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.

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