UPDATE 1-US shale oil could soar, but care needed-report

* Shale oil could produce 2-3 mln bpd oil by 2035

* But regulations could restrict production to 600,000 bpd

* Assessment comes from advisory panel to Energy Dept

* Chu-US still needs to diversify its energy sources

* Public confidence "frayed" in industry after Gulf spill
(Updates with comments from Chu, Anadarko CEO Hackett)

By Roberta Rampton and Selam Gebrekidan

WASHINGTON/NEW YORK, Sept 15 (Reuters) - North America's
nascent shale oil fields could one day produce as much crude as
Venezuela, an advisory panel to the U.S. government said on
Wednesday in a report urging policies to aid expansion.

The surprisingly optimistic assessment of the country's
fastest-growing source of new oil came from the industry-led
National Petroleum Council in a report to Energy Secretary
Steven Chu -- but it also came with a warning against excessive
regulation.

By 2035, shale oil -- also known as "tight oil" because it
is sandwiched between hard layers of shale rock -- could
produce 2 to 3 million barrels of oil per day given the right
regulatory environment and technology breakthroughs, said the
panel, which includes a who's who of the oil and gas industry.
Output from such fields has jumped from near nil to around
600,000 bpd.

The increase in supplies would be equivalent to about a 50
percent boost in current domestic output, but far from enough
to replace imports. The United States consumes about 20 million
barrels of oil per day, importing about half of that.

The potential growth in oil production that could come from
shale oil, offshore drilling, and the Canadian oilsands belies
the conventional wisdom that North American oil production is
on an inevitable decline, said Andrew Slaughter, a Shell
official who led the council's study of resources.

"The potential is very significant, and if choices are made
to develop those resources, that decline that we've seen over
the last 10 to 15 years could actually turn up, and turn into
growth," Slaughter told reporters. "It's a matter of choice."

But if the federal and state governments crack down on the
"fracking" practices of companies or change tax treatment for
oil exploration and production, production could stagnate at
about 600,000 barrels per day, the report said.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

COLUMN-Shale oil sparks revolution [ID:nN1E76R0TI]

ANALYSIS-Shale makes Texas oil boom again [ID:nN03301518]

ANALYSIS-Big bets on US shale oil [ID:nN20139968]

FACTBOX-Investment in unconventional plays [ID:nN05128439]

TAKE A LOOK-Fracking safety debate [ID:nN18229665]

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CHU-CAN'T PUT OFF TRANSITION

The National Petroleum Council has advised the U.S.
government on oil issues since the Second World War. Its latest
study involved more than 400 people, mostly from inside and
around the industry, incorporating an aggregation of
proprietary estimates as well as publicly available
projections.

The study team was led by Jim Hackett, chief executive of
Anadarko Petroleum (APC.N), Marvin Odum, CEO of Shell's
(RDSa.L) North American unit, and Aubrey McClendon, CEO of
Chesapeake Energy (CHK.N).

With Chu, a Nobel-laureate physicist, as its top energy
official, the Obama administration has been known more for its
work on renewable energy and energy efficiency, and has not had
a close relationships with the oil industry.

Chu told executives on Thursday that "staggering" oil
demand from China and India will keep them in business for "a
century," and he reiterated arguments that the United States
needs to diversify into cleaner renewable energy, using new
supplies of natural gas and oil to help with the transition.

"Because these transitions take decades, that doesn't mean
just put it off," Chu told reporters after his speech.

"The President's right -- we can't drill our way out of
this," he said.

FRACKING TRANSFORMS OIL, TOO

Hydraulic fracturing or "fracking" has transformed the
natural gas industry, dramatically boosting U.S. production and
making the country self-sufficient in natural gas. And it is
increasingly making waves in the oil market as well.

The technique involves blasting water, sand and chemicals
into rock, and has sparked calls for more government oversight.
[ID:nN1E77A0RF]

Fracking has also boosted oil production in North Dakota
and Texas, and companies have snapped up leases in other states
seen to hold potential. [ID:nS1E78B1LH]

In July, shale oil accounted for about 580,000 barrels per
day of production in North Dakota and Texas combined, according
state regulators and industry estimates. [ID:nN1E76Q250]

The report makes the case for the government to lift
drilling bans and expand leases to give companies better
"access" to resources.

But the report noted that public faith in the industry has
"frayed" after the oil spill in the Gulf of Mexico and other
environmental disasters, compelling the industry to do better.

The report argues for a new network of regional councils to
promote best practices for the oil and gas industry, groups
that would be "light on bureaucracy" but that could work with
communities on their concerns.

"It is a practical answer to the community impact
challenges and the community communication challenges we have
as an industry," Anadarko's Hackett told reporters.
(Editing by Jonathan Leff and Alden Bentley)