Energy investment swings on the end of a clockwork pendulum. Oil prices high? All the alternative energy sources get funded. Oil prices low? It can wait.

With the continuing unrest in foreign oil producing countries and crude oil prices hanging around the $70/barrel mark, we’re on the investment part of the swing, and it looks like that pendulum may get stuck there, at least for a while. Most of the ink has been spent on the ethanol boom and BioWillie BioDiesel. But the real may money come to those who want to party like its 1979.

Because the last time Shale Oil made the headlines, you were wearing bell bottoms.

Blood from a Stone

Oil Shale is a rock; a rock with high levels of an organic material called kerogen. Kerogen in turn can be distilled to produce fuel oil and combustible gas. There is no one specific composition of oil shale; like coal it comes in all sorts of flavors depending on chemical composition, the type of kerogen, how old it is, where it comes from, and what died to make the kerogen in the first place. Like most fossil fuels, it is thought be formed mostly by ancient plant matter. In this case, those plants are deposited in low oxygen environments (lakes, bogs, etc.) where their decomposition can't be completed by bacteria. Add in time (lots of it), pressure (tons of sediment rock washing over the organic material) and the complete removal of water (through evaporation and pressure) and you end up with sedimentary rock with lots of hydrocarbons (kerogen) embedded in it: Oil Shale.

Oil Shale has been used for ages. Settlers used it to grease their wagon wheels as they headed out west. Kerosene, paraffin wax, lubricating oil, and ammonium sulphate were all at one time made from early oil shale operations. Getting actual fuel shale oil (the liquid) from oil shale (the rock) is a more modern idea, with a history dating back to the early 1900's, when a shortage of gasoline triggered folks to look to oil shale deposits for “transportation fuels.” The high crude prices of the 1970's predictably renewed interest in extracting oil from oil shale, and investment soared. But once crude prices dropped, it was no longer cost effective and companies saw record losses on their forays into the market. As crude prices have risen again and the cost of crude extraction rises, oil shale is once again on corporate whiteboards, and investment into technologies and retorting (distilling) processes are on the rise too.

Where’s The Rock?

There are oil shale deposits all over the world, but the United States has the market cornered. The largest known deposit is in the western United States (Colorado, Utah, Wyoming, etc.), with a total estimated resource of 1.7 trillion barrels worth of oil. Yes, you read that right, trillions, with a T. Now of course, all of that isn’t recoverable. But estimates from the RAND corp ranging from 500 billion to 1.1 trillion recoverable barrels. To put that in perspective a mid-range estimate of 800 billion barrels is more than three times what people think is still available from Saudi Arabia. These kinds of numbers make President Bush breathe “energy security” with longing intonations as he rolls over in his sleep.

No, Virginia, we’re not running out of oil.

Double Double Toil and Trouble

The trouble is that it isn’t easy to get this stuff out of the ground.

There are at least as many ways to refine or “retort” oil shale as there are types of the rock itself. They can be classified as mining and surface retorting and in-situ retorting. The first involves removing the shale from the ground, transporting it to a retorter and processing it (using heat) to get the oil and other products from the rock. In-situ retorting involves heating the shale underground to a high temperature to separate the oil from the rock, without having to use open mines. The desired products are then pumped to the surface and transported for further refining.

It’s not that easy though. 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 Shell's 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 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, Chevron 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.

The Department of Energy is also interested and has been putting its money into companies researching the needed technologies. A typical investment is in Composite Technology Development Inc., who is developing technology that will enable in situ mining of oil shale in a cost effective manner. Small plays like this – as they look for private or public equity – can present real opportunities.

As exciting as all this sounds, a commercial-size operation is probably 10 years away. But given the way the price of crude has been behaving, if the technology works, we may see products from oil shale in our gas tanks down the line. Watch this space.