Asleep at the Switch

By Donald L. Barlett and James B. Steele

What does a real synfuel operation look like, the kind that can change a country's energy fortunes? The answer can be found 700 miles north of Montana near a onetime frontier outpost in Alberta called Fort McMurray. At Syncrude Canada's North Mine, a huge open pit nearly two miles across and 250 ft. deep, giant shovels scoop out a petroleum-soaked deposit called oil sand that is beginning a long journey from here into the gas tanks of American cars. The region contains enough of the crude mixture to produce an estimated 175 billion bbl. of oil, eight times the known deposits of conventional crude in the U.S.

Everything here is done on a scale that would make Paul Bunyan feel right at home. The electric-powered shovels that mine the sands are several stories tall. Dozens of giant yellow earthmoving trucks lumber in and out of the mine carrying tons of freshly excavated sand. The largest ones weigh as much as 400 tons--more than 200 times the size of the average car. The trucks use huge tires that cost $55,000 each. The drivers sit so high above ground that one says piloting these behemoths is "like driving a two-story house from the second-floor bathroom."

The deposits can be as little as 25 ft. below the surface. After topsoil is removed, the shovels scoop the oily mix into the trucks, which transport it to hoppers for crushing. Hot water is injected to create a slurry that separates the raw oil from sand, clay and other particles. Then 2,500-h.p. pumps, the world's largest, push the viscous oil sands through pipes to a plant on-site that converts it to crude oil. From there, it goes by pipeline to refineries in the U.S. The output of the Alberta operations is expected soon to reach 1 million bbl. a day, surpassing U.S. crude production on Alaska's North Slope. The U.S. now imports more oil and petroleum products from Canada than from any other country.

Before you conclude that the moral of this story is that Canada is just lucky to have the stuff, read on. For the U.S. has vast quantities of a similar deposit called oil shale, a claylike rock soaked through with fossil fuel. In fact, at least 1 trillion bbl. of it, or four times Saudi Arabia's oil reserves, is locked up in the mountains 200 miles west of Denver. The U.S. spent billions of dollars to figure out a way to mine the stuff, then gave up and walked away. Why Canada has succeeded at creating a homemade source of alternative fuel while America has failed to tap its resources is testimony to Washington's short attention span when it comes to energy concerns.

How did the U.S. miss the opportunity? Ever since the 1920s, oil-shale pilot plants have been opening and closing in Colorado, reflecting the Federal Government's failure to develop a consistent energy policy. But in 1980, at long last, shale seemed poised for takeoff. Two traumatic Persian Gulf oil crises in the 1970s had sent oil prices zooming and had given rise to high hopes in Washington and the oil industry that shale would develop into a synthetic-fuel industry. To encourage domestic production, Congress enacted the synfuels tax credit and also created the Synthetic Fuels Corp. As envisioned by President Jimmy Carter, synfuels would "replace 2.5 million bbl. of imported oil a day by 1990." Oil companies flocked to Colorado. Those already active in the field, like Union Oil Co. of California (Unocal), redoubled their efforts to bring plants online. Unocal started construction of a mine and processing plant near Parachute, Colo., in 1980 and predicted that it would produce 50,000 bbl. of oil a day by the late 1980s. Calling the Unocal project vital to the nation's energy supplies and national security, chairman Fred L. Hartley described it as a "solid economic proposition."

The most dramatic sign that shale had finally arrived came from Exxon (now ExxonMobil), the world's largest oil company. In May 1980 Exxon bought control of the Colony Oil Shale Project, a promising pilot venture near Parachute. Exxon paid $300 million up front and said it would invest at least $2 billion. The plant was supposed to produce 47,000 bbl. a day by 1985. And that was only the beginning. An internal corporate report predicted that by the mid-1990s Exxon would be producing 2 million bbl. a day from shale--enough to slice U.S. imports 20%. To accommodate the workers and families who would stream into Colorado for the new industry, Exxon began building a company town for 25,000 people. Called Battlement Mesa, it would be a self-sustaining community of single-family homes, apartments, churches, schools, stores, recreation centers--even a golf course.

So what does Parachute look like today? The building where Unocal started converting shale to oil is still there, but it's not doing much to wean the nation from foreign oil. After sitting idle for years, the building was acquired in 1999 by American Soda, which began producing baking soda and soda ash from nearby deposits.

Battlement Mesa, the company town that was to be the hub of the new industry, still exists, but not for oil-shale workers. It has become a retirement community. Against a backdrop of majestic mountains, retirees pump iron, hike scenic trails, swim and play golf. There's no trace of the Exxon project that was supposed to be shale oil's breakthrough. All vestiges of the mine and outbuildings are gone. The road leading to the plant site is still there, but it abruptly ends at the top of the hill. The land has been reclaimed and today looks much as it always did.

One by one, all the oil-shale projects of the 1980s were scrapped. Exxon spent $1 billion within two years of its much ballyhooed plunge into shale, then abruptly abandoned the project in 1982, citing market conditions and escalating costs. The Unocal plant actually did begin producing a modest amount of oil in the 1980s, but then in 1991 it too shut down, after heavy losses.

A decline in crude-oil prices was partly responsible, but a larger factor was a government policy reversal. Although bullish on shale, coal and other synfuels in 1980, Washington soon cooled to the idea, as it had done in the past. After 1980, the Reagan Administration thought private industry, not government, should shoulder all the costs. Subsidies were reduced, and in 1985 the Administration killed the entire program, except for the synthetic-fuels tax credit. "The Administration no longer believes continued funding of the Synthetic Fuels Corp. serves any useful purpose," Budget Director James Miller told Congress. Former Colorado Governor Richard Lamm, among others, considered Washington's outlook to be shortsighted: "America's energy policy is zigzagging through history like a drunk."

To be sure, massive oil-shale development might not be feasible for the U.S., given the enormous environmental consequences. But whatever the specifics, the U.S. needs to set a policy that would genuinely add to the nation's energy supply--and then stick with it.

Canada did just that. As with the oil-shale deposits in the U.S., geologists and oilmen long knew about Alberta's immense oil-sands resources, but technological obstacles and high costs prevented development. Unlike conventional oil deposits that can be pumped to the surface, oil sand is a heavy, tarlike substance that must be mined and processed before it can be refined into gasoline and other products. Today's burgeoning industry is a testament to both government incentives and oil-company determination.

Though the first oil-sands plant, a small undertaking pioneered by Sun Oil Co., opened in 1967, it wasn't until the 1970s that Canada really got serious. Realizing that most oil companies would be reluctant to commit long-term money, the Alberta provincial government in 1974 launched the Alberta Oil Sands Technology and Research Authority (AOSTRA) to provide seed money and fund research. AOSTRA formed partnerships with oil companies and conducted tests. That work helped make oil sands economically feasible, says Eddy Isaacs, managing director of the Alberta Energy Research Institute. Perhaps more important, Isaacs says, the work showed bankers and potential investors that "we know how to do this." Besides paying for research, the governments of Alberta and Ontario invested millions of dollars in a start-up oil-sands company, Syncrude Canada. Both governments sold their interests after the company became established. The Alberta government's role, Isaacs says, "was visionary, and now we are seeing the results."

At the huge North Mine, the work goes on round the clock, 365 days a year, in some of the worst weather on Earth. In summer the ground turns mushy, and the huge trucks bog down. "It's like working in peanut butter," says a Syncruder. In the winter, when temperatures can drop to -40DEGF, the oil sand is so hard it grinds up the shovels' steel teeth as if they were plastic combs. It's not unusual to replace the teeth after a single 12-hour shift. Suncorp, another oil-sands company, has an $8 million annual budget just for that.

Running a highly synchronized mining and oil-conversion operation in subzero climate is expensive. But the oil-sands companies have steadily lowered their costs through research, technological development, trial and error and just plain persistence. From $20 a bbl. two decades ago, the cost of production is down to less than $10, far below the world price of oil.

While billions of barrels will be recovered by surface mining, the vast bulk is buried too deep and can be extracted only by so-called in situ mining. Steam is injected into underground shafts, melting the oil and allowing it to be pumped to the surface. This is even more sophisticated than open-pit mining. But Canada is ready for this next phase too. For years, AOSTRA underwrote research to develop the technology. In the beginning, Alberta got little help from the oil companies because the payoff appeared too remote to justify the expense. So AOSTRA bankrolled most of the early work, including the building of tunnels for the first experiments. Eventually, as the tests made headway, the industry was won over and began to fund research with AOSTRA. Result: a process called steam-assisted gravity drainage, which will extract billions of barrels of oil.

In part because that technology has been developed, oil companies plan to invest billions of dollars in new Canadian plants in coming years. This could lead to as many as two dozen oil-sands operations by 2010, compared with four today. However many come online, U.S. consumers will benefit. President George W. Bush took note of this during a visit to Quebec in 2001: "There is some very good news in our hemisphere, at least as far as Americans are concerned, and that is that because of technologies--the Canadians have developed vast crude-oil resources ... in what they call tar pits ... That's good for our national security; it's good for our economy."