Hydraulic fracturing (fracking) technology has enabled oil and gas producers to tap reserves in shale formations across North America. The oil coming out of the shale is referred to as shale oil or tight oil. Oil shale production, however, is a different than production shale oil. In this article, we’ll look at the difference between these similar sounding energy sources.

Pre-Oil Rock

Oil shale is essentially rock that contains solid bits of kerogen, a precursor to oil. All oil is from organic matter that is subjected to intense heat and pressure until it breaks down into hydrocarbons. With the kerogen in oil shale, there wasn’t quite enough heat to finish the job – but that, of course, can be fixed. (For more, see: The 5 Biggest Risks Faced by Oil and Gas Companies.)

Two methods have been developed to extract petroleum products from oil shale. One is to mine it like the rock it is, and then heat it in the low-oxygen environment needed to turn the kerogen into oil and gas. The other method is to heat the oil in situ, applying heat to the formation, and then pumping out the resulting oil. The major difference between these methods is that the first one requires more heat than the second.

There are also other additional benefits to the in situ method, as the gas produced can be recycled back in to produce more heat, and the end product is of higher quality, and much less mining and crushing is needed. That said, both methods result in a product that costs more per barrel than do conventional oil products. (For more, see: 5 Common Trading Multiples Used in Oil and Gas Valuation.)

Royal Dutch Shell (RDS.A) abandoned its Mahogany Shale Project in 2013, presumably because the extraction costs resulted in an uncompetitive product. But this is nothing new in the sphere of unconventional oil. Projects start and stop as the economics of unconventional deposits shift with market prices. Exxon Mobil Corp. (XOM) has a history with oil shale going all the way back to the 80s, and is still looking at tapping the 4-trillion-plus barrels estimated to be trapped in Colorado oil shale. (For more, see: Exxon Mobil - 3 Facts that Might Surprise You.)

Oil Trapped in Rock

In contrast to oil shale, shale oil refers to hydrocarbons that are trapped in formations that are not very porous, meaning that the oil and gas cannot flow out into the pipe as easily as with traditional wells. Instead, the oil is accessed by drilling horizontally across the deposit, and then fracking to open up the rock and allow the oil to flow. This is done by drilling companies such as Marathon Oil Corp. (MRO) and Apache Corp. (APA), who are working on formations like Eagle Ford – the name most investors think of when they hear any combination of the words 'oil' and 'shale'. (For more, see: Marathon Oil or Marathon Petroleum: Which is the Better Stock?)

The Bottom Line

Whether we are talking shale oil or oil shale, there is a common denominator: both cost more per barrel for extraction than more conventional oil deposits. This means that both are prey to market forces. Oil shale in particular, while potentially an enormous source of oil, is still a work in progress as far as bringing the production costs down enough to compete. This is unlikely to change when oil prices are below $60 a barrel.

Shale oil, on the other hand, has shown some resilience in such a price environment, as some deposits are still being extracted with the expectation of making a profit at current market prices. So, in the end, the biggest difference between oil shale and shale oil is that shale oil is still a money- making endeavor, whereas oil shale is a potentially important source for the future. (For more, see: Is U.S. Shale Becoming the Global Swing Producer?)