OIL SHALE:

Armed with new technology, industry tries again to tap rich U.S. deposits

In late March, Red Leaf Resources, a small energy company in Sandy, Utah, received a state permit allowing the company to break ground on an oil shale production facility in eastern Utah. Company officials predict that within the next 18 months, Red Leaf will begin commercial oil shale production -- the first in the United States in 30 years.

To produce oil, the company plans to mine the oil shale and dump the crushed rock into a clay-lined pit. Layering the rock with pipes, the company will seal the rock enclosure and pump heated gas into the pipeline network. Once the oil shale is heated to at least 650 degrees Fahrenheit, the solid bituminous material in the rock, known as kerogen, will chemically convert into oil and natural gas.

"It takes a few months to heat it up to a temperature high enough to sweat the oil and hydrocarbons out of the rock," said Jeff Hartley, a government affairs consultant to Red Leaf.

In the early stages of production, the company expects to produce 9,000 to 9,500 barrels of oil per day from a football-field-sized plot. Eventually, it will ramp up its daily production level to 30,000 barrels of oil. Red Leaf estimates its extensive leases could contain the equivalent of 1.5 billion barrels of oil.

Red Leaf is part of a growing industry movement aimed at testing new technologies to tap America's bountiful oil shale reserves, which are ranked as the richest in the world (see related story).

The industry is focused on the Green River Formation underlying Colorado, Utah and Wyoming, which holds an estimated 800 billion barrels of recoverable oil, according to the Energy Information Administration. That's roughly equivalent to all the conventional oil reserves in the Middle East.

Some estimates go even higher. A 2005 oil shale report by RAND Corp., a nonprofit research group, said the three-state region could hold 1.5 trillion to 1.8 trillion barrels of oil equivalent, though not all of it could be recovered.

Energy companies have been trying to capitalize on America's oil shale for decades. Previous efforts fell flat when world oil prices plummeted and government support dried up. Today, with world oil prices reaching beyond $100 per barrel and international oil demand continuing to grow, oil shale extraction is enjoying a resurgence.

International oil giants, foreign energy companies and a new generation of small firms are investing money in advanced technologies to develop the U.S. oil shale reserves. Many of those firms insist they can take the oil to market for $60 per barrel or less -- enough to cover costs and make a respectable profit.

"It's not crazy to think that you can do it for well below a hundred dollars per barrel," said James Bartis, a senior policy researcher at RAND Corp. and author of a 2005 RAND report on oil shale development in the United States. "The question is, is somebody going to get out there to build that first-of-a-kind commercial plant?"

Despite high oil prices, industry officials say interest in oil shale development could stall if the Bureau of Land Management follows through with a plan to dramatically reduce the amount of federal lands open to oil shale leasing.

In February, BLM issued an environmental assessment that proposes to limit leasing in the three-state area to 462,000 acres -- a 75 percent cut from the Bush administration's 2008 plan to open 2 million acres. The Obama administration proposal also would restrict the companies' activity on the federal lands, offering leases for research and development projects but not for commercial production.

"The current plan is extremely restrictive," said Jeremy Boak, director of the Colorado School of Mines' Center for Oil Shale Technology and Research. "It cramps anybody's ability to find a decent-sized plot of land and have a choice of where they want to operate."

The BLM proposal was developed after environmental groups successfully challenged the Bush oil shale plan. The environmentalists charge that oil shale extraction would devastate local wilderness areas, use too much water and produce massive levels of greenhouse gas emissions.

An August Government Accountability Office report raised similar concerns about oil shale development, arguing that it "could have significant impacts on the quality and quantity of water resources" in the West.

The report concluded, however, that the full impact of oil shale development "is unknown because technologies are not yet commercially proven, the size of a future industry is uncertain, and knowledge of current water conditions is limited."

Bounty in Utah, Colo.

Red Leaf is operating on private and state lands in a region of Utah called the Uinta Basin, where the ore is sometimes found in outcroppings on the landscape. The Utah oil shale veins tend to be located 60 feet or so below the earth's surface and can be easily mined.

Red Leaf is not alone in targeting the Utah region. Enefit American Oil, the U.S. branch of an Estonian national energy company, has also purchased mineral rights on private lands in the region and plans to build an oil shale extraction facility.

By 2020, the company expects to produce 25,000 barrels of oil a day, expanding to 50,000 barrels by 2024. Enefit's Utah facility will use technologies that the company advanced during its 30 years of oil shale development in Estonia. And as Estonia is part of the European Union, the oil shale technologies must meet the bloc's tough air and water pollution standards, noted Enefit CEO Rikki Hrenko.

The most valuable U.S. oil shale resources, however, are located deep under northwestern Colorado's Piceance Basin, a 1,300-square-mile region of rock that contains an estimated 1.52 trillion barrels of oil equivalent fuels. Those veins of oil shale tend to be 1,000 feet below the earth and can be up to 1,000 feet thick.

The Piceance oil shale concentrations are so massive that a single acre has the potential to produce 2.5 million barrels of oil, according to RAND's Bartis. Eighty percent of the basin region is owned by the federal government.

Because mining in the basin would be prohibitively expensive, energy companies are looking for ways to heat the oil shale underground, a process that requires heating the ore to at least 650 degrees Fahrenheit to convert the kerogen into oil and gas.

Several energy companies -- notably American Shale Oil LLC, Exxon Mobil and Royal Dutch Shell -- are testing complex new "in situ" technologies to produce oil and gas from the deep oil shale reserves.

The technological advances in oil shale development have not tempered environmental opposition to the industry. A March report by Western Resource Advocates, a Boulder, Colo.-based environmental group, argued that the industry would use a significant amount of water at a time when states are struggling to balance competing needs for the dwindling resource.

Environmentalists warn that oil shale extraction would increase air pollution in the region and produce 25 to 75 percent more greenhouse gas emissions than conventional crude oil.

The report charged that other oil and natural gas development in the West has polluted the air in Colorado, Utah and Wyoming, leaving some of the rural communities with "worse air quality than Los Angeles."

Air pollution issues could be the "deal breaker" for companies hoping to build a massive oil shale industry in the West, argued Jason Hanson, an oil shale researcher for the Center of the American West at the University of Colorado, Boulder.

Hanson noted that federal air quality standards set for the region under the Clean Air Act could dramatically limit oil shale production. "It's conceivable that the first company that actually gets up and running will take up all of that margin and the remaining companies would be boxed out" because their operations would cause the region to exceed federal air pollution caps, he said.

The industrial activity, which would be located close to national parks and monuments, could also have a devastating impact on the dwindling populations of native plants and wildlife, Hanson said. He noted that the three-state region is home to more than 200 species that are protected under federal law.

But industry officials say the environmental community's air and water pollution estimates for the oil shale industry are based on technologies developed in the 1970s and '80s. "The oil shale technologies in all of the studies cited by environmental groups are 30 years old or more," said Red Leaf's Hartley. "At the time, there were legitimate concerns with water."

Industry officials argue that the new technologies use far less water and produce less pollution. "There's a wide range of technologies being considered," said Glenn Vawter, executive director of the National Oil Shale Association, an industry-funded education group. "We won't know what the water usage will be until we know what the technology is."

Shale boom and bust

The oil shale industry has gone through boom and bust times in the West for more than a century. Local lore has it that early U.S. settlers learned about the energy potential of the oil shale rock through bitter experience.

At a congressional hearing last year, Helen Hankins, Colorado state director for the Bureau of Land Management, shared the legend of a homesteader who built a fireplace out of the oil shale rock that he'd found near his home. "During a housewarming party, [he] not only saw his fireplace but his home go up in flames," she said.

The most recent push to commercialize oil shale came during the 1970s Arab oil embargo, when America poured billions of dollars into developing the nation's unconventional energy technologies. At the same time, Canada focused on tapping its own domestic resources -- Alberta's massive oil sands reserves.

U.S. oil shale companies ultimately produced about 6 million barrels of oil from the Western rock, said Vawter. But the domestic industry collapsed in the 1980s when world oil prices plummeted to $10 per barrel and the U.S. Congress ended federal subsidies supporting the oil shale program.

When federal support dried up, Exxon shut down its $5 billion project in northwest Colorado, putting more than 2,000 people out of work. Colorado residents still refer to that day, May 2, 1982, as "Black Sunday."

Meanwhile, Canada has continued to underwrite its oil sands development program for the last 30 years, despite wild fluctuations in the world oil prices.

"In Canada, the first plants could pay for their operating expenses, but they weren't profitable," said Alan Burnham, chief technology officer of American Shale Oil. "But Canada had a government policy which supported that industry as it went through the technology maturation. And so when the price of oil popped back up, it's in great shape."

Burnham, who worked for a U.S. oil shale company in the 1970s and '80s, argued that when the U.S. government cut off federal subsidies for the industry, "we essentially stopped oil shale activities. Now it will take longer for us to get up that maturity curve."

As the price of oil inched back up early this century, the federal government took a fresh look at oil shale. In 2005, Congress passed the Energy Policy Act, which directed the Interior Department to begin leasing in the three-state region. In 2008, the Bush administration handed out six oil shale leases to four companies.

The leases granted the energy firms access to 160 acres of federal lands, with the possibility of leasing an additional 5,120 acres if their oil shale technology could be ready for commercialization in 10 years. At the time, 30 companies applied for the federal leases.

In 2010, the Obama administration offered another round of leases. This time, however, the companies that developed new market-ready technologies on their 160-acre leases were only promised another 640 acres to commercialize their process. Only three companies applied.

The terms of the next round of oil shale leasing have yet to be disclosed by the Interior Department, which is holding a series of public hearings in the West on BLM's new oil shale development proposal. The final plan could be released this summer.

Meanwhile, House Republicans are pushing the White House to expand that leasing plan. This spring, the House passed a transportation bill that would require BLM to offer 2 million acres of public land for oil shale exploration in Colorado, Utah and Wyoming. That provision, crafted by Colorado Republican Rep. Doug Lamborn, was later blocked by the Senate.

Oil shale development continues to travel a bumpy road in the United States. But energy companies are still attracted to the resource, based on the sheer volume of oil locked up in the Western shale reserves, Vawter said.

"The rationale for most of the companies involved in this is: It's such a huge resource that if we can crack the economic cost barrier and do it in an environmentally responsible way, it just opens up such a huge resource of oil for the United States," he explained.

Hrenko of Enefit argued that oil shale development should be treated much like any other energy resource. "We have models from the mining industry and best practices available from the oil refining industry," she argued. "What we're doing is essentially marrying those two."

But RAND's Bartis insisted that the U.S. oil shale resources are too precious to open to unlimited development. "This is not like normal leasing of federal lands, where you say, 'Who wants the land?'" he said. "This is such an amazingly wonderful resource that it's important to the taxpayers that we monetize it. This is a tremendous asset for the United States. It needs to be properly husbanded."

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