The Lowdown on Oil Shale, the Sleeping Giant in Unconventional Resources



What’s all the hubbub about oil shale?

Among all unconventional resources of oil, oil shale has the most potential to change the worldwide dynamics of supply and demand across geographies.

Shale oil is extracted from oil shale. Oil shale is a fine-grained sedimentary rock that contains the organic material kerogen. But oil Shale needs to be heated in order to convert kerogen into shale oil. This heating can be done underground, or “in situ,” as well as on the ground, or “on situ,” after extracting the oil shale from the underground mine.

Shale oil is a very heavy, sour oil, riddled with far more impurities than conventional crude oil. In fact, it’s heavier than the lowest quality conventional crude oil. Thus, processing of shale oil into refinery grade, feedstock—also known as synthetic crude oil—involves additional expenses.

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Largest resources of shale oil

Oil shale has a mammoth potential to become the world’s largest resource for unconventional oil. According to estimates from the American Petroleum Institute, the amount of shale oil recoverable from the Western US oil shale is approximately 800 billion barrels. Doesn’t sound like much? Compare this amount to the total proved reserves of Saudi Arabia: approximately 268 billion barrels.

We should note here that oil shale deposits are found around the globe, in thirty-seven countries. Having said this, we should also note that shale oil production is still in its experimental phase, where heavy hitters in oil, such as Royal Dutch Shell, are still trying “in situ” production of shale oil, which involves heating the rock inside the ground itself and then extracting the shale oil.

All this means that the costs involved in this kind of production are still so high that even when Texas Intermediate crude hit $100 per barrel, it didn’t give much incentive for many upstream companies to boost their shale oil E&P. As far as we know, the highest quality oil shale deposits in the world are in the US—in the Green River Formation in Colorado, Utah, and Wyoming.

Companies with upstream operations

Royal Dutch Shell (RDS.A) has begun to develop an experimental in-situ facility for shale oil. Other players that operate in different unconventional resources include EOG Resources (EOG), Pioneer Natural Resources (PXD), EQT Corporation (EQT), and Southwestern Energy Company (SWN).

Apart from investing directly in these companies, investors can also gain exposure to upstream energy companies like these by investing in the SPDR S&P Oil and Gas Exploration & Production ETF (XOP).

Continue to the next part of this series for a discussion of the role of shale gas in the world of upstream energy companies.


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