This one comes to us from Stansberry & Associates, as so many of them do, and is an ad for The Oil Report from Matt Badiali ($99 a year, last time I checked).

He’s got a great opening, as usual:

“Hidden 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world — more than 2 TRILLION barrels. On August 8, 2005 President Bush mandated its extraction. Three companies have been chosen to lead the way. Test drilling has already begun…”

Man, who wouldn’t want to buy into that?

He’s even got a quote from Orrin Hatch, ““The amounts of oil are staggering. Who would have guessed that in just Colorado and Utah, there is more recoverable oil than in the Middle East?”

So according to S&A, we’re on the cusp of a new Western Oil Boom in the U.S. — only this time, it’s Oil Shale we’re talking about.

And specifically, it’s the Green River Formation of Oil Shale, most of which is under government owned land in Colorado, Utah and Wyoming.

The part that’s in Colorado is called the “Piceance Basin” — and that’s where the real core of this investment idea takes hold.

There were six original finalist companies that were considered for these licenses, or were testing extraction technology, and Badiali believes that …

“From the remaining three … only one company’s drilling technology will meet the government’s strict shale development standards – and go on to develop oil shale on a commercial level. This company would be responsible for launching America’s first commercial oil shale operation and production”

There are a few comparisons to Alberta’s oil sands in the ad, just to remind us that we’re talking about real potential and buckets of money maybe being made. There is apparently more oil in the green river shale basin than there is in the Canadian oil sands, and in greater concentration (that doesn’t necessarily mean it’s easier to extract).

So what’s this favorite company of Badiali’s?

There are a few hints:

They have a patented extraction procedure, which involves heating the shale and extracting the liquefied oil.

They’ve invested more than a billion dollars in shale, not including an investment of $150 million in similar formations in China.

They think they can extract more than one billion barrels of oil per shale acre.

So what is this company that Stansberry & Associates thinks is the way to “stake your claim to $2 trillion of oil?”

Well, we’ve got to tighten the screws on the comprehensivationizer a little for this one … hmmm, maybe a bit more …

Aha!

This is

Shell Frontier Oil, owned by Royal Dutch Shell (RDS.A or B on the NYSE)

Shell has been working in this area for a while, and does indeed have agreements to work on both US and Chinese oil shale — last fall, they were awarded leases to try three different techniques on 160 acres of US land in the green river basin.

Their basic technology is kind of interesting — baldly simplified, doing what they call “in situ conversion,” they freeze the ground around the shale, then heat up the shale to release the oil, then pump out the oil. The freezing apparently keeps the oil that they heat from just leaching back into the ground or spreading around before they can pump it out. Do NOT assume that I really know what I’m talking about with this, but that’s my understanding.

It sounds at the same time to be beguilingly simple and ridiculously hard to do, but hey, there ain’t that much easy oil left to extract in the world. Essentially, they drill a bunch of holes and insert refrigeration … stuff … into them, then drill a bunch more and put in … some kind of heating thingamabob … and then watch the oil and gas evaporate out of the formation and fall into their wallets. Or something like that.

They believe this will remain a profitable venture with oil over $30, and I’d be inclined to say that oil is never again going back down to those levels (though “never again” is probably the dumbest thing an investor can say to himself). At least, it doesn’t sound any harder than drilling under a couple miles of water, which is nearly commonplace now.

I don’t know whether or not the government will allow large scale extraction, but it’s certainly true that they’re allowing Shell and a limited few others to experiment and see what might work, and how expensive it will be. There’s certainly potential, to the mind of a guy like me who knows nothing about geology — but I’d say that there are also risks, including both market risks (if oil does drop in price substantially) and political risk, since this is likely to be an environmental hot potato if it causes anything like the kind of degradation that many oil sands mining operations cause. I have no idea whether or not Badiali is correct in predicting that Shell’s method will be better than their competitors’, but it sounds like it’s at least easier on the mountain scenery than a strip mine.

It is also important to note, I think, that this is anything but new — and for that reason, Shell is moving pretty cautiously here. This has been a potential oil boom area before, with an accompanying bust that certainly shattered a few companies following the last energy crisis of the 1970s.

There’s an interesting column from the Rocky Mountain News about this project — and you’ll note, it’s from 2005 … Shell has been working on this for decades, and it’s been known that they’ve figured out a pretty good technology for a long time. It may be that this will move the stock or be a big winner for you, and if this is really going to be the next huge oil production site Shell may indeed be in on the ground floor with these first government leases … but I have no idea how much potential that has for Shell’s share price in the near term.

This seems to me to be a perfectly decent investing idea if you’re looking for a megacap oil company, it’s not that expensive at a single digit PE and a nice yield, but we’re still looking at a multi-hundred-billion dollar company … not particularly likely to double by the end of the year, as so many other newsletter-touted stocks promise. Then again, I would urge you not to listen to my uninformed opinion — there’s plenty of reading to do on this company if you’re interested, so go forth and researchify … and share with your fellow sleuths.

Oh … and the other two companies still in the running for this? They’re Chevron (CVX), and EGL Resources (which appears to be a private, closely held partnership).