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FN Arena News: Deepwater, Tar Sands, Shale: Are Alternative Oil Sources Realistic?

EXTRACT: What Shell is doing is simply speeding up about 10 million years of nature. Of course, to maintain that sort of heat for that length of time requires a somewhat substantial amount of energy. A bigger power plant, in fact, than Colorado has ever built. And every incremental 100,000 barrels of oil produced will require another plant.


July 18 2006
By Greg Peel

Daily Wealth’s Matt Baldiali would have you believe there are fortunes to be made in investing in companies that invest in alternative sources of oil. No doubt he’s right. For in a world concerned with the future of oil availability, any sniff of hope will send share prices rocketing on perception alone.

As to wether oil can be realistically extracted from alternative sources without overbearing economic or environmental costs is another matter.

Last week FN Arena highlighted the possibilities of coal-to-oil conversion (Will Coal Replace Oil? 13/07/06).

While oil is over US$50/bbl such a process is economically viable, but coal is environmentally very unsound. Conversion of natural gas to liquid also has its drawbacks.

Baldiali has highlighted three specific sources of oil that investors should pay close attention to: deepwater drilling, tar sands and shale oil. In each case there are pundits who proclaim the source as a panacea. In each case there are associated problems.

As recently as the late 1990s experts were foreseeing the exhaustion of the Gulf of Mexico’s very large oil fields – those known as “elephants”. But in 1999, BP employed new deepwater technology to discover a potential three billion barrel reserve called Thunder Horse. Current producing fields make up only 25% of Gulf reserves, notes Baldiali. The other 75% lies in deep water.

The Noble Corporation of Texas is a deepwater drilling expert. Speaking on the ABC’s Four Corners program recently, Noble’s CEO James Day noted: “Deep water, a decade ago, was 1,000 feet. People used to think 1,000 feet would never be passed. We drilled a well recently at 9,000 feet of water. We’ve got rigs designed for 10,000 feet [3.2km] of water.”

All very exciting, except when you learn that while a standard land rig might cost US$10 million to build, a deepwater rig costs US$500 million. If you want to hire one it’s US$300,000-600,000 per day. That’s still going to hurt at the pump.

And if James Day is meant to be champion of deepwater drilling, he’s not very good at it. “The people that I trust and believe – geophysicists, geologists – say the days of the big fields are gone.While we can drill off West Africa, and they have significant reserves, or Brazil, or the deepwater US Gulf, they’re just going to be replacing what we’re currently consuming. But that’s just treading water. That assumes we’re not increasing consumption”.

So deepwater drilling may not prove to be the saviour after all. That doesn’t dismiss it as an investment opportunity, however, so for the record Matt Baldiali likes Transocean (NYSE: RIG).

Tar sands are a type of bitumen that has formed from the decay of ancient forests. Unlike earth-locked crude oil reserves, the light oil in tar sands leached out into the ocean many moons ago, leaving the remaining heavy oil to mix with sand and become a sludge. But there’s an awful lot of sludge. Alberta’s reserves cover an area the size of Florida, or two Tasmanias. There are also large reserves in Orinoco in Venezuela.

Tar sands represent “more oil than the Middle East”.

Baldiali suggests investors look into a Canadian company called Suncor (TSX:

The simplest way to extract oil from tar sand is to scoop it up into bloody great tip trucks and cart it off to be washed and refined. Sounds simple enough, but in reality the process requires separation in vats of water and solvents heated by natural gas, and washing with more reservoirs-full of fresh water before the refining process. (Four Corners)

There is another method involving drilling and steam which is being trialled. However, The Wall Street Journal has noted “heavy oil has big economic and environmental drawbacks. It costs more to produce and takes more energy to turn into gasoline than traditional light oil. Recovering and processing Fort McMurray’s [Alberta] heavy crude releases up to three times as much greenhouse gas as producing conventional crude. And upgrading it into refined products will require a gigantic investment to retool global refineries”. (source:

So much heat does the extraction process require that oil company Total even considered building a nuclear plant at Fort McMurray. has summed up the ramifications or tar sand oil extraction rather well:

“Canada, which exports more oil to the US than any other country, already is having trouble meeting its pledge to cut [carbon dioxide] emissions largely because of its mushrooming heavy-oil production.

By 2015, Canada’s Fort McMurray region, population 61,000, is expected to emit more greenhouse gases than Denmark, a country of 5.4 million people.

“In northern Alberta, the oil-sands boom is remaking the landscape. The mining operations have clear-cut thousands of acres of trees and dug 200-foot-deep pits. The region is dotted with large man-made lakes filled with leftover waste from the mining operations. To chase off migratory birds, propane cannons go off at random intervals and scarecrows stand guard on floating barrels.”

What price the world’s obsession with oil?

Which brings us nicely to Baldiali’s third option – the secret shale oil reserves of Colorado. Actually, I wrote about this “secret” in another publication last year.

In 1930, the US government placed protective legislation on a 16,000 square mile area of land sitting on the corners of Colorado, Utah and Wyoming. Rumour has it they knew what lay beneath. The area is presently a wildlife reserve.

What does lie beneath is vast quantities of shale. Oil can be extracted from shale, and no prizes for guessing just how much oil might be trapped within the region. Yep, “more oil than the Middle east”. Baldiali suggests a mere 2 trillion barrels.

Last year George Bush signed a mandate lifting the protective legislation on the area, known as the Green River Formation. Test drilling has begun. Initial estimates, considered conservative, suggest the area could produce 3 million barrels of oil per day.

Shale oil is not a new phenomenon – it last received headlines during the oil shocks of the seventies. There are deposits in other countries, including Australia, but nothing comes close to the reserves in the US.

Writing in the Colorado Business Journal, Amy Gillentine notes that after a century of trying, and US$10 billion in investment, shale oil currently represents 0.0001% of world energy. However, it has only been recently that the oil price has made alternative oil sources viable of course.

Baldiali points out there are several US companies that could actually extract the oil for US$10 barrel. Where have they been? The reality is that commercial extraction is still in its infancy, if Shell’s experience is anything to go by.

Gillentine reports that Shell had previously decided that such a process used too much energy, too much water and displaced too much land. However, Shell has since come up with a new method that it is currently testing.

The company plans to heat the rock to about 700 degrees Fahrenheit for three years.

What Shell is doing is simply speeding up about 10 million years of nature. Of course, to maintain that sort of heat for that length of time requires a somewhat substantial amount of energy. A bigger power plant, in fact, than Colorado has ever built. And every incremental 100,000 barrels of oil produced will require another plant.

What this equates to is that for every unit of energy provided by shale oil, two-thirds of a unit of energy is required to produce it. To extract one million barrels of oil per day would require ten new power plants and five new coal mines. To get the area up to producing three million barrels per day would require infrastructure that would, on estimation, take twenty years to construct.

That’s a long time to wait by the bowser. Shell has decided not to take its shale oil experiments to a commercial level.

Baldiali is convinced, however, that there is a fortune to be made in investing in shale oil production. So big a fortune that he won’t tell you what companies to invest in unless you subscribe to his newsletter. One thing is for certain, however, is that large-scale shale oil production would be environmentally devastating for the Green River area. Vast amounts of rock would be displaced. Vast amounts of water would be deployed. The entire Colorado River valley would be under threat.

What price the world’s (and particularly America’s) obsession with oil?

Any alternative source of oil requires substantial cost. In the case of deepwater drilling, there’s doubt as to whether there’s really much oil to find. In the case of tar sands and shale, the energy derived from oil will consume vast amounts of energy from coal or gas and vast amounts of water. Coal-to-oil conversion obviously requires coal, but also more coal to fire the plant. Do you see a pattern here?

None of these energy sources results in less greenhouse emissions, and some result in more. If carbon credits become securitised on a global basis, such that carbon producers will need to pay for the emissions they produce, then such solutions will likely no longer be viable.

Even the US is concerned about global warming, or at least it is making a show of being so. The Chinese have come to realise economic superiority is not much of a reward for making its nation uninhabitable. At some point the focus will have to swing away from how to find/produce more oil to how to live without it.

In the meantime there will no doubt be money to be made chasing an out of date dream.

Article ends…

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