In a last gasp for Jimmy Carter-era synthetic fuel programs, Unocal Corp. said Tuesday that it will suspend production at its $650-million shale oil project in Parachute Creek, Colo., citing continued losses.
Closure of the 13-year-old project, the only remaining commercial shale oil operation in the country, spells the apparent end of major efforts to squeeze oil from rocks as a way to displace imported crude.
Officials blamed the project's lack of profits on falling oil prices and production problems. The plant, which was first announced in March, 1978, will shut down June 1, despite renewed concerns about the nation's energy security in the wake of the Persian Gulf War.
"This was the last of the major alternative energy projects from a cycle back in the late 1970s and early 1980s," said George J. Gaspar, a petroleum analyst with Robert W. Baird & Co. in Milwaukee.
"I think there will still be a low level of activity in research, but . . . it doesn't look like there'll be any plans for full-scale production for a long time," added Verne Smith, oil shale research manager with the nonprofit Western Research Institute of Laramie, Wyo., an affiliate of the University of Wyoming.
Unocal was one of several oil companies that started shale oil projects in the Rocky Mountains in the late 1970s. The Los Angeles-based oil firm persevered after most others abandoned their projects.
"This was a pioneering, first-of-a-kind plant that demonstrated that the technology works--but not at the rates we had hoped," Unocal Chairman Richard J. Stegemeier said in an interview. "We said . . . this plant would come under intense scrutiny and observation to see whether we could return it to profitability. We gave it a good try, but were obviously unable to do that."
The project was designed to tap the rich deposits of oil shale that Native American inhabitants of the area once called "the rock that burns" because of its high oil content. Unocal estimated that at least 600 billion barrels of oil might be recoverable from shale--more than 20 times the country's proven crude oil reserves.
"Shale oil has been a hope and dream since the beginning of the 20th Century," said Daniel Yergin, an energy consultant and author of the best-seller "The Prize," a history of oil. "The problem has been to make it economically competitive and also environmentally attractive."
Unocal's project mined shale, crushed it and heated it to extract high-quality oil that could be refined like regular crude.
Capital costs for the project were $650 million. Construction was completed in 1983, and--after many delays--the company increased production to a peak in 1990 of 1.5 million barrels of shale oil.
The resulting oil was subsidized by $114 million in federal price supports. Last year, the federal government guaranteed an average price of $49.77 a barrel for the so-called syncrude; Unocal figured that the real market value of the oil was about $24.17.
Even so, the project was never profitable. Last year--its best--the project still lost $7 million, Stegemeier said.
Stegemeier blamed low oil prices and problems with the plant's efficiency. "The original plant was designed to cover our costs if oil prices were $42 a barrel, and (if) we operated at 10,000 barrels a day 330 days per year," he said.
But oil prices fell in the mid-1980s to below $10 a barrel, and even now, oil is selling for about $20 a barrel. Moreover, the plant never achieved the optimum rate of production.
"With all the fixed costs and low production and low on-stream efficiency, we would have had to take in well over $50 a barrel to break even," Stegemeier said.
As a result, most of Unocal's initial investment was written off in 1985 and 1988. With the shutdown, analysts estimate that additional writedowns may total as much as $100 million. Others speculate that Unocal may now try to sell the project to the Department of Energy.
Stegemeier would say only that the company would discuss options for the project with government officials. He added that the company would study data from the project to assess the technology and determine whether production can ever resume.
The project now employs about 685 Unocal and contract employees from Mesa and Garfield counties in Colorado. About half of the workers will be laid off beginning in June, Stegemeier said. The company is donating $100,000 to each county.
The end of major shale oil developments was foreshadowed in May, 1982, when Exxon Corp. closed its Colony project near Grand Junction, Colo., after spending $1 billion.
In January, Occidental Petroleum Corp. said it would shut down its Colorado shale oil project as part of a corporate restructuring after the death of corporate patriarch Armand Hammer. That project had a book value of $30 million.
Environmentalists object to shale oil projects because they scar the land with mines, require massive amounts of water and produce heavy air emissions, said Tina Arapkiles, a spokeswoman for the Sierra Club in Boulder, Colo.
But efforts to turn rocks into energy continue even as Unocal pulls the plug on its own project. Today, officials from the Illinois Institute of Technology plan to meet with congressional staff members to press for research funds for a new shale oil technology that they argue can be viable at $20 a barrel, institute consultant Ed Blaguscewzewski said.
For now, however, the failure of massive shale oil projects sends a message to policy-makers wrestling with proposed energy policies in the wake of the Middle East crisis, Yergin said. "The lesson I take from this is to be cautious about going for the huge, dramatic program that isn't rooted in economics," he said.
A HISTORY OF PARACHUTE CREEK March, 1978: Union Oil Co. of California announces plan to construct first U.S. commercial-scale oil shale facilities near Parachute.
December, 1980: Project construction begins.
July, 1981: Union Oil signs shale oil price guarantee contract with U.S. Department of Energy.
May, 1983: Construction work force peaks at 2,000.
August, 1983: Construction completed on 10,000-barrel-per-day design capacity facility. Start-up operations commence.
July, 1986: Sustained production for eight consecutive days.
December, 1986: First shipment of synthetic crude oil.
August, 1988: 1-millionth barrel of syncrude shipped.
October, 1989: Record daily production of 7,000 barrels per day.
December, 1989: Project loses $22 million for the year.
December, 1990: Annual production reaches 1.5 million barrels; project loses $7 million for year.
March, 1991: Unocal announces suspension of production operations effective June 1. The project continues to lose money in 1991.