Mailbag: Setting the Record Straight on Shale Oil

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 (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.