The shale gas bubble

Reports: Shale Gas Bubble Looms, Aided by Wall Street

Desmogblog,

19 February, 2013

Two long-awaited reports were published today at ShaleBubble.org by the Post Carbon Institute (PCI) and the Energy Policy Forum (EPF). 

Together, the reports conclude that the hydraulic fracturing ("fracking") boom could lead to a "bubble burst" akin to the housing bubble burst of 2008.

While most media attention towards fracking has focused on the threats to drinking water and health in communities throughout North America and the world, there is an even larger threat looming.  The fracking industry has the ability - paralleling the housing bubble burst that served as a precursor to the 2008 economic crisis - to tank the global economy.

Playing the role of Cassandra, the reports conclude that "the so-called shale revolution is nothing more than a bubble, driven by record levels of drilling, speculative lease & flip practices on the part of shale energy companies, fee-driven promotion by the same investment banks that fomented the housing bubble..." a summary details. "Geological and economic constraints – not to mention the very serious environmental and health impacts of drilling – mean that shale gas and shale oil (tight oil) are far from the solution to our energy woes."

PCI's report is titled "Drill Baby, Drill," authored by PCI Fellow and former oil and gas industry geoscientist J. Dave Hughes, while EPF's report is titled "Shale Gas and Wall Street," authored by EPF Director and former Wall Street financial analyst Deborah Rogers.

"100 Years of Natural Gas"? Uh huh... 

In President Barack Obama's 2012 State of the Union address, he repeated the fracking industry's favorite mantra: there are "100 years" of natural gas sitting beneath us.

“We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy,” he stated. 

Hughes concludes that the "100 years" trope serves as a disinformation smokescreen and at current production rates, there are - at best - 25 years under the surface.

Industry proponents rely on a figure known as "technically recoverable reserves" when they promote the potential of shale basins. The figure that actually matters though, is production rates, or what the wells actually pull out of the reserves when fracked.

In the case of U.S. shale gas, the booked reserves are operating on what Hughes coins a "drilling treadmill," suffering from the law of "diminishing returns." 

Hughes analyzed the industry's production data for 65,000 wells from 31 shale basins nationwide utilizing the DI Desktop/HPDI database, widely used both by the industry and the U.S. government. He sums up the quagmire he discovered in doing so, writing,   

Wells experience severe rates of depletion...This steep rate of depletion requires a frenetic pace of drilling...to offset declines. Roughly 7,200 new shale gas wells need to be drilled each year at a cost of over $42 billion simply to maintain current levels of production. And as the most productive well locations are drilled first, it’s likely that drilling rates and costs will only increase as time goes on.

The reality, he explains, is that five shale gas basins currently produce 80 percent of the U.S. shale gas bounty and those five are all in steep production rate decline.

And shale oil? More of the same.

Over 80 percent of the oil produced and marketed comes from two basins: Texas' Eagle Ford Shale and North Dakota's Bakken Shale, both of which are visible from outer space satellites.

"[T]aken together shale gas and tight oil require about 8,600 wells per year at a cost of over $48 billion to offset declines," Hughes writes. "Tight oil production is projected to...peak in 2017 at 2.3 million barrels per day [and be tapped by about 2025]...In short, tight oil production from these plays will be a bubble of about ten years’ duration."

At current production rates, Hughes concludes, there is 5 billion barrels of shale oil located underneath the Bakken and Eagle Ford, which equates to a measly ten months worth of oil at current runaway climate change-causing U.S. oil consumption rates.

PCI accompanied Hughes' report with 43 charts and graphs and a digital U.S. map with the production data of all 65,000 fracking wells in the lower 48.

Wall Street's Complicity

Roughly 17 months ago, activists from around the country set up encampments outside of Wall Street, coining themselves Occupy Wall Street. As Rogers' report demonstrates, they had the right target in mind.

Rogers opens the report on a defiant note. 

"The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets," she wrote. "Further, leases were bundled and flipped on unproved shale fields in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007."

In its early days operating in the U.S., the industry cloaked itself as a "mom-and-pop" shop start-up venture.

Rogers unpacked the reality behind this rhetorical ploy, writing that Wall Street firms are "intricately married to [shale gas and oil corporations]...With the help of Wall Street analysts acting as primary proponents for shale gas and oil, themarkets were frothed into a frenzy."

In other words, there are two spheres of economics unfolding: day-to-day in-field shale oil and gas production economics and Wall Street high finance economics. It's the insane economics of Wall Street investors fueling the economic decisions of those working in the field, in what Rogers describes as a "financial co-dependency."

Faulkner: "The past is never dead. It's not even past."

Are we witnessing another "Inside Job" of the sort Charles Ferguson portrayed in his Academy Award-winning documentary film by that namesake?

In his 1951 classic play, "Requiem for a Nun," William Faulkner wrote, "The past is never dead. It's not even past."

These are the words of a sage, particularly given the past century of "The Great American Bubble Machine," as Rolling Stone investigative journalist Matt Taibbi has documented of Wall Street's behavior financing multiple economic spheres that have led to near system-wide collapse.

At the very least then, if it all "hits the fan," we can't say we weren't forewarned.