www.ceres.org InvESTOR RISkS from Oil Shale Development * The Department of the Interior’s Bureau of Formation oil shale Green River Formation Oil Shale Deposits Land Management (BLM) recently proposed resources lie beneath limiting federal leases for development of federal lands, primarily oil shale to Research, Development, and lands managed by BLM. 3 Demonstration (RD&D) leases instead of Unlike conventional crude commercial leases. Given the many risks oil, the kerogen in oil shale surrounding oil shale development, is not liquid in its natural including technological uncertainties, state and has to be heated regulatory risks, and water constraints, through a process called BLM’s proposed RD&D approach makes “retorting” to separate it sense. Investors should be similarly from the shale. There are cautious in evaluating future investment two basic ways of retorting: in this technology. surface methods involve Given the many risks surrounding mining and crushing the shale and heating it above- oil shale development, including ground in a manner technological uncertainties, similar to conventional regulatory risks, and water refining; in situ methods constraints, BLM’s proposed involve heating the shale RD&D approach makes sense. while it is still in the ground and pumping the resulting hydrocarbons to the surface. 4 Source: Dyni, USGS, 2006 Background Oil shale technology is still in the early stages of development, even projects are currently under environmental Oil shale is a sedimentary rock that contains though it has been recognized as a review from a second round of BLM solid hydrocarbons in the form of kerogen, potential U.S. energy resource since the RD&D lease solicitations in 2009. 6 which is essentially immature petroleum. mid-1800s. Sporadic attempts to Several other oil shale projects are under Due to its relatively shallow depth, the commercialize oil shale during periods of development on state and private lands. kerogen in the shale has not been subjected high oil prices or heightened concerns (See table on next page) to enough heat and pressure to fully convert about energy security repeatedly failed once it into petroleum hydrocarbons. 1 The largest In 2008, BLM issued a plan to lease larger oil prices fell again. 5 oil shale reserves in the U.S. are in the amounts of federal land—more than two Green River Formation beneath Colorado, As oil prices and energy security concerns million acres—for commercial oil shale Wyoming, and Utah (see map). Estimates have risen again over the past decade, development, which was legally challenged of the technologically recoverable oil there there has been renewed interest in oil by environmental organizations. As part of range from about 0.5 to 1.1 trillion barrels; shale. In 2005, BLM initiated an RD&D the ensuing settlement, BLM agreed to take to put that in context, the midpoint in that program for companies to test oil shale a fresh look at the plan in 2011. The recent range (800 billion barrels) is more than triple technologies and their impacts, resulting in draft Programmatic Environmental Impact the proved oil reserves of Saudi Arabia. 2 the issuance of six RD&D leases for oil shale Statement that BLM prepared as part of More than 70 percent of the Green River projects on federal lands. Three additional this process recommended leasing smaller 99 Chauncy Street • Boston MA 02111-1703 • Tel 617.247.0700 • Fax 617.267.5400 May 2012 INvESTOR RISkS FROM OIL ShALE DEvELOPMENT amounts of land—just under 462,000 UUU Core Technological Uncertainty UUU Regulatory Risks acres—only for RD&D “so as to obtain more information about the technological Oil shale technology is still in the early stages Current and future regulations may pose requirements for development of this of development, particularly in situ processes. serious risks to oil shale. Lifecycle carbon resource, as well as the environmental Surface retorting technology has not been emissions for fuels derived from oil shale are implications, before committing to broad- applied successfully in the U.S. at a likely to be 25 to 75 percent greater than for 7 scale commercial development.” Because commercially viable level, and though the conventional petroleum fuels, depending on there are still many unknowns about the technology has been in development for the process used. 15 Assuming the estimates technologies that may be used for several years, further development and of elevated CO 2 emissions for oil shale are commercial development of oil shale, the testing is required. 10 The uncertainties reaffirmed and verified, then development of RD&D approach to leasing is prudent. around continued testing and development these fuels could face risks from regulations Likewise, investors considering investment in of new technologies and processes for such as: producing oil from oil shale leave a great deal the development of oil shale should be sure d lifecycle emissions requirements (e.g., still unknown, including the amount of the to obtain a comprehensive understanding of Section 526 of the Energy Independence resource that is recoverable, the efficiencies the wide range of risks that these projects and Security Act of 2007, which prohibits and costs of various methods, the impacts on could present. federal agencies from procuring natural resources, and the effects of various “alternative or synthetic fuel” unless its technologies on the costs of final products Key Investor Risks from lifecycle greenhouse gas emissions are (and thus the competitiveness of oil shale). 11 Oil Shale Development less than or equal to conventional fuels); 16 It is primarily this uncertainty that led BLM d Investors face risks from oil shale exposure to recommend making acreage available clean fuel standards and low carbon fuel through their public equity investments in oil only for RD&D leases. 12 And this uncertainty standards that aim to regulate and companies and their holdings in related creates risk for investors. As the Task Force reduce the lifecycle carbon intensity of companies. They may also face risks on Strategic Unconventional Fuels transportation fuels (e.g., the LCFS through private equity and other forms of (comprised of federal, state, and local adopted by California in 2009, though it is development capital. Investor exposure can officials) put it, “[d]emonstration of first- currently being challenged in court); 17 and be difficult to assess, due to limited generation technologies will be required at d legislation that puts a price on carbon , disclosure from the companies involved. To a commercially-representative scale before which, while unlikely in the near term, get a sense of some of the figures in play, significant private investment will lead to remains a possibility in the longer term. Exxon spent $1 billion on failed oil shale 13 commercial production.” The Task Force Given its high carbon intensity, oil shale will development efforts in the 1970s and early further explained that “[t]echnology be very dependent on carbon capture & 1980s (Exxon pulled out in May 1982 when uncertainty is the largest single risk factor sequestration (CCS) if it is to survive and oil prices began to decline and newly associated with oil shale development. This thrive as carbon-reducing regulations take discovered less-costly reserves came uncertainty remains even after 50 years of hold. In addition to being very expensive, online), 8 and Shell’s recent agreement to government and industry research to develop CCS faces many uncertainties—including develop oil shale in Jordan is projected to 14 a commercially viable retorting technology.” with respect to its commercial viability, cost $20 billion or more over that project’s public opposition, enabling policies, carbon first two decades. 9 price levels, public financing needs, and Investors should be aware of the range of constraints on markets for captured CO 2. risks that oil shale development efforts face, Other federal and state environmental which could potentially lead to stranded Technology uncertainty is the regulations, including those related to air assets and reduced shareholder returns. largest single risk factor associated and water quality, may pose additional risks with oil shale development. to oil shale development. For instance, oil shale operations will produce a range of air pollutants (both criteria pollutants and air Some Oil Shale Projects & Leases in the United States toxics) covered by the Clean Air Act (CAA). Company State Lease Type The CAA’s Prevention of Significant Deterioration (PSD) regulations might American Shale Oil LLC (AMSO) CO BLM 1st Round constrain oil shale development in the Green Anadarko Petroleum Corp. WY Private River Formation and elsewhere, particularly AuraSource, Inc. UT Applied for BLM 2nd Round where oil shale resources are near or Red Leaf Resources, Inc. UT Private & State immediately upwind of “Class I” areas of EnShale, Inc. UT State natural or scenic value where incremental Exxon Mobil CO Private & Applied for BLM 2nd Round increases in air pollution are strictly limited. Great Western Energy, LLC UT State Furthermore, if the oil shale industry reaches Independent Energy Partners CO Private the stage of applying for PSD permits, and Millennium Synfuels, LLC UT State those permits are based on use of Best Available Control Technology (BACT), it is Natural Soda Inc. CO Applied for BLM 2nd Round possible that the first few facilities will Enefit American Oil (acquired OSEC in 2011) UT BLM 1st Round, Private, & State exhaust the total PSD increment allowed Shell Exploration and Production Co. CO Private & BLM 1st Round (3) for the region. 18 UUU Market Risks UUU Water Constraints UUU Risks from Public Opposition The economic competitiveness of oil shale Oil shale development may be constrained by CCS projects in places such as Ohio, new is contingent on several market factors, the technology’s need for large amounts of York, and Germany have faced strong public including high up-front expenditures and water.