Oil And Gas:

Heritage panel encourages use of Rocky Mountain oil shale to solve energy issues

With energy security as a top issue in Congress, a major focus for some lawmakers has been the expansion of domestic oil production. Could the answer to our energy needs be in the Rocky Mountain oil shales? During today's E&ETV Event Coverage of a Heritage Foundation event, Ben Lieberman, senior policy analyst at the Heritage Foundation, and Daniel Fine, co-editor of "Resource War in 3-D: Dependency Diplomacy Defense," discuss the energy opportunity they believe exists in the shale rocks beneath the Rocky Mountain region. Fine addresses the technological, political, and economic hurdles facing oil shale development. He also explains how an increased supply of oil from the Rocky Mountain region would affect the Strategic Petroleum Reserve.

Transcript

John Hilboldt: Hosting our program today is Ben Lieberman. Mr. Lieberman is our senior policy analyst in the Thomas A. Roe Institute for Economic Policy Studies. He specializes in the Clean Air Act, climate change, and the impact of environmental policy on energy prices; before joining Heritage Mr. Lieberman served as associate counsel and director of Air Quality Policy at the Competitive Enterprise Institute. His work on environmental and energy issues appears in numerous newspapers, magazines, and journals and he frequently testifies before congressional committees on these vital issues. Ladies and gentlemen, my colleague, Ben Lieberman. Ben?

Ben Lieberman: Well, thank you all for coming and thanks to Dr. Fine who will be talking today about oil shale in the Rocky Mountains and its potential to be an extremely important component of our domestic energy supply. Now if there's been a theme to America's energy policy over the last 35 years or so it's been one of constraints and of limitations placed on an energy supply. This includes such things as restrictions on drilling in the Arctic National Wildlife Refuge or ANWR or in the 85 percent of America's offshore areas that are currently off-limits. In fact, to generalize a little beyond petroleum and transportation fuels, just about every element of our nation's energy supply and energy infrastructure if it's not inadequate now it runs the risk of becoming inadequate in the years ahead given the expectations of continued energy demand growth. I think it's not going too far to say that we haven't had an energy policy in this country so much as we've had an anti-energy policy.

For example a Department of Energy study identified more than 30 federal, legal, regulatory impediments to energy production in the U.S. These hurdles are especially challenging on federal lands where much of the nation's energy potential lies and that includes most of our oil shale. And the problem is not just areas where energy production is restricted out right, but also areas where the regulatory provisions or even years or decades of procedural delays and inevitable lawsuits have their effect. And while these environmental and other restrictions remain in place and are enough of a challenge, we also have the specter of global warming legislation, which could make matters even more difficult for the domestic fuel supply. Now some of these restrictions came about as a reaction to events such as 1979 Exxon Valdez oil spill. No, that was 1989, excuse me, 1979 was Three Mile Island as another example of something that helped crimp our energy choices. Others have accumulated over time, especially during periods of cheap energy like the 1990s when the political path of least resistance was to give in to the demands of the environmentalists and not in my backyard or NIMBY activists, but times have changed.

The need for our energy today is far greater and will become greater still in the years ahead. And technological advances have reduced the environmental footprint from energy production, so there are less risks, less worries about domestic energy production. We're long overdue to revisit our domestic energy policy with an eye towards increasing access and with fewer roadblocks to access. To be sure, not all or even most of our energy problems are self-imposed. The news, of course, is dominated by worrisome events from oil exporting nations that are unstable and unfriendly to the U.S. And there are far too many nationalized oil companies around the world, not enough private ones, not enough commitment among oil-producing nations to free-market principles like private property rights, rule of law, limited government, transparency, openness to foreign investment. But however serious the energy problems the world may impose upon us, we've made matters worse by not making good use of what's available here.

Now one potential source of domestic energy is the trillions, trillions with a T, barrels of oil trapped in shale beneath mostly federal lands in Colorado, Wyoming and Utah and there are some small scale test projects currently under way. But there are also a number of hurdles that have to be overcome, and not just the environmental ones that I touched on. Some of you may remember that oil shale was the subject of some false starts back in the 1970s and early 1980s, so there's valid reason for skepticism even beyond the environmental, legal, and regulatory challenges; questions about the economic and technological viability of oil shale. And there certainly will be political opposition. The same forces that have kept ANWR restricted are also equally as opposed to oil shale and, of course, any tough measures designed to fight global warming will make things even more difficult for oil shale to proceed. So the challenges are very real, but the potential here is enormous if we can overcome the economic, technological, regulatory, political, and other barriers to producing oil from shale. America could have perhaps five times more oil than Saudi Arabia. That's an awful lot of oil, but there's also some very big ifs involved as well. Well, today we're going to explore those ifs. What exactly is shale oil? And what has to happen in the years ahead for oil shale to meet its potential and what would doing so mean for the nation? And here to help explore these very fascinating questions, I'm pleased to welcome Dr. Daniel Fine.

Daniel Fine: Thank you for the introduction and I'm so absolutely pleased to be invited to Heritage Foundation and to develop with Heritage and in Washington what might be called the shale story, which currently is almost silent with regard to national policy, world petroleum policy and so on. Earlier on I did a book on resource war, in the late Reagan administration, and that was based upon how to understand, how to conceptualize strategic resources; oil, gas, and hard-rock minerals. I'm currently based both on the East Coast and in New Mexico. And there, in New Mexico, participating in the New Mexico energy model for the country and maybe the world. It's very interesting that the New Mexico model is based on a diversity of fuels. It is not exclusive. In fact, the language of alternative, conventional, bio, geo is almost disappearing.

The concern, from a state wide, is that what is fuel? Where is the supply of fuel going to come from? And the model is diversification, meaning you have -- in New Mexico you have solar, the national laboratories. You have the fourth-largest producer of natural gas. California depends on New Mexico for 30 percent of its gas and electricity. And you have the potential for hydrogen and you have CO2 exports and a whole range, all of the fuels. That's a good model for the country to follow, one portfolio, all the assets, how to evaluate, how to assess them in terms of production of energy and fuels. Robert Gallagher, who served in Washington in the Clinton administration in DOE, is the director of the New Mexico Oil and Gas Association and he participates in this as well. Now, today I want to strike a chord, get some resonance for shale. It's a very big part of American history. First of all, shale is not yesterday in a sense.

It goes back to 1913, to Winston Churchill, to the British essentially establishing a state company, going into then Persia to secure the access to petroleum for the Navy. And in the United States we did the same. The administration at that time established NDOE, one of the longest established departments called the Office of Strategic Reserves and Oil Shale. From 1913 on the government has been watching carefully oil shale, as well as industry. It has a history that involves five presidents and an episodic history in terms of when it comes, why it didn't come, what is the story of it. It even produced histories in the 60s and 70s, almost novel like proportions. The most interesting point to me is that the pioneers who, with covered wagons, knew about shale. They used it and found it going west in the 19th century for axle grease in those wagons. So that petroleum source was there, around even before the country was unified coast to coast. To get back to the government, the government established this office. Geologists of the time collaborated and established that in Colorado, in three states, in three petroleum basins, the Peance Basin is one, there was an enormous petroleum reserve. And it was locked shale rock in the form of what is called kerogen. And I'm sure kerogen will never make T-shirts around, you know, "Let's go kerogen." But it's a free, petroleum, organic settlement. It is what nature did not complete. By heat and combustion the petroleum developed, but the kerogen is shale rock did not. Not sufficient heat in the geologic process of the earth to develop this, the molecules etc., to get them hot enough to become petroleum. So it sits locked in the pores of enormous shale rock formations in that part of the world, in northwest Colorado, Wyoming, and some in Utah.

Now the shale rock that we're talking about, having been discovered in the 1920s, set Congress on its heels. The leasing act, MLA, in 1920 was changed to allow for shale development, promotion of shale in the United States, because 1920 was a scare period. We were running out of oil. Again, very familiar to the tone of 2005 to today, the last 18 months, at least, and two years. And then nothing happened. Shale went silent. And under President Hoover the decision was made no longer to lease shale. Fifty-four years took place without one lease going into shale. The Second World War came, again, the extinct Bureau of Mines, no longer exists, began to look at shale during the war and then it faded. Stewart Udall, who was a founder basically of the Democratic Party of the environmental movement, was pro-shale. As Secretary of Interior he'd mobilized, in the 1960s, to move shale forward, to lease it, to make it commercial. And it failed again. The debate in the '60s was the very low price of conventional petroleum excluded shale. The shale costs, the shale investment would be higher than the imported, low-cost petroleum. And the American companies went worldwide in the '60s. And at that point the economics, as mentioned before, were not favorable. In the 70s with OPEC and with the embargo and the price escalation shale, once again, came about and the first leases went forward. American oil companies stepped forward in Wyoming and around particularly in Colorado. And in 1970s prices paid $41,000 an acre to get close to this. Seventy-five percent of the shale is federal, 25 percent is patented private in this colossal resource.

How large is it? What can we say today? Shale is reserves known now in an area called the Peance Basin of 1100 square miles. The shale there is 1 million barrels per acre, roughly 750 billion barrels of oil. And then, if you extend outward to Wyoming and to Utah, 1.3 trillion. This is why you hear shale next to trillions not billions or millions of barrels. And this is oil now. The kerogen must be understood as having heated and converted into petroleum. The Air Force, in the 1970s, looked at shale and tested it and found that it was a superior liquid for jet fuel. And roughly 65 percent of the oil shale is liquid, could go into jet fuel. The J-8 engine can take shale oil product as jet fuel and it is a superior product. So you have all of the dynamics now going through the 70s which led to the Iranian hostage take, the escalation in price, and as we move to the '80s, the Synfuel Corporation, which failed but attracted a good deal of government incentive and private initiative. Now why did it fail in '82? It failed in '82 because after '82 look at your price charts. The Saudi Arabian product production began to escalate and new supply, non-OPEC, OPEC, came on the market. The market was saturated with conventional oil from the Middle East and the prices fell and fell rather radically to about $15 a barrel, which was no breakeven even for Texas oil in 1986.

So the market, again, changed the dynamic against shale oil. It was more costly to get shale in the 70s. Why? The technology of the 70s is not the technology of 2007. The technology of the 70s had a fingerprint which today probably would be unacceptable in the United States. The process to get your kerogen and to heat underground was essentially mining. That is to take the shale itself, ton by ton, to the surface and to crush it, with great water needed to do that, and to heat it. And then you have disposal problems under those plans of what to do about it, the shale that's left over, the residue. You have extraordinary water, three barrels of water to one barrel of shale, and cost. But that has changed. The 1970s are 30 years ago and I want to go into that for a bit with you. Now sensitive to price, we should be very sensitive to the price now and where we have been in 2003-04. What happened in 2005? Well, we had a major super storm in the Gulf. And the Gulf was 30 percent and is 30 percent of our oil and 25 percent of our natural gas. We are increasingly concentrated in the Gulf of Mexico. Congress was unable under the Republican majority to pass OCS legislation which would have expanded access offshore. With one minor concession in the Gulf nothing was done. We are still locked into a Gulf centered, Gulf of Mexico centered domestic supply.

Number two, what happened with Katrina was that it triggered thinking about natural disaster and linked up to climate change, because the climate change movement saw the storm, Katrina, as one element in the superheated ocean which would cause more super storms. This triggered another development in the market itself. All of your oil and gas, heating oil and products, price is determined in markets. Producers and consumers follow that market. That's the exchange market, New York from Singapore, around the world. But investors and speculators began to see that there is a new vulnerability to oil and it came from the war in Iraq and the geopolitics of the Middle East and from natural disaster. And they began to invest in speculating oil, driving the price up from 2005 2006. Now just as a footnote, because another time we'll talk about the climate change as a climate change crisis or a crisis of climate in contrast to an energy supply crisis. The two are different, but often get, essentially one penetrates the other and leads to some conclusions. But the interesting part of that was the belief of speculators that a climatologist who followed climate change was the prediction in Colorado from one institute, there would be seven super storms last summer of the Katrina class. And none occurred. And gradually the prices of oil on that exchange, gas fell from the high of 78 as you know to the low of 50 and now we're in the middle. This shows some uncertainty and unpredictability about those scenarios. That is a digression and I want to get back to shale. The resource is not responsible for price or technology. The resource is there. The resource is feasible. Around it is a technology change, and around that is always price. Why hasn't that Colorado shale but on the market here and where would we be today if it had been? Is there function outside the resource itself, in the recovery and the technology and the process to make it into oil? It is a function of policy and price. There's a silence today about this that I want to call your attention to. Those of you who are familiar with the Energy Policy Act of 2005 can turn to section 369. 369 called upon the administration and the agencies, the DOE, to produce a report to commercialize, make decisions to commercialize oil shale in the United States, to recognize it as a strategic fuel. And that 369 Report was mandated by Congress and it was due 60 days ago. It's still there. It has not yet been addressed and signed off and sent to the Congress because it contains incentives that are needed still to develop the shale in Colorado, oil shale. Those incentives are quite obvious.

here's a market risk in shale, as I've said, because of the price of the last 90 years and the episodic way shale has been handled by the world market. So market reduction risk is in the DOE potential recommendation and that means it translates into production price credits and so forth, tax credits and possibly one other item, which I'm going to mention; streamlining permitting, that's important; consolidating the acreage allowable to an investor; a whole range of recommendations pending release of that report. Go to the energy Act, you'll see in section 369 what was mandated about shale and why it is still silent, in other words, nothing out there. In terms of the report and the shale element in it there is an interesting part. It put into US law a partnership with Alberta. It exists that Alberta, which is the major world producer of tar sands, going from practically zero to almost a million, over a million barrels a day, a major exporter to the United States, has been a success story. The conversion of tar sands through the natural gas and steam injection have produced oil. And those reserves in Alberta are now classified officially, Oil and Gas Journal, as real reserves, not resources. They've moved to reserves. That exists in U.S. legislation, in law, to form those partnerships. So as the President leaves Washington this afternoon to go to Brazil to sign a well-publicized agreement on Brazil's sugar conversion to ethanol, why not add to that an agreement under section 369 of the EPAC 2005 an agreement with the Brazilian government to co-develop, share technology and information, Brazilian oil shale? The United States has 1.3 billion barrels. Number two in the world is Brazil with 90 billion barrels. Ninety billion barrels and the geopolitics of Brazil starting to develop 90 billion barrels of oil shale, in addition to its own conventional petroleum, will change foreign policy, price, import dependence and so on. So why not a second agreement on oil shale? Brazil has done work on oil shale, but it has done work in the pre-1970s format with reclamation problems.

Now why am I optimistic about shale in 2007? It's been 27 years, 25 years since it shut down the colony development in Colorado. What is available in terms of technology that changes the perspective of shale? Why should we not call shale now an official strategic fuel potential in the United States? And why not commercially develop it in the most aggressive way? Well, the technology issue is moving rather well in terms of progress. For example, one major development is Shell Oil. Shell has established some leadership. It has been in Colorado for 30 years. It has invested, in terms of R&D, a significant amount of its own revenues and it is moving toward commercialization. Shell is a BLM lease, a Bureau of land Management lease. It's working with, it's an R&D lease and it's moving stage by stage to prove up and resolve all the issues around extraction of shale, a unique process. It's called in-situ conversion process, that's their patented technology, ICP, simple conversion. Instead of the visualization that you have to retort heat and dispose of shale rock in sort of an industrial surface kind of a scenario, Shell is going underground. The refinery for shale, if Shell succeeds, will be underground. Nothing will be on the surface, surface impact minimal, almost zero. This is a tremendous change in technological capability to do that. And it makes shale accessible.

Shell is confident that it can develop that shale, it's own, at this point, BLM cooperation, at prices around $25 a barrel. And with oil now between 50 and 78 this is a margin, a secure margin at this point, of doing business, of producing oil in Colorado from shale. Older studies have always said that, again, using the 1970s scenario, that you would have to go on top of the ground and you would have enormous problems, as I said, in reclamation. And water use in the older studies was three barrels, as I said, of water to one. No water.

How does Shell do this? The visualization is simple, that Shell is going to put down, underground, into this shale formation, wire borehole heaters, electrical heaters. The heaters will take and move up to around 600 to 800 Fahrenheit. The radiant heat will then do what nature did not do, as it happened for organic matter, which made petroleum, conventional. It will heat and combustion will form. And then the second part will be production injection and getting, by pressure, getting the liquid to the surface. And that is the process Shell envisions in Colorado. The good news, which, again, there's silence except bloggers. I read the bloggers and they, many of them, have discovered shale. If you can see what they're saying, many of the bloggers out in the West nightly have a debate about this. But anyway, what you see here is a potential for an environmentally friendly extraction of shale for the first time. No service problems, nothing on the surface, an underground refinery. And that is a change not available in 1980-81. But it has to be done by way of creating, from Shell's perception, under today's social and environmental standards, protection of water. So Shell is developing a unique technology of an ice wall around the action of heating the shale. And the ice wall that they're going to put up, and they're doing it experimentally now, is simply to contain liquids from going into groundwater and to protect the thermal process so that water doesn't get into the heating process. It's simple. But step-by-step they're moving along that technology.

Los Alamos joined the shale development technology just three months ago and signed an agreement with Chevron. And Chevron is going to use another unique technology not available. Chevron is going to approach the rock itself underneath, rubblize it by explosive. And then, of course, flush it out with a critical liquid which is CO2. In both cases CO2 is utilized. Chevron, CO2, the gas that creates the climate change and greenhouse gas, in the Shell case, is reinjected. The bottom line here is that the approach to shale extraction, converting it into oil in the United States, will be a technology that will contain carbon. There will be a carbon footprint that will be established to diminish the carbon emission from the process of production by way of sequestering carbon, storing it underground, putting it into aquifers, saline aquifers and so forth. So there is no claim now that the conflict between shale oil and the environmental or the climate change crisis will have a problem. But nothing will move forward without the carbon footprint that's integrated in the technology of recovery.

Now the resource, again I go back, is in the trillions of barrels of oil. And if you compare, let's look at Saudi Arabia. Saudi Arabia's official reserves are about 289 billion barrels. The New York Times recently said, lastly week, that it had discovered what is called essentially unconventional fuel, which is the topic today. And they were looking at how to get more oil out of existing fields. And the Saudi response to that was we too can do that. We can potentially double our reserves with great investment. We are, the United States, is the leader by the way in what is called ERO, enhanced oil recovery, injection of water, steam, and so forth to get more out of a field that is now mature and declining because of the pressure in the field. The Saudi upgrade of their own, it will take billions to do it, is still one half of the size of Rhode Island positioned in Colorado. We're talking still about 1.2, 3 trillion barrels of oil. The Rocky Mountains are the Saudi Arabia of oil shale.

The United States has 75 percent of the world resource, which is about 1.8 trillion barrels. Brazil is next and it's an interesting follow-up. As the size of the resource grows you can see the geopolitical configuration also. China comes into this very quickly. China has announced incentives, government incentives for shale development in the last six weeks. We are silent, again, on section 369. China has said that it will develop production incentives for shale and move that way. And then you have a whole series of interesting companies in the Middle East without oil.

Morocco, Israel, and Jordan are the next shale reserve holders in the world. So it's a configuration of potential shale producers that might have an international organization, an OPEC of shale one day, a sharing of the technology and whatever. And I should add, Estonia, which has been doing this first under the Soviet Union and continues to derive much of their energy from shale. Where are we with regard to the market today and investment and so forth? The price of oil will continue as the uncertain variable. And that's why the recommendations are still to look at shale with market risk reduction. Secondly, the permitting process, much liberated from 1920 to 2005 in terms of the size of a shale. Shale was once seen in the United States as so valuable that the anti-monopoly issues in the government dominated shale. The government decided at one point that it wanted competition in shale and limited the acreage to 5000 acres per company. We changed that in 2005 to 25,000, in other words, in five different locations. But if you look at the acreage per resource, one million barrels of oil, from oil shale, per acre, there you get the idea of what acreage does. And do you can do your computation, the Bureau of Mines has given three leases, 160 acres, these are R&D leases. So we're talking about underneath an R&D lease, so roughly around 250, 300 million barrels.

How long can shale last? Shale can last for 200, in other words, there's enough shale to sustain the United States consumption of crude oil easily through 2030; and enough there, with an import, according to what I've looked at, an import dependence of maybe 20 percent going out from 2030. One of the arguments has been foreign oil import dependence. The elements of the national security community in Washington have joined essentially, well, I would call it the alternative fuels community, the biofuels community, under the notion that we are dependent upon potentially hostile sources after 9/11 and that we could be disrupted. So the national security argument, or the energy security argument, clearly looked at foreign oil import dependency. If shale is commercialized by 2012 we can, under production Colorado alone and from two basins, eliminate dependency on Middle East oil by 2020. The President wants to do it, wants to lower it by 20 percent by 2017. Shale production will eliminate it altogether. And that dependence is roughly, well, look at it, 2.3 billion, million barrels a day. The projection is that when it is commercialized, when the decision is taken by the companies I've named, then the ramp up will occur and with everything favorable, that is world price, we would be at 2 million barrels a day and that would be the objective of the Department of Energy in the shale process, at 2 million barrels a day. And currently we're getting 2.2 million barrels a day from the entire Middle East, 19 percent that's all. Our major sources of imports are Canada and Mexico, North America. And this adds to a North American energy domestic source, which minimizes and reduces foreign oil dependency with GDP benefits to the American people and price benefits.

Some of the projections are that when shale is commercialized in the next three to five years the price of crude will drop at least five dollars a barrel. That's conservative, but that depends on supply and demand worldwide and the economies of the world worldwide. At this point I want to just introduce a little New Mexican story and that is there's been a great deal of excitement about biofuels. And as you know in Mexico and New Mexico and Arizona the prime base for a staple tortilla is white corn and because of the biofuels interest investment, US farmers are beginning to turn their crops from food to fuel. And white corn has almost disappeared from the market, even though Mexico has a NAFTA quota of 460,000 tons a year, Mexico is not getting it. So the price of tortilla corn in Mexico has had demonstrations in the street and has caused the low income families difficulties in buying daily bread. I introduce that in contrast to the notion that we have a resource that has no impact whatsoever, zero, on food supply at all. I'll just conclude with a point about the history of this as well. When you leave here the question is why is there silence today in this administration on shale? There is a strategic task force that for two years has been meeting with five governors and they have recommendations. There are two major companies and a third, EGR, with leases moving through R&D very rapidly.

A week ago Shell had community discussions to bring in 600 employees into the shale area. And in the Rocky Mountain slopes that is big news. That's jobs and so forth. The perception is that something is going to happen and something rather big. But there is a gap between the technology, the availability of the resource, the commercialization that's coming and Washington policy. And I hope this afternoon I've made a couple of points. And the last one is this, probably the most effective signal, apart from releasing this report, is that the President's proposal in the State of the Union, you'll recall, was to add 750 million barrels of oil to the Strategic Petroleum Reserve by the year 2020.

I would propose a long-term contract with the shale oil producers mentioned today and others that all of the production from 2013 in shale oil, from Colorado and the Rocky Mountains, to 2020 be dedicated to the SPR. Under existing law the SPR, again, the EPAC of '05 can enter into a long-term purchase agreement and buy, for the SPR, oil. And that would be an internal oil supply. It would not be the SPR going to the world market. It would not be imported oil. And it would be a powerful incentive for the oil shale industry. It would itself reduce market risk to a phenomenally low level in this respect. And it would put the US government in the forefront. The defense agency, DOD, would be the buyer along with the SPR. And you would have an astonishing, quick, rapid commercialization result with that. So if the intention is to add to the Strategic Petroleum Reserve, add to it, buy into strategic unconventional fuel produced in the United States, domestic. And that is the initial stimulus needed for the long-term development.

There are some who say that that 1.3 trillion barrels, under market and good positive circumstances, could eventually be ramped up to 10 billion barrels a day. Now that is the far-off, highest scenario I've seen with a resource like that. At 10 million barrels a day we are moving back toward the 1960s, close to a position where our import dependence on petroleum is becoming marginal. Using that number, and I say that's a remote number, far-off, but it is absolutely doable under the resource that exists and the technology. That would give us the following composition; we would be 80 percent North American at that point. With Mexico, Canada, Colorado, the oil shale and conventional Texas, Alaska all factored in and maybe 20 percent oil dependent, reducing it from 67 to 70 percent oil import dependent to that. And then there's more. But I want to stop here and I know there are some questions and thanks for your attention.

Questioner: OK, because I want to kind of tell the people in my company about this because with our company going through problems and airline problems, this builds security for our airline industry.

Daniel Fine: Well, the airline industry, as I said, has been watching this, at least the Air Force and the DOD, quite clearly. And they're looking at alternative fuels. One is the potential of oil shale. All the work has been done. The J-8 fuel is not only substitutable, but it's better than petroleum and that was established in the '70s as well. And the Air Force was having a symposium, I guess last week, on alternative fuels. They're looking at everything. There's another alternative or an unconventional fuel called coal to liquids, but I'm not addressing that one, but that's a potential as well.

Ed Borchard: Dr. Fine, I'm Ed Borchard, Borchard and Company. I'm currently working in Alberta with the Canadians on the water problem. The water problem is one of the biggest problems because it takes anywhere from 2 gallons to 4 gallons to produce 1 gallon of petroleum and it has a terrible effect on the natural environment., and many problems are coming from that. Do you have any comments on that particular problem?

Daniel Fine: That is quite true. The retort that I talked about, building your processing and wetting the shale, that was where the water went, was about three to one. This is also cited in the RAND report which was mildly negative on oil shale, but it is a dimension of the problem that existed in 1979. The two processes that I've mentioned, the injection of a supercritical fluid which flushes the kerogen out of the rock and so on is CO2 and that's recycled. That becomes the problem today, the carbon footprint, how to get that manageable. Neither the Chevron nor the Shell process is going to be water intensive and they have to be sensitive to the Colorado River basin because that is the source of the water and they have to share the water under 21st-century standards. So I believe that the water problem is less under technology change than it was. I think you can follow that. What has changed is the fact that you've got a carbon based material and you have to capture the carbon, the CO2, use it, inject it, store it. And that's what's going forward under the BLM leases today. So there's no surprise that the carbon footprint is integrated in shale development. It's not hostile to it.

Kurt Couchman: I'm Kurt Couchman with Sunoco. If you look at a map of where the pipelines that run crude in the US are and where the refineries in the U.S. are, middle American refineries, that is Ohio and Texas, Oklahoma, the middle part of the country has access to crude through pipelines running pretty much from anywhere to anywhere. If you look at the coasts, California and the East Coast, in particular the Philadelphia region, they don't have crude pipelines that run to them. And so even if this oil shale is developed to the point where it's commercial or when it's developed to the point where it's very commercially available, getting it to a significant portion of domestic refining capacity is going to be a bit of a problem. Are there any policies that you would recommend to change the current ability to cite crude pipelines, to overcome state and local opposition, which currently handle the regulations?

Daniel Fine: There are current pipelines in the Peance Basin of Rio Blanco County running to Salt Lake. Salt Lake is pipeline connected. The infrastructure was put in place and refining and upgrading, again, in Salt Lake. It has a regional component. But I would not, what I would do is look at a very interesting development. The Canadians faced a pipeline problem as well and a refining problem with their tar sands in Alberta. So a leading Canadian company and ConocoPhillips decided to reinvest or invest in each other. ConocoPhillips will make its refineries in the lower 48 available to tar sands product, bitumen, coming through. That's the twin of kerogen coming out of the tar sands. So the tar sands from Alberta will go to two or three US, mid-US refineries. This is the adaptability on the refinery issue to get both tar sands and oil shale market, to refining and get it into the system as well. It has not arisen. It has not become a problem in terms of the development. The obstruction to development is not transportation at this point. Perhaps in Utah there is somewhat. Utah has some tar sands and shale and they will have to connect Utah into the pipeline infrastructure, but it might be a little different. Utah has about 12 billion barrels of oil shale against the Colorado. And Wyoming is another player in that as well. I should say, before we go, that if you want a measurement and you're asked about this, per ton of rock, in Colorado, 35 gallons of oil roughly. And then it declines in Wyoming to 20 and 25 gallons, so Wyoming is less economic than Colorado and so on. So visualize a ton of rock, because this is unorthodox in terms of petroleum, and what the rock will yield in terms of gallons. And it is economic at 25 for one ton. That is now economic at $20 to $25 cost and so on. And you all know the geopolitical issues, I don't want to enumerate. The world, with perspective on one, the declining space for private shareholder held American or non-American companies in a world where the national oil companies are changing contracts, expropriating Caracas, Venezuela, and diminishing the exploration space in the world for the same companies who are in Colorado, Shell, Chevron, and so forth. And the geopolitical risk out there and so forth. This is a call, it's an anomaly. It becomes almost an irrational resource question. Why is a resource that way, in the United States, not developed? And why is there so much silence around it and so forth?

Questioner: What would you say is your answer to that question? Why, in your opinion, is there so much silence and is this resource so underdeveloped?

Daniel Fine: What's the reason for this?

Questioner: Exactly.

Daniel Fine: Well, the reason for this is historic in a way, uncertainty over price. And that's why I said the SPR, the Strategic Petroleum Reserve, goes first. If the President declared we're going to buy the oil, then where do you buy it? You can stimulate the industry that way. And the second is the episodic way shale is handled. In other words, when the Heritage Foundation said, "What's the best way to present the lecture?" I said, "Back to the future." Because every geologist that went to school at Colorado School of Mines and got his degree, the professor of geology put on a pyramid. And the pyramid was, if you had studied geology from the 20s on, was at the top was your conventional oil, petroleum from Texas. And as you got to the base of the pyramid was the hard to get stuff. Shale was almost at the bottom, and underneath shale was gas hydrates, which is even more difficult to get. But the professor would say to these students who were petroleum engineers, "One day we're going to get it, maybe in the next century." And there were forecasts that the pyramid would open up as price and technology developed. This was in the American perspective from 1913 on. And my point is, is that the expectation that that cycle, the hydrocarbon cycle, was in place during this current crisis and has been essentially put off to the side by a combination of public, media, whatever issues. Some of them I alluded to today, and, of course, by climate change.

The issue on climate change is simple. The Congress debates it for 18 months, and I watched all the debates from one side and the other. And I was very confused because the debate took place, within five minutes a speaker from one faction or the other would say, "We've got to reduce our dependence on foreign oil." The next speaker would say, "Oil, now do we mean dependence on foreign oil or imported oil? Or do we mean dependence on oil itself?" And if you look at it that way there are two camps, oil itself is available. It's abundant, 3.7 trillion barrels in unconventional oil in the world. We're halfway through the conventional. There may be a peaking out. You've heard the peak oil thesis, but the peaking out means that your discovering level is lower than it has been. You're not replacing as much as you did in conventional oil only. But when you peak at oil, it simply means that the old pyramid comes into play. You move down the pyramid and the peak is never reached. You're on a plateau and then you're into unconventional hydrocarbon oils. Now those who say the issue is oil itself make themselves very clear. They want to move away from oil, all forms of carbon. They want a carbon free world and that is their position, but let's not confuse import dependency with that issue. Imported oil is not similar. It does not equate with oil itself. Two different ways of looking at the same debate.

Bob Hershey: I'm Bob Hershey. I'm a consulting engineer. What do we have to learn from the oil shale experience of Estonia, they've been doing it for several years?

Daniel Fine: From the oil shale ...

Bob Hershey: Of Estonia. You mentioned ...

Daniel Fine: Yes, yes. The Estonians, remarkable. Estonia has derived and continues to develop oil shale for electrical power. It burns the shale. It can make a fuel as well. We're talking fuel today, but shale is around for production into utility, in other words, electric power, burning it. And Estonia is a world leader in that respect. Estonia has just entered into an agreement with Jordan to develop Jordanian oil shale and so on. That's why I introduced the question of signing an agreement with Brazil, getting President Bush alerted to two agreements, one for sugar, one for shale. And then taking out, under existing law, technology sharing and agreements in co-development in Brazil. But we have much to learn from Estonia and the tar sands issues and so on, there are many co-products. One co-product by the way from Colorado shale is Trona, soda ash, its enormous, which was called Nickelite and the mineral byproduct, very valuable in terms of fertilizer and so forth, is an enormous co-product. It was interesting that the Bureau of land Management looked at the Exxon application. Exxon wanted a lease and Exxon did not put down its data, did not surrender data or interest in the co-product and they didn't get the lease. So there's a valuable co-product, soda ash, in it, Nickelite, that you can get out of shale.

Richard Ranger: My name is Richard Ranger. I'm with API. How do you respond to the contention that the main reason that shale has not been developed has been because of economics, because of price, because of the cyclicality of crude oil prices, which at a couple of points perhaps reached levels where shale, a couple of points where companies were induced to invest in shale technologies as they then understood them, and then backed away, given downward price cycles? I think part of the response is your proposal to purchase shale oil production or kerogen production, as you outlined in your talk. But it seems like you're describing the history in a more complicated manner. If this had been economic to produce it would have been produced.

Daniel Fine: Well, you introduce the whole history really in the question. In the 1960s Stewart Udall called for shale leases. There was no interest from industry. The American industry was not interested at that point because crude oil per barrel was three dollars. And so the industry itself, looking at its assets and its opportunities on a world scale by the 1960s, had to compare its rate of return to shale. And a cycle of price. Why did shale fail in 1982? Why did Exxon close down its operation in Colorado? The slope of supply, the Saudi output, up till, through the 80s, again, took the price down where it was not economic against other opportunities. Now, what's interesting about that, you know, was what is economic in shale then and what is today? In other words, there are some studies still around and they collect sometimes on the Internet, you know, people will quote them. These studies are dated in '73, '72 latest, which say that shale needs $70 a barrel. But in testimony in the House Resource Committee in 2005 Shell said, "No, we see, in 2005, $20 to $25, economic for us to continue." So we're in a period when the industry has to essentially project and take some risks. What's the risk of price? How do you evaluate forward prices against risk at this point? The shale story that I see, in all cases that I presented today, will return industry a minimum of 15 percent return on investment, ROI. That will be indeed possible at prices we'll say over $40. And if you see oil going down to $40, and some analysts do, you're there. One of the things that the shale oil industry will look at will be a floor price as well to essentially address the problem of 90 some years of price volatility. And that will be interesting to see. But I think, at this point, the consensus is that oil has reached a plateau, the price of oil, as you begin to look forward, are we going to go back to the days of essentially $20 oil? If you see that then you don't invest in shale. But if you see oil at 40 plus, I think the industry has a real candidate. Well, thank you again.

John Hilboldt: Thank you all for coming.

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