Setback for Synfuel

By John S. DeMott

Exxon shuts down its shale project

Just three years ago, the plan to develop synthetic fuels was to be another Manhattan Project, a dramatic, accelerated national effort to meet energy needs from American resources and help make the U.S. less dependent on foreign crude. Its cost: up to $88 billion, 44 times the World War II effort to build an atomic bomb.

Last week the U.S. synthetic-fuels program suffered its sharpest blow, one that could prove to be a major setback for large-scale attempts to develop energy alternatives to conventionally obtained oil. Exxon, the world's largest energy company, and the Tosco Corp. pulled out of their multibillion-dollar Colony Shale Oil Project in Colorado, effectively abandoning the most ambitious U.S. synthetic-fuel project.

With $400 million already spent in building a plant, Colony was going to be the most serious attempt ever made in the decades-old dream of wresting energy from northwestern Colorado's rugged Piceance Basin, which contains possibly 1.2 trillion bbl. of oil. The fuel is trapped in a form of limestone that geologists call marl, which is commonly known as shale. Colony's 8,800 acres alone are estimated to contain at least 500 million bbl. of oil, a month-long supply for the entire U.S. at the current levels of consumption. The project's facilities include a huge retort for cooking a compound called kerogen, contained in shale, and extracting oil from it. Authorities projected that by the late 1980s, Colony could be producing about 45,000 bbl. of oil from shale daily.

The grand dreams of Colony were done in by the high costs of the new technology and the prospect of flat, or perhaps even declining, world oil prices. When Exxon joined Tosco in the Colony project in 1980, it estimated that $2 billion to $3 billion would be spent. The latest estimates, which were presented to Exxon's directors in April, ran to a budget-bursting $6 billion.

Two years ago, when the oil giant was deciding to get into the Colony development, oil was shooting toward $40 per bbl. and experts were predicting $50 oil by the mid-'80s. What has happened, of course, is that the price of crude has declined an average of $3 per bbl. during the past year. The shale-oil development that made sense economically with $50-per-bbl. oil was not a good business proposition in a world of $33 petroleum.

Exxon's long-term forecasts still anticipate an increase in oil prices, but not as rapid as previously expected. R.P. Larkins, the manager of Exxon U.S.A.'s synthetic-fuels department, said that shale oil is simply too expensive now and that "nothing over the long term would offset our costs." Adds John Lichtblau, president of the Petroleum Industry Research Foundation: "The fact is that from a market point of view, most synfuel projects are not economically viable."

Randall Meyer, president of the U.S. subsidiary of Exxon, met two weeks ago with Tosco President Morton M. Winston in Los Angeles and told him that Exxon was withdrawing its funding of the project. Tosco exercised its option to sell Exxon its 40% share in Colony. Tosco, with various partners, has been trying to develop shale oil in Colorado for almost 30 years. Along the way, it has become the second largest refiner of gasoline in the U.S., behind Ashland.

Tosco, though, was not big enough to carry the Colony project by itself. Its net worth is only $259 million, and it was hoping that revenues from oil shale would be large enough to make its investment in time, money and faith pay off. Winston, of course, thinks that Exxon acted too hastily. Says he: "Tosco believes that the project would be found satisfactory if full engineering and other assessment work were completed."

Dissident Tosco shareholders, however, have been threatening to force the company to abandon Colony because of unbearable costs. Led by Kenneth M. Good, 37, a Colorado land developer and owner of 8.8% of Tosco's outstanding shares, those stockholders last week were making plans to put their own directors on Tosco's board at the Tosco annual meeting, to be held this week; later they hope to remove Winston from office. Says Good: "Tosco is a company with tremendous assets that are being mismanaged."

Exxon's departure left Union Oil with the largest stake in shale oil in the U.S. That company has a project not far from Colony's retort, where 1,700 workers are now employed. Union President Fred Hartley vowed to press ahead, calling Exxon's decision "irrelevant" to Union's plans. Says he: "We've always felt ours was the only project really going on. The others were simply going through the motions." The company plans to have up to 700 more workers at the shale works by June. In 15 months, its plant should begin producing 10,000 bbl. daily, and the bullish Hartley sees no reason why that could not be expanded at some point to 100,000 bbl.

The Department of Defense is already committed to buying much of the product refined from the Union Oil output. Thirty percent of Union's shale-oil production will be refined into jet fuel, and 70% will be made into diesel. The Government has agreed to pay $42.50 per bbl. of the product, plus automatic increases that will be tied to inflation, no matter what happens to world crude oil prices. This would channel up to $400 million to Union in price guarantees during the first seven years of the contract, not far from the $550 million it will have spent on the project.

Aside from Union's efforts, the only other major synthetic-fuels project in the U.S. is the partially completed $2.1 billion Great Plains Coal Gasification Project near Beulah, N. Dak. The plant is scheduled to produce 125 million cu. ft. of high-quality natural gas daily, from 14,000 tons of coal, by December 1984.

Even before the Exxon decision, the Federal Government was already getting out of the synfuel business. The Synthetic Fuels Corporation, the agency proposed by the Carter Administration to make federally guaranteed loans for synfuel projects, is off to a slow start. The Reagan Administration's market-oriented philosophy does not foresee a major Government role in synthetic energy production. A large part of the $17.5 billion allotted by Congress for shale under Carter has not been spent. Another $68 billion, envisioned in the original program as being spent on synfuels in a second phase in 1985, probably will not be appropriated at all.

As of March 31, 1981, there were 63 applications from a range of sponsors including energy companies, municipalities and utilities for federal support of synfuels projects, but the Administration whittled them back to only five. They are two coal-liquefication plants in Kentucky and Wyoming, a methanol conversion plant in North Carolina, a coal-gasification facility in Memphis and a heavy-oil upgrading project in California.

Edward Noble, chairman of the Synthetic Fuels Corporation, defends the less ambitious Government role by saying that he "is not interested in just throwing a lot of money out there." He says that the Reagan Administration's goal is to "develop an infrastructure, even if it's just with a few plants."

Oil shale and other synfuel development may be sliding into a long twilight. This has happened several times in the past. Said a Department of Energy Official: "We've been witnessing the birth of this industry for 100 years." In the 1920s, oil was in short supply and there was great talk about shale development. Then the East Texas oil fields were discovered, and shale was forgotten. For now, Colorado shale rock is likely to remain in them thar hills. --By John S. DeMott. Reported by Robert T. Grieves/New York, Richard Woodbury/Parachute

With reporting by Robert T. Grieves/New York, Richard Woodbury/Parachute

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