Oil shale: potential energy giant shackled by high cost
Exxon Corporation's surprise decision to mothball its oil shale project raises a crucial question: Can the world's largest untapped source of fossil fuel be developed without direct government involvement?
For nearly a century, the energy industry has known that oil shale constitutes a tremendous potential energy resource. According to the latest estimates, the rock beneath parts of Colorado, Wyoming, and Utah contains enough fossil fuel, in a rubbery form called kerogen, to make 1.8 trillion barrels of oil. But the economics of mining the pinkish marlstone, cooking out the kerogen, and refining it into a usable fuel has always seemed just out of reach.
Since 1918 the oil shale industry has gone through a series of booms and busts. After the Iranian revolution of about two years ago, with the resultant oil price increases and the establishment of the US Synthetic Fuels Corporation (SFC), the industry began its strongest boom ever.
But last winter, one of the strongest advocates of oil shale, Occidental Petroleum, was forced to close down its operations because of adverse economics, including substantial increases in estimates of the project's capital costs. Now , Exxon's withdrawal from what was the largest commercial development effort of its kind has definitely turned the boom back into bust. It leaves only Union Oil with a commercial-scale project, bolstered by a contract with the federal government to purchase its shale oil at a fixed price.
SFC officials don't believe Exxon's decision to step away from at least a $6 billion investment in shale oil means the end of the US synthetic fuels effort. William Rahatican, SFC vice-president for external relations, says, ''This is not a big setback for the industry, but for a particular project.''
Mr. Rahatican says the SFC expects US corporations to submit 30 to 35 projects at its next solicitation on June 1. Of these, four to five will be shale oil projects. Currently, two shale oil proposals are before the SFC for either funding guarantees or price supports.
But Wall Street's interpretation of Exxon's announcement is more pessimistic. Rosario S. Ilacqua, an energy analyst with the brokerage house L. F. Rothschild, Unterberg, Towbin, says, ''We're back where we've been for the past 20 years. Everytime the cost of oil moves up, the cost of these projects rises faster. It's tough to compete with drilling a little hole.''
Exxon's announcement followed statements over the weekend that Shell Canada Ltd. and Gulf Canada Ltd. were pulling out of the $13.1 billion Alsands oil sands project.
''What these cancellations tell us,'' says Sanford Margoshes, an energy analyst at Bache Halsey Stuart Shields Inc., ''is that there is a reevaluation in the . . . outlook for real crude prices going on and that there are pitfalls in the long lead times in projects such as these in an inflationary environment.''
Exxon cited two reasons for its decision. The first involved economic conditions, particularly the softening world price of oil. Oil on the world market has dropped about $6 per barrel in the last few months. The second reason was increasing cost estimates for the 47,000 barrel-per-day Colony project. Exxon's formal statement says capital cost estimates for the project have ballooned from $2-to-$3 billion to $5-to-$6 billion.
''From what I've seen, this escalation in capital cost comes about because the early designs are oversimplified. As designs become more sophisticated, they require better steel, higher operating temperatures, for example. The result is that the costs go up by factors, not just percentages,'' explains Graham Taylor of the Colorado Energy Research Institute (CERI), who authored a recent report on oil shale.
The decision was an abrupt shift in Exxon policy that took local employees and Tosco Corporation, Exxon's co-owner in the shale project, by surprise. It was no secret that Exxon estimates of the project's cost had increased substantially. In fact, these figures had sparked the SFC to question federal loan quarantees granted to Tosco. However, Tosco managed to convince SFC officials that it should retain its guarantees. As a result of Exxon's decision, Tosco has decided to exercise an option in their contract requiring Exxon to buy Tosco's 40 percent of the project.
''We recognize very soberly that this is a major setback to all synthetic fuels, and certainly to oil shale. It's begun to seem to me that one of the implications is that the US oil shale industry isn't going to go forward without considerable and extensive participation by the government,'' Tosco's chief executive, Morton Winston, told the Rocky Mountain News Sunday.
This sentiment was echoed an SFC statement, which said this ''highlights the need for assistance of the type envisioned by the Energy Security Act if an industry is to be established.''
Oil shale is fundamentally different from traditional oil. In the oil industry, the major costs involve finding the petroleum in the first place. Once discovered, it is not very expensive to produce. As a result, price fluctuations effect exploratory activity far more than the profitability of producing wells.
With synfuels, however, the location of the basic fuel is known and all the costs are in mining and processing the material into a useful fuel. Consequently , the profitability of a multibillion-dollar synthetic fuels plant is highly dependent on the future price of its product - something extremely difficult to forecast given the volatility of oil prices.
With oil shale there is another important factor at work.
''Oil shale is being held back by primitive technology,'' says Martin Robbins , the director of CERI. Some experts in the field speculate that part of Exxon's decision may be to delay the project so that they can explore alternative approaches.