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Mailbag: Setting the Record Straight on Shale Oil

by | published May 23rd, 2012

It’s been a while since I dipped into the mailbag to answer some of your questions.

And with Europe on the brink, I thought I’d take the time to answer a few more.

Remember, if you have a question or a comment, be sure to register below and type your thoughts into the box.

Okay, who’s first?

Q: Last week, the U.S. Government Accountability Office announced there is more oil in Colorado, Utah, and Wyoming than any place in the world. So why aren’t we developing it? What’s your take? ~ Chris K.

A: Chris, that’s a good question. Unfortunately, this announcement is just an old headline with many shortcomings.

For those who don’t know, Anu K. Mittal, the Government Accountability Office’s director of natural resources and environment, submitted written Congressional testimony in early May about the long-term potential of oil production in the United States.

And, at first, it seemed like a bombshell.

But numerous media outlets have been howling for deregulation of the domestic oil sector over what has pretty much been a non-secret for years.

It’s true that Green River Formation – an assemblage of more than 1,000 feet of rocks beneath areas of Colorado, Utah, and Wyoming – contains the world’s largest deposits of oil shale. As for just how much “oil” is there, it’s about equal to the world’s entire proven oil reserves.

“USGS estimates that the Green River Formation contains about three trillion barrels of oil, and about half of this may be recoverable, depending on available technology and economic conditions,” Mittal testified.

Now, before we get ahead of ourselves, there is a major difference between the Green River Formation and the shale fields we discuss regularly in the Bakken, Eagle Ford, or the Marcellus.

The stuff at Green River is not “crude oil.”

Unlike the crude in the tight oil formations, the oil shale consists of very heavy hydrocarbons that are not liquid but actually rock solid. This oil shale looks more like coal than crude. This shale rock contains solid bituminous materials called kerogen. This fuel is released as petroleum-like liquid when the rock is heated at extreme temperatures though a chemical process.

Put simply, this rock is basically fuel that the earth hadn’t finished “cooking,” and only an expensive chemical process can expedite its conversion into oil.

Production of this sort of shale is much costlier, too. It’s upwards of $100 a barrel to produce (in 2007 dollars). In addition, the formation is centered on federal lands and most of it in protected wildlife areas. So we can’t expect the environmentalists or the EPA to just open the doors.

If we’re hoping for “cheap, reliable energy” right here in America, based on this news, we’re going to need to be honest with ourselves in the short term. This formation will produce energy, but it won’t be cheap, and reliability will require a host of factors that need to go right over the long term.

Think of it this way…

There are trillions of dollars of gold and silver in the world’s oceans. But, like oil shale, it currently costs more to extract the commodities from the ocean than their underlying value is worth or will be worth in the near-future on the futures markets.

Energy independence is certainly possible. It’s just a question of how much we’re willing to pay for that luxury, and that’s not just a question of dollars and cents.

Q: So James, please tell us about the other applications for exporting facilities throughout the U.S. that are pending – who are the companies behind the applications – who should we be buying besides Cheniere Energy? ~ Jim O.

A: Jim asked this question a few weeks back after reading my piece on the Federal Energy Regulatory Commission’s decision to allow Cheniere Energy Inc. (AMEX: LNG) to export liquefied natural gas (LNG) from its Sabine Pass Terminal.

According to the FERC’s April 26 release on Import and Export terminals, there are four proposed export terminals and four U.S.-sponsored sites. The four proposed export terminals are in Freeport, Tex.; Corpus Christi, Tex.; Coos Bay, Ore.; and Lake Charles, La.

The U.S. sites identified by project sponsors include the terminal in Cove Point, Md.; Hackberry, La.; Brownsville, Tex.; and Astoria, Ore.

Now, the majority of these sites have been proposed by companies that are not public or are traded on pink sheets, and aren’t worthy of our attention. Naturally, we feel that Cheniere has the better long-term position given their success in working with the FERC and their ability to sign long-term contracts with buyers all around the world well before they begin exporting.

The Cove Point facility, which has been proposed by Dominion Resources Inc. (NYSE: D), has given rise to a number of concerns. First, the Sierra Club has stated that they will block Dominion’s approval for exporting LNG on the grounds of an agreement both signed a few years ago. This could lead to significant delays.

Meanwhile, Sempra Energy (NYSE: SRE) is working with Cameron LNG on the Hackberry, La., deal. But the project will not break ground until 2013, and the company would not begin exporting until late in 2016.

The final company of note is Southern Union and the Lake Charles Facility. In August 2011, around the time the company was purchase by Energy Transfer Equity (NYSE: ETE), it received approval to export up to two billion cubic feet of natural gas a year from its facility.

Energy Transfer, based in Dallas, is a diversified energy partnership that has some nice upside in the market and yields 6.75% right now. The company is heavily engaged in the midstream markets, with more than 17,500 miles of pipeline and significant storage for oil and gas.

Still, it’s safe to say that Cheniere remains the best positioned in the LNG game for now. What’s more, it is up 50% since Kent added it to his Energy Advantage portfolio as a core holding.

Kent will be back on Friday, and then off on Monday. Have a terrific Memorial Day weekend if you’re here in the States.

Sincerely,

James

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. edward
    May 23rd, 2012 at 13:58 | #1

    I am long a chunk of OIL Sept calls w/ a strike price of $30… does this trade still have a chance? I know there is plenty of time, but oil goes down everyday…tx

  2. Charles Jacoby
    May 23rd, 2012 at 14:52 | #2

    What can you tell us about the joint venture between Arrakis Oil, Imperial Chemical and Peak Oil Sands, LLC to develop the bitumen in Kentucky using a patented process which includes a proprietary chemical. The chemical is EPA approved, requires little or no water, and attaches to the sand. The sand supposedly separates out from the oil, with the oil floating to the top for easy separation.

  3. jerry saylor
    May 23rd, 2012 at 15:01 | #3

    Dr Moors,

    Even with Iran agreeing to inspections with the UN, do you still believe that the Europe-Iran conflict will cause much higher oil prices?

  4. Linda
    May 23rd, 2012 at 15:15 | #4

    Since Cove Point was a working LNG import terminal in the past, can you please tell us why it is not acceptable now for it to be retrofitted as an export terminal.

    Thanks.

  5. enthusceptic
    May 23rd, 2012 at 16:58 | #5

    Globalization sounds nice, but is far from a reality in many ways. Money transfers can be complicated, and accessing stock markets can be impossible.
    Even the mighty USA needs FDI, and not only from people that the people of the US complain about. Thinking that most countries in the world are irrelevant or hostile is a big mistake. Most people in the world want the same, progress and prosperity.
    The growing global middle class will not only put pressure on the availability of natural resources – creating great investment opportunities – but a better protection against out-of-control immigration to the US and Western Europe, terrorism and crime than the US Military and other govt. organizations can.
    Let me get to the point: I challenge you who have any kind of influence or knowledge about stock broking. Establish a truly international brokerage that gives access to all or most stock markets in the world, open to anyone anywhere.
    Then capital can flow to where it’s needed, and we can make lots of money.
    Protectionism, regulations and SEC etc. you say? What about offshoring? I bet Carribbean, Swiss, Singapore, Hong Kong or other banks would fall all over themselves to help with getting set up.
    I’m just a dreamer, or what…?

  6. jdc
    May 23rd, 2012 at 17:02 | #6

    Kent,

    I think it is safe to say that prices will be stagnant or slightly decelerating for the rest of the year. The Iran “crisis” will blow over as the world, read United States, has no thirst for further provocative or military action. Presuming that Iran continues with their supply levels, and that both Merkel and Obama are hindered domestically; the worldwide slow down, read demand, is the pre-eminant factor in oil pricing. Supply will increase to full capacity for a rubber band effect.

    Now after the elections, we can expect a full round of government stimulus the world over. Meaning demand should pick up vociferously from 2013 on with Europe leading the way.

    Doesn’t it make more sense to forego short term plays and invest for the longer term trend, and load up incrementally as oil dips, bobs, and weaves? We can anticipate a huge upswing next year and thereafter.
    Demand is not going anywhere this year in my opinion, and supplies will only go up.

  7. gary
    May 23rd, 2012 at 19:02 | #7

    so what about $200 bl oil in the wake of IAE having all but worked out Iranian nuke site inspections

  8. Bruce M. MacMi9llan
    May 23rd, 2012 at 19:29 | #8

    Dr. Moors,

    I’ve been reading about HyperSolar (HYSR)and their development of hydrogen from water using photosynthesis. Apparently, they’ve developed nano particles that when placed in water and using the Sun will produce free hydrogen. What do think of this Company and this technology? Is it a good long term speculative play of value?

    Thanks,

    Bruce

  9. Francis
    May 23rd, 2012 at 21:21 | #9

    Hi,
    I am a paid subscriber of Energy Inner Circle and Energy Advantage.
    Question: There are signs of tention easing up in the Middle East oil embargo. Nations involved in the negatiation with Iran expect positive outcomes. Suggesting the embargo might not be put in force on July 1st. If that happens, how will it affect the October call trade you recommended recently in your Energy Advantage?

  10. Vir
    May 23rd, 2012 at 22:10 | #10

    Dr. Moon,
    As in every publication of your report, exact date mentioned for oil rally is Jully 1st! Can you please let us know on what basis this date is arrised into your calculations.

    Thanks,

  11. S.L.
    May 24th, 2012 at 20:47 | #11

    Good Day Dr.Moore Kent ! I sent you and email requesting stock options on oil investments. Can you send me info on if and when is a good time to invest in oil and how much will be required for new comers wanting to invest in oil through stock options. In the past you sent me info on oil investing and what you saw as a good time to call your broker to inform him that you wanted to make a move. Thank you for all the valueble info and look forward to receiveing more.
    sincerely Mr.Floyd S.L.

  12. Marius
    May 25th, 2012 at 01:26 | #12

    To Linda
    Because the idiots from Sierra Club are opposing to that, and unfortunately they have a too big voters base for politicians to ignore them!@Linda

  13. Marius
    May 25th, 2012 at 01:37 | #13

    To entusceptic
    As a us citizen try to open a BANK account in Switzerland, Hong Kong, Singapore or Panama, and see what they will tell you. I consider it will be polite for them just to show you the door. It is much worse with a brockerage account. Thank for that to your elected representative, Uncle Sam, and, yes, to his unconstitutional Frankenstein monster aka IRS!@enthusceptic

  14. Marius
    May 25th, 2012 at 04:49 | #14

    And now, just a tought burning some (way after) midnight oil.No connections with the article upstairs…
    About 13 years ago I was asked by a reporter what I think about oil,US oil policy, and where we’ll get us in the future. At that time oil was trading around 13$/barrel, gas was around 80 cents/gallon, and almost everybody in Texas was “killing” the wells on his property. If was costing you 15$ or 16$ to pull out of the ground something you could sale for only 13$, why to Hell would bother? It would drive you to the poor house.
    Well, to the first question, which sounded something like this: “Do you really think will ever be a revival of Texas oil?” , my response was:”Sure, when the price will be high enough,don’t count Texas out of big picture.”
    The second question was:”Do you think US Government has an energy policy regarding oil?”. My response:”Defenetly not!Their policy is to be reelected, or to promote their selfiterest,but,believe me, that’s a policy by itself, and is a good one, well, at least for energy policy of US.” “WHY?!!!…” “Because at this point we don’t burn the oil FROM OUR GROUND!!! We burn the oil from Middle East, Libya,West Africa. When they will run off of it we still have ours.Remember, Texas oil make us the winners in WWII on two fronts, Germany and Japan.Germany lost the war, only because she fail to conquer Baku.(well, and because an stupid Hitler refused to give Rommel all the help he needed to take Suez Cannal-but that’s another storry)Anyway I consider that lack of decision, from White House and Congres the best energy plan!…”
    “But, how much oil do you think we have here in the USA? At this point, almost 70% of our needs came from abroad.” “Sure, because they are cheaper.But beware,Texas and California are far away to be exhausted.Don’t count off Oklahoma, Louisiana and Kentucky.If every producing oilwell around the world would be shut down tomorrow,excepting those in US, the world woud run at least 10 years whithout a brownout.And let’s not consider the science advacements by itself…”
    Oh boy, 13 years ago, everybody laugh at that. It was so easy to laugh instead to listen…
    Now what we have?,let’s see, Bakken formation,North Dakota,Montana,Saskatcewaan, and maybe much wider – just suppose to outdo Prudhoe Bay.
    Green Rever basin?…What?… about 1.5 TRILLION barrels recoverable whith today technology?…
    Not counting Eagle Ford, Monterey, Haynesville, and all that gas in Marcellus ( and not only)…
    Well,now I’m just telling to everybody who beyond ears has some brains – EXPORTING LNG NOW, IS DENIING OUR CILDREN’S FUTURE…

  15. Ahmed
    October 30th, 2012 at 09:55 | #15

    Marius,,thank you a very important and crtical cord the end of your shouting essay…LEAVING SOMETHING TO UR CHILDREN…watchong governments all over the world none of them doing any thing in this direction…POSTERITY AFFAIRS..I call for all rational government o establish a ministry with the sole business is to look after what we leaving to our future generations..the ministry and or government body should assigned the duty to tell every energy agency to chip part of the you priducing and consuming and rserve it for futuire..some how..eiher store or leave it underground..In the USA people ar screaming for potential oil peak..and ironicall shipping gas and C products obraod, in a way eshausting their energy stock after temporary commercial gains.. in the middleeast, they talk lavishly about future generations and theur need for guaranteed supplies of resources but nothing is done about it.
    I think it is high time that soem sober country or government show some leadership in this line…I read books out of the US about the posterity, but I have not seen any serious work done about…

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