The collapse in the price of oil over the last year, combined with a questionable environmental record, has once again put a stop to efforts in the U.S. to exploit our huge supplies of oil shale. This expensive and (potentially) environmentally unfriendly production process will have to wait until the next oil bubble to get some traction.

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A Different Shale
Just so there is no confusion, the oil shale that is referred to in this article is not the same as the "shale plays" that are commonly discussed in the media. These typical plays are where oil or gas is trapped underground because of low rock permeability, and then released through hydraulic fracturing. This other oil shale is oil that is obtained after heating shale rock to temperatures of more than 500 degrees, which converts kerogen to crude oil. (Read Oil And Gas Industry Primer for a refresher.)

Shale Size
Most people assume that oil shale deposits are restricted only to the Rocky Mountain states of Wyoming, Utah and Colorado. However, there are deposits in other states including Tennessee, Ohio, Kentucky and Indiana. The resource potential of the oil shale is staggering. The U.S. Geological Survey (USGS) recently estimated the resource potential of just the Piceance Basin in Colorado to be 1.525 trillion barrels of oil. However, the report also noted that there are "significant technological and environmental challenges, and no economic extraction method is currently available in the U.S." Also, the amount of recoverable resources is usually only a fraction of the total resource and the USGS couldn't estimate an amount that is recoverable.

Development
In 2006, the Bush Administration issued permits to both Royal Dutch Shell (NYSE:RDS.A) and Chevron (NYSE:CVX) to start research and development projects on leases in Colorado. The Obama administration has recently withdrawn these permits, citing uncertainty of the environmental impact.

Shell is one of the more advanced in researching the technology to exploit these resources. In the company's Mahogany research project, Shell uses a process similar to the one used in the oil sands of Alberta, and heats the shale underground and then brings the hydrocarbons to the surface.

Chevron has a strategic alliance with the Los Alamos National Laboratory "to develop an environmentally-responsible and commercially-viable process to recover crude oil and natural gas from western U.S. oil shales." The last commercial oil shale project in the United States was the Long Ridge project built by Unocal, which was closed in 1991. The project produced an average of 5,900 barrels of oil per day at its closing. Unocal has since been bought by Chevron. Exxon Mobil (NYSE:XOM) also had a large-scale oil shale project in Parachute, Colorado, but closed it in 1982. A search of the company's web site indicates no current research or projects in oil shale.

Other countries are also moving ahead with new research to extract this oil in an environmentally friendly method. Brazil has the second largest amount of oil shale reserves after the U.S., and Petroleo Brasileiro (NYSE:PBR) is currently researching a process called Petrosix. Its operations currently process 7,800 tons of shale rock per day.

The Bottom Line
It seems that investors can use shale oil proposals as a psychological and behavioral signal of the top of the Energy market, as talk about this huge resource always seems to rear its head at just the time when investors appetites for the stocks are waning. It remains to be seen whether this resource will ever be commercially exploited on a large scale. (Learn more about oil shale as an alternative energy source in Peak Oil: What To Do When The Wells Run Dry)



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Tickers in this Article: RDS, CVX, XOM, PBR

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