Oil glut takes away economic incentive; Alternative energy projects faltering

Oil from the tar sands of Canada and the shale deposits of the Rocky Mountains were supposed to help bring energy self-sufficiency to North America and free it from the tight control of the oil exporting nations.

However, a world oil glut and its partner, falling prices, have left the pricing system of the Organization of Petroleum Exporting Countries in disarray. Ironically, they have also taken away much of the economic incentive for oil sands and shale oil projects, leaving the short-term future of these resources uncertain. And in the long run, the oil glut and declining prices could leave the world vulnerable to another oil shortage.

The world's current bounty of oil and its reduced price were primary factors in the decision of three of eight partners to withdraw from the Alsands project in northeastern Alberta last week.

First, Dome Petroleum and its affiliate, Hudson's Bay Oil & Gas Company, took out their 12 percent share. Then, Shell Explorer Ltd., owned by the Shell Oil Company, pulled its 20 percent stake. Two other partners, Amoco Canada and Chevron Standard, with 10 and 8 percent, respectively, had folded their tents a few weeks before.

Now there are only three firms, including Petro-Canada, the national oil company, remaining in the $14 billion project aimed at turning the gooey oil-and-sand mixture into usable petroleum. The project is supposed to produce 137,000 barrels of oil a day, or 10 percent of Canada's production, by 1990.

''The one thing the participants wanted to realize was a return that was above the inflation rate,'' says Alex Squires, energy analyst with Pitfield Mackay Ross Ltd., a Toronto investment firm. Without the promise of that kind of return, projects like Alsands ''may likely die,'' Mr. Squires says. It is possible, however, that they could be ''resurrected in some other manner,'' with the government perhaps taking on a bigger share, he says.

''The economics of these projects are getting thinner and thinner,'' says Michael Smolinski, energy analyst with Data Resources Inc. (DRI), the Lexington, Mass., economic consulting firm.

''All of these projects (oil sands and shale oil) were based on projections of what oil prices would be in five or 10 years,'' notes Rosario S. Ilacqua, energy analyst at L.F. Rothschild, Unterberg, Towbin in New York. ''But there's been a downward revision in what the price will be 10 years from now. On the other hand, the cost of building these things keeps going up.''

Despite its current troubles, the Alsands project will continue, says Hans Maciej, technical director of the Canadian Petroleum Association in Edmondon, Alberta. While it ''is in trouble at the moment,'' he says, ''that's no indication of collapse.''

There are two other oil sands projects in Alberta. But one of them, Syncrude, due to a plant breakdown, is reportedly only operating at half capacity, turning out 60,000 barrels a day. The other, Suncor, has not resumed production since two major fires in January.

For Canadian oil sands projects to survive, Mr. Maciej argues, they need more than a return to tight oil suplies and higher prices. They also need a reduction in the Canadian government share of oil revenues.

Last September, Alberta's provincial government and Canada's federal government ended a 16-month pricing dispute with an agreement that increased the federal share of oil and gas revenues from 10 to 29 percent. Alberta, which produces 85 percent of Canada's oil and gas, cut its share of revenues from 45 to 34 percent, and the oil companies' share fell from 45 to 37 percent.

If oil prices do not head upward again, ''there may have to be a significant adjustment in what the companies get,'' to keep them interested, energy analyst Squires says.

But higher oil prices are not expected soon. ''In our current forecast through 1986, we see significantly lower prices for oil, relative to inflation, '' says James Osten, oil analyst in DRI's Toronto office.

Might the federal government reduce its share, then?

''There is no possibility of that,'' says Marc Lalonde, Canada's energy minister. ''The problems with Alsands are particular to that project. . . . Other projects -- including offshore oil -- are going ahead without any problems under the agreement.''

Despite the current economic climate, the Alsands project should continue, Mr. Lalonde said in a telephone interview with the Monitor. ''Canada needs the oil. We are still importing oil, but we want to be self-sufficient.

''I would still argue that tar sands are a good source of oil. But the oil companies tend to take a very short-term view of these things. We are in a recession, but when we come out of it, we will need these oil resources.'' For a long time, the oil companies overestimated the future price of oil, Lalonde notes. Now, he says, they are being ''too pessimistic'' in expecting prices to stay low.

The three companies left in the Alsands currently hold a 50 percent share of the project. These remaining partners are talking with ''other parties'' about the possibility of joining the project, Lalonde says, though he would not name them.

Another factor is slowing the development of the oil sand projects: tight money and high interest rates. ''The capital markets have dried up and the private companies don't have the wherewithal to go ahead with projects like these on their own,'' Squires says.

The ''price of money'' has also inhibited the development of shale oil, says Martin D. Robbins, director of the Colorado Energy Research Institute. But Mr. Robbins thinks the current climate of oil oversupply, declining price, and high interest rates could lead to important advancements in shale oil technology, if the oil companies seize the opportunity.

''Current shale oil recovery technology,'' he argues, ''is basically the same as it was in 1949. Here you have a technology that is more than 30 years old and it's never been tested on a full-scale project.'' Oil companies should use the ''breather'' in oil demand to research new, more efficient ways to get oil out of shale in the next century, he believes.