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Shale Gas: Bubblenomics & Shell Games

February 14, 2012
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This piece was written by guest blogger Martha Powers.

Deborah Rogers has never seen an investment more hyped than shale gas.  On February 1st, Ms. Rogers spoke at the University of Pennsylvania about whether extraordinarily optimistic predictions should lead us to ask how much gas is actually contained in shale, which has long been touted as an economical solution for our country’s energy independence.  Decidedly, she told us to question.

On the surface, it appears that shale gas is exploding—more and more wells are being dug, we hear the words “cheap” and “abundant,” and even President Obama, once again, cited the potential for natural gas during his recent State of the Union.  But, as we learned late last week, the Energy Information Agency slashed Marcellus Shale estimates by over 60%, leaving only a mere 6 years of supply at current consumption rates.  So, what is this apparent inconsistency?  This is what Ms. Rogers first started asking a few years ago when she began exposing the anomalies of shale gas.

Ms. Rogers, who is part of an air monitoring task force for the Texas Commission on Environmental Quality (the equivalent to Pennsylvania’s Department of Environmental Protection), serves on the Advisory Council for the Federal Reserve Bank of Dallas.  She is no stranger to the industry, as she comes from an oil and gas family and lives on the land that has been in her family for three generations near Ft. Worth, watching drilling infrastructure develop up and around her home.

As she explained, due to a Securities and Exchange Commission (S.E.C.) rule change adopted in 2009, gas companies can now claim reserves previously not allowed, and no third party independent audit is required.  This allows for monies to be borrowed on shale gas reserves that are not necessarily verified.  When Ms. Rogers helped to sound the alarm, the S.E.C. began an investigation in 2011 looking for discrepancies between what drilling companies are telling investors about costs, profits and performance of shale gas wells versus the reality of the situation.

And, according to Ms. Rogers, that reality is quite different than what has been portrayed by the companies.  Even though there are a number of very active wells, it is often the case that they are surrounded by huge areas of profitless wells.  Companies claim that a well lasts for 50 years or more, however, in the Barnett shale where Ms. Rogers lives, a well lasts 15-20 years at most, with the majority of wells being played out by year 7.  While it is true that shale gas has grown, that has come at the expense of conventional drilling.  That is to say, unconventional wells are replacing conventional wells, they aren’t adding to the overall number of active wells, further adding to the illusion of a natural gas “boom.”

Even if there is high initial production with an unconventional natural gas well, this tends to fall off dramatically after the first few months, after which companies must drill more and more new wells to keep pace with production levels.  Ms. Rogers depicted the situation as drilling to meet debt service.  This problem, she argued, combined with the high number of profitless well and the overestimating of shale gas reserves, means that much of the shale gas may not be commercially extractable unless natural gas prices rise.  This voids industry’s main argument that natural gas is a cheap source of energy.

Ms. Rogers described the morning she discovered that two of her baby goats had died during the night.  It occurred soon after Chesapeake had started drilling operations near her farm.  After air testing was conducted on her property, a senior toxicologist at a local university was so troubled by the results that he wrote a letter of concern.  However, this letter was not allowed to be written on university letterhead.  The toxicologist’s scientific findings could not be affiliated with his academic institution because the school receives a substantial amount of funding from the oil and gas industry.

(As a side note, we learned that the Department of Earth & Environmental Science at the University of Pennsylvania does not receive any money from the oil and gas industry, according to Prof. Bob Giegengack).

For those of us who may be have been more focused on the innumerable environmental and health issues surrounding natural gas drilling, such as myself- an environmental studies graduate student, Wednesday’s talk provided much needed insight into the dangerous financial game the industry is playing.  As Ms. Rogers said, if an investment has been hyped to this extent, you had better beware.

Deborah Rogers’ website: www.energypolicyforum.com

5 Comments
  1. Walter Tsou permalink
    February 14, 2012 8:07 pm

    Six years of gas for a lifetime of contaminated water and destroyed forests. No thanks.

  2. Thelma permalink
    February 14, 2012 10:24 pm

    This makes me feel that the Gas Wells are a get rich for their owners at the expense of the farmer and those that need clean water and eatable food.
    Why wont the Pollies look into it properly before there are more deaths and a massive court case.

  3. February 15, 2012 6:05 am

    This is exactly the point, the hot air of hype expanding a false bubble for commerence. One only needs to take a look at CHK and their business formula. CHK’s covert expansions, using multiple shell companies, to secure leases with private land owners in northern Michigan only to void those agreements and then buy state land leases in the same area under another shell company for a fraction of the price. Since 2008 CHK has sold $13Billion in shares to China, India, Australia and France. They are in the business of leasing HYPE more so than NG. This is NOT free enterprise, this is fraud.

  4. Marguerite permalink
    February 15, 2012 7:05 am

    As an economist, I have watched the financial engineering aspects and reserve games as well as the environmental issues over the years with regard to NG. This is in fact another huge risk bubblenomics scheme by profiteers playing the Wall Street game. Chesapeake and Aubrey McClendon look like another Enron to me. Check out this blog comment and the article from Oct. 24 in Forbes. With a $6 bil cash flow problem in 2012 and the wherewithal to easily raise $12 bil ‘tomorrow’, something is hugely wrong. Especially as long as all this booking of reserves based on spudded wells (for instance, in PA long before we get our regulatory act together, if ever, and all these actions fall under grandfathering). Read Aurthur Berman on reserves and production curves from 2011. Watch the pro-fracking wannabe leaseholders scream as the drillers pull out of PA dry gas, halting leasing as the price continues to hover at $2. It is ALL financial engineering.

    .forbes.com/sites/christopherhelman/2012/02/13/chesapeake-energys-new-plan-desperate-measures-for-desperate-times/

  5. February 15, 2012 9:13 am

    This is fascinating – thanks for posting.

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