Although they prefer not to publicize it too loudly just yet, Shell Oil Company and the U.S. government have taken steps toward tapping into the world’s largest known oil shale deposits using an innovative in-ground heating method.
The Green River Formation of Colorado, Utah and Wyoming “holds the equivalent of 800 billion barrels of recoverable oil—as much as the U.S. would use in 110 years, at current consumption levels, and three times the proven oil reserves of Saudi Arabia,” according to a Nov. 13 press release from the Bureau of Land Management.
“More than 70 percent of the Formation, including the richest and thickest oil shale deposits, lies under federally managed lands,” the release said. The federal government has a critical role in determining the future of the U.S. oil shale reserve, and it has quietly taken steps to support oil companies in accessing this resource.
In 2005, the Energy Policy Act “liberalized the lease ownership provisions of the Minerals Leasing Act of 1920, thereby removing a major deterrent to private-sector investment in oil shale development,” according to a 2005 study produced by the RAND think tank for the Department of Energy.
Photo courtesy of Shell
In 2006, the Bureau of Land Management granted approval for five 160-acre leases for oil shale research, development and demonstration in Colorado. Three of the leases went to Shell, one to Chevron and one to EGL Resources.
Of the three companies, Shell has the technological advantage, with successful tests already completed that offer promise of an economically competitive way of accessing the resource.
Shell successfully tested in situ (in-ground) methods that involve heating the shale with massive electric heaters below ground for a few years and pumping the oil out after conversion.
“On only a 30 x 40-foot testing area, Shell successfully recovered 1,700 barrels of high quality light oil plus associated gas from shallower, less-concentrated oil shale layers, thus determining our technological design works,” Shell’s website said.
Production of a barrel of oil requires approximately a ton of oil shale, and it creates byproducts that are potentially hazardous to the surrounding environment.
To contain those byproducts, Shell is testing an underground “freeze wall,” made of ice, that will separate the production zone’s possible contaminants from the groundwater. Early tests of the freeze wall approach have been successful.
This complex approach should be profitable as long as oil costs at least $25 to $30 per barrel, Shell predicted. This represents a huge economical improvement over past methods, which used an expensive and environmentally-damaging open-ground mining and surface retorting (heating) process.
Oil companies implementing the costly surface retorting approach poured billions of dollars into Colorado’s Piecance Basin in the late 1970s and early 1980s, creating jobs, spurring the local economy and straining the local infrastructure. Real estate prices jumped as towns expanded. New businesses cropped up to service the many new residents employed by the oil companies.
Map courtesy of Oil Shale & Tar Sands Leasing Programmatic EIS Information Center
In order for surface retorting to be profitable, oil barrel prices had to stay in the range of $70 to $95. When barrel prices dropped in the early 1980s, oil shale was deemed unprofitable and abandoned. On May 2, 1982, a day locally known as “Black Sunday,” Exxon shut down its $5 billion project in Colorado.
The negative impact on the local economy has not been forgotten, and nobody wants to repeat that scenario—least of all Shell.
It is no surprise then that Shell and the U.S. government have been cautious with publicizing recent developments. It remains to be seen whether Shell’s in situ approach will be successful on a larger scale, so Shell has not yet committed to a commercial venture.
According to the 2005 RAND study, “A firm decision to commit funds to such a venture is at least six years away.” Even then, “at least an additional six to eight years will be required to permit, design, construct, shake down, and confirm performance of that initial commercial operation.”
Ultimately, the study concluded, “Under high growth assumptions, an oil shale production level of 1 million barrels per day is probably more than 20 years in the future, and 3 million barrels per day is probably more than 30 years into the future.” This means that any investments based on oil shale’s future are significantly speculative and long-term.
The government supports oil shale as a way for the U.S. to achieve energy independence. The Department of Energy compares shale oil to the Alberta tar sands, saying that “Oil shale in the United States, which is as rich as tar sand, could similarly be developed and become a vital component in America’s future energy security.”
The process for production could eventually prove cheaper and more environmentally friendly than extraction from tar sands, also known as oil sands.
The oil produced from oil shale is a similar product to that produced from oil sands, according to the Department of Energy.
Oil sands and oil shale require massive amounts of water to produce oil, and the Alberta oil sands and the Green River Formation are both located in areas where water is a limited and precious resource.
Shell’s in situ oil shale process would also require electricity that exceeds the capacity of the existing local infrastructure. At least one huge new power plant would be needed of unprecedented size in the area.
However, Shell expects that it would extract 3.5 units of energy in return for each unit used in production.
Oil shale towns that suffered from the 1980s bust went through a boom process similar to the one currently occurring in Fort McMurray, Alberta.
Oil sand production has brought money flowing into Fort McMurray, a city that increased in population by 67.2 percent between the years 1999 and 2005, from 36,452 to 60,983, according to Syncrude, a major oil company in the area.
Property values in the Fort McMurray area have skyrocketed during the past few years as oil sand production became more profitable and more oil companies and their many employees moved into the area. Property is scarce, and prices have risen so high that it’s hard for investors to justify investments in Fort McMurray now.
Local infrastructure is taxed to its limit with the sudden population influx and the needs of the large oil companies. For example, the city is now dealing with a homeless problem and heavy traffic along the two-lane highway connecting Fort McMurray with the oil sands and with Edmonton.
In light of the Fort McMurray example, investors will do well to keep an eye on U.S. oil shale development. If it follows a path at all similar to oil sands development in Alberta, properties in the Green River Formation area and nearby towns could offer a compelling opportunity for investors looking to get in on the ground floor of a boom.
Southwestern Wyoming and northeastern Utah would be particularly appealing, since prices in those areas are currently very low.
Northwestern Colorado would also be attractive, although it would be starting at higher property values because it is already home to more industries.
Oil companies and the U.S. government are currently taking a slow and cautious approach to oil shale, but the development process could likely be expedited if global factors made it politically and/or economically advantageous to put more money and energy into accessing this resource. If oil shale were to become commercially profitable, its impact on surrounding towns would be immense.