The Shale Gas Scam Goes Public

It is always gratifying when the New York Times catches up to what some of us have been saying for years now. I was pleased to see their recent three-part series Insiders Sound an Alarm Amid a Natural Gas Rush (June 25), Behind Veneer, Doubt on Future of Natural Gas (June 26) and S.E.C. Shift Leads to Worries of Overestimation of Reserves (June 27). The shale gas scam has gone public.

I intend to milk this story for all it's worth, and there's far more material than I could cover in a single post. So this is the first of two (or three) articles on the subject.

I will talk about the Times' articles next week, and the responses to them. I shall also describe in some detail how the scam works. This first post allows us all to get on the same page about the current state and future of shale gas production in the United States. Here's stuff I've posted about shale gas on DOTE.

• Betting The House On Shale Gas  (why we need the natural gas)
• Shale Gas Shenanigans  (the scam)
• The Shale Gas Shell Game  (more about the scam)
• A Miracle In The Marcellus Shale?  (more about the scam)
• Natural Gas Boom Gets Put On Hold  (U.S. natural gas production has been exaggerated)
• Our Energy Problems Are Over!  (ridiculing the hype about shale gas)

The Times had access to all sorts of internal e-mails and documents which were not available to me when I wrote those articles.

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.

In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves.

Many of these e-mails also 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.

“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.”

Here's a few choice quotes from those anonymous inside sources.

• "The word in the world of independents is that the shale gas plays are just giant ponzi schemes and the economics do not work"

— This August 2009 e-mail is in response to an article in an industry publication questioning shale gas economics. The official is from IHS Drilling Data, a research company that specializes in energy issues.

• "I believe you are factual in your analysis of the shale plays. It looks to me that the hype about those plays is creating a false sense of security for the American public"

— From an e-mail exchange between a geologist in Texas and a petroleum geologist who spent about a decade and a half at Phillips Petroleum Company. They discuss whether the hype about shale gas is giving a false sense of security with regard to energy policy.

• "Many energy analysts have concluded that the average cost of gas that is needed for shale gas companies to break even financially and start making a profit is roughly $7.50 per million cubic feet. Under the new S.E.C. rules companies can only include gas in their reserves estimates that they report if the companies can realistically and affordably get that gas out of the ground within 5 years," said Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas who has been skeptical about shale gas economics. These two facts raise a troublesome question: How are companies including gas on their books when the price of gas remains so low? In other words, how are companies booking these reserves when most energy forecasters and the futures market does not predict the price of gas rising above $6 per million cubic feet before 2016? It would seem that booking such gas would defy the S.E.C. about only booking gas that can affordably be pulled from the ground within 5 years. I know the S.E.C. has asked some companies to explain in detail how this rule applied to their reserves calculations — but I still have to wonder, is the S.E.C. fully policing this 5-year rule?"

— This is an April 2009 e-mail from a geologist at North Star Geological Services LLC. He says that when he works for shale companies in the Haynesville shale play and asks them questions about true costs, well performance and longevity, he gets no answers.

There's plenty more where these examples came from. And finally there's this graph from the first Times article.

I hope you'll read some of my previous posts on shale gas if you haven't already done so. I'll have more for you next week.

Comments

[fairytale]

good post.