Shell’s Shale Oil Shutdown—1-800-Dry-Hole

Early last week, Shell Oil announced it was shutting down its oil shale research project in western Colorado. Combine their departure with Chevron’s exit back in February 2012 and you can count another nail in oil shale’s coffin.

Yet since this unconventional resource ranks among the largest in the world, estimated by some at 1+ trillion barrels of potential liquid energy, this might well not be the final chapter in efforts to develop it. But it probably should be.

Shale oil may be the fool’s gold of the energy world. As long-time friend, energy writer and commentator Randy Udall wrote back in 2005, “If crude oil is king, oil shale is a pauper. It’s the dregs. The mystery is not that we lack an oil shale industry; it’s that we’ve spent billions trying to develop one.” His most pointed question: are such development efforts acts of inspiration or desperation?

A badly-kept secret is that there is no oil in oil shale. The rock is actually called marlstone and the hydrocarbon it contains is a waxy substance that never went through the “oil window”—the heat and pressure applied over millions of years to turn the solid into liquid energy. Instead, developers such as Shell cooked the kerogen into petroleum by injecting heat energy. A lot of heat energy. Gigabunches of heat energy. In fact, so much was needed—one very large new power plant per 100,000 barrels/day of liquid produced—that the process, despite extensive R and D, never made economic sense.

Shell was guarded with the details of their energy balance analysis, also known as Energy Return on Energy Invested. But it seemed likely that for every unit of energy input to produce liquid from kerogen, the output was just two units, maybe 2.5 units best case. (For comparison, conventional oil in the USA is likely to result in roughly 10 units of energy output for every one unit input.) Further, while Shell claimed they owned enough water rights to supply the substantial amounts required during production, residents of arid western Colorado expected large impacts on their water supply.

The high energy and water requirements undoubtedly contributed to Shell’s exit, though the company tended to speak in terms of “evolving priorities” and “other opportunities. In Shell’s comments to journalists, they didn’t exactly say, “it’s over. Kaput. Finito.” After all, that would be fessing up to the fact that their “tens of millions of dollars” invested in oil shale R and D as of mid-2005 came up way short—a high-stakes gamble with some learning spinoffs, but mostly money down a rathole.

If misery loves company, Shell has plenty of it. During the 1915-1920 era, oil shale promoters endured the first of many investment boom and bust cycles. Half a century later, the most infamous of these crashes hit western Colorado hard; it was the flaming out of our $8 billion federal investment in oil shale started during the late 1970s. When Exxon Mobil Corp. pulled the plug on its $5 billion project on May 2, 1982 (called “Bloody Sunday”), it cut 2,200 jobs and sent west-central Colorado into a decade-long depression. Today, Shell’s decision only impacts perhaps a few dozen Coloradans. But it deals a body blow to the latest round of oil shale hype.

As recently as 2005, one California Congressman—who must have been either blind, dumb or devious—intoned that if we would just get with the oil shale program, as a US Dept. of Energy report claimed, the USA could be producing 10 million barrels a day of the stuff in a couple of decades. Given that our oil production of the $3/barrel variety actually peaked at close to 10 million b/d some 40+ years ago, the notion that we could ever produce that much from very expensive shale oil was delusional.

Randy ranked in the top tier of oil shale skeptics. Our tour together of Shell’s Mahogany Creek research site in August 2005 kick-started his concerns. Over the next eight years, he penned a number of brutally frank op-eds, wrote “The Illusive Bonanza: Pulling the Sword from the Stone,” and started speaking out about the challenges and downsides of oil shale. He rarely pulled his punches.

During our visit to Shell’s R and D site, company personnel showed us the small area, a footprint about the size of a two-car garage, from which they had produced 2000 barrels of high-quality petroleum liquids. That was the culmination of 25 years of R and D efforts. They opined that after another five years of R and D, by 2010 they should be able to make a go/no-go decision about commercialization. But in 2010, Shell admitted they needed more time. Now we have their answer: we’re outta here.

Before Randy died this past June, it may be that his last publication was his article questioning a recent twist in the oil shale story: the entrance by Estonia’s government-owned oil company Enefit into the US oil shale saga. Estonia apparently agreed to subsidize Enefit’s efforts to export its oil shale technology to the US and elsewhere. An Estonian mining engineer wondered why Estonian taxpayers were subsidizing half a billion kroons for such development. Randy went on as follows:

“But what is a ‘kroon,’ you might ask. Kroons were once the local currency in Estonia. Then, when the country adopted the Euro, the old banknotes were compressed into bricks and burned for heating fuel. Smarter to burn those, in my view, than to burn oil shale.”

Yet the sheer size of this illusive prize and the high price of petroleum products make it likely that some level of R and D will continue, with or without oil majors like Shell and Chevron. So, as Yogi Berra might put it, it ain’t over til it’s over…though it probably should be.

ASPO-USA