Stinky Water, Sweet Oil

You won’t think much of Rio Blanco County if you ever drive
through it. In fact, unless you take a right turn off
Interstate-70 West at Rifle, head north on Railroad Avenue
and then west on Government road to Colorado state highway
number thirteen, odds are you’ll never even step foot in
Rio Blanco County.

But even if you keep heading west toward Grand Junction,
through the town of Parachute and the shuttered oil shale
refineries from the 1970s, you’ll see the Book Cliffs
geologic formation on your right. For miles and miles. It’s
a bleak landscape. Almost lunar. At first glance, it’s the
kind of land you’d never want to explore, much less settle
down in.

In the small world of geologists, though, the region is
well-known. In fact, you might even say it’s the single
most important patch of undeveloped, unloved, and desolate
looking land in America. But you’d never guess this
particular corner of the Great American Desert may play an
integral role in America’s strategic future just by looking
at it. You’d never guess that the whole stretch of brown,
red, and orange land contains enough recoverable oil and
gas to make you forget about the Middle East for the rest
of time.

There are places in Rio Blanco County like Stinking Water
Creek, named after the smelly mix of oil and water the
first white settlers found there, that tell you oil’s
always been around the Rocky Mountains. It’s just not
always been easy to find. It’s one thing to find oil that
bubbles out of the ground in liquid form. It’s quite
another to drill a thousand feet down, and encounter oil
locked up tight inside a greasy rock.

The first seeping pools of oil were discovered in Western
Colorado as far back as 1876, the year the state entered
the Union. But exploration didn’t get serious until
drillers settled in the town of Rangely in Rio Blanco
County.

By 1903, thirteen different drillers had come and gone in
Rangely. According to the local museum, the only six wells
that actually struck oil were producing just two to ten
barrels of oil a day. Hardly a Spindeltop, the gusher that
launched the Texas oil-boom on January 10th, 1901, and
immediately began producing 100,000 barrels per day.

The energy reserves of the Piceance Basin, upon which Rio
Blanco County sits, contain massive petroleum reserves of a
very unusual nature: Oil shale.

Most of the nation’s oil shale reserves rest under the
control of the U.S. government – a legacy of a 95-year old
Congressional Act. In 1910, Congress passed the Pickett
Act, which authorized President Taft to set aside oil-
bearing land in California and Wyoming as potential sources
of fuel for the U.S. Navy. Taft did so right away. The Navy
was in the process of switching from coal burning ships to
oil burning ships. And the U.S. military, conscious of the
expanding role of America in the world, needed a dependable
supply of fuel in case of a national emergency.

From 1910 to 1925 the Navy developed the Naval Petroleum
and Oil Shale Reserves Program. The program became official
in 1927 and President Roosevelt even expanded the scope of
the program in 1942 as the U.S. geared up for war with
Japan and Germany.

Several of the oil fields set aside for the nation’s first
strategic reserve, particularly Elk Hills in California,
would go on to produce oil for the U.S. government. Elk
Hills was eventually sold off to Occidental Petroleum for
$3.65 billion in 1998 in the largest privatization in U.S.
history. The shale reserves, however, still remain, locked
1,000 feet underground in the Colorado desert.

The destruction of Hurricane Katrina shows the importance
of a strategic petroleum reserve, or, more accurately, a
strategic energy reserve. But the SPR in Louisiana only
holds about 800 million barrels of emergency, enough to get
the country through about 90 days of regular oil usage.
That’s barely a band-aid for a country that faces a
potential energy heart attack.

In other words, the future of oil shale may have finally
arrived. Extracting oil from shale is no simple task, which
is why the reserves remain almost completely undeveloped.
But an emerging new technology promises to unlock the
awesome potential of the oil shale.

“The technical groundwork may be in place for a fundamental
shift in oil shale economics,” the Rand Corporation
recently declared. “Advances in thermally conductive in-
situ conversion may enable shale-derived oil to be
competitive with crude oil at prices below $40 per barrel.
If this becomes the case, oil shale development may soon
occupy a very prominent position in the national energy
agenda.”

Estimated U.S. oil shale reserves total an astonishing 1.5
trillion barrels of oil – or more than five times the
stated reserves of Saudi Arabia. This energy bounty is
simply too large to ignore any longer, assuming that the
reserves are economically viable. And yet, oil shale lies
far from the radar screen of most investors.

But we here at Strategic Investments are on the case. Just
yesterday, I caught a first-hand glimpse of a cutting-edge
oil shale project spearheaded by Shell. I trekked out to a
barren moonscape in Colorado to tour the facility with
Shell geologists. To summarize my findings, oil shale holds
tremendous promise, but the technologies that promise to
unlock this promise remain somewhat experimental. But
sooner or later, the oil trapped in the shale of Colorado
will flow to the surface. And when it does, it will enrich
investors who arrive early to the scene.

I’ll be sharing more of my first-hand observations and due
diligence on the oil shale industry in future issues of
Strategic Investments. I’ll also be sharing a few more of
my observations next week, here in the Rude Awakening.

And the Markets…