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Insiders Warn “Shale Plays are Just Giant Ponzi Schemes” in Bombshell-Laden NY Times Piece on Natural Gas, Fracking

By Joe Romm  

"Insiders Warn “Shale Plays are Just Giant Ponzi Schemes” in Bombshell-Laden NY Times Piece on Natural Gas, Fracking"

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The lead story in the New York Times today is a detailed bubble bursting of the much vaunted boom in unconventional natural gas.

Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States.

But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.

The NYT has gained access to some amazing, must-read e-mails that “suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles.”

“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

If this were just one or two e-mails  from people outside of the industry, they might be easier to dismiss.  But  as the headline states, “Insiders Sound an Alarm Amid a Natural Gas Rush”:

“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

… “And now these corporate giants are having an Enron moment,” a retired geologist from a major oil and gas company wrote in a February e-mail about other companies invested in shale gas. “They want to bend light to hide the truth.”

The article raises three serious concerns about the new gas boom:

  1. Are most wells going to deplete much faster than people expect?
  2. Will the price of natural gas have to be much higher than people thought to make the economics work?
  3. Will this all mean more fracking — with all of the potentially dangerous side effects, including leakage of methane, which boosts the lifecycle greenhouse gas emissions of  shale gas?

Let’s start with the first.

“I think we have a big problem.”

Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, recalled saying that in a May 2010 telephone call to a senior economist at the Reserve, Mine K. Yucel. “We need to take a close look at this right away,” she added.

A former stockbroker with Merrill Lynch, Ms. Rogers said she started studying well data from shale companies in October 2009 after attending a speech by the chief executive of Chesapeake, Aubrey K. McClendon. The math was not adding up, Ms. Rogers said. Her research showed that wells were petering out faster than expected.

“These wells are depleting so quickly that the operators are in an expensive game of ‘catch-up,’ ” Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed.

“This could have profound consequences for our local economy,” she explained in the e-mail.

And again, this isn’t just outside experts:

“Our engineers here project these wells out to 20-30 years of production and in my mind that has yet to be proven as viable,” wrote a geologist at Chesapeake in a March 17 e-mail to a federal energy analyst. “In fact I’m quite skeptical of it myself when you see the % decline in the first year of production.”

“In these shale gas plays no well is really economic right now,” the geologist said in a previous e-mail to the same official on March 16. “They are all losing a little money or only making a little bit of money.”

Around the same time the geologist sent the e-mail, Mr. McClendon, Chesapeake’s chief executive, told investors, “It’s time to get bullish on natural gas.”

In September 2009, a geologist from ConocoPhillips, one of the largest producers of natural gas in the Barnett shale, warned in an e-mail to a colleague that shale gas might end up as “the world’s largest uneconomic field.” About six months later, the company’s chief executive, James J. Mulva, described natural gas as “nature’s gift,” adding that “rather than being expensive, shale gas is often the low-cost source.” Asked about the e-mail, John C. Roper, a spokesman for ConocoPhillips, said he absolutely believed that shale gas is economically viable.

The key issue around how long these wells can produce is how extensive are the reserves of unconventional natural gas?

I don’t think there’s any question that there’s a fair amount of unconventional natural gas out there.  The questions are how long it will last and how much can be produced at current prices and what are the environmental impacts?

The e-mails do not explicitly accuse any companies of breaking the law. But the number of e-mails, the seniority of the people writing them, the variety of positions they hold and the language they use — including comparisons to Ponzi schemes and attempts to “con” Wall Street — suggest that questions about the shale gas industry exist in many corners.

“Do you think that there may be something suspicious going with the public companies in regard to booking shale reserves?” a senior official from Ivy Energy, an investment firm specializing in the energy sector, wrote in a 2009 e-mail.

A former Enron executive wrote in 2009 while working at an energy company: “I wonder when they will start telling people these wells are just not what they thought they were going to be?” He added that the behavior of shale gas companies reminded him of what he saw when he worked at Enron.

The NY Times itself review a considerable amount of data.

Production data, provided by companies to state regulators and reviewed by The Times, show that many wells are not performing as the industry expected. In three major shale formations — the Barnett in Texas, the Haynesville in East Texas and Louisiana and the Fayetteville, across Arkansas — less than 20 percent of the area heralded by companies as productive is emerging as likely to be profitable under current market conditions, according to the data and industry analysts.

Richard K. Stoneburner, president and chief operating officer of Petrohawk Energy, said that looking at entire shale formations was misleading because some companies drilled only in the best areas or had lower costs. “Outside those areas, you can drill a lot of wells that will never live up to expectations,” he added.

A review of more than 9,000 wells, using data from 2003 to 2009, shows that — based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well — less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.

Terry Engelder, a professor of geosciences at Pennsylvania State University, said the debate over long-term well performance was far from resolved. The Haynesville shale has not lived up to early expectations, he said, but industry projections have become more accurate and some wells in the Marcellus shale, which stretches from Virginia to New York, are outperforming expectations.

Even big-time natural gas advocates  think that  natural gas prices will have to rise to make many of these ventures profitable.

“I wouldn’t worry about these shale companies,” said T. Boone Pickens, the oil and gas industry executive, adding that he believes that if prices rise, shale gas companies will make good money.

Mr. Pickens said that technological improvements — including hydrofracking wells more than once — are already making production more cost-effective, which is why some major companies like ExxonMobil have recently bought into shale gas.

Shale companies are also adjusting their strategies to make money by focusing on shale wells that produce lucrative liquids, like propane and butane, in addition to natural gas.

That  is another bombshell.

So to make wells profitable they may need to be fracked multiple times,  and companies will need to  produced liquids like propane and butane?   What exactly is the implication of that for the emission of toxic releases into the air and groundwater?  (see Duke study finds “systematic evidence for methane contamination of drinking water associated with shale gas extraction”)

I would also add that if the wells aren’t going to last anywhere near as long as expected and/or multiple frackng is needed, then the fugitive emissions issue becomes of greater concern, since so many of the emissions are associated with fracking itself.  This  means, for instance, methane leakage during the process may be higher than thought for a given well, whereas the total amount of natural gas delivered for combustion may be lower than thought (see “Is natural gas cleaner than coal?“)

These are very serious issues that, again, should be examined by an independent body, such as the National Academy of Sciences.

The article ends:

“All about making money,” an official from Schlumberger, an oil and gas services company, wrote in a July 2010 e-mail to a former federal regulator about drilling a well in Europe, where some United States shale companies are hunting for better market opportunities.“Looks like crap,” the Schlumberger official wrote about the well’s performance, according to the regulator, “but operator will flip it based on ‘potential’ and make some money on it.”

“Always a greater sucker,” the e-mail concluded.

Is this a basis for US energy policy?

Below are the earlier comments from the Facebook commenting system:

Mike Roddy

Let’s give the Times credit here for great reporting. They will need a lot more pieces like this in order to restore their credibility, but it is a great start.

June 26 at 2:19pm

Mike Roddy

The Times authors did overlook a critical factor here. Exxon Mobil is now the largest gas producer, and Koch, merchant utility banks, and other major corporate interests are not far behind.

In some ways they are smarter than we are. They don’t care if they are losing money on fracking now or in the near future, or that gas prices are low. The long term market is what interests them. Utilities are going to order gas power production plants based on recent prices, which are of course very low. When spot scarcities occur and prices inevitably rise, the gas companies will make windfall fortunes, just as they do now with oil. The utilities may already have installed a couple of hundred gigs of new gas plants by then, having crowded out solar and wind, and will pay the high prices.

This is pretty obvious. We need to stop them before they screw us once again.

June 27 at 12:14pm

Richard Brenne

Good points, Mike.

June 28 at 5:02am

Mary Ellen Meyer

Thanks, Joyce, for sending…hoping this is getting the attention of more people. I really find this fracking frightening!

June 28 at 8:31pm

Lou Grinzo

Years from now, we will see the “natural gas bubble” as one of the biggest mistakes in our energy and climate history. Either it will be a huge economic bust or it will lock the US into dangerously higher emissions than we need. (consider the long lifetime of infrastructure, particularly electricity plants.)

We need to find the intelligence and enlightened self-interest to forgo NG fracking.

June 26 at 5:44pm

Mike twotwo

With the appearance of maps like this http://geology.com/energy/​world-shale-gas/ , the concern is what happens globally. Need some estimates of how much CO2 this global resource represents.

June 27 at 8:00am

Mary Jo Cronin

This gas drilling is wrong on so many levels. Thanks for backing up arguments against drilling with yet another great argument.

June 29 at 9:14pm

Prokaryotes

‘Fracking’ Mobilizes Uranium in Marcellus Shale http://www.sustainablebusi​ness.com/index.cfm/go/news​.display/id/21321.

June 26 at 1:15pm

Prokaryotes

Natural gas from fracking ‘dirtier’ than coal http://www.news.cornell.ed​u/stories/April11/GasDrill​ingDirtier.html.

June 26 at 1:20pm

Joan Savage

A sub-program of the boom & bust is rapid turnover in gas leases for profit. The “landman” negotiates leases on the cheap from property owners and sells leases at a profit to other middlemen or the gas companies. The landmen have made their profits before a well is dug, and even if no well is dug. This phenomenon showed up when a citizen’s group mapping the gas leases in Onondaga County NY noticed the frequent turnover in lease-owner names.

June 26 at 4:11pm

Prokaryotes

You can now vote for the story at reddit.

http://www.reddit.com/r/en​ergy/comments/i9ncf/inside​rs_warn_shale_plays_are_ju​st_giant_ponzi/

June 26 at 1:48pm

Paul Magnus

Fracking fracked!

June 26 at 2:09pm

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