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Shale Promises or Shale Spin The Economics of Hydrofracking

New York Times. Article published 26 June, 2011 exposing financial anomalies of shale gasJuly 2011, SEC subpoena a number of shale gas companies August 2011, NY State AG subpoena shale gas companiesAugust 24, 2011 - DOE slashes estimates of Marcellus shale reserves 80%. Why We Should Question Sha

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Shale Promises or Shale Spin The Economics of Hydrofracking

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    1. Shale Promises or Shale Spin? The Economics of Hydrofracking Deborah Rogers Syracuse, NY 1/17/2011

    2. New York Times Article published 26 June, 2011 exposing financial anomalies of shale gas July 2011, SEC subpoena a number of shale gas companies August 2011, NY State AG subpoena shale gas companies August 24, 2011 - DOE slashes estimates of Marcellus shale reserves 80%

    3. Why We Should Question Shale Gas No doubt gas exists in shale but... Is production really as stable and secure as it appears? Are jobs, taxes and economic benefits really as great as claimed? Do economic benefits outweigh environmental degradation? Will shale gas provide energy independence?

    4. Pattern of Hype Each play heavily promoted as better than the last Jobs creation overstated Taxes and Revenues overstated Reserves overstated

    5. Rhetoric vs. Reality “...if oil is "The Prize," then natural gas is "The Gift." Nature’s gift to the people of the world.” - Jim Mulva, CEO, Conoco Phillips "the switch from [shale] gas to [shale] oil suggests shale gas can survive only through cross-subsidization, not on its own merit. Perpetual expansion cannot forever disguise a serious problem with the bottom line.” - Platt’s Oil and Gas Reporter, December 2010

    6. Is There Really Enough? “Gas can enhance energy supply security through its abundance. There is enough to meet industrial, residential, commercial and power generation needs” - Jim Mulva, CEO Conoco Phillips “Recent frac data from the Barnett shows a play in severe decline...The Barnett’s well failure rate also continues to rise over time” - Bernstein Research, 2010  USGS slashed DOE estimates by 80% in Marcellus play

    7. Production vs. Reserves “Gas can enhance energy supply security through its abundance” - Jim Mulva, Conoco Phillips Production vs. Reserves? Conventional gas projects decimated Is it really a “boom”? Drilling to meet debt service

    8. City of Ft. Worth Audited gas revenue 2008 - $50M appr. Audited gas revenue 2009 - $19M appr. Audited gas revenue 2010 - $38M appr. Number of wells more than quadrupled between 2008-2010 Four times more wells cannot keep production at prior levels

    9. Taxes and Revenues “Only 18% of municipalities directly experiencing drilling activities...said their tax revenues had increased, while 26% of the local governments indicated that their costs had increased.” “These findings from local officials contrast with prior economic studies which predicted that there would be large local tax impacts but which did not verify what is actually occurring.” s

    10. City of Ft. Worth A Cautionary Tale Benzene was detected at 94% of all sites tested within the city proper - June 2011 Other toxics of concern were found contributing to a toxic cocktail TCEQ confirmed that drilling contributes more air toxics than ALL cars, trucks, and airplanes in the region combined DFW has now passed Houston as region with highest air toxics

    11. Jobs and Economic Activity Study in 2010 funded by industry, claimed 44,000 jobs created and $7.17B in economic activity in Pennsylvania “A new study of the economic impacts of the Marcellus Shale has found that natural gas development created roughly half the jobs and economic activity reported in earlier, industry funded studies.” - Times Tribune, 30 August, 2011

    12. Ohio State Study Industry projects 200,000 jobs for Ohio Ohio State University projects 20,000 or 1/10th industry projections Industry originally projected 100,000 total jobs for Pennsylvania, then claimed 44,000 Ohio State estimates 20,000 actual jobs in Pennsylvania originally

    13. Jobs = Economic Boom Industry’s Numbers Inflation? Perryman Group claimed 111, 131 direct jobs from shale production in North Texas alone in 2008. Fact: 166,500 TOTAL jobs in production sector for all of US - Bureau of Labor Statistics, 2008 Chesapeake Energy claimed 53,200 direct jobs in shale production in Ft. Worth/Arlington alone in 2010. Fact: 93,800 TOTAL jobs in production sector for all of US - Bureau of Labor Statistics, 2010.

    14. Record Capacity “Record capacity” could be for wrong reasons “Drilling Treadmill” “Record capacity” instills notion that shale gas is “cheap and abundant” How secure is our “record capacity”?

    15. Misleading Statistics EIA stated U.S. had 100 year supply of gas, then slashed estimates by 80% in Marcellus Much of EIA original erroneous data was provided by industry Neither EIA nor USGS estimates take into account cost of extraction

    16. Reserve Consistency “There was a time you were all told that any of the 17 counties in the Barnett Shale play would be just as good as any other county. We found out there are about two or two and half counties where you really want to be.” - Aubrey McClendon, CEO Chesapeake Energy, Bloomberg, 2009

    17. Is Production Erratic, even in core areas? Examined 9,100 of 15,000 wells in Barnett (from Railroad Commission Data) and found that less than 6% of all wells meet minimum economic thresholds - Art Berman, Petroleum Engineer “It is sometimes said...that 20% of [shale] wells carry a project; the other 80% can easily be uneconomic.”- Dr. John Lee, Texas A&M, and Architect of SEC Rule Change

    18. Shale Consistency Non-Existent “The quirky nature of shale geology means the risks are high that an investment made in a sparsely drilled prospect will go bust.” - ITG Investment Research Inc., January, 2012 “One parcel of land may hold enough fuel to justify prices...while the adjacent land is almost worthless to drillers.” - ITG Investment Research Inc., January, 2012

    20. SEC Rule Change Rule change adopted 2009 Can claim reserves previously not allowed No independent audit necessary Can appear that companies are growing and finding costs are plummeting Is this really the case?

    21. Reserve Claims “Those that select to book liberally can have extremely low finding costs, and those that book more conservatively...could have higher finding costs.”- Mark Papa, CEO, EOG Resources Some increased “booked” reserves by as much as 200% Allows monies to be borrowed on reserves that are not necessarily independently verified

    22. Finding Costs “F&D costs (excluding acquisitions) decreased an average of 48% in 2009.”- Ernst and Young, October 2010 5 of 7 shale companies examined Costs dropped significantly more than industry average Same companies that chose to “book liberally”

    23. Plummeting Costs? PetroHawk costs declined 86% (after rule change) Comstock and PetroQuest - declined 75% Range Resources and Chesapeake - declined 66% EOG - declined 48% - only one in line with industry average

    24. Shareholder Value? “If we don’t have enough wells for valid statistics for what we have drilled already, or if we don’t have enough future drilling opportunities to have reasonable expectations of average outcomes, then we may have to write down our assets, as some are doing.”- Dr. John Lee, Architect of SEC Rule Change

    25. Asset Writedowns according to Company 10-K’s filed with SEC Impairment charges as percentage of total shareholder equity - 2008-2010 PetroHawk - 185% (* total 2007 shareholder equity) Quicksilver Resources - 151%* Chesapeake Energy -115%* Devon Energy -102%* Encana Energy - 71%* Range Resources - 45% Significant shareholder value destruction

    26. Highest and Best Use? If at least 80% of wells are uneconomic (Berman’s estimate based on TRRC data is over 90% in the Barnett), is this the “highest and best use” of our land? Environmental costs could be huge - 94% of sites tested in FW had benzene emissions Water is permanently removed from hydrological cycle in spite of growing population in urban areas

    27. WHY? “U.S. Shale Bubble Inflates After Near-Record Prices for Untested Fields” - Bloomberg Headline, January, 2012 2011 set records for average international crude prices Chinese, French and Japanese Energy explorers committed more than $8 billion in 2 weeks to U.S. shale prospects - January 2012

    28. Why the Majors Took the Bait Two sets of economics: Field Economics “Street” Economics International crude pricing Majors have not grown reserves in over a decade

    29. Industry’s Two-Pronged Approach Pickens Plan - mass conversion of power plants and truck fleets to natural gas - very publicly touted Shale Exportation - very quietly pursued behind the scenes

    30. Shale Exportation October 2011, the first export permit for terminal at Sabine Pass is granted Additional permits have been applied for Shale gas will indeed be exported from U.S.

    31. Asian Markets “...the Chinese are willing to pay a premium to secure North American resources necessary to feed the growing Asian economy.” - Oil and Gas Financial Journal, 2011 “Shell has placed a big emphasis on North American gas; it’s an area of growth for us. We’ve invested something like $15B since 2004 in the onshore [sector]. What we develop here, [we’d] like to export to the rest of the world.” - Royal Dutch Shell, 2011

    32. Exportation Benefits to Companies Asian gas prices tied to crude 2011 sets record prices for crude internationally Current U.S. domestic price about $4 per million BTU Asian markets currently paying about $15 per million BTU for long term contracts Substantial spread

    33. Classic Consumer Squeeze Industry boasts a $250 million per day economic stimulus to U.S. from fall in natural gas prices U.S. manufacturers ramping up If natural gas is exported then prices will rise, perhaps precipitously Classic consumer squeeze

    34. EnergyPolicyForum.com

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