Hearings and Business Meetings

250 North Street Grand Junction, CO Grand Junction City Hall Auditorium 09:30 AM

Mr. Stephen Mut

CEO of Unconventional Resources , Shell Exploration and Production Company

TESTIMONY OF STEPHEN MUT, PRESIDENT OF SHELL UNCONVENTIONAL RESOURCES ENERGY, BEFORE THE U.S. SENATE ENERGY AND NATURAL RESOURCES COMMITTEE FIELD HEARING ON POTENTIAL OIL SHALE DEVELOPMENT IN COLORADO, UTAH and WYOMING
JUNE 1, 2006
GRAND JUNCTION, COLORADO
Good morning, Mr. Chairman, Senator Hatch, and Senator Salazar. My name is Stephen Mut and I lead Shell Unconventional Resource Energy.

As you know, for about a quarter of a century, Shell has been working to develop and to advance, hopefully to commercial success, an innovative technology which we are increasingly optimistic can open up the vast oil shale resources located in the Rocky Mountain area. This technology, once thoroughly proven, will allow Shell to produce clean, high quality transportation fuels such as gasoline, jet fuel and diesel as well as clean burning natural gas from oil shale in an economically viable and very environmentally sensitive fashion. Because the oil shale resource in the United States represents the largest, most concentrated onshore “hydrocarbon” resource on Earth, Shell’s ICP technology holds promise for significantly increasing U.S. domestic energy production. When unlocked, this critical national asset will help to provide an energy bridge to 22nd century clean energy. If these resources are properly managed, there is the potential to reduce price volatility and political turbulence caused in part by tight energy supply-demand balances.

As a diversified energy and petrochemicals company, Shell is investing heavily in a wide variety of energy sources, including renewables such as wind, solar, and hydrogen. We are making progress increasing the role those energy sources will play in the energy mix, but in the meantime America and the world will continue to need oil and natural gas to meet rapidly growing energy demand.

For decades, energy companies have been trying, without success, to transform oil shale resources here in the West into affordable energy products. Oil shale can be found in large parts of the Green River Basin and is over 1,000 feet thick in many areas. According to DOE estimates, the Basin contains in excess of 1 trillion recoverable barrels of hydrocarbons locked up in the shale. It is thus easy to see why this vast resource has remained a target.

In 1982 Shell commenced laboratory and field research on a promising in ground conversion and recovery process. This technology is called the In-situ Conversion Process, or ICP. In general terms the ICP process accelerates the natural process of oil and gas maturation by literally tens of millions of years. This is accomplished by slow sub-surface heating of petroleum source rock containing kerogen, the precursor to oil and gas. This acceleration of natural processes is achieved by drilling many holes into the resource, inserting electric resistance heaters into those heater holes and heating the subsurface over a 3 to 4 year period. During this time very dense oil and gas is expelled from the kerogen and undergoes a series of changes that allow the lighter hydrocarbon products that are more mobile to move in the subsurface through existing or induced fractures to conventional producing wells from which they are brought to the surface. The process has the potential to produce a significant proportion of the original carbon in place in the subsurface—substantially more than the normal recovery efficiency of conventional oil and gas production. The carbon that remains in the subsurface resembles a char, is extremely hydrogen deficient, and if brought to the surface, would require extensive energy-intensive upgrading and saturation with hydrogen. We call this process Smart Carbon Sequestration because the easiest carbon to sequester is that which is not brought to the surface in the first place.

Since 1996, Shell has successfully carried out five small field tests on its privately owned Mahogany property in Rio Blanco County, Colorado. In the most recent test conducted in 2004 and 2005, more than 1,500 barrels of light oil plus associated gas were produced from a very small test plot using the ICP technology. We are pleased with these results, not only because oil and gas was produced, but also because it was produced in quantity, quality and on schedule as predicted by our computer modeling.

As an update, Shell has commenced work on the first of two final tests needed to prove the technology commercially viable. The first of these is a purely environmental test of the capacity of our freeze wall technology to protect the groundwater system from the ICP process and the ICP process from the groundwater. We hope to replicate the results from our initial freeze test performed in 2003, this time by building a football field sized freeze wall that will extend down to commercial depths. This larger size and
greater depth will give us sufficient information to allow us to confidently scale up to commercial size. Once the freeze wall is created and found to properly contain, we plan to stress test it to failure and then test various repair techniques. Over the next 18-24 months, we will gain sufficient knowledge to validate the adequacy of this technology in a commercial setting.

Secondly, once the BLM completes its ongoing oil shale R&D leasing processes and issues the leases for which Shell has applied, we intend to proceed with permitting and then development of a small oil shale production test in which we would expect to produce 500-1500 barrels of oil and gas per day to validate our 24 years of research again at a size and in an area that would allow us to scale up to a commercial development.

It is important to point out that the cost of all of these past and presently projected field tests has been entirely on Shell’s dime and none of the projects have been underwritten by any governmental dollars whatsoever.

When these two field tests have advanced sufficiently over the course of the next several years, we will have gained sufficient technical knowledge to validate the technology as an integrated unit. It is important to remember though, that we are still in a research mode and that any final decision on a commercial development would come near the end of this decade.

Though the DOE estimates that this general part of the tri-state area may contain in excess of 1 trillion barrels of potentially recoverable hydrocarbon resources, or some four times the reserves found in Saudi Arabia, we at Shell say that it contains somewhere between zero and a huge amount of marketable energy barrels. On the upside, it is important to remember that technology and its limits will determine how much of this resource can be economically recovered. On the downside, we remind ourselves that “Zero” barrels is a possibility because no one has yet been able to develop oil shale on a sustainable commercial basis. In order to meet this challenge Shell or any other company must clear three distinct hurdles:

• Demonstrate that its recovery technology would be viable on a commercial basis at oil prices lower than today’s levels
• Demonstrate the capability for protecting the environment, and
• Minimize socioeconomic impacts to surrounding communities and their citizens.

These criteria collectively translate into Sustainable Development---one of Shell’s core principles. Stated more simply it means caring for People, the Planet, and Profits.
Relative to protection of the environment, the ICP process has a number of positive attributes. Despite the fact that ICP requires substantial amounts of electricity, the reduced processing required for the lighter cleaner product mix when combined with sequestration of concentrated CO2 streams may result in a carbon dioxide footprint on par with and in some cases better than existing heavy oil production on a life cycle basis. The concentration of the resource leads to a smaller physical footprint and one that can be rather easily reclaimed. The in-situ nature of the process eliminates tailings piles. Process and cooling water needs are reduced relative to past efforts. Though it may not be as economic, we would likely move to air-cooling to reduce project water demand. Groundwater is protected by a robust freeze-wall. We are working to achieve a combination of these ingredients that will create an environmentally attractive package.

Equally importantly, Shell is committed to working closely with the communities in this area first to identify issues and then to develop plans to address, in advance, the potential socio-economic impacts of a commercial development. Even though Shell is still several years away from making a commercial decision, we anticipate commencing very early substantive discussions with a range of community stakeholders in this area to begin to analyze potential community impacts and to partner together to find solutions. We feel it is critically important to commence this more specific dialogue long before we make any firm decisions as to what a commercial oil shale project might look like. By doing so, we can jointly identify potential infrastructure and socioeconomic impacts that might arise from large-scale development and then jointly move forward to arrive at responsible and practical solutions to satisfy those identified needs. So later this year or early next, we hope to begin this collaborative process with area stakeholders. This will mean publicly identifying in nominal terms the potential size, scope and impact of a commercial operation. It will not mean that Shell has made any specific decisions because those are still years away. But just as in any commercial project, we find that spending more time, effort and money upfront with our stakeholder partners almost always results in a better and more fiscally sound development.

Finally, we feel strongly that government has a significant leadership role to play in the development of oil shale. We feel that the leadership role for government is best channeled in four specific areas including:

• Providing access to Federally owned oil shale bearing lands,
• Removing unnecessary procedural obstacles that could delay oil shale development by streamlining the permitting process chain,
• Working with industry to develop innovative ways to provide front- end assistance to local communities to match their infrastructure investment needs as opposed to the back-end loading normally seen for royalty and tax revenue streams, and
• Developing mechanisms as described in the DOE report on the Strategic Significance of America’s Oil Shale Resource to help accelerate the establishment of an oil shale industry and to stabilize its operation.

We believe that this type of leadership was clearly evident in the development of last year’s Energy Act that was largely authored by the Energy and Natural Resource Committee. Section 369 of that Act, the Oil Shale Section, contained many important provisions, three of which gave much needed guidance and clarity to our efforts in oil shale including:

• Elimination of the antiquated single lease limitation which would potentially have kept companies from achieving critical mass in their operations and which would have rewarded technology followers rather than technology leaders in this area.
• Mandating collaboration by and among various Executive Departments and State and local governments in the planning for oil shale exploitation.
• Establishing an orderly process for development of a regulatory and fiscal regime under which oil shale developers will need to operate.

Mr. Chairman, Senator Hatch and Senator Salazar, we commend you for the bi-partisan manner in which you all plus Senator Allard worked to reach a balanced set of legislative provisions to encourage responsible domestic oil shale development, as is included in the Energy Act.

We would also like to commend the Bureau of Land Management for its creativity and leadership in developing the Oil Shale Research and Development Leasing Program which is a small but vitally important step in providing a driving force to companies like Shell to advance their research and technology development efforts.

Mr. Chairman, Senator Salazar, and Senator Hatch, we at Shell thank you for coming to Western Colorado to seek input from the area’s community leaders and residents. We are proud to be a partner with the region and its residents in this great effort which has the potential to change this Nation’s indigenous energy supply/demand imbalance, to reduce its significant trade deficit, and to spur on economic growth well beyond the boundaries of the three State area.

I will be happy to address any questions you might have.