Monday, April 18, 2005

The Shale Game

The Utah radio station KSL 1160 asks the immortal question Could Utah Oil Lower Gas Prices?

[M]ore and more of your money is going towards skyrocketing oil and gas prices. Alternative sources other than the Middle East are being looked at for oil, and one place is right here in Utah.
That sounds terrific, until you read the full piece, and realize that they're talking about - wait for it - shale oil and tar sands.
Utah has plenty of oil but it's all stuck in rock or sand....Utah Geological Survey Energy and Minerals Program Manager David Tabet says the reason no one has mined the oil is the extremely high cost.

However since a barrel of oil is now over $50 dollars companies may consider doing it if they get help from the government.
Where does one start? The cost of extracting and refining shale oil is, obviously, going to put its price well above $50 per barrel - if Australia's disastrous experience is any guide, the per-barrel cost could be three or four times that amount, without factoring in external costs - so the idea that it'd reduce gas prices is insane on its face. The corporate welfare hinted at in this article would come from taxpayers, of course; I fail to see how it'd help consumers to have them subsidize artificially low oil prices out of their own pockets.

Further, the greenhouse gas emissions of shale oils are about four times higher than that of regular oil, depending on the refining method used. It's also unbelievably water-intensive, which is a serious consideration in the desert West.

Via Energy Bulletin, today's Denver Post has a good, skeptical editorial on the financial hazards of investing in shale oil:
The boom of the late 1970s and early '80s was fueled by crude-oil prices that reached a high of nearly $40 a barrel in late 1981 (or about $80 in today's dollars).

It was thought that the 1.8 trillion barrels of oil locked in the Green River formation in Wyoming, Utah and northwestern Colorado could be developed economically.

Then oil prices plunged sharply, and on "Black Sunday," May 2, 1982, Exxon Corp. pulled the plug on its $5 billion Colony Oil Shale Project near Parachute. Others followed, leaving western Colorado's super-heated economy in a shambles.


Anonymous said...

OT: answer to your question at 3:24 pm on Eschaton

Phila said...

Thanks for the tip, AJ!

You too, Ted...I saw your comment and responded.

Anonymous said...

The cost of extracting and refining shale oil is, obviously, going to put its price well above $50 per barrel

Do you have a source for this? Every study I have read on shale oil puts the all-in per barrel cost at @ $25, including energy cost.

Anonymous said...

re: financial risk to drillers, something you may be forgetting to consider is the ready availability of swaps/forwards/futures as hedging instruments (which for oil didn't really exist in the early 80's.) Companies can today lock in high forward oil prices in ways that weren't available then. Suncor eg has been hedging part of its forward oil sands production for years. WTI is >$50/bbl all the way out to '07.

Phila said...


Perhaps you're thinking about cost versus market price? If shale oil costs $25.00/pb to produce, it'd be roughly twice as expensive as conventional oil.

Anyway, I'll dig up the cite for my claim, and post it ASAP.

Phila said...


OK, after a bit of fact-checking, I think I see where we're getting mixed up. Assuming a production cost of $25/pb, shale oil would sell for a good deal more than $50/pb. The externalities put it through the ceiling, IMO.

Production costs for conventional oil are in the vicinity of $3 - $10/pb, depending on the country and site.

Regarding Australia's Stuart Project, Greenpeace claims that $360 million was spent to produce 1.5 million barrels of shale oil, before the project closed down. That's - what - $245/pb? As Greenpeace said, they proved that "It's feasible to produce oil from rocks at great environmental expense and with devastating toxic side effects and not be able to make a profit even with huge government subsidies."

Given that you'd expect early production costs to be very high, and to drop as processes are streamlined and economies of scale are realized, that's not entirely fair. But as you've probably guessed by now, I don't believe that shale-oil production will be economically feasible within the decade. And if you factor in environmental intensivity/damage to "ecosystem services," it may not be feasible in our lifetimes.

Just one man's opinion, though. And I'm no expert.