Shale Oil Not The Answer

This morning on CNBC, the Chief Executive Officer of Continental Resources (CLR), Harold Hamm, gave an overview of what he considers to be the answer to America's energy deficit:  Oil Shale.

Mr. Hamm was billed as the richest oil man in America, so he ought to know what he's talking about, don't ya think?  I think someone needs to send him the "Marko's Take" pieces on "Peak Oil", which discuss in detail exactly why oil shale is NOT the answer and NOT even close.

CLR is a major operator in what is known as the Williston Basin, a large fossil fuel deposit stretching from Canada into North Dakota and Montana.  Increased oil production is driving a healthy state economy, one of the only healthy states in the Union.

The Bakken Oil Shale Formation is believed to contain a whopping 3.65 billion recoverable barrels of oil.  Not bad, but hardly the answer.  Even if it could be accessed immediately at NO cost, it would last for 40 days of world oil consumption.  Yes, 40 days.

However, shale oil is notoriously expensive to access.  It is energy intensive, meaning that it requires substantial energy just to produce the energy.  So for every barrel accessed, it requires more than half a barrel in energy.  Thus, the 40 day supply shrinks to 20 days or less.

In addition, shale oil requires great quantities of water.  And, it is accessed through very environmentally unfriendly strip mining.  Have you every seen a shale oil project?  It would make the Sierra Club get out cannons, normally reserved for Japanese whaling boats, and launch them at the oil men.

Shale oil, on the other hand, is quite light, meaning that it has abundant quantities of the more valuable oil products such as jet fuel and gasoline.  On the other, other hand, it is full of various minerals and metals, which are very expensive and energy consuming to refine.  Our refinery system would need to be dramatically upgraded if shale oil ever became a great source of energy.  Don't worry.  It won't!

The large U.S. Oil Companies have passed on shale projects for the most part.  I know, they want to keep oil out of our hands so they can enslave us.  But, aren't they interested in making money?  Don't you think that if there was money to be made, they'd be there in force?  Yet, none of them show anything but a casual and passing interest. 

The majors prefer to pursue the "cheap" offshore oil in the Gulf of Mexico which must be accessed by drilling many miles down into the Continental Shelf.  And, incurring the wrath of environmental groups.  And, incurring the wrath of Congress.  And, the public.  Seriously, if shale were so promising, why would they pursue deep drilling, with all its expense and risk, when a cheap domestic source were available?

There are a plethora of articles which suggest that the U.S. and World are literally swimming in oil.  That is just not so.  Fossil fuels are being depleted are very rapid rates, and every major oil producer, with the exception of Russia and Brazil have entered their own "Peak Oil" situation, and production is now falling off a cliff.  That includes the United States, Venezuela, Mexico, the North Sea and most of the Middle East.  Only Iran and Iraq have healthy reserves.  Wonder why we decided to invade Iraq?  Wonder why we are so against Iran's nuclear capabilties?  I would think it's obvious.

In fact, our presence in Afghanistan is not only about Opium, but about natural resources.  Don't think for a second that we haven't mapped all the resources in that country.  If it had nothing, trust me, our troops would have left long ago.

For investors, opportunities in oil are fraught with multiple risks.  Most importantly, is the likelihood of a "Windfall Profits Tax", which was a failure in the 1970's and would be just as big a failure if enacted today.
However, the major oil companies have very fat dividends and are among the only safe plays in the stock market today.

Don't yourself be fooled by the un-justifiable hype in Shale Oil.

Marko's Take

What Exactly Is Peak Oil?... Part 1

Peak oil refers to a hypothesis originated by M. King Hubbert in 1956.   He accurately predicted that U.S. production would crest between 1965 and 1970.  U.S. production topped at 9.4 MM barrels in 1970.  His model, known as "Hubbert's Peak" suggests that a non-renewable resource will follow a roughly symmetrical bell-curve shape based on the limits of exploitability and market pressures.

Hubbert also predicted that world production would peak shortly after 2000.  He was right.  World oil production peaked in 2005 at approximately 85 MM barrels per day.   However, given the unprecedented rise in oil prices in 2008, output slightly exceeded the prior peak as various countries like Saudi Arabia took unprecedented measures to boost production in order to keep prices from skyrocketing further.  We know that the subsequent crash in oil prices caused production to be curtailed, so 2008 will prove to be the year of maximum oil production.

But, how do we know that production won't rise again as a result of the discovery of some major oil field?
Elementary, my dear Watson!  There are no new fields large enough and close to production that could possibly offset the inevitable decline in the production of existing fields.  In order for any field to begin production, it must first be found, drilled and delineated BEFORE any meaningful production occurs.  That process takes many, many years.  So, by the time a GIANT oil field comes into production, the existing fields will be well into decline and the new field will only slightly offset the decline.

What about synthetic crude such as Tar Sands or Oil Shale?   At this time, neither are significant except to a few countries.  Shale oil, touted as the next big thing has been known since the 1950's, yet no significant production from that source is in existence!  It isn't a matter of price.  Oil shale is "energy intensive", meaning that it requires a lot of energy to produce energy under current technology.  Therefore price is meaningless!

Tar Sands are produced, especially in Alberta, Canada.  However, current production is only 1.2 MM barrels per day.

The ONLY reason Peak Oil might be incorrect would be the belief that oil is renewable as some have argued.  This argument is ridiculous!  Air and water are renewable as they are both composed of gasses.  In the case of water, Hydrogen and Oxygen, while air is composed primarily of Nitrogen and Oxygen.  Crude Oil is composed of Hydrogen and Carbon, so it doesn't share similar properties.

Finally, the U.S. has known about Peak Oil for years, as Hubbert's predictions have turned out to be uncannily correct.  We invaded Iraq in 2003.  Wonder if there was a connection?

Tomorrow we'll continue our "Take" on Peak Oil.

Thanks for reading!

Marko's Take