Stinky Water, Sweet Oil, Part II

America’s oil shale reserves are enormous, totaling at
least 1.5 billion barrels of oil. That’s five times the
reserves of Saudi Arabia! And yet, no one is producing
commercial quantities of oil from these vast deposits. All
that oil is still sitting right where God left it, buried
under the vast landscapes of Colorado and Wyoming.

Obviously, there are some very real obstacles to oil
production from shale. After all, if it was such a good
thing, we’d be doing it already, right? "Oil shale is the
fuel of the future, and always will be," goes a popular
saying in Western Colorado.

But what if we could safely and economically get our hands
on all that oil? Imagine how the world might change. The
U.S. would instantly have the world’s largest oil reserves.
Imagine…having so much oil we’d never have to worry about
Saudi Arabia again, or Hugo Chavez, or the mullahs in
Tehran. And instead of ships lined up in L.A.’s port to
unload cheap Chinese goods, we might see oil tankers lined
up waiting to export America’s tremendous oil bounty to the
rest of the world. The entire geopolitical and economic map
of the world would change…and the companies in the
vanguard of oil shale development might make hundreds of
billions of dollars as they convert America’s untapped
shale reserves into a brand new energy revolution.

Presidents Gerald Ford and Jimmy Carter may have been
entertaining similar ambitions in the late 1970s when they
encouraged and funded the development of the West’s shale
deposits. A shale-boom ensued, although not much oil
flowed. The government spent billions and so did Exxon
Mobil. New boomtowns sprung up in Rifle, Parachute,
Rangely, and Meeker here in Colorado.

And then came Black Monday. May 2, 1982. The day Exxon shut
down its $5 billion Colony Oil Shale project. The
refineries closed. The jobs left (the American oil industry
has lost nearly as many jobs in the last ten years as the
automobile and steel industries.) And the energy locked in
Colorado’s vast shale deposits sat untouched and unrefined.

Extracting oil from the shale is no simple task. The
earliest attempts to extract the oil utilized an
environmentally unfriendly process known as "retorting."
Stated simply, retorting required mining the shale, hauling
it to a processing facility that crushed the rock into
small chunks, then extracted a petroleum substance called
kerogen, then upgraded the kerogen through a process of
hydrogenation (which requires lots of water) and refined it
into gasoline or jet fuel.

But the difficulties of retorting do not end there, as my
colleague, Byron King explains:

"After you retort the rock to derive the kerogen (not oil),
the heating process has desiccated the shale (OK, that
means that it is dried out).  Sad to say, the volume of
desiccated shale that you have to dispose of is now greater
than that of the hole from which you dug and mined it in
the first place.  Any takers for trainloads of dried,
dusty, gunky shale residue, rife with low levels of heavy
metal residue and other toxic, but now chemically-activated
crap?  (Well, it makes for enough crap that when it rains,
the toxic stuff will leach out and contaminate all of the
water supplies to which gravity can reach, which is
essentially all of ’em.  Yeah, right.  I sure want that
stuff blowin’ in my wind.)  Add up all of the capital
investment to build the retorting mechanisms, cost of
energy required, cost of water, costs of transport, costs
of environmental compliance, costs of refining, and you
have some relatively costly end-product."

But a new technology has emerged that may begin to tap the
oil shale’s potential. Royal Dutch Shell, in fact, has
recently completed a demonstration project (The Mahogany
Ridge project) in which it produced 1,400 barrels of oil
from shale in the ground, without mining the shale at all.

Instead, Shell utilized a process called "in situ" mining,
which heats the shale while it’s still in the ground, to
the point where the oil leaches from the rock. Shell’s
Terry O’Connor described the breakthrough in testimony
before Congress earlier this summer (And Congress may have
an acute interest in the topic, since the U.S. government
controls 72% of all U.S. oil shale acreage):

"Some 23 years ago, 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 1996, Shell successfully carried out
its first small field test on its privately owned Mahogany
property in Rio Blanco County, Colorado some 200 miles west
of Denver. Since then, Shell has carried out four
additional related field tests at nearby sites. The most
recent test was carried out over the past several months
and produced in excess of 1,400 barrels of light oil plus
associated gas from a very small test plot using the ICP
technology…

"Most of the petroleum products we consume today are
derived from conventional oil fields that produce oil and
gas that have been naturally matured in the subsurface by
being subjected to heat and pressure over very long periods
of time. In general terms, the In-situ Conversion Process
(ICP) accelerates this 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 holes into the resource, inserting electric
resistance heaters into those heater holes and heating the
subsurface to around 650-700F, 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. These
changes include the shearing of lighter components from the
dense carbon compounds, concentration of available hydrogen
into these lighter compounds, and changing of phase of
those lighter, more hydrogen rich compounds from liquid to
gas. In gaseous phase, these lighter fractions are now far
more mobile and can move in the subsurface through existing
or induced fractures to conventional producing wells from
which they are brought to the surface. The process results
in the production of about 65 to 70% of the original
"carbon" in place in the subsurface.

"The ICP process is clearly energy-intensive, as its
driving force is the injection of heat into the subsurface.
However, for each unit of energy used to generate power to
provide heat for the ICP process, when calculated on a life
cycle basis, about 3.5 units of energy are produced and
treated for sales to the consumer market. This energy
efficiency compares favorably with many conventional heavy
oil fields that for decades have used steam injection to
help coax more oil out of the reservoir. The produced
hydrocarbon mix is very different from traditional crude
oils. It is much lighter and contains almost no heavy ends.

"However, because the ICP process occurs below ground,
special care must be taken to keep the products of the
process from escaping into groundwater flows. Shell has
adapted a long recognized and established mining and
construction ice wall technology to isolate the active ICP
area and thus accomplish these objectives and to safe guard
the environment. For years, freezing of groundwater to form
a subsurface ice barrier has been used to isolate areas
being tunneled and to reduce natural water flows into
mines. Shell has successfully tested the freezing
technology and determined that the development of a freeze
wall prevents the loss of contaminants from the heated
zone."

It may seem, as O’Conner said, counter-intuitive to freeze
the water around a shale deposit, and then heat up the
contents within the deposit. It’s energy-intensive. And
it’s a lot of work. What’s more, there’s no proof yet it
can work on a commercial scale.

Yet both technologies, the freeze wall and the heating of
shale, have been proven in the field to work. The freeze
wall was used most recently in Boston’s Big Dig project. It
was also used to prevent ground water from seeping into the
salt caverns at the Strategic Petroleum reserve in Weeks
Island, LA.

But still, you may be wondering, does it really make sense
to heat the ground up a thousand feet down for three or
four years and wait? Of course it does. In case you missed
O’Conner’s math, Shell could harvest up to a million
barrels per acre, or a billion barrels per square mile, on
an area covering over a thousand square miles.

It’s still early days in the oil shale fields of Colorado
and Wyoming, but it looks to me like someone’s gonna make a
lot of money out there. I’m working hard to discover how we
outside investors can play along. Check in tomorrow for my
preliminary findings, along with a few notes from my visit
last week to Shell’s Mahogany Ridge.

And the Markets…