Some worry natural gas outlook is inflated

By IAN URBINA
New York Times

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 emails and internal documents and an analysis of data from thousands of wells.

In the emails, 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 emails 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.

(see the e-mails and other documents here)

Recalls dot-coms

“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 email. “Reminds you of dot-coms.”

“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 email on Aug. 28, 2009. Company data for more than 10,000 wells in three major shale gas formations raise further questions about the industry’s prospects. There is undoubtedly a vast amount of gas in the formations. The question remains how affordably it can be extracted.

The data show that while there are some very active wells, they are often surrounded by vast zones of less-productive wells that in some cases cost more to drill and operate than the gas they produce is worth. Also, the amount of gas produced by many of the successful wells is falling much faster than initially predicted by energy companies, making it more difficult for them to turn a profit over the long run.

If natural gas ultimately proves more expensive to extract from the ground than has been predicted, landowners, investors and lenders could see their investments falter, while consumers will pay a price in higher electricity and home heating bills.

Environmental impact

There are implications for the environment, too. The technology used to get gas flowing out of the ground — called hydraulic fracturing, or hydrofracking – can require over a million gallons of water per well, and some of that water must be disposed of because it becomes contaminated by the process. If shale gas wells fade faster than expected, energy companies will have to drill more wells or hydrofrack them more often, resulting in more toxic waste.

The emails were obtained through open-records requests or provided by industry consultants and analysts who say they believe that the public perception of shale gas does not match reality. In the emails, some people within the industry voice concerns.

“And now these corporate giants are having an Enron moment,” a retired Unocal geologist wrote in a February email about other companies invested in shale gas. “They want to bend light to hide the truth.”

Others within the industry remain optimistic. They argue shale gas economics will improve as the price of gas rises, technology evolves and demand for gas grows with help from increased federal subsidies being considered.

“Shale gas supply is only going to increase,” Steven Dixon, executive vice president of Chesapeake Energy, said at an energy industry conference in April in response to skepticism about well performance.

Studying the data

“I think we have a big problem.”

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

A former stockbroker with Merrill Lynch, Rogers said she started studying well data from shale companies in October 2009 after attending a speech by the chief executive of Chesapeake, Aubrey McClendon. The math was not adding up, 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,’” Rogers wrote in an email 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 email.

Fort Worth residents were already reeling from the sudden reversal of fortune for the natural gas industry.

In early 2008, energy companies were scrambling in Fort Worth to get residents to lease their land for drilling as they searched for so-called monster wells. Billboards along the highways stoked the boom-time excitement: “If you don’t have a gas lease, get one!” Oil and gas companies were in a fierce bidding war for drilling rights, offering people bonuses as high as $27,500 per acre for signing leases.

Actor Tommy Lee Jones signed on as a pitchman for Chesapeake, one of the largest shale gas companies. “The extremely long-term benefits include new jobs and capital investment and royalties and revenues that pay for public roads, schools and parks,” he said in one television advertisement about drilling in the Barnett shale in and around Fort Worth.

To investors, shale companies had a more sophisticated pitch. With better technology, they had refined a “manufacturing model,” they said, that would allow them to drop a well virtually anywhere in certain parts of a shale formation and expect long-lasting returns.

For Wall Street, this was the holy grail: a low-risk and high-profit proposition. But by late 2008, the recession took hold and the price of natural gas plunged by nearly two-thirds, throwing the drilling companies’ business model into a tailspin.

In Texas, the advertisements featuring Jones disappeared. Energy companies rescinded high-priced lease offers to thousands of residents, which prompted class-action lawsuits. Royalty checks dwindled. Tax receipts fell.

The impact of the downturn was immediate for many.

“Ruinous, that’s how I’d describe it,” said the Rev. Kyev Tatum, president of the Fort Worth chapter of the Southern Christian Leadership Conference.

Tatum explained that dozens of black churches in Fort Worth signed leases on the promise of big money. Instead, some churches were told that their land may no longer be tax exempt even though they had yet to make any royalties on the wells, he said.

That boom-and-bust volatility had raised eyebrows among people like Rogers, as well as energy analysts and geologists, who started looking closely at the data on wells’ performance.

Some doubts about the industry are being raised by people who work inside energy companies, too.

“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 email to a federal energy analyst.

23 Comments

  1. fightin_farmer

    Drill HERE, Drill NOW, …

    #1
  2. liven-n-iraq

    More hype in hopes of creating some panic from the NYT. If these businesses are making bonehead decisions, then they profits will decline. And that will either force the companies to change their practices or cause investors to withdraw their money. It’s all about free enterprise and the free market.

    #2
  3. Davebo

    Yet another reason why proclamations by Tommy Lee Jones (or his college roomate Al Gore) should be taken with a spoon full of sugar.

    This windfall was always full of mostly hot air and was pushed by the usual suspects.

    Drill there, now, is the logical answer. Even if the usual suspects say no.

    #3
  4. ntangle

    Nah, I’ve never seen producers pump up their estimates in order to sell shares. Never happens.

    #4
  5. Indianpaintbrush

    So be careful when investing your money…. How is that any different from any other investment? I see a whole lot of innuendo and not much substance in this article. Natural gas prices have often been volatile and the landman/lawyer is not your friend if you are leasing your land, he’s out to get the best deal for his company.

    #5
  6. Indianpaintbrush

    “There are implications for the environment, too. The technology used to get gas flowing out of the ground — called hydraulic fracturing, or hydrofracking – can require over a million gallons of water per well, and some of that water must be disposed of because it becomes contaminated by the process.”
    —————————————-
    Define “some”. And yes “some will be disposed of, but as time goes on more and more companies are looking for ways to recycle and filter the water, so there will be less fluids disposed of….. Also, with other drilling, the mud and fluids must be disposed of, so why is this article trying to scare people with threats of the disposal bogey-man?

    #6
  7. rat618

    It’s never as easy as it appears, no matter how much the “Drill Baby Drill” crowd wants it to be. The Barnett and Bakken shale play promoters make it sound like “Jed Clampett” exploration. While there is a good deal of potential the harm that these promoters have brought hurts both the naive investor and the industry as a whole.

    #7
  8. Bobo Jones

    Some? … you mean Socialist Democrats with a anti-growth economic policy.

    #8
  9. Glenn

    As long as companies keep drilling and adding production the gas supply should increase, even if the per well ultimate reserves are less. Any disruption in drilling schedules will cause a precipitous decline. Companies will need to keep drilling and adding new wells. It’s called a treadmill and it’s happened before.

    #9
  10. Peter Wang

    Never count on senior executives to tell the truth about anything. Pontius Pilate asked, “What is truth?” Go ask Art Berman here in Houston, he knows a hell of a lot about the truth about gas shale. He’s on LinkedIn.

    #10
  11. In the end those investors are probably my 401k and I will wind up paying for it…..

    #11
  12. Trail Trash

    “Boom or bust” in the oil patch…stop me if you’ve heard this one before.

    #12
  13. Dave M.

    I work in the industry and understand the fracking process. But, am not an expert.

    My comment relates to the nature of these shale reservoirs. They have very little natural permeability-perm (a measure of a reservoirs ability to flow), hence the need for fracking. Most of the perm they do have lies in vertical fissures. Their horizontal perm is negligible.

    Fracking is an attempt to vastly increase the perm by injecting massive amounts of sand or proppant into the reservoir. The idea here is that by increasing the perm by 1,000′s of times, the well will flow for a long period, justifying the expense of the frack.

    In order for this to occur the the frack needs to propagate and connect hundreds of vertical fissures in the rock to connect with the layer of sand that is laid in horizontally. This can be modeled but it is really anyone’s guess as to how well this is done. Time will tell.

    If I am investor I would give this technique some time to prove itself before I rushed with a wad of cash.

    The oilfields of history are littered with the corpses of early investors. Particularly in shale plays.

    #13
  14. mikeone one

    Clean fuel my big fat A.
    Exempted form the clean water act in 2005 as one of Cheney’s last slap in he face of Americans everywhere, this fuel may burn better ,but extracton is a nightmare for our children and theirs. Local damage done to the very people who built this country (ranchers /farmers) will spill our way oe day.
    Ever wonder why , in rural Wyoming, you can at times now see an ozone field the size of Connecticut with worse air that LA? Yep, it hurts topside too. Watch a piece called Gasland if you wanna see company reps telling American ranchers straight faced there is nothing wrong with their century old water system that now belch toxins. The denials only stop when offered a cold glass of cool fresh water. I though that kinda stuff only happened in a bad TV movie. Gasland- currently on cable.
    Listen, I was raised up in an Humble Oil Family. My dad officed right under the Petroeum club in the Humble buiding. But he knew every farmerwhose field they pmped thru by first name in Katy all the way up to the Sun Oil lines in West Texas. He and most of the old timers would be horrified at this intellectually dishonset program.
    Giving away our water so a few billionaires can crap on us for short term gain. Oh yeah, throw a few pitiful beans to ignorant preanut gallery on the way out the door to the South of France.

    #14
  15. Chapalamon

    Some worry about everything.
    My personal view regarding this story is that one should break it down to simpler terms. In this case, I suggest that one should “follow the money”.
    1. Look at how many hard dollars are being spent by companies to drill for natural gas. That’s real. They aren’t using OPM (other people’s money), it’s their capital budgets they are spending. Oil & gas exploration companies are accunstomed to wide swings in their commodity prices, unlike other industries.
    2. On an energy equivalent basis, it takes 6 MCF of gas to equal 1 barrel of oil. So, natural gas, selling at $4.50/MCF Mulitplied by 6 equals $27.00, yet 1 barrel of oil cost 3 times that (at $91.00 per barrel).

    So, one has to believe that markets will develop to utilize gas in the place of oil. The economic incentive is there. Follow the money.

    This article almost makes it seems that the exploration companies are hyping how easy it is to develop & extract the natural gas reserves. For me, the premise of the article is just flawed if one follows the money.

    There will be slumps and increases in prices and the drilling activity will adjust accordingly. That’s just natural free market economics are play.

    #15
  16. Reality_Sets_In

    “It may not be as cheap to extract from shale as companies claim”
    -
    Shale idea has been around since the 70′s.
    They knew it was too expensive back then and that is why it hasn’t been developed. Why is this news now????

    #16
  17. mikeone one

    Awfully Short mention on the enviro end. With regards to your one sentence on “getting rid “of the “toxic” waer waste on the whole about one half of the water is recovered . THey call it “produced” water. It is simply pumped onto the ground ,sometimes in pits, sometimes not, and then sprayed in the air to “assist “in evaporation process.
    That is the kinda remediation you get from these newbies operators when you exempt them form the clean water act.
    Proof is in the puddin. Who’dever think the State of Wyoming would have massive ozone alerts? The wyoming gas fields. Clean energy .
    If you people do not stop terming your investment soley upon the almighty buck, your children are gonna pay big time.
    I got bought out by Exxon, but we at Humble still had a great voting block at the time of the Valdez. WE had an ACCIDENT, but didn’t lie. We bit the bullet , “lost” alot a money , buy paid up as requested and thought we were so kind to do so.. But today that are still a lotta good hard working fishing families who are a shadow of themselves because we pushhed the envelope. I lost alot of money. Whoopee. Those honest people lost their livlihoods. This kinda fast buck who cares about them attitude is irreversible.
    I see the way the offshore people are running their busineses and the way these johnny come lately Cheneys would tear up the irreplacables for a quick buck and know I am glad to be outta the businese activly.
    This is the most dishonest misrepresented operation going on in this country. Another “god Bless America ” here to help you Rip off. Only this time with more irreversible consequences. Throwing know carcinogens down into the water system. Insane. Thanks Cheny , BP and all you newbie scumbags.

    #17
  18. Joseph Kubica

    Sounds like some Behind-the-scene LOBBY GROUP – is hard at work here!

    #18
  19. Gary

    Nobody has mentioned that the aquifers under this region are being pumped dry or low level. Many south Texas ranches have lost their wells. This is a disaster in the making in this drought stricken area.

    #19
  20. TexKen

    Typical NY Times, an agenda driven doom and gloom story. I’m less worried about the amount of oil and gas in the this country than the Ivy League idiots ruining everything.

    #20
  21. Bill

    Anybody that thinks that is “More hype in hopes of creating some panic from the NYT” should READ MORE CLOSELY. (And, hang on to that Enron stock of yours. It’s going out of sight).

    #21
  22. I get the feeling that their is plenty of everything to go around, but if everyone realized this, then we might find the person hiding behind the curtain.
    We do not reward sharing in this world.

    #22
  23. Dollar

    Geee, the gloom and doomers win, tired of fighting these headwinds.

    I will sell my CHK stock and buy Schwinn.

    Cause we all gonna need a good bicycle when our energy policy is what the New York Times wants it to be.

    What is the NYT’s solution to our energy problems ?

    Anyone have a clue what they suggest ?

    #23