and thereby Continental Oil Company, had under its control the greatest reserve of energy in the form of Btu's of any group in the world.

The fact that there is a technology-now becoming increasingly practical— by which we can convert coal into liquid and gaseous fuels certainly adds impetus to the trend towards this single energy industry concept. In the future we will tend more and more to think in terms of reserves of fossil fuels and uranium as an entity.

During this same period we must remember that the Gulf Oil Company aeacquired control of the Pittsburg & Midway Coal Company through its acquisition of the Spencer Chemical Company; in an announcement in the newspapers just recently it is indicated that the giant Standard Oil Company of New Jersey, through its marketing company, Humble Oil Company, will create a new “Department of Coal and Oil Shale" and there are various reports as to its activity in acquiring coal reserves. Some of these reports indicate many hundreds of thousands of acres of coal reserves have already been acquired. Also, there are reports of the activity of the Atlantic-Richfield companies and their coal reserves in the far west. It seems to me that the energy future is being laid out clearly for us to read.

These big companies, with large amounts of money, with activities of both national and international scope, have decided that the coal reserves of this Nation are a vast reserve of energy that have to be tapped in order to meet the energy demands of this Nation and of the world.

For the first time, activity in the coal industry will be on a big money basis, whether it is to develop liquid fuel as synthetic crude or a gaseous fuel as a synthetic pipeline gas. In either case, it means that the use of coal reserves will spread further and further from the source.

This change certainly presents challenges to everyone in the coal industry and in the fuel industry and I believe it also presents great opportunities to those in coal. Some of us here can remember very clearly when the interests of the coal industry narrowed down to individual companies and individual coal fields and to certain regions. Gradually, but inexorably, this has changed to where our industry is truly a national factor in the energy economy of this Nation.

No one questions but that the coal reserves of this Nation, still unmined. represent the Nation's largest source of untapped energy. This gives the coal industry an inherent advantage as it enters this new energy era. It has not only the advantage of tremendous amounts, but it also has the characteristic of lending itself very well to conversion to other forms of fuel, whether it be solid. liquid or gaseous. This would seem to indicate that regardless of the energy mix which the Nation might demand in the years ahead, coal will always be in a dominant position.

I do not want to appear overly optimistic or to give the impression that it is all "down hill" from here on in. I recognize, as you do, that we have some major problems. First, is the fact that the people of this Nation have decided that the air of the atmosphere should not be polluted by either noxious gases or irritating particulates and if unrealistic air pollution regulations were to be adopted throughout the Nation, coal could be literally barred from many of these major markets. We must continue to resist, by every means at our command, efforts to impose standards limiting the permissible limit of sulfur in coal to a level which cannot be shown to be necessary for the protection of the public health and which cannot be met without the introduction of sulfur removal technology which has not yet been perfected.

We in our industry must realistically push for research by the coal industry. by the United States government to give us some low-cost means of elimination of sulfur from coal. In the awful competition with nuclear power we cannot at any time let up on the unending job of presenting to the customer a better product and at a lower and more competitive cost. Even if we were to influence the government to a point where it would retire completely from direct or indirect subsidies for nuclear power, we still must meet this competition with a positive program, and the only place where it will count is if we can beat them in the market place.

Senator Jennings Randolph in a speech on the floor of the Senate several months ago, called attention to what he called a "startling imbalance which has

long existed between research and development funds for nuclear research and funds for other forms of energy". Senator Randolph stated that developing new methods of converting coal into electric power at lower cost should have priority equal to that for improved and cheaper generation of nuclear power. I agree most heartily with Senator Randolph's statement.

The overall budget for research in coal, regardless of the nature of that research, is exceedingly modest when we consider how important the results are to the Nation. At this time we have reason to believe that there are many members of both Houses of Congress in substantial support of increased coal research. Senator Randolph, who has been joined in all of this effort by Senator Cooper of Kentucky, aptly pointed out in his speech that "it would be a national scandal for a large portion of our coal reserves to remain unusable in the ground because we lacked the foresight to so manage our affairs as to achieve a proper balance between fossil fuels and nuclear power."

It is interesting to appraise the future markets in the energy field. I will not go into them in detail. However, take for instance, if we were to obtain the use of coal in the many chemical processes to which it lends itself, the maximum estimate for the annual use would be approximately 20 million tons of coal. But, if the development of synthetic crude progresses, as it has in the last few years and becomes economically competitive with natural crude, and the coal industry were to service the crude industry to a total of 10% of its needs, which is considered very conservative, the coal necessary would approximate 143 million tons annually.

Assuming that the production of synthetic pipeline gas from coal were to become economically feasible and readily competitive and again that the manufacture of this gas from coal serviced the pipeline industry to only 10% of its need, this would represent another block of approximately 145 million tons of coal annually.

This illustrates, I believe, why in looking ahead we can readily speak of a new era in coal with some optimism and recognition of the challenges because I am told that both of the above processes are within sight of being accepted as economically competitive to the natural product.

This comes at a time when the nuclear industry is being "extremely confident" in stating what the situation will be 15-20 years from now as far as the electric utility industry is concerned and its use of nuclear power plants.

At a Symposium that I attended at Oak Ridge, Tennessee, this last week, the blunt statement was made "We won an important battle when the Oyster Creek Reactor was announced and we won the war when TVA announced the reactors at Browns Ferry". I am not just sure what battle they referred to but I certainly deny that the nuclear industry has won the energy war-and as has happened so many times in the past I think the reported demise of the coal industry is premature.

We realize and you gentlemen know better than I, that the coal industry has learned to live with and to ultimately overcome problems every bit as serious as the attack of the nuclear energy industry. I cannot help but conclude that the new era of a unifying energy industry will be a great help to the coal industry and to the Nation.

As all of you are aware, the National Coal Policy Conference has proposed and urged the formulation of a national fuels policy under which the best possible use would be made of all of our energy resources. Perhaps we are now seeing the development and formulation of a fuels policy on a company by company basis, as these large companies become involved in the activities of the various forms of energy and become purveyors of energy as such. As a matter of cold business economics these companies will, of themselves, determine and make the best possible use of all of their fuels so as to receive the maximum return for their stockholders from their reserves of Btu's.

There cannot help but be an important and vital role for the coal industry in this new and emerging energy era. We are going to have to evolve, maintain and execute a positive program of doing a far better job of producing, delivering and utilizing coal. I am sure that we will do the job, not only for the best interests of our individual companies and their employees, but for the Nation as a whole.

Thank you.

THE PROSPECTS FOR THE DEVELOPMENT OF A SHALE OIL INDUSTRY

Henry Steele*, Rice University

Many times in the history of the United States technological change and new discoveries have created new industries while partially or completely destroying others. Recent evidence suggests that another case of creative destruction is in the offing, with shale oil production supplementing, and in time partly displac ing, the long-established crude petroleum industry. Recent research has indicated two developments which portend such an event-important technological advances in the processing of oil shale,' and an acceleration of the long-run increase in the costs of finding, developing, and producing crude oil.2

The favorable competitive position of shale oil is demonstrated in this paper by offering evidence in support of the following supplementary theses: (1) the real costs of finding, developing, and producing crude oil have more than doubled in the last 20 years, with the bulk of the increase occurring in the decade of the 1950's; (2) the status of shale oil technology has advanced to the point where "wellhead" costs of producing shale oil are low enough to allow profitable production at current crude oil wellhead prices, (3) the economic costs of current petroleum conservation practices are very great, are not likely soon to decrease, and can be avoided entirely in the case of shale oil; hence (4) there would be an improvement in the over-all efficiency of resource allocation in the energy market if current new investment in the petroleum industry were to be shifted in part from crude oil exploration to shale oil production.

3

The author gratefully acknowledges the encouragement and financial assistance provided by Resources For the Future, Inc., of Washington, D.C., for research_on_shale oil costs during the summer of 1962. The author is particularly indebted to Sam H. Schurr of Resources For the Future, and to Russell J. Cameron and the late Ernest P. Miller of Cameron and Jones, Inc., Denver, Colorado, who provided the technological and engineering basis for the shale oil production cost estimates contained in this paper. The author is also indebted to his colleagues, professors Edgar O. Edwards and Gaston V. Rimlinger, for valuable criticisms of earlier drafts. Sole responsibility for any errors, however, remains with the author.

1 This is borne out by the existence of a very extensive literature, especially in the petroleum industry trade journals. See especially American Petroleum Institute, Indepedent Petroleum Association of America, and Mid-Continent Oil and Gas Association, Joint Association Surveys of Industry Drilling Costs, 1953, 1955, 1956, 1959, (New York); C. C. Anderson, "Petroleum and Natural Gas in The United States-Relation of Economic and Technologic Trends." paper presented at Canadian Sectional Meeting of the World Power Conference, Montreal, 1958; B. C. Netschert, The Future Supply of Oil and Gas (Baltimore, 1958); R. G. DeLilliac and G. Lugol. "Cost of Exploration and Production in the United States," Petroleum Engineer, July 1955, p. B40; R. E. Megill. "The Cost of Finding Oil," Oil and Gas Journal, March 30, 1959, p. 250; G. D. Priestman, "A Key to the Future A Review of the Economics of the United States Oil Producing Industry," Journal of Petroleum Technology, November 1960, pp. 11-14; H. J. Struth, "What It Costs to Find United States Oil," Petroleum Engineer, November 1960, pp. B19, B23; J. E. Hodges and H. B. Steele, An Investigation of the Problems of Cost Determination for the Discovery, Development, and Production of Liquid Hydrocarbon and Natural Gas Resources, Houston, Rice Institute Pamphlet, Vol. XLVI, No. 3. October 1959; Steele, "Index Numbers and Cost Analysis: An Application to the Petroleum Industry," Rice University Studies, Summer 1963.

2 The basic cost studies consist of the following: U.S. Bureau of Mines. "A Proposal for Mining 14,035 Tons of Oil Shale Daily-Western Colorado," Special Report, November 1949 U.S. Bureau of Mines, "A Proposal for Mining 19.200 Tons of Oil Shale DailyWestern Colorado," ibid., November 1950; National Petroleum Council. "Subcommittee Report to the National Petroleum_Council's Committee on Synthetic Liquid Fuels Production Costs," October 15, 1951: U.S. Department of the Army, Corps of Engineers, The Synthetic Liquid Fuel Potential of Colorado, Volumes I and II (New York, 1951). Further work done since that time is reported upon in E. P. Miller and R. J. Cameron, "Shale Oil Nears Competitive Level with Domestic Petroleum," Journal of Petroleum Technology, August 1958, pp. 26-S.

Crude oil wellhead prices are quoted by buyers and make allowance for transportation costs to refineries. Since no crude oil is produced directly in the oil shale region for sale to California refineries, no precisely comparable wellhead price for crude oil is available. (The quality of shale oil is such that it should command about the same price per barrel as crude oil, or perhaps a slightly higher price.) Where transport costs of shale oil to refineries have been estimated, such as to the Los Angeles market, it appears that profitable sales to refineries may be made at refinery prices for crude oil.

TABLE 1.-Crude oil and shale oil average costs, 1951 and 1962

? Cost per barrel of working interest, net of 14.5 percent average royalty. Total cost per barrel discovered is hence divided by 0.855 to indicate the cost to the operator per net barrel found by the operator.

For source, see table 2, cols. 3, 4, 5, and 9. Cols. 3, 4, and 5 are divided by 0.855; col. 9 gives total net working interest cost per barrel.

4 Estimated by author.

National Petroleum Council Study of 1951, as adjusted by author in unpublished dissertation, "The Economic Potentialities of Synthetic Liquid Fuels From Oil Shales" (MIT, 1957). (Adjustments made to segregate outlay costs from computed opportunity costs.)

Estimates made by author in collaboration with Cameron & Jones of Denver, Colo. (See table 4.)

COST COMPARISONS: CRUDE OIL AND SHALE OIL, 1951-1962

Table 1 shows average estimated costs of producing crude oil and shale oil, together with transportation costs to the refinery, for 1951 and 1962 (1960 for crude oil). In 1960, the estimated average cost (net of by-product "credits" for natural gas and natural gas liquids) for producing a barrel of crude oil and transporting it to a refinery was $4.41, while the average cost estimated for producing and transporting a barrel of shale oil to the refinery was only $1.99. As of 19601962, the cost of shale oil appears to be only about 45.1 per cent as high per barrel as the cost of crude oil.

Previous interest in the relative costs of crude oil and shale oil culminated in 1951. In that year, average crude oil costs have been estimated at about $2.27 per barrel, while shale oil costs were estimated by the National Petroleum Council at about $2.23 per barrel. Despite the apparent cost advantage of shale oil, none was produced. Chief among many reasons for the reluctance to produce shale oil was the uncertainty surrounding shale oil cost estimates, based then only on experimental process evaluations and pilot-plant operations. But absence of production did not imply absence of serious interest. Public funds had financed most shale oil research and development before 1951, but private funds were to provide the great bulk of research and development thereafter.

To what extent is the change in the relative cost picture due to higher crude oil costs, and to what extent have the costs of producing shale oil declined? The available facts tend to indicate that the former factor is the more important. A comparison of 1962 costs with 1951 costs as shown in Table 1 is most instructive on this point. Crude oil costs had risen from $2.27 per barrel in 1951 to $4.41 per barrel in 1960, an increase of 94.3 per cent, while shale oil production costs declined from $1.82 to $1.46 per barrel, a decline of 20.0 per cent. Shale oil transportation costs had, however, increased by 30.0 per cent, reducing the decline in total shale oil costs to 14.6 per cent. During this period, therefore, the ratio of crude oil costs to shale oil costs increased from 101.8 per cent to 221.6 per cent, an increase in relative costs of 117.7 per cent.

"Petroleum Engineer," November 1960, pp. 1419, B23.