RAND Study Says High World Oil Prices and Technological Developments Could Make Shale-Derived Oil Competitive

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August 31, 2005

Oil shale from the Western United States could become the source of millions of barrels of competitively priced oil each day in 20 to 30 years if technological, environmental and governance issues are resolved, according to a RAND Corporation study issued today.

As a result of rising world petroleum prices and advances in extraction techniques, oil shale deposits that are now difficult to extract could be recoverable in the future at costs that would make them a major provider of U.S. energy needs and an attractive alternative to conventional crude oil, the study found.

However, the study says many uncertainties about technology performance and environmental impacts will not be fully resolved until the initial round of large-scale commercial oil shale facilities are constructed and operated. Given this, the report recommends that if oil shale is commercially produced, development should proceed at a measured pace.

Since the future prospects for oil shale remain uncertain, the RAND report recommends that the federal government refrain from major investments in oil shale development until the private sector is prepared to commit its technical, management and financial resources. However, the report recommends a few low-cost efforts that can begin in the near future to move oil shale development forward.

The report by the RAND Environment, Energy and Economic Development program says that between 500 billion and 1.1 trillion barrels of oil are technically recoverable from high-grade oil shale deposits located in the Green River geological formation, covering parts of Colorado, Utah and Wyoming.

The mid-point of the RAND estimate – 800 billion barrels – is three times the size of Saudi Arabia's oil reserves. This is enough oil to meet 25 percent of America's current oil demand for the next 400 years.

The benefits of a competitive oil shale industry are substantial. For an output of 3 million barrels per day, the study estimates direct economic benefits of about $20 billion per year. Federal, state and local governments would receive about half of this amount in the form of lease payments, royalties and taxes.

Production at 3 million barrels per day also could likely cause oil prices to fall by 3 to 5 percent, saving American oil consumers roughly $15 billion to $20 billion annually, according to the report. A multimillion-barrel per day oil shale industry could also create several hundred thousand jobs in the United States.

Oil shale is a sedimentary rock containing petroleum-like solids. These solids are released when the rock is heated – a process called retorting. For about a century, Western oil shale deposits have been touted as an alternative source for conventional crude oil, but production costs have persistently remained above conventional oil prices.

The study is titled “Oil Shale Development in the United States: Prospects and Policy Issues.” It indicates that oil production based on older oil shale mining and processing technologies would not be profitable unless crude oil prices consistently stay above at least $70 to $95 per barrel. The price of crude oil jumped past $70 per barrel Aug. 29 in response to Hurricane Katrina. In addition, significant adverse environmental impacts are associated with oil shale mining, above ground processing and disposing of spent shale.

“In the past 25 years there have been significant technical advances in mining, materials processing, and controlling environmental damage,” said James Bartis, senior policy researcher at RAND and the report's lead author. “That may be good news for oil shale, but we don't yet know how these technical gains translate into lower costs or whether they significantly reduce adverse environmental impacts.”

Another technical development that has been taking place involves heating the oil shale while it is still in the ground – a process called in-situ conversion. Mining is not required. Instead, electric heating elements are placed in bore holes, slowly heating the shale oil deposit. The released liquids are gathered in wells specifically designed for that purpose.

In contrast to surface mining, in-situ conversion does not permanently modify land surface topography and may be significantly less damaging to the environment. Small field tests conducted by Shell Oil involving an in-situ approach appear promising. While larger scale tests are needed, Shell anticipates that this method may be competitive with crude oil priced below $30 per barrel. RAND has not developed an independent estimate of the price level needed to make in-situ conversion competitive.

On the environmental side, adverse land and ecological impacts will accompany oil shale development no matter which approach is used. Oil shale production will also result in airborne and greenhouse gas emissions that could severely limit oil production levels.

Because the entire Green River formation lies in the Colorado River drainage basin, water quality is an important issue. At present, not enough is known about how to prevent water contamination from surface and in-situ operations.

More than 80 percent of high-grade oil shale resources lie under federal lands within a concentrated geographic area. The key governance issue is the approach that the Department of the Interior will use to allow access to these federal lands.

“Because oil shale resources are so geographically concentrated, leasing has to balance environmental and land-use impacts with development opportunities,” Bartis said. “Otherwise, early oil shale developers might overstress the environmental carrying capacity of the area, and we will never see more than a few hundred thousand barrels per day of production.”

  • The RAND report recommends that the U.S. government take the following low-cost steps to advance oil shale development, even before the long-term future of oil shale is determined:
  • Add oil shale to the Department of Energy's research and development portfolio.
  • Establish a national oil shale archive to hold and preserve information on oil shale resources, technologies and impacts of development.
  • Analyze lease program implementation options, such as combining adjacent lease tracts and fostering extensive resource recovery in lease tracts.

When private firms are willing to invest in oil shale development without appreciable government subsidy, government decision-makers should address core environmental, leasing policy and oil shale development issues, according to the study. The report recommends that the federal government should then:

  • Develop and implement a research plan to establish options for mitigating ecological damage.
  • Conduct research aimed at mathematically modeling the subsurface environment, along with long-term hydrological, geochemical and geophysical monitoring programs.
  • Conduct research aimed at establishing and analyzing options for long-term spent shale disposal.
  • Model regional air quality to determine preferred locations for federal leasing and to inform decisions on air quality permits for initial plants.
  • Develop a federal oil shale leasing strategy for the Green River Formation.

Since oil shale development could profoundly affect local residents and other stakeholders, the report also suggests the creation of a regionally based organization dedicated to planning, oversight and advice, and public participation.

The other authors of the report are Tom LaTourrette, Lloyd Dixon, D.J. Peterson, and Gary Cecchine, all of RAND. The study was sponsored by the National Energy Technology Laboratory of the U.S. Department of Energy.

RAND Environment, Energy and Economic Development research addresses environmental quality and regulation, energy resources and systems, water resources and systems, climate, natural hazards and disasters, and economic development in the United States and internationally. The program conducts research for public and private sector clients.

Printed copies of “Oil Shale Development in the United States: Prospects and Policy Issues,” (ISBN: 0-8330-3848-6) can be ordered from RAND's Distribution Services (order@rand.org or call toll-free in the United States 1-877-584-8642).

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