New York Times: US shale a "giant Ponzi scheme"

Industry emails cast doubt on long-term economics of US shale gas

Shale wells have become a common sight in many US states. But are they to stay? GETTY IMAGES
Shale wells have become a common sight in many US states. But are they to stay? GETTY IMAGES

The New York Times yesterday released hundreds of emails reported to be from analysts and industry insiders, which cast serious doubt on the long-term economic viability of US domestic shale gas production.

One email from an unnamed analyst at IHS Drilling data, a specialist research firm, states "the word in the world of independents is that shale plays [the industry term for shale formations] are just giant Ponzi schemes and the economics just do not work".

In language evoking behavior rife during the international property bubbles leading to the financial crisis of 2008, another email describes the corporate strategy of Chesapeake Energy, a major shale player, is to flip gas leases for profit rather than undertake exploration and production work on them. One email compares the shale phenomenon to Enron, the US energy company that collapsed in 2001 after revelations that corporate fraud and false accounting were used inflate its share price.

While the emails do not generally dismiss the amount of gas in the ground in vast areas such as the Barnett and Marcellus shale, they raise questions over the profitability of extracting the gas.

The news that will hearten Middle East gas exporters, who have largely written off the US as an export market in the medium to long term, on the back of huge production and reserves targets announced by US shale gas explorers.

However, the disclosures may cast doubt on the viability and longevity of shale projects in the region, and bolster the position of conventional gas exporters such as Qatar. Jordan has an ongoing shale exploration and production agreement with Shell, and earlier this year Sonatrach, the Algerian state gas company, announced it would be looking into possible shale projects with Italian firm Eni.

The apparent success of shale gas production in North America, and particularly in the United States, has triggered the exploration of shale gas resources around the world. Shale gas exploration is being undertaken in China, India, Poland, Germany, Spain, France, the United Kingdom, the Netherlands, Australia, Austria, Sweden, Switzerland, Italy, Hungary, Romania, Ukraine, and Argentina.

Some of the emails show industry figures being extremely dismissive of shale's future. A 2010 email from a Schlumberger employee dryly describes the process of "flipping" wells as a "new profession" and slams a European well he has been working on as "crap" that the operator will nonetheless be flipped to someone else on the basis of putative potential. "Always a greater sucker," the email says.

The New York Times disclosures follow an announcement that the US Government's Environmental Protection Agency is sending agents to shale wells to evaluate the effects of hydraulic fracturing on drinking water. Interim results of the field work are expected by the end of 2012.

Numerous concerns over the environmental impact of hydrofracking, including damage to the water table, have been raised since the advent of shale in 2005.

Evidence of pollution to the water table will be extremely bad news for the shale industry, which lobbied hard to win an exemption from the Clean Water Act.

Environmental concerns aside, according to the New York Times, 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. 

The e-mails were obtained by the New York Times 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 some cases, shale investment is compared to the late 1990s dot com bubble that burst spectacularly in March 2000.

In three major shale formations — the Barnett in Texas, the Haynesville in East Texas and Louisiana and the Fayetteville, across Arkansas — less than 20 percent of the area heralded by companies as productive is emerging as likely to be profitable under current market conditions, according to the data and industry analysts, reports the New York Times.

“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 e-mail to a federal energy analyst. “In fact I’m quite skeptical of it myself when you see the % decline in the first year of production.”

The documents reveal fears of a speculative bubble within US shale producers, who may have overbid for gas leases and inflated production and reserve figures with a view to attracting investment. 

The documents may also lead to a reappraisal of natural gas prices, which have been held low in the US on the assumption of cheap, sustainable and plentiful domestic supplies. Data seen by the Times throws this assumption into doubt. 

The Barnett shale, which has the longest shale production history, provides the most reliable case study for predicting future shale gas potential. The data suggest that if the wells’ production continues to decline in the current manner, many will become financially unviable within 10 to 15 years.

Spokeman for Chesapeake said they remain confident shale production will remain productive for at least 30 years. David Pendery, a spokesman for IHS, told the Times that though shale gas prospects had previously been debated by many analysts, in more recent years costs had fallen and technology had improved.

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