FacebookTwitterGoogle+RedditEmail

The Great Shale Oil Swindle

by NAFEEZ MOSADDEQ AHMED

Recent headlines in the US press about the coming economic boom heralded by the shale gas revolution would lead you to think we are literally swimming in oil. A spate of reports last year, in particular the International Energy Agency’s (IEA)World Energy Outlook (WEO) in November 2012, forecast that the US will outstrip Saudi Arabia as the world’s largest oil producer by 2017, becoming, as Reuters put it, “all but self-sufficient in net terms” in energy production. According to the IEA, the projected increase in oil production from 84 mbpd (million barrels per day) in 2011 to 97 mbpd in 2035 will come “entirely from natural gas liquids and unconventional sources” — largely shale oil and gas — while conventional oil output will begin to fall from 2013.

These resources can only be mined at the cost of massive environmental pollution: their extraction involves hydraulic fracturing (“fracking”; pressurised injection of a mixture of water, sand and detergents to create new cracks in the rock to force out the gas), using the technique of horizontal drilling (1). But their exploitation in the US has brought about the creation of hundreds of thousands of jobs and offers the advantage of cheap and abundant energy. Exxon Mobil’s 2013 Energy Outlook says the shale gas revolution will make the US a net exporter by 2025. But is the shale revolution all it’s fracked up to be? The ongoing fragility of the global economy should give pause for thought. Spain’s once-flourishing economy — the Eurozone’s fourth largest in 2008 — is now in dire straits as its supposedly unstoppable property bubble burst unexpectedly that same year, with house prices dropping by a third. But policymakers have learnt few lessons from the 2008 crash, and may be on course to repeat similar mistakes in the petroleum sector.

New York Times investigation first unearthed major cracks in the “shale boom” narrative in June 2011, finding that state geologists, industry lawyers and market analysts “privately” questioned “whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves” (2). According to the paper, “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 early 2012, two US energy consultants, writing in the flagship British energy industry journal Petroleum Review, sounded the alarm. They noted a strong “basis for reasonable doubts about the reliability and durability of US shale gas reserves” which have been “inflated” under new Security and Exchange Commission (SEC) rules introduced in 2009 (3). The new rules allow gas companies to claim reserve sizes without any independent third party audit.

Dodgy economics of fracking

The overestimation of reserve sizes is being used by oil industry majors to obscure the dodgy economics of fracking. Apart from the harmful effects on the environment, the problem is one of production rates, which start high but fall fast. In Nature, former UK chief government scientist Sir David King, co-writing with scientists from his Oxford Smith School of Enterprise & the Environment, noted that production at wells drops off by as much as 60-90% within the first year (4).

Such a rapid decline has made shale gas distinctly unprofitable. As production declines, operators are forced to drill new wells to sustain production levels and service debt. Rocketing production at inception, combined with the economic slowdown, drove US natural gas prices from about $7-8 per million cubic feet in 2008 down to less than $3 per million cubic feet in 2012.

Finance specialists have not been taken in. “The economics of fracking are horrid,” writes US financial journalist Wolf Richter in Business Insider  (5). “Drilling is destroying capital at an astonishing rate, and drillers are left with a mountain of debt just when decline rates are starting to wreak their havoc.
To keep the decline rates from mucking up income statements, companies had to drill more and more, with new wells making up for the declining production of old wells. Alas, the scheme hit a wall, namely reality.”

Arthur Berman, a petroleum geologist who worked with Amoco (before its merger with BP) says that “the decline rates [of the] shale reservoirs experience … are incredibly high” (6). Citing the Eagle Ford shale site in Texas (the “mother of all shale oil plays”), he points out that the “annual decline rate is higher than 42%.” Just to keep production flat, they will have to drill “almost 1,000 wells in the Eagle Ford shale, every year… Just for one play, we’re talking about $10bn or $12bn a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from?”

‘It’s all in the red’

Last year saw some of the biggest energy companies suffer due to the bubble economics of the shale gas boom. ExxonMobil’s CEO, Rex Tillerson, complained that the lower prices due to the US natural gas glut, although reducing energy costs for consumers, were depressing prices and were thus often insufficient to cover production costs resulting in dramatically decreased profits. Although, in shareholder and annual meetings, the company had officially insisted it was not losing money on gas, Tillerson candidly told a meeting at the Council on Foreign Relations: “We are all losing our shirts today. We’re making no money. It’s all in the red” (7).

The British BG Group was forced “to take a $1.3bn writedown in its US natural gas assets” due to the gas supply glut, “leading to a sharp fall in quarterly and interim profits” (8). By November 2012, after Royal Dutch Shell saw its earnings fall for the third consecutive quarter by “24% on the year”, Dow Jones reported the “negative effects in their earnings”, underscoring “how disruptive the shale boom of the past few years has been to the sector.”

Even Chesapeake Energy — billed as America’s shale pioneer — found itself in a crisis, forcing it to sell assets to meet its obligations. “Staggering under high debt,” reported The Washington Post, Chesapeake said “it would sell $6.9bn of gas fields and pipelines — another step in shrinking the company whose brash chief executive had made it a leader in the country’s shale gas revolution” (9).

How has this been allowed to happen? Analyst John Dizard pointed out in theFinancial Times (6 May 2012) that shale gas producers have spent “two, three, four and even five times their operating cash flow to fund their land, drilling and completion programmes.” To sustain this “deficit financing”, too much money “was borrowed, on complex and demanding terms. Wall Street should have provided reality checks to the shale gas people; instead, they just provided cashier’s cheques with lots of zeroes at the end.” But according to Dizard, the bubble will continue growing due to increasing US dependency on gas-fired power. “Given the steep decline rates of shale gas wells, compared to conventional wells, drilling will have to continue. Prices will have to adjust upwards, a lot, to cover not only past debts but realistic costs of production.”

Worst-case scenario

Nonetheless, it is not ruled out that several large oil companies could find themselves facing financial distress simultaneously. If that happens, according to Berman, “you may have a couple of big bankruptcies or takeovers and everybody pulls back, all the money evaporates, all the capital goes away. That’s the worst-case scenario.”

In other words, the premise of “peak oil” — the point at which geological constraints and economic factors will combine to make the black stuff more difficult and expensive to produce — is far from undermined by the shale gas boom. Several independent scientific studies released over the last year — largely ignored by the media — vindicate this conclusion.

In a study in Energy Policy, Sir David King and his Oxford team concluded that the oil industry had overstated world reserves by about a third, and estimates should be downgraded from 1,150-1,350 billion barrels to 850-900 billion barrels. “While there are certainly vast amounts of fossil fuel resources left in the ground, the volume of oil that can be commercially exploited at prices the global economy has become accustomed to is limited and will soon decline” (10).

King and co, in their Nature paper, found that despite reported increases in unconventional oil and gas production by fracking, depletion of the world’s existing fields is still running at 4.5-6.7% a year. They categorically dismissed notions that a shale gas boom would avert an energy crisis. And US financial risk analyst Gail Tverberg found that since 2005 “world [conventional] oil supply has not increased”, that this was “a primary cause of the 2008-2009 recession” and the “expected impact of reduced [conventional] oil supply” will mean the “financial crisis may eventually worsen” (11). That is not all: a new report from the New Economics Foundation warned that the arrival of “economic peak oil” — when the cost of supply “exceeds the price economies can pay without significantly disrupting economic activity” — will occur around 2014/15 (12).

Following a hugely successful industry PR offensive, journalists and policymakers have largely ignored these studies. But the upshot is simple: Rather than ushering in a new wave of lasting prosperity, the eventual consequence of the gas glut is likely to be an unsustainable shale bubble, fuelling a temporary recovery that masks deeper structural instabilities. When the bubble bursts under the weight of its own debt obligations, there will be a collapse in supply and a spike in prices, with serious economic consequences.

Nafeez Mosaddeq Ahmed is executive director of the Institute for Policy Research & Development and chief research officer at Unitas Communications Ltd, both in London; his latest book is A User’s Guide to the Crisis of Civilization: And How to Save It , Pluto Press, 2010, which inspired the award-winning documentary feature film The Crisis of Civilization,2011.

(1) This exposes more reservoir rock to the wellbore allowing maximum resource extraction.

(2) “Insiders Sound an Alarm Amid a Natural Gas Rush”, The New York Times, 25 June 2011.

(3) Ruud Weijermars and Crispian McCredie, “Inflating US shale gas reserves”, Petroleum Review,London, January 2012.

(4) David King and James Murray, “Climate policy: Oil’s tipping point has passed”, Nature, London,no 481, 26 January 2012.

(5) Wolf Richter, “Dirt Cheap Natural Gas is Tearing up the Very Industry that’s Producing It”, Business Insider, Portland, 5 June 2012.

(6) “Shale Gas Will be the Next Bubble to Pop – An Interview with Arthur Berman”, 12 November 2012;www.oilprice.com

(7) “Exxon: ‘Losing our Shirts’ on Natural Gas”, The Wall Street Journal, New York, 27 June 2012.

(8) “US shale gas glut cuts BG Group profits”,Financial Times, London, 26 July 2012.

(9) “Debt-plagued Chesapeake energy to sell $6,9 billion worth of its holdings”, The Washington Post, , 13 September 2012.

(10) Nick A Owen, Oliver R Inderwildi and David A King, “The Status of conventional world oil reserves — hype or cause for concern?”, Energy Policy,Guildford,vol 38, no 8, August 2010.

(11) Gail E Tverberg, “Oil supply limits and the continuing financial crisis”, Energy, Stamford, vol 35, no 1, January 2012.

(12) “The economics of oil dependence: a glass ceiling to recovery”, New Economics Foundation, London, 2012.

This article appears in the excellent Le Monde Diplomatique, whose English language edition can be found at mondediplo.com. This full text appears by agreement with Le Monde Diplomatique. CounterPunch features two or three articles from LMD every month.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

March 30, 2017
William R. Polk
What Must be Done in the Time of Trump
Howard Lisnoff
Enough of Russia! There’s an Epidemic of Despair in the US
Ralph Nader
Crash of Trumpcare Opens Door to Full Medicare for All
Carol Polsgrove
Gorsuch and the Power of the Executive: Behind the Congressional Stage, a Legal Drama Unfolds
Michael J. Sainato
Fox News Should Finally Dump Bill O’Reilly
Kenneth Surin
Former NC Governor Pat McCory’s Job Search Not Going Well
Binoy Kampmark
The Price of Liberation: Slaughtering Civilians in Mosul
Bruce Lesnick
Good Morning America!
William Binney and Ray McGovern
The Surveillance State Behind Russia-gate: Will Trump Take on the Spooks?
Jill Richardson
Gutting Climate Protections Won’t Bring Back Coal Jobs
Robert Pillsbury
Maybe It’s Time for Russia to Send Us a Wake-Up Call
Prudence Crowther
Swamp Rats Sue Trump
March 29, 2017
Jeffrey Sommers
Donald Trump and Steve Bannon: Real Threats More Serious Than Fake News Trafficked by Media
David Kowalski
Does Washington Want to Start a New War in the Balkans?
Patrick Cockburn
Bloodbath in West Mosul: Civilians Being Shot by Both ISIS and Iraqi Troops
Ron Forthofer
War and Propaganda
Matthew Stevenson
Letter From Phnom Penh
James Bovard
Peanuts Prove Congress is Incorrigible
Thomas Knapp
Presidential Golf Breaks: Good For America
Binoy Kampmark
Disaster as Joy: Cyclone Debbie Strikes
Peter Tatchell
Human Rights are Animal Rights!
George Wuerthner
Livestock Grazing vs. the Sage Grouse
Jesse Jackson
Trump Should Form a Bipartisan Coalition to Get Real Reforms
Thomas Mountain
Rwanda Indicts French Generals for 1994 Genocide
Clancy Sigal
President of Pain
Andrew Stewart
President Gina Raimondo?
Lawrence Wittner
Can Our Social Institutions Catch Up with Advances in Science and Technology?
March 28, 2017
Mike Whitney
Ending Syria’s Nightmare will Take Pressure From Below 
Mark Kernan
Memory Against Forgetting: the Resonance of Bloody Sunday
John McMurtry
Fake News: the Unravelling of US Empire From Within
Ron Jacobs
Mad Dog, Meet Eris, Queen of Strife
Michael J. Sainato
State Dept. Condemns Attacks on Russian Peaceful Protests, Ignores Those in America
Ted Rall
Five Things the Democrats Could Do to Save Their Party (But Probably Won’t)
Linn Washington Jr.
Judge Neil Gorsuch’s Hiring Practices: Privilege or Prejudice?
Philippe Marlière
Benoît Hamon, the Socialist Presidential Hopeful, is Good News for the French Left
Norman Pollack
Political Cannibalism: Eating America’s Vitals
Bruce Mastron
Obamacare? Trumpcare? Why Not Cubacare?
David Macaray
Hollywood Screen and TV Writers Call for Strike Vote
Christian Sorensen
We’ve Let Capitalism Kill the Planet
Rodolfo Acuna
What We Don’t Want to Know
Binoy Kampmark
The Futility of the Electronics Ban
Andrew Moss
Why ICE Raids Imperil Us All
March 27, 2017
Robert Hunziker
A Record-Setting Climate Going Bonkers
Frank Stricker
Why $15 an Hour Should be the Absolute Minimum Minimum Wage
Melvin Goodman
The Disappearance of Bipartisanship on the Intelligence Committees
FacebookTwitterGoogle+RedditEmail