Shell pulls out of oil shale project, leaving one big operator behind

Shell is abandoning its decade-long quest to commercially extract shale oil from Colorado, leaving just one major company betting big on the future of that unconventional crude in America.

Shell Oil Co. late Tuesday confirmed it was giving up its Mahogany project in Colorado after investing tens of millions of dollars and 31 years on the endeavor, to focus on other opportunities and producing assets. Chevron Corp., made a similar decision in February 2012, when it said it would abandon its own federal oil shale lease in Colorado’s Piceance Basin.

The moves come against the backdrop of a surge in recoverable oil reserves that are easier to extract from dense rock formations in North Dakota, Texas and other states using horizontal drilling and hydraulic fracturing. By contrast, oil shale has defied decades of industry efforts to find a commercially viable way to distill crude from the oily fine-grained sedimentary rock found primarily on federal land in Colorado, Utah and Wyoming.

“The energy market has evolved since we first started this research in 1981,” said Shell spokeswoman Kelly op de Weegh, noting the company’s pursuit of liquids-rich shale opportunities and its long-term interests in natural gas, including potential plans to build a $12.5 billion plant in Louisiana to transform natural gas into transportation fuels.

“Shell has a large portfolio of opportunities, and each one competes for capital,” she added. “Managing the portfolio means decisions will be taken to ensure the right balance of both near-term and long-term opportunities.”

Now, the biggest company with hopes of developing a federal oil shale lease is Irving, Texas-based Exxon Mobil, which purchased a 10-year, 160-acre research, development and demonstration lease in Rio Blanco County, Colo., last year. Natural Soda Holdings Inc. holds a similar RD&D lease in the region. And American Shale Oil Corp., a joint venture of France’s Total and Newark, N.J.-based Genie Energy, started pilot tests on its 160-acre lease in the Piceance Basin.

The government estimates there are 2 trillion barrels of oil equivalent locked in shale rock, with federal land making up 72 percent of that oil shale acreage. Former President George W. Bush’s Interior Department opened roughly 2 million acres of land in Colorado, Utah and Wyoming to commercial oil shale leasing, while also approving regulations setting royalty rates for eventual production that critics blasted as too low.

But the Obama administration changed course, tossing out those Bush-era contracts and creating new rules for oil shale leases. In February, former Interior Secretary Ken Salazar signed a document limiting the research and development projects to 678,000 acres of federal land.

The recent decisions have drawn complaints from the oil industry and attention from some western state lawmakers, who said the U.S. was creating obstacles to a potential new energy source. Republican lawmakers convened a field hearing in Colorado in August 2011 to explore the “roadblocks.”

But while some parts of Washington, D.C. were focused on western oil shale, drilling was beginning to boom in other parts of the U.S., as companies began combining hydraulic fracturing and horizontal drilling to yank oil and gas from tight rock formations.

“As a matter of basic economics, oil shale does not make the cut,” said David Abelson, oil shale policy adviser at Western Resource Advocates, a group that opposes the development. “The technology isn’t there. And there are other opportunities.”

Fundamentally, energy companies are up against a geological problem as well as an economic one, he noted: Government incentives haven’t been able “to overcome the basic thermodynamics and economics of oil shale.”

The government has been integrally involved in oil shale before. In 1980, for instance, Congress created a corporation — backed by tens of billions in subsidies — with the goal of exploiting oil shale rock.

Ross Lane, director of the Western Values Project, said its time for lawmakers to stop “pretending that oil shale makes any economic sense.”

“Taxpayers have underwritten projects like these for nearly 100 years,” he said. “It’s time to spend our limited resources elsewhere.”

Also on FuelFix:

How fracking transforms fortunes, land