Why Investors Should Be Interested in Shale Oil

While there are technologies that are being used today to produce energy from oil shale, most notably in Estonia, where it is used primarily for electrical production just by burning the stuff like coal, there are no commercial scale shale oil production operations. Like so many alternative energy technologies, there are pilot projects, which are at least a step in the right direction. Some of them, like Royal Dutch Shell’s (RDS.A) Mahogany Research Project in Colorado, which has been in the works since 1993, are quite mature.

And it does seem feasible that shale oil could be a real alternative. If you look at the EROI (Energy Return on Investment), shale oil comes out between 0.7 and 13.3. Compared to other energy sources, this isn’t as bad as it looks. Early in crude oil’s production history (1940’s), the EROI was 100 at the time of discovery – it was easy to find, and easy to get out of the ground. In the 1970’s, it dropped to around 23, still more than good enough – nobody considered not drilling for oil.
Depending on how you calculate it, ethanol ranges from 0.8 to 1.7 – at the low end, it’s an energy sink, taking more energy to produce than you get from the final product, and at the high end, it barely makes sense if you don’t factor in all of the non-mathematical factors like renewability and environmental impact. Shale oil clocks in right between ethanol and crude on EROI, although it comes with a spectacular range. The data comes from this 2004 academic study (.pdf) on energy return on investment.

Of course, any energy production scheme comes with a whole host of environmental concerns, and oil from shale is no different. The carbon impact of the mining (which requires a lot of power in the first place), ground and water contamination, physical scaring of the landscape, air quality from the fuel oil after it’s refined and used – these are all concerns that need to be addressed as the technology is tested.

So what now?

Investors should be interested because big oil is interested. Exxon Mobil (XOM), Chevron (CVX) and Royal Dutch Shell are all spending money to test new ways to get this particular blood from a stone. They see possible full-scale production costs of $30 a barrel. Technology has advanced to the point that it just might be cost effective to pursue shale oil, especially with crude prices so high and expectations that it will remain high for some time. Each company is pursuing a different method. Chevron at looking at a chemical solution, Shell is looking to heat the shale in the ground through hundreds of steel rods that will convert the hydrocarbons trapped in the shale into extractable oil, and Exxon Mobil is working on a process using electrically charged petroleum byproducts that are shoved into the ground to heat the shale. Even Raytheon Co. is in the mix looking to develop a process using radio waves to “cook the shale.” Pretty far out, but if they get it right, the impact on the world’s energy markets could be substantial.

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