1975 to 1987 included the last attempt to extract oil from shale.
`More Sane Process'
``This new approach is a much more sane process, but that's all relative,'' Lamm said in an interview. ``They're doing this in an immensely fragile area where wagon ruts from the Oregon Trail in the 1840s are still visible. It doesn't excite me because I think they're about to indelibly change our state.''
Local residents are also leery, recalling the ghost towns and job losses left behind from the last shale boom and bust.
Battlement Mesa, Colorado, a town Exxon built to house an expected 25,000 shale workers, was abandoned when the company shut its mine on May 2, 1982, a day locals still refer to as ``Black Sunday.'' The town is now a retirement community.
``I don't think this is going to go anywhere,'' said John Savage, an attorney in Rifle whose father started a shale-oil company in 1956. ``It's just too tough to get that oil out of the ground. There's trillions of barrels down there, but there's too much rock on top of it.''
Oil companies also are exploring shale fields in Jordan, Morocco and Australia, though preliminary assessments indicate none is as oil-rich as the Colorado and Utah deposits. The final approval for full-scale projects in the U.S. won't be made until after 2010.
``If we waited a few million years, all this stuff would turn to oil,'' Rand's Bartis says. ``Some people don't want to wait that long.''
To contact the reporter on this story: Joe Carroll in Chicago at [email protected]
Last Updated: May 28, 2007 19:08 EDT



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