Nat Gas: bubble, boon or break-even? *updated*

The New York Times continues its series taking a skeptical look at the natural gas shale boom with pieces Sunday and Monday on whether industry has been over-hyping the economics of the business.

Industry didn’t waste any time with a counter-punch.

Aubrey McClendon, CEO of Chesapeake Energy, wrote a letter to company employees over the weekend refuting the articles’ claims and saying it is “… the handiwork of the same group of environmental activists who have been the driving force behind the NYT’s ongoing series of negative articles about the use of fracking …”

John Hanger, a Pennsylvania attorney with some deep energy background provides an impassioned foil to the New York Times pieces, pointing out good things about shale gas the stories don’t get into.

Nick Grealy of No Hot Air says the article is not the Wiki Leaks of shale that it purports to be.

The analysts at investment bank Tudor Pickering & Holt say the stories cherry pick information from “peripheral industry observers (not shale gas experts)”:

“Saying shale gas not easy/cheap to extract is cheap shot with no back up info and rehashing discredited arguments.  But calling it Enron?  Better back it up with more than this article does.  Remember, Barnett shale production (see below) is currently at record levels, even with rig count one-half of peak levels.  Shale gas is real.  Disregard this as an unsubstantiated NYT hit piece.

***Update:

Kyle Isakower, the American Petroleum Institute’s vice president of regulatory and economic policy, said in a conference call Monday the organization was “doing some fact checking ourselves.”

“Our members are very astute business people they don’t invest billions of dollars in non-profitable ventures,” Isakower said. “The resource estimates that have been used come from the government. I can’t see any reason that EIA would not have any incentive to not give their very best estimate.”

***

Not surprisingly, the piece is stirring other kinds of reaction.

Congressman Maurice Hinchey (D-NY) called for the Securities and Exchange Commission to look into gas producers’ accounting”

“We already knew shale gas drillers were misleading the public about hydrofracking’s environmental risks. Now we are learning that these companies may be cooking the books and using Enron-like tactics to paint a rosy and unrealistic picture for investors, policymakers and local communities.”

*** Update:

Like clockwork, U.S. Rep. Ed Markey (D-Mass.) has also weighed in on the NYT series. In a letter to Energy Information Administrator Richard Newell, Markey asked that the methodology behind the ploclamations of shale gas reserves be reviewed:

“It’s one thing to see the prospects for American natural gas through rose-colored glasses. It’s another thing for the natural gas industry and regulators to put blinders on the American people,. “We don’t need near-sighted industry optimism. Instead, let’s discover the reality of our domestic natural gas reserves, and plan our energy future accordingly.”

Markey also wrote to SEC Chairman Mary Shapiro asking her to look into allegations made in another NYT story about charnges in how companies account for oil and gas reserves.

***

This notion that the economics of many gas wells is questionable has been around for a while. For some it makes for some inside baseball kind of humor.

And there has been a bit of a froth forming on the deal front for shale acreage acquisitions and joint ventures. Marathon Oil recently dropped a heck of a lot of money in the Eagle Ford shale, for prices that come somewhere around $21,000 per acre.

But having The Times write about it in such a way certainly will give those already opposed to natural gas drilling for environment reasons another hook to hang their arguments on — even if these same people neither understand a income statement or have ever read a stock prospectus.

Is industry going to respond to these claims the same way it reacted to the first mainstream challenges to the environmental safety of fracking — namely by saying there are no risks and environmentalists were just creating problems where there were none?

Judging from the weekend response, it appears that’s the case.

It also appears that the rebuttal will be one aiming at discrediting individuals tied to the stories (as Hanger did above by denegrating previous stories by the reporter and as it appears may have happened in the past when well-known Houston shale skeptic Art Berman wrote some columns in World Oil).

The initial attack mode on the environmental issue doesn’t appear to have worked too well, at least from the standpoint of winning the hearts and minds of the vast majority of Americans and lawmakers, however.

True, the shale boom is continuing, but opposition to the practice, particularly in the Northeast, is growing.

Unless companies come up with a different tactic (something akin to agreeing to frac fluid disclosure laws) fence-sitters or those new to the debate may prove difficult to win over.

13 Comments

  1. Dollar

    WOW !! Tom , this question is soooooo difficult .

    But just to take it seriously, if these shale plays are a ” boon ” or another ” Enron ” or ” ponzi scheme ” ………

    Then as an XOM stockholder, I think Rex Tillerson is waaaaayyy over paid. What is this rube doing spending $36 billion in the Marcellus ?

    I want him fired today !!!

    This is tooo much fun. :)

    #1
  2. Trail Trash

    Nothing new about Boom-Bust plays. Remember the Austin Chalk.

    #2
  3. Tom Fowler

    Dollar:
    I’m so glad I could give you a mental workout this morning. ;}

    #3
  4. Nick

    The Marathon aquisition in the Eagle Ford was in the more liquid rich portions of that play, and to call the Eagle Ford a shale is a stretch. When people talk shale gas, they are talking dry gas from the Barnett, Woodford, Marcellus, Haynesville, etc. Not the Eagle Ford. Not the Bakken. Not the Niobrara.

    Dry shale gas plays dont work at 4 mcf/gas. I dont know how those Chesapeake boys are doing it, but I suspect that buying the acreage cheap and selling it high contributes a lot more to their success then the actual production…

    #4
  5. Dollar

    CHK has 95% of their gas hedged at $6 mcf for the next two years.

    #5
  6. Steve

    Nick,
    “…buying the acreage cheap and selling it high…” has not been in Chesapeake’s play book for quite some time. They form Joint Operating Agreements (like with CNOOC in the Eagle Ford and Rockies, Statoil in the Marcellus) to cover as much as 2/3 of the drilling/operating costs in exchange for 1/3 of the revenue from the producing well. This is a fairly ingenious way to be able to drive up lease acquisition costs and effectively “price out” their competition in a given play.

    #6
  7. jason11

    The comments from the Tudor&Pickering analyst are a simple strawman. None of the articles in the NYTimes describe shale gas as fake or non-existent. The articles never claim that there really isnt much gas coming out of the ground.

    The point he is making to refute the Times, was never part of the argument made by the Times article. He seems to forget that Enron really was a business with actual activity.

    #7
  8. Greg

    Ahhh… nothing like hearing the whines coming from the have nots. I have grown up in a family whose grandfather worked for Pure Oil, my father worked for Humble / Exxon for 38 years. I currently work in the industry doing financial analysis. I spent my high school and college summers hauling hay and working in the oil fields and gas plants of east Texas. By the grace of God, my family also owns producing royalties. The complaints to my knowledge are from those who are reaping nothing or have nothing better to do. In short, sit down, shut up, and stay out of someone else’s affairs.

    #8
  9. Mark from Louisiana

    The George Soros funded propaganda machine is hard at work I see.

    America’s huge reserves of natural gas-bearing shale offer lower energy prices, and the hope of increasing our energy independence. George Soros is determined to use his wiles and network of grant recipients to hobble development of America’s energy ace in the hole.

    The movie Gasland came out of nowhere to slam the shale gas industry — an industry that has already substantially brought down the price of natural gas throughout the nation, saving consumers and business untold billions of dollars in energy costs. The natural gas boom spawned by technologies such as horizontal drilling and fracking have also enriched citizens and states that have reaped part of the bounty brought to the surface by these technologies. Gasland casts aspersions regarding the safety of these technologies, especially to the water tables.

    The film’s charges have been rebutted . State departments that regulate energy development have praised energy companies for their environmentally sensitive practices.

    Nevertheless, Gasland has provided fuel for critics of shale gas development. I have speculated, with good reason, that Democrats are trying to stop the tapping of this vast resource and that major Democratic donor George Soros would be a beneficiary if shale gas were stopped in its tracks. His bought and paid for group, MoveOn.Org, has diverted from its typical topics of interest and has thrown itself into the battle over shale gas.

    This brings me back to Gasland, a documentary that was run on the HBO network and that also may have prompted a 60 Minutes report on shale gas. Did Gasland really come out of nowhere, or did it benefit from the helping hands of George Soros?

    Gasland was shown at the Sundance Film Festival — that was the first step in its journey to make the bigtime (including the HBO screenings). Gasland got a major boost in prominence when it landed a coveted spot at Sundance.

    This was quite an accomplishment since most entries are rejected. Yet Gasland survived the winnowing process.

    Did it have friends in powerful places who helped?

    The Sundance Institute receives funding from George Soros; furthermore, the Sundance Documentary Film Fund was formerly known as the Soros Documentary Fund. Soros and his Open Society Institute have given many millions of dollars to the Sundance Institute. The officials who run Sundance know their donors and their special interests.

    According to the Capital Research Institute, Sundance founder Robert Redford “genuflected” before Soros when Open Society gave the Institute 5 million dollars in its latest “gift”:

    #9
  10. bradley

    Yeah, and they all said Dad Joiner was a nut as well…

    #10
  11. Energy Moron

    Howdy Neighbor

    It is increasingly clear that the future belongs to China.

    A coal fired plant is in the final processes of permitting in South Texas, the White Stallion project.

    This whole debate is purely political and has no technical merit (and, since when does this McClendon represent “the industry”… your words). The correct headline on the fuelfix blog should be CHK, not the industry.

    This is non-value added lawyer junk, pure and simple.

    Here is the correct question. If I want to build a power plant, I want to enter into a 30 year contract for price stability. I don’t care about Tony Hayward and the potential gas committee and the “hundred years” (actually, the potential gas committee report specifically says not to use the 100 year term!) but alls I want is to have a 30 years supply that is cheaper than coal.

    Both sides are nuts.

    What is going to happen with this Democratic sponsored nonsense (yes, Dems are the coal folks) is

    1) More coal fired plants and
    2) Natural gas converted to liquids for transportation fuel.

    Both of these are going to be environmental disasters.

    So, when Manhatten is threatened by rising oceans… look in the mirror NYT reporters who are acting as Soros’ agents (just like Kock controls the tea party nonsense).

    #11
  12. Dollar

    The audacity of this , still astounds me.

    For anyone to suggest that Exxon has been the victim of an oil/gas ponzi scheme is beyond ridiculous.

    Maybe Exxon needs to clear all their potential oil/gas investments through the journalists at the NYT, less they get fooled.

    What a pretentious joke these journalists are.

    #12
  13. Gas Phreak

    I wouldn’t worry too much. They said the EXACT same thing about the early Enron critics. I believe they said the EXACT same things about the early derivatives critics too.
    I’m sure they are very astute business people who didn’t invest billions of dollars in non profitable ventures like Enron and derivatives. I’m sure they were very profitable, at least up until their complete collapse.

    Much better to worry about George Soros.

    #13