Unocal Changes Its Oil-Shale Plans, Won’t Use Subsidy

Unocal said Friday that it has dropped plans for a major modification of its oil-shale operations in western Colorado and won’t use a controversial $500-million federal subsidy earmarked for the project.

Company officials said they decided the changes, designed to capture and recycle excess heat from the current mining and oil-producing complex, would have cost about $352 million--or 35% more than expected. They also said they were not sure the technology would work.

Unocal said it will continue to operate the original phase of the project, which over the past several months has produced about 400,000 barrels of synthetic crude oil from shale carved out of a mountain near Parachute, Colo.

The decision not to use the $500 million is likely to be a major disappointment in Colorado’s oil-shale country, where previous withdrawals by other oil producers cost thousands of jobs. But the company said the number of its employees there will remain at about 450.

$500 Million Criticized

Under a 1981 contract with the U.S. government, Unocal is receiving $46 a barrel for the syncrude, compared to the market price of about $18 a barrel. The government is making up the difference under the $400-million price guarantee contract, and has paid Unocal about $5 million for the 200,000 barrels shipped so far this year.

The initial government subsidy of $400 million for the alternative-energy plant was never challenged, but the subsequent commitment by the federal Synthetic Fuels Corp. for an additional $500 million to improve the troubled project came under attack in late 1985.

A lawsuit filed last year by Sen. Howard Metzenbaum (D-Ohio) and others in federal court in Washington seeks to block the $500 million in loan guarantees and price supports on the grounds that the now-defunct government agency was not authorized to make the commitment.

An aide to one party in the suit said Unocal’s decision not to proceed would make the lawsuit moot. The company had until June 30 to declare its intention to use the funds or lose them.

The $500 million was intended to cover loan guarantees to pay for construction of a so-called fluidized bed combustion system. It also would have provided further price supports for the syncrude.

Unocal’s project stemmed from skyrocketing oil prices and fuel shortages in 1979. Like Exxon and other major oil companies, Los Angeles-based Unocal proposed to mine the oil-heavy shale that underlies parts of northwestern Colorado and separate the oil from the shale.

Unocal’s project was supposed to begin operation in 1983, but only recently has the company begun to overcome technological problems. It is currently producing about 5,000 barrels of synthetic crude a day, or half the plant’s intended capacity.

The expansion called off Friday involved a fluidized bed combustion system intended to improve the burning efficiency of the plant and solve a problem Unocal has had in cooling the shale after the oil was separated.

Richard J. Stegemeier, president of Unocal, said the company has since improved the cooling system and that he is “confident we can proceed with our current technology.”

Unocal hopes to reach production of 10,000 barrels a day to recover its investment of more than $650 million in the project.

“Two years ago we couldn’t make the thing work, so we went after the loan guarantee. We sort of backed into this $500-million commitment,” Stegemeier said. “But when we got into the details, we found the capital costs substantially higher than expected.”

He said the elimination of investment tax credits under the new tax reform law was one of the factors making the modification project less attractive.