Israel May Hold the World’s Third Largest Reserve of Shale Oil (economywatch - David Caploe, PhD.)

Last summer huge deposits of natural gas were found along Israel's northern coastline.

As with almost everything having to do with that controversial country, both Israelis and others found this "revelation" a mixed blessing, to say the least. On the one hand, it certainly eases concerns about Israel's energy viability, with enough not just for its own needs, but sufficient quantities to become a major exporter as well.

At the same time, many Israelis feared the effect such "easy money" would have on the country's already significant elite corruption problem, and its proximity to Lebanese territorial waters raised once again the question of the wisdom of Israel's 2006 invasion, which alienated many previously pro-Israeli elements in Lebanon, and seemed sure to fuel a national consensus to contest any easy access for which Israelis might be hoping.

Hmmmm ... sounds a bit like BP and their Arctic drilling problems in Russia ... ;-) ...

Now, it turns out, even more fuel is being added to Israel's energy fire -- so to speak -- with the equally stunning news that the country may hold the world's third largest quantities of shale oil - behind the US and China, both of whom would consume almost all of their own production - meaning Israel could indeed become the world's largest exporter of shale oil -- hence the comparison to Saudi Arabia.

Israel a global super power in energy ??? The mind boggles.

But the same sort of technological revolution that has made previously inaccessible on-shore natural gas suddenly available - via a process of hydraulic fracturing, or fracking, an environmentally destructive process whose impact on the global natural gas scene we discussed last week - is now apparently transforming the extraction of shale oil as well - and in so doing, shaking up the energy dynamics of the entire world, including Israel.

How did all this come to be ???

The most recent developments in this story start with Dr Harold Vinegar, the former chief scientist of Royal Dutch Shell, who is at the center of an ambitious project to turn Israel into one of the world's leading oil producers. Israel Energy Initiatives, or IEI, where Vinegar is chief scientist, is working on projects to extract oil and natural gas from oil shale from a 238sq km area of the Shfela Basin, to the south and west of Jerusalem.

Oil shale mining is often frowned upon by environmentalists for many of the same reasons as fracking: it's a dirty process that is both energy and water-intensive.

IEI, which is owned by the American telecom group IDT Corp, believes its technique will be cleaner than that of other operators because the oil will be separated from the shale rock up to 300m beneath the ground.

Water will be a by-product of the process, rather than being consumed by it in large volumes. Vinegar says Israel has the third-biggest oil shale deposits in the world, outside the US and China:

"We estimate there is the equivalent of 250 billion barrels of oil here. To put that in context, there are proven reserves of 260 billion barrels of oil in Saudi Arabia."

And not to upset too many people, but we also ran an item earlier this year about Arab scientists working for ARAMCO who argue that the Saudis have, in fact, systematically OVER-estimated their proven reserves.

IEI estimates the marginal cost of production will be between $US35 - 40 per barrel.

This, Vinegar points out, is cheaper than the $US60 or so per barrel that it costs to extract crude from inhospitable locations such as the Arctic - wow, if BP CEO Dudley isn't gnashing his teeth when he reads this ;-) - and compares with $US30 - 40 per barrel in some of the deepwater oilfields off the coast of Brazil.

"These Israeli deposits have been known about, but have never been listed before. It was previously assumed there was not the technology to deal with it."

IEI hopes to begin production on a commercial basis by the end of the decade, with a view to producing 50,000 barrels per day at the outset. This would be a fraction of the 270,000bpd consumed daily by Israel, but would be a significant step towards making the country energy-independent. With one barrel of oil comprising 42 gallons, Vinegar estimates each ton of oil shale contains approximately 25 gallons.

The extraction process involves heating the rock underground, using electric heaters, to approximately 325C, the level at which the carbon-carbon bonds in the rock start to "crack".

Wow, this really DOES sound like the shale oil equivalent of "fracking". The oil produced by the process is light and easily refined to a range of products, including naphtha, jet fuel and diesel.

This is significant, since light oil -- like that produced in Libya -- is considered "sweet" and much less costly to refine than the heavier crude found in Saudi Arabia.

Given the importance of political receptivity to outside investors in the energy business, it's not surprising the project is attracting serious interest from outside investors. In November, 2010, an 11% stake in Genie Oil & Gas, the division of IDC that is the parent company of IEI, was acquired for $US11m by Jacob Rothschild, the banker, and Rupert Murdoch, chairman of News Corporation and promoter of right-wing lunacy throughout the English-speaking world.

Genie's advisory board includes impressive figures such as Michael Steinhardt, the hedge fund investor, and more frightening ones, like Dick Cheney, former US vice-president, and co-founder of the Shiite Islamic Republic of Iraq, along with his running buddy George W Bush.

An appraisal is now under way that would be followed by an 18-month pilot stage, according to Vinegar. Among the issues this will address will be concerns raised by environmental groups, including an examination of IEI's claims that the process does not require excessive use of water or energy.

Reassurance will also be sought that a local aquifer, which is several hundred metres below the shale deposits, will not be contaminated by the work. This is key, because, while the Middle East may have an abundance of fossil-fuel energy, it has a decided shortage of water, so any process that is a major net consumer of water may not be cost-effective from an overall point of view.

Assuming these early stages are completed successfully, a demonstration phase would then take place over three to four years, during which the work completed in the pilot phase would be continued on a larger scale. Only then would the commercial operations begin.

By that time, up to 1000 people would be employed on the project, many of them specialist engineers from outside Israel, says Vinegar, who adds:

"Funding is not needed for the pilot and demonstration, although once we get to 50,000 barrels per day, we would want to have a partner. We have been approached by all the majors."

Not surprisingly, the project still faced a number of significant issues, as Vinegar points out:

"There is a geological risk:

- Is the resource there?
- What is the risk to the aquifer?
- We have no doubts here, in particular that the resource is there and is of good quality,
- but the pilot can prove these things.

"Then there is the technological risk:

- Can we drill long horizontal wells?
- Can the heaters be placed in them?
- And can they last?

"And finally there is the economic risk, what the price of oil does. But I think the price is going to continue rising, to the extent that, by 2030, we will be at around $US200 per barrel."

And while this seems to have escaped Vinegar's attention, which is not a great sign, there is a fourth potential risk for the project: whether it is capable of sufficiently overcoming substantive objections from environmentalists to win popular support - perhaps the most important challenge facing him and his colleagues.

If they are successful, though, it will probably mean an end to one of the most humorous stories in Jewish culture about fossil-fuel energy: During a crowded Passover service, a rabbi telling the story of the Exodus from Egypt was interrupted by an old man, who kept shouting, "Moses was a schmuck, Moses was a schmuck."

Of course, the congregation was shocked, and the stunned rabbi finally asked the old man why he was criticizing the great hero of Judaism / Christianity / Islam. The old man replied without hesitation: "He said when they come out of Sinai, turn left. If he had any brains, he should have told them, "Turn right.'"

David Caploe PhD
Chief Political Economist
EconomyWatch.com