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The Shale Gas Scam Goes Public

Dave Cohen, Decline of the Empire
It is always gratifying when the New York Times catches up to what some of us have been saying for years now. I was pleased to see their recent three-part series Insiders Sound an Alarm Amid a Natural Gas Rush (June 25), Behind Veneer, Doubt on Future of Natural Gas (June 26) and S.E.C. Shift Leads to Worries of Overestimation of Reserves (June 27). The shale gas scam has gone public.

I intend to milk this story for all it’s worth, and there’s far more material than I could cover in a single post. So this is the first of two (or three) articles on the subject.

I will talk about the Times’ articles next week, and the responses to them. I shall also describe in some detail how the scam works. This first post allows us all to get on the same page about the current state and future of shale gas production in the United States. Here’s stuff I’ve posted about shale gas on DOTE.

The Times had access to all sorts of internal e-mails and documents which were not available to me when I wrote those articles.

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 e-mails and internal documents and an analysis of data from thousands of wells.

In the e-mails, 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 e-mails 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.

“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 e-mail. “Reminds you of dot-coms.”..

(June 30, 2011)


Reality Check for the Natural Gas Boom: A Look at the NYT Shale Gas E-Mails

Dave Summers, Oil Price
I doubt that this will ever reach the levels of public interest that has led earlier exposures of information to acquire a “gate” appendage, but the New York Times (NYT) has begun a running series of articles, starting this weekend, on e-mails that they have acquired that largely deal with the gas shale business. In the discussion on Focus today, it was the first topic of conversation, and so I thought I would write about what the fuss is about. Not, I should hasten to add, that any of this should come as a surprise to you gentle readers, since many of the “revelations” have been covered here in the past.

There is a considerable body of literature that tends to look at future supplies of natural gas, particularly from shales, through very optimistic lenses. This includes reports from such agencies as the EIA and the IEA that suggest that the world is entering the “Golden Age of Natural Gas.” Recent discoveries and projections have led to estimates that the world will be afloat on natural gas for the foreseeable future, as many countries have natural gas tied to shale layers, and American success in developing these deposits could lead to similar success in other countries, providing large volumes of indigenous fuel, at potentially low cost. Unfortunately, as those who have read my posts here know, much of this is over-inflated and not going to happen. While I discussed the problems with the EIA report back in April (haven’t got round to writing on the IEA report yet,) the fundamental points remain valid. The point brought out by the NYT is that the concerns that I have written about are also prevalent within the industry itself, even while it seeks to draw investors into putting up money to drill more wells. And in that activity, as the articles note, industry has been very successful.

If I can re-iterate some of the concerns, they begin with the cost of the drilling and completion operation. Both parts of this are expensive, the initial cost to drill a vertical well, and then turn it horizontal and run it out thousands of feet within the shale costs millions of dollars, as then does the subsequent series of events that includes fracturing the horizontal well a number (perhaps 30) times and using expensive suspension fluids to force small particles into those cracks so as to prop them open and allow gas to migrate from the rock into the well. The costs as a rough initial marker, run around $5 million dollars per well, though they can go considerably higher.

This sort of investment requires a significant return on investment, and in the best wells initial flow rates of over 10 million cubic feet per day can be achieved. However, as the industry has long known, but likely not the general public, those wells are proving to drop in production very quickly.

In some ways the response of the industry reminds me a little of what happened after the climate change e-mails were released to the web in what became known as Climategate. Very little specific focus on the criticism, rather moves to obfusticate the issue, and change the subject. In this regard it is sad to note that in the response that Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, released on the story his major defense seemed to be

If the Times was interested in reporting the facts and advancing the debate about the prospective benefits of natural gas usage to energy consumers, it could easily have contacted respected independent reservoir evaluation and consulting firms that annually provide reserve certifications to the U.S. Securities and Exchange Commission or contacted experts at the U.S. Energy Information Administration, the Colorado School of Mines’ Potential Gas Committee, the Massachusetts Institute of Technology, Navigant Consulting and others who would gladly have gone on record to confirm the abundant resources that have been made available thanks to the horizontal drilling and hydraulic fracturing techniques that Chesapeake and other industry peers have pioneered in deep shale formations across the U.S.

…As I noted in my comment on the EIA report there is a huge difference between a reserve (which is economically realizable) and a resource, which is not necessarily economic. The response did not address, in sufficient technical detail, the points that the NYT and released e-mails make, about the decline rates and thus long-term viability of the wells in production. Nor did it highlight in sufficient detail how, outside of the sweet spots such as the Day Kimbell well site, the less productive wells can be expected to remain economically competitive when their production costs could well be over 50% higher than the current price of natural gas as it is sold to the pipeline…


Chesapeake Energy Corporation Comments on Inaccurate and Misleading New York Times Article

Aubrey McLendon, Chesapeake Energy website
Chesapeake Energy Corporation (NYSE:CHK) rejected an inaccurate and misleading article in the Sunday, June 26, 2011 edition of the New York Times that accused the company of exaggerating natural gas shale wells’ productivity and industry reserve estimates of future well performance despite numerous available sources verifying the estimates.

Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, commented, “Chesapeake stands behind all of its statements to shareholders, partners and the public regarding our natural gas discoveries and production. Our industry’s operations and investment decisions are informed and guided by the best geoscientific, petrophysical and 3-D seismic data available and analyzed by some of the best drilling, completion, production and reservoir engineers in the business. The results of the industry’s efforts to revolutionize natural gas development and production have been extraordinary and continue to improve.

“The Times story was obviously motivated by an anti-natural gas agenda. It is telling that the reporter chose not to interview a single reliable source and instead selectively quoted emails from unnamed sources or well-known industry critics dating back to as early as 2007 to invent a series of inaccurate and misleading allegations. If the Times was interested in reporting the facts and advancing the debate about the prospective benefits of natural gas usage to energy consumers, it could easily have contacted respected independent reservoir evaluation and consulting firms that annually provide reserve certifications to the U.S. Securities and Exchange Commission or contacted experts at the U.S. Energy Information Administration, the Colorado School of Mines’ Potential Gas Committee, the Massachusetts Institute of Technology, Navigant Consulting and others who would gladly have gone on record to confirm the abundant resources that have been made available thanks to the horizontal drilling and hydraulic fracturing techniques that Chesapeake and other industry peers have pioneered in deep shale formations across the U.S…
(June 27, 2011)
As Dave Summers points out in his post above, this response to the NYT articles doesn’t address the issues of the leaked emails….-SO