US Alternative-Fuel Prospects Dim as Unocal Quits Shale

Move seems sure to fan smoldering debate over Bush administration's energy policy

EVEN as the third crisis in two decades runs its course in the oil-rich Middle East, efforts in the United States to develop a vast domestic energy resource have received a setback. Unocal Corporation, a Los Angeles-based oil company, last week announced plans to suspend production of synthetic crude oil on June 1 at its money-losing shale oil project in Parachute Creek, Colo.

The decision is sure to be grist to feed the debate over the Bush administration's energy policy, which emphasizes that "wherever possible, markets should be allowed to determine prices, quantities, and technology choices," according to the policy document.

The Western US contains 600 billion barrels of shale oil, dwarfing the nation's conventional oil reserves of 25 billion barrels and equaling the combined reserves of all 13 members of the Organization of Petroleum Exporting Countries (OPEC).

Parachute Creek, armed by the Carter administration with a federal subsidy, was intended to pioneer the production of "syncrude" from shale oil. Completed in 1983, the project has produced 4.5 million barrels to date, making it the largest such project in US history. But despite receiving an average $25.44 per barrel from taxpayers on top of the syncrude sales price, the project still could not make money.

"This was way at the end when it came to competitiveness, and was showing no sign of improving," says Daniel Yergin of Cambridge Energy Research Associates, a Cambridge, Mass., consulting company. "There are better paths to go down."

Technical difficulties and breakdowns prevented Unocal's $654 million facility from operating at its design rate of 10,000 barrels per day, 330 days a year. The project lost $22 million in 1989. Last year was its best, producing 1.5 million barrels of syncrude, less than half of what was intended, for a loss of $7 million.

Unocal had no reason to hope the situation would improve further, chairman Richard Stegemeier said in an interview. "We'd sort of run out of ideas on what is the next quantum jump that we could make that would turn this thing into profitability. We just can't tolerate endless loss in any project."

The suspension seems particularly inauspicious, coming when the potential for a disruption of imports from the world's most oil-rich region has just been reconfirmed. Imports provide half of the 6 billion barrels of oil consumed in the US annually.

However, President Bush's national energy strategy (NES) is based on the premise that "popular opinion aside, our vulnerability to price shocks is not determined by how much oil we import."

"Some will suggest," an NES summary says, "that we should embark on measures such as oil-import fees, large taxes on gasoline, subsidies for the production of liquid fuels from coal, shale."

"But the cost would be very high." These measures "would not necessarily shield the US economy from the effects of future world oil-market disruptions, not even if the United States were to eliminate virtually all oil imports." The NES relies in large part on an efficient market to smooth out the bumps.

"It's easy to conclude that we should simply let the free market find its way," Mr. Stegemeier says. "But if that is our case, then we should forget about trying to jawbone the American people with regard to conservation, energy efficiency, alternative energies, renewables" and rely on "the volatile areas of the Middle East."

"I just happen to think that's not a very sound energy policy," says Stegemeier, who advocates an oil-import fee. He also criticizes US retail energy prices, which he says are one-third or less of those paid elsewhere. Oil, he says, is "almost a throwaway commodity for the average consumer in the United States." He notes that each US car burns an average 500 gallons of gasoline a year. A 50-cent tax on gasoline, then, would cost American drivers an extra $250 a year.

"That's still less than half of what his European and Japanese counterparts pay for gasoline," Stegemeier says. "They are no more affluent than we are, and they somehow have survived."

Stegemeier's views put him among a very small minority of chairmen of multinational oil corporations. However, few have Unocal's interest in seeing shale oil commercialized. His company has been acquiring shale-oil properties for more than 60 years. Its holdings in the area of Parachute Creek alone are 50,000 acres holding 3.3 billion barrels.

In December another Los Angeles-based oil company, Occidental Petroleum, discontinued a small project to evaluate shale-oil technology. "The time has not yet come for oil shale," says an official at the Department of Energy (DOE). "Nobody wants to make the investment, including the government, apparently."

Last year DOE had a research budget of $17.2 million for shale oil. This year's request is zero.

Says Dr. Yergin: "With Unocal shutting down its project, the last towel has been thrown in."

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