Stinky Water, Sweet Oil...The Last Word


Last week, I paid a visit to Royal Dutch Shell’s oil shale
project in Colorado. The visit left me with more questions
than answers, but I came away from the place with the sense
that this opportunity is very real…or, at least, it soon
will be.

After driving across a vast expanse of “Nowhere,” Colorado,
my brother and I met up with a few geologists from Shell.
Of course it’s just those large, unpopulated tracts of high
desert that make the area so appealing from a geopolitical
point of view. Tapping into the oil shale 2,000 feet
underground isn’t going to bother too many people. And
there are no spotted owls around either. If the technology
to turn shale into oil works, the entire area will become a
new American boom patch.

Soon after we arrived, the geologists escorted us around
the facility, chatting all the while about the successes
and challenges of their venture.

The two trickiest aspects of oil shale development, as the
geologists and engineers explained, are heating the shale
to extreme temperatures, while simultaneously surrounding
the heated area with a subterranean ice wall. Shell doesn’t
know, or isn’t saying, which part of the project will be
the most challenging. If you were about to change the world
by making it economic to tap into as much as 2 trillion
barrels of oil under the Colorado plateau, you’d be pretty
careful about showing your competitors how you were going
to do it.

First, anything that heats up rock around it to around 600
or 700 degrees Fahrenheit has to conduct electrically
generated heat well. The most conductive metals on the
Periodic Table of Elements are, in order, silver, copper,
and gold. Naturally, the number of heaters you put in a
place affects the amount of time it takes to turn the shale
goo into API 34 crude. The more heaters, the more cost,

And given the fact that Shell does not know yet if the
heaters will be recoverable, you can see that sticking
silver, copper, or gold heaters 2000 meters underground and
then leaving them there once the kerogen has been pumped
has a serious effect on the economics of your operation.

At the moment, Shell is not sure what the optimal size of
production zones ought to be. The big issue here is how big
can a freeze-wall be to be effective and freezing the
groundwater surrounding a shale deposit? The test projects,
as you can see, were quite small. Shell doesn’t know, or
isn’t saying, what the optimum size is for a each “pod” or
“cell”. That’s what they’ll have to figure out at the next
stage…and the picture with the dirt is a football field
sized project….where rather than creating the freeze-wall
at 50 meters down…they will do it at 1,000 ft. down….
with 2,000 being the desired and necessary depth for
commercial viability. I’m not sure anyone has ever created
a freeze-wall at that depth….neither is shell. But we’ll
find out. The oil itself that comes from the process looks
like…oil. No heavy refining needed.
Shell thinks the whole thing is economic at a crude price
of $30. So barring a major reversal of geopolitical trends,
they’re forging ahead.

Since the Bureau of Land Management owns about 80% of the
oil shale acreage in Colorado, there is no investment play
on private companies that might own land with rich shale
deposits. Although, if Shell and the DOE are right that you
can recover a million barrels of oil per acre…it wouldn’t
take much land to make a man rich out here.

The Bureau of Land Management recently received ten
applications (by eight companies) for a pilot program to
develop Colorado’s shale reserves. The program allows the
companies access to public lands for the purpose of testing
shale-extraction technologies. You see below an interesting
mix of large, publicly traded oil giants and small,
privately held innovators.

Natural Soda, Inc. of Rifle, Colorado.

EGL Resources Inc. of Midland, Texas.

Salt Lake City-based Kennecott Exploration Company.

Independent Energy Partners of Denver, Colorado

Denver-based Phoenix Wyoming, Inc.

Chevron Shale Oil Company.

Exxon Mobil Corporation.

Shell Frontier Oil and Gas Inc

There is dispute within the industry over how long, if
ever, demonstration extraction technologies can become
commercially viable. I’ve spoken with some of the smaller
companies that have applied for leases from the BLM. Some
of them will have to raise money to conduct the project.
And some of them have been less than forthcoming about how
exactly their extraction technology is different or better
than previous methods.

How will it all unfold? Well, for starters, it could all
utterly fail. To me, Shell’s in-situ process looks the most
promising. It also makes the most sense economically. There
may be a better, less energy-intensive way to heat up the
ground than what Shell has come up with. But Shell,
Chevron, and Exxon Mobil clearly have the resources to
scoop up any private or small firm that makes a

And there are a host of smaller firms involved with the
refining and drilling process that figure to play a key
role in the development of the industry, should that
development pick up pace.
The Energy Policy Act of 2005, otherwise known as a
listless piece of legislation without any strategic vision,
does, at least, make provision for encouraging research
into the development of shale. But government works slow,
when it works at all. It’s going to take an external shock
to the economy to really ratchet up interest and
development of the nation’s energy
reserves…say…something like a nuclear Iran.

In upcoming issues of Strategic Investments, I hope to
report on the companies helping Shell out with its pilot
project on BLM lands. I’ll also write to you about the
refiners and pipeline companies that could help move
refined oil out of Colorado and to nearest cities and

And the Markets…




This week 

















10-year Treasury 





30-year Treasury 





Russell 2000 

























Yen (YEN/USD) 

JPY 114.49  

JPY 114.12  



Dollar (USD/EUR) 





Dollar (USD/GBP) 





The Daily Reckoning