Bloomberg News

Rock-Heating for Oil Pits Shell Against Environmentalists

February 27, 2012

A proposal to tap the world’s largest oil-shale deposits in the western U.S. by heating rocks until petroleum sweats out has become the latest election-year conflict over energy policy.

Companies including Chevron Corp. (CVX), Royal Dutch Shell Plc (RDS/A), an Estonia utility called Eesti Energia AS, and a joint venture of Genie Energy Ltd. and France’s Total SA (FP), are seeking to tap into as much as 4.29 trillion barrels of oil. Much of it is on lands controlled by the federal government in Colorado, Wyoming and Utah.

“We’re not asking for any special treatment,” Rikki Hrenko, chief executive officer of Eesti Energia’s U.S. unit, Enefit American Oil, said in an interview. “We’re asking to be able to proceed as any other industrial development would.”

The U.S. Bureau of Land Management this month proposed reducing access for research and development of oil shale in the region by three quarters, to 461,965 acres, to protect water supplies. That prompted the Republican-led House on Feb. 16 to pass legislation that would require the agency to conduct at least five commercial lease sales in the oil-shale region by the end of 2015.

Senator Orrin Hatch, a Utah Republican, offered similar language as an amendment to the Senate transportation bill on Feb. 17.

Prices Rise

The dispute joins a growing number of conflicts centered on energy policy as the price of oil and gasoline have both risen and become issues in the presidential campaign. President Barack Obama last month rejected an application to build a pipeline connecting Canadian oil sands with refineries on the U.S. Gulf Coast, which prompted efforts in Congress to override the decision.

The administration says it wants to ensure oil-shale production, like fracking for natural gas, poses limited risk to water resources.

“Because there are still many unanswered questions about the technology, water use, and impacts of potential commercial- scale oil shale development, we are proposing a prudent and orderly approach,” Bob Abbey, the director of the Bureau of Land Management, said in an e-mail on Feb. 24. “If oil shale is to be viable on a commercial scale, we must take a common-sense approach that encourages research and development first.”

Oil Rally

Republicans are pushing higher production to help lower gasoline prices, create jobs and add revenue to the U.S. Treasury from royalties.

A rally in oil and gasoline prices may boost oil-shale producers. Eesti Energia said its oil production in Estonia is profitable when oil trades at $60 a barrel, and would be “a little higher” in the U.S. Crude averaged $96.77 on the New York Mercantile Exchange in the past 12 months.

The average price for regular gasoline, at a record for this time of the year, spurred Obama to reiterate support for all energy sources, including oil, natural gas, solar, wind and biofuels.

Eesti Energia, which hired Washington-based lobbying firm Allen D. Freemyer Esq PC after buying leases in Utah in 2011, increased spending on lobbying about 50 percent to $30,000 in the fourth quarter, according to Senate records.

Oil shale doesn’t contain oil but kerogen -- a low-energy solid that must be heated before it turns into oil and bleeds from the rock.

Estonian Electricity

Eesti Energia, a state-owned company in Estonia, developed technology that heats rock to about 900 degrees Fahrenheit (480 degrees Celsius), or almost five times the boiling point of water, to extract the oil. The Tallinn-based power-plant owner provides the Baltic nation with most of its electricity by crushing and heating oil shale to generate power.

Eesti Energia, which holds federal leases, plans to start producing 25,000 barrels a day in 2020 using leases with private landowners in Utah. The company will mine the rock, crush it and then extract oil using high heat. The Estonian company’s investment may reach $5 billion, Hrenko said.

American Shale Oil LLC is a venture of Genie Energy and Total. It plans a pilot program this year on 150 acres of leased federal lands, spending as much as $25 million over two or three years in a region that may contain 10 billion barrels of oil, according to William Ulrey, a Newark, New Jersey, spokesman for the project. The extraction technique, which heats the rock while still in the ground, may be at commercial production rates in five years at earliest, he said.

Production may reach about 100,000 barrels a day during commercial operations, according to a Web-based presentation.

Deterring Investment

The Bureau of Land Management’s reduction of acreage available for research and development is hurting further expansion, because the industry still needs a lot of testing to reduce the environmental impact of the production, Ulrey said.

“These changes deter needed investment in oil-shale technologies, and ultimately undermine the effort to gain American energy independence,” he said.

As the production plans are so far into the future, the Natural Resources Defense Council called it a “nonexistent industry” with a “19th century technology.”

“Oil shale seems to be a really bad bet for the energy future,” Bobby McEnaney, a council land-policy analyst, said in an interview. “ We already know that other energy sources out there are cheaper, quicker and viable, such as wind.”

The bill passed by the House is H.R. 3408.

To contact the reporter on this story: Katarzyna Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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