@RISK Aids Innovative Oil & Gas Producer Red Leaf Resources in Development of New Shale Extraction Technology
- Industry: Oil/Gas/Energy
- Product(s): @RISK
- Application: Developing new oil shale technologies
Red Leaf Resources, Inc., (RLR), based in Salt Lake City, is a start-up energy technology company focused on providing a novel method for accessing oil shale reserves with the smallest environmental impact possible. As they are still in the R&D phase, RLR is reliant on private equity. Given the uncertain nature of oil markets and the economy in general, RLR needs comprehensive and clear methods to assess risk, and to display a range of possible financial outcomes to board members and other decision-makers. Using @RISK, RLR has been able to provide stakeholders with a view of the range of potential outcomes, including ranges of Net Present Value and Internal Rate of Return, depending variations in factors affecting these numbers.
Our project is so long-term—minute changes in each variable can make a huge difference over a long period. That’s why @RISK is so helpful in capturing the uncertainty.Dan Rakovan, Manager of Strategic Planning, Red Leaf Resources
Formed in 2006, Red Leaf Resources is focused on developing EcoShale® technology, which recovers oil from oil shale. Oil shale, not to be confused with shale oil, is a fine-grained sedimentary rock containing kerogen, an organic material that has not reached thermal maturity. Heat, pressure and the passage of millions of years would eventually turn this organic material into liquid oil or natural gas. All of the various oil shale processes apply heat to the shale to accelerate the natural process of converting kerogen to liquid oil and gas. This conversion process is called pyrolysis. Different technologies (e.g. Red Leaf ’s EcoShale® technology) use different approaches to apply heat to the shale. Red Leaf’s EcoShale® process involves surface mining the shale, placing it in either an earthen capsule or a steel drum, and heating the shale to the pyrolysis point (approximately 700° Fahrenheit).
The exact method for applying the heat in the EcoShale® process is still being fine-tuned, and thus the company may be years away from commencing continuous commercial production. “We’re developing a technology that will hopefully be cost-competitive in the near future,” says Dan Rakovan, Manager of Strategic Planning. “The current low price oil environment has created a challenge for the industry.” However, with the world’s oil reserves slowly running out, Red Leaf Resources is positioning itself to take advantage of new, harder to access sources of oil. “As you can see from the Wood Mackenzie graph below, by 2025 we expect a supply gap of over 20 million barrels per day. It is this gap that we expect our technology to help fill.” Their home state of Utah possesses the largest, most accessible oil shale in the world, with an estimated 50 billion barrels of oil from oil shale.
So, with all this long-term potential, but near-term obstacles, how can a privately-held R&D company give a clear picture to stakeholders about the risks and rewards of their endeavor?
Rakovan turned to @RISK to model the company’s potential financial future. For inputs into the Monte Carlo simulation, he included:
*Capital expenditures (CapEx) *Operating expenditures (OpEx) *Oil prices
For oil prices, Rakovan used a flat price deck of $80 a barrel (in current-day dollars) which goes up with inflation over time as the ‘base case’ for oil price. “We then do sensitivities which give different distributions for different price changes,” explains Rakovan. “We also used the regression tool on historical prices—the past five, ten and twenty years—and that tool allows us to get future projections for those trends, so we can see if it continues on.” Through these methods, Rakovan gets an expected oil price.
Using @RISK’s Monte Carlo simulation, Rakovan is then able to view a range of certain outcomes for NPV and IRR. “Our project is so long-term—minute changes in each variable can make a huge difference over a long period,” says Rakovan. That’s why @RISK is so helpful in capturing the uncertainty.”
Rakovan finds @RISK particularly beneficial for communicating complex concepts to the board. “I love the curves the applications provides,” he says. “It helps explain the uncertainty of the project in a very rational and understandable way.” While Rakovan had used other Monte Carlo simulation software prior to @RISK, he found the other tool could not compete with Palisade’s presentation-ready graphs. “I was trying to find ways to improve our presentations, and I liked that @RISK worked directly with our Excel spreadsheets—the others don’t do that.”