Privately, the officials from these companies discuss the
fact that gas drilling in unconventional shale is not profitable at current
prices, and won’t be until and unless those prices get up in double-digit
range. That means that the companies have to survive, not by producing gas, but
by taking on debt or obtaining income from flipping leases, pledging future
production, or attracting equity from investors. This tends to promote a
hand-to-mouth kind of existence in which payments to contractors may all too
easily fall behind, producing the liens discussed in the previous post. More
generally, though, it means that making money relies on hyping the shale plays
to the investors, lease or future production purchasers. And the insiders
voicing their opinions in the New York Times document dump believe that
such hype is poorly grounded in fact.
According to the documents, the extent and consistency of
the fields is questionable, the rapidity of production declines understated,
the extent of reserves and the lifetime of wells grossly overstated. And the
flipping of leases depends on the “greater fool” mentality of any speculative
bubble: it depends on how many people are left who can be convinced, without
basis in fact, that the thing in question is valuable.
In a conference held in October of 2008, Chesapeake’s
McClendon openly admitted that the company’s business model consists as much in
flipping leases as in producing gas. He said, “I can assure you that buying
leases for X and selling them at 5X or 10X is a lot more profitable than trying
to sell gas at $5 or $6 mcf.” (Note that gas prices have fallen well below that
mark since then.) The problem is, of course, that a lease is only worth
anything if its possible to make a profit on selling the gas produced from it.
As soon as potential buyers lose their confidence that this is possible—as the
seller clearly has in this case—flipping will no longer be possible, and the
bubble bursts.
In one internal memo, an employee of IHS Drilling Data, a
research company that specializes in energy issues, writes that “the word I
hear from every company” is that the Haynesville and Marcellus shales are “not
economic.” In another, an official from Anglo-European Energy, an oil and gas
company, writes, “After buying production for the last 20 years, hopefully I
know the characteristics of great wells (flat decline curves, low operating
costs, large production) and as you know the shale plays have none of these.
The herd mentality into the shale will eventually end possibly like the sub
prime mortgage did.”
An official at Suemaur Exploration and Production, a
subsidiary of Dominion E & P, which is one of the largest independent
natural gas and oil operators in the United States and Canada, writes in an
email, “I am also a shale skeptic and think as an industry we are claiming we
have a long-term solution to the American energy problem but do not bother to
tell anyone the potential cost. I think we have a bunch of 25-year-old analysts
driving the boat and people who should know better looking the other way while
peeling off part of the pie.”
As the above selection suggests, the financial problems
foreseen by the authors of the New York Times documents are not confined
to the gas companies, those who invest in them, or even owners of leased
properties. The American people, some of them think, are being taken for a ride
by gas companies that are promoting a major switch to natural gas
infrastructure while prices are low, in order to get a captive audience for it
when prices rise—as they will, for instance, if the current push to develop LNG
exports is successful.
The documents contain a March, 2011 exchange between a
federal energy official and a geologist at Chesapeake, in which the federal
official writes, “The way I see it, is if industry can get Congress behind
natural gas through policy, then industry has US by the balls in terms of
allowing development to continue as the shale wells that are already drilled
rapidly deplete—higher prices, more money for industry, and more dependence on
drilling.”
So much for the supposed patriotism involved in supporting
the natural gas alternative as a primary focus for the U.S. Natural gas hype is
not about finding a real solution for America’s energy problem; it is about diverting
U.S. investment into the dying fossil fuel industry for a few more decades,
providing them with one last round of profits while making it even more
difficult and expensive to switch to sustainable fuels when the shale plays go
bust.