Fracking Industry's Faulty Claims Cast Doubt on Shale Investments
By Sharon Kelly
America is in the midst of the biggest onshore oil and gas rush in recent history, with excitement spreading across the U.S. Oil and gas companies have cashed in on this frenzied excitement by courting huge investments domestically and abroad.
But a growing chorus of independent analysts and law enforcement agencies have their doubts and have questioned whether shale drillers are over-hyping their financial prospects and overestimating how much oil or gas they can profitably pull from the ground. Just this week, one of America's biggest agricultural lenders, the Netherlands-based Rabobank, announced that it would no longer lend money to companies that invest in shale gas extraction (nor to farmers worldwide who lease their land to these drillers).
The way that oil and gas companies describe their prospects in their financial statements matters because investors—and not just the uber-wealthy ones but also pension funds, university endowments, average folks with retirement savings or 401(k)s—can lose catastrophically if the information they rely on is faulty.
This matters to taxpayers too, since lawmakers need accurate information when making long-term decisions about the industry subsidies and tax breaks granted to encourage the drilling boom. The shale fracking rush could prove to be an expensive bust for taxpayers if oil and gas wells do not perform as promised.
Concern that companies have been over-exuberant about shale led Wall Street's two top cops, the Securities and Exchange Commission (SEC) and the New York Attorney General to investigate whether oil and gas companies have been "overbooking" their reserves (translation: inflating their appeal by promising investors more fossil fuels than their wells can actually deliver).
In the drilling industry, Chesapeake is known for being more aggressive than many of its competitors in its "land grab" strategies, its use of book-keeping methods to obscure costs, even in its legal and public relations posture toward local communities that try to block drilling.
Last year, Chesapeake came under renewed heavy scrutiny after then-CEO Aubrey McClendon’s $1.1 billion in personal loans, an undisclosed private hedge fund and extensive perks were revealed by an award-winning Reuters investigation.
Little has leaked out about the SEC and New York Attorney General probes. One company, Goodrich Energy, announced in September 2012 that the SEC probe into their reserves was over, but no other companies made similar announcements.
Recently, with little fanfare, Chesapeake announced a move that underscores the importance of these concerns and also offers another example of the revolving door that has characterized relations between the oil and gas industry and the regulatory agencies that are supposed to police them.
The SEC's Revolving Door Problem
On June 17, Chesapeake Energy announced it had appointed a new chief Compliance Officer, Patrick K. Craine. Craine is an accomplished attorney—he was a partner at a major law firm, Bracewell & Guiliani, where he specialized in white collar criminal defense, regulatory enforcement and internal investigations.
But hands down his greatest value to Chesapeake will be the role Craine played at the SEC. A former prosecutor, Craine handled many oil and gas cases at the SEC and, according to his law firm bio page, "prosecuted the largest oil and gas reserves restatement case in history."
Companies that hire former regulators often dismiss concerns about revolving doors, arguing that no one knows the rules better than the people who used to administer them. Their specialized knowledge and experience in interpreting rules is invaluable to companies who want to follow the rules in good faith and navigate complicated regulations, they say.
But since the financial collapse in 2008, watchdogs have honed in on the problems that can result when former prosecutor go to work for the industries they once investigated – especially at the SEC.
"Former employees of the Securities and Exchange Commission routinely help corporations try to influence S.E.C. rule-making, counter the agency’s investigations of suspected wrongdoing, soften the blow of S.E.C. enforcement actions, block shareholder proposals and win exemptions from federal law," the Project on Government Oversight (POGO) wrote in a report released earlier this year.
When the people who are supposed to police an industry are too cozy with the people representing that industry, they can pick up their world view. They can come to identify strongly with the people they are supposed to be overseeing, undermining their ability to take tough measures. And current regulators can unconsciously give former colleagues who now work for the industry greater deference or leeway because of their shared past.
That's why many federal agencies have ethics rules that attempt to guard against regulatory capture. But last year, the SEC's own Inspector General investigated how the SEC guards against conflicts of interest caused by revolving doors and concluded that the agency's ethics rules on these matters were riddled with loopholes.
And when it comes to policing the colossally wealthy and politically powerful oil and gas industry, the SEC is especially outgunned as its staff of enforcement specialists consists of little more than a handful of experts.
A Little-Noticed SEC Rule Change
In some ways, the SEC has helped create some of the very problems it is now investigating at Chesapeake and other drilling companies.
At the end of 2008, the SEC loosened rules that govern how oil and gas companies can calculate their reserves. The new rules from the SEC allowed more leeway in predicting how much oil and gas their wells, particularly unconventional oil and gas wells like shale or coal bed methane, could produce. This was a boon for drilling companies like Chesapeake in their effort to attract investment.
This little-noticed SEC rule change—one of the Bush Administration’s last moves before leaving office—allowed companies license to more optimistically book unconventional oil and gas, including shale gas and shale oil.
The impact of this rule change on the shale gas industry was enormous and immediate.
"The final SEC rules have demonstrably created a situation where there is room for interpretations" that allow unconventional oil and gas companies to book larger reserves, a July 2012 Society of Petroleum Engineers paper by Ruud Weijemars concluded, adding that "a difference in reserves reporting ‘culture’ has emerged between U.S. independents—engaged in unconventional-gas developments—and the oil majors."
After the SEC changed its rules, a huge gulf emerged between the ways that these independents booked their reserves and how conventional oil and gas companies applied the rules.
"Digging deeper into company reports reveals some additional cause for concern about the certainty of economic production from shale gas reserves," Weijemars wrote in his peer-reviewed paper.
A company-by-company review led to a damning conclusion for the unconventional gas industry. Weijemars found that "throughout 2009, companies such as Petrohawk, Devon, Chesapeake and EOG could not produce gas with an operational profit. The 51 percent increase of 2009 proved reserves from U.S. shale producers therefore cannot be explained by economic fundamentals."
He said instead, that companies appeared to be making money through financial engineering and the use of creative financing. Forty percent of Chesapeake’s 2009 operational income didn’t come from selling gas, but instead came from derivative trading. (Weijemars is not alone in having doubts about Chesapeake’s prospects—last year a report by ITG Investment Research calculated that Chesapeake could only deliver 70 percent of the oil and gas it was promising.)
"Today’s reality is that nearly all North American shale-gas projects are losing money faster than can be generated from operational income," Weijermar and Joost van der Linden wrote in First Break, a journal that covers applied geophysics, petroleum geoscience and reservoir engineering, "which means losses must be compensated" using various financing techniques and selling off acreage.
The SEC is the federal agency that should be asking hard questions, uncovering information like this and making sure the numbers provided to investors add up. And indeed, Chesapeake has found itself under numerous inquiries that will keep former-SEC prosecutor Patrick Craine’s hands full. But so far it's not clear how aggressively the SEC will police Chesapeake's reserve claims —or similar claims by the rest of the shale oil and gas industry—or whether any results will simply be buried.
Meanwhile, market analysts are increasingly finding red flags in the industry’s publicly-disclosed data. These concerns have even drawn the attention of Congress.
"Shale wells deplete alarmingly," testified energy analyst Deborah Rogers in May before the Senate Committee on Energy and Natural Resources. Rogers, who was recently appointed an adviser to the U.S. Department of the Interior's Extractive Industries Transparency Initiative which is looking into some of these issues, described a pattern where companies like Chesapeake need to drill more wells just to keep gas flowing out and cash flowing in.
She also explained why this pattern is not just financially worrisome.
"The collateral damage in the form of air toxics, ground water depletion, encroachment, road damages and potential aquifer ruination in the United States could be immense," she said, "and will only continue to rise as more and more wells need to be drilled."
Visit EcoWatch’s FRACKING page for more related news on this topic.
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Transitioning to renewable energy can help reduce global warming, and Jennie Stephens of Northeastern University says it can also drive social change.
For example, she says that locally owned businesses can lead the local clean energy economy and create new jobs in underserved communities.
"We really need to think about … connecting climate and energy with other issues that people wake up every day really worried about," she says, "whether it be jobs, housing, transportation, health and well-being."
To maximize that potential, she says the energy sector must have more women and people of color in positions of influence. Research shows that leadership in the solar industry, for example, is currently dominated by white men.
"I think that a more inclusive, diverse leadership is essential to be able to effectively make these connections," Stephens says. "Diversity is not just about who people are and their identity, but the ideas and the priorities and the approaches and the lens that they bring to the world."
So she says by elevating diverse voices, organizations can better connect the climate benefits of clean energy with social and economic transformation.
Reposted with permission from Yale Climate Connections.
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If weather is your mood, climate is your personality. That's an analogy some scientists use to help explain the difference between two words people often get mixed up.
Size Matters<p>Climates are a bit like woven tapestries. The big picture is important, no question. But so are all the seemingly minor details found inside the larger whole.</p><p><a href="https://research-information.bris.ac.uk/en/persons/tommaso-jucker" target="_blank">Tommaso Jucker</a> is an environmental scientist at the University of Bristol. In an email, Jucker says he'd define the term microclimate as "the suite of climatic conditions (temperature, rainfall, humidity, solar radiation) measured in localized areas, typically near the ground and at spatial scales that are directly relevant to ecological processes."</p><p>We'll talk about that last bit in a minute. But first, there's another criteria to discuss. According to some researchers, a microclimate — by definition — must differ from the larger area that surrounds it.</p><p><a href="https://www.cfc.umt.edu/research/paleoecologylab/publications/Davis_et_al_2019_Ecography.pdf" target="_blank">Forests</a> provide us with some great examples. "The climate near the ground in a tropical rainforest is dramatically different from the climate in the canopy 50 meters [164 feet] above," says University of Montana ecologist <a href="https://www.cfc.umt.edu/personnel/details.php?ID=1110" target="_blank">Solomon Dobrowski</a> in an email. "This vertical gradient among other factors allows for the staggering biodiversity we see in the tropics."</p><p>Likewise, scientists observed that a 2015 partial <a href="https://animals.howstuffworks.com/insects/bees-stopped-buzzing-during-2017-solar-eclipse.htm" target="_blank">solar eclipse</a> caused the air temperature of an Eastern European meadow to <a href="https://rmets.onlinelibrary.wiley.com/doi/full/10.1002/wea.2802" target="_blank">change more dramatically</a> than it did in a nearby forest. That's because trees provide not only shade, but their leaves also reflect solar radiation. At the same time, forests tend to reduce wind speeds.</p><p>All those factors add up. A 2019 review of 98 wooded places — spread out across five continents — found that forests are 7.2 degrees Fahrenheit (4 degrees Celsius) <a href="https://natureecoevocommunity.nature.com/posts/47363-forests-protect-animals-and-plants-against-warming" target="_blank">cooler on average</a> than the areas outside them.</p><p>Now if you hate the cold, don't worry; there's a cozy exception to the rule. According to that same study, forests are usually 1.8 degrees Fahrenheit (1 degree Celsius) warmer than the external environment during the wintertime. Pretty cool.</p>
A Bug's Life<p>When does a microclimate stop being, well, micro? In other words, is there a maximum size we should be aware of when discussing them?</p><p>Depends on who you ask. "In terms of horizontal scale, some have defined 'microclimate' as anything that is less than 100 meters [328 feet] in range," Jucker says. "I'm personally less prescriptive about this."</p><p>Instead, he says the "scale at which we want to measure [a particular] microclimate" ought to be "dictated" by the questions we're trying to answer.</p><p>"If I want to know how temperature affects the photosynthesis of a leaf, I should be measuring temperature at centimeter scale," Jucker explains. "If I want to know if and how temperature affects the habitat preference of a large, mobile mammal, it's probably more relevant to capture temperature variation across [tens to hundreds] of meters."</p><p>For instance, solitary plants have the power to generate itty-bitty microclimates. Just ask <a href="https://www.colorado.edu/geography/peter-blanken-0" target="_blank">Peter Blanken</a>, a geography professor at the University of Colorado, Boulder and the co-author of the 2016 book, "<a href="https://amzn.to/2XN6FT8" target="_blank">Microclimate and Local Climate</a>."</p>
The urban heat island effect is a good example of how microclimates work. NOAA
Microclimates on a Grand Scale<p>It's no secret that our planet is going through some rough times at the macro level. The global temperature is <a href="https://climate.nasa.gov/vital-signs/global-temperature/" target="_blank">climbing</a>; nine out of the <a href="https://www.noaa.gov/news/2019-was-2nd-hottest-year-on-record-for-earth-say-noaa-nasa" target="_blank">10 hottest years on record</a> have occurred since 2005. And by one recent estimate, roughly 1 million species around the world are <a href="https://ipbes.net/sites/default/files/2020-02/ipbes_global_assessment_report_summary_for_policymakers_en.pdf" target="_blank">facing extinction</a> due to human activities.</p><p>"One of the big questions that ecologists and environmental scientists are trying to answer right now is how will individual species and whole ecosystems respond to rapid climate change and habitat loss," says Jucker. "...To me, [microclimates are] a key component of this research — if we don't measure and understand climate at the appropriate scale, then predicting how things will change in the future becomes a lot harder."</p><p>Developers have long understood the impact small-scale climates have on our daily lives. <a href="https://science.howstuffworks.com/environmental/green-science/urban-heat-island.htm#pt0" target="_blank">Urban heat islands</a> are cities that have higher temperatures than neighboring rural areas.</p><p>Plants release vapors that can moderate local climates. But in cities, natural greenery is often scarce. To make matters worse, plenty of our roads and buildings have a bad habit of absorbing or re-emitting heat from the sun. <a href="https://www.google.com/books/edition/Microclimate_and_Local_Climate/LHUZDAAAQBAJ?hl=en&gbpv=1&bsq=urban%20heat%20island" target="_blank">Vehicle emissions</a> don't exactly help the situation.</p><p>Still, it's not like Boston or Beijing are thermal monoliths. Sometimes, the documented temperatures <a href="https://e360.yale.edu/features/can-we-turn-down-the-temperature-on-urban-heat-islands" target="_blank">within a single city</a> vary by 15 to 20 degrees Fahrenheit (8.3 to 11.1 degrees Celsius).</p><p>That's where metro parks and city trees come in. They have nice cooling effects on nearby neighborhoods. "Several cities around the world have developed programs to increase urban green spaces," says Blanken. "Tree planting programs and green roof programs, have been shown to lower surface temperatures, decrease air pollution and decrease surface water runoff (urban flash-flooding) in urban areas."</p>
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By Jeff Berardelli
Note: This story was originally published on August 6, 2020
If asked to recall a hurricane, odds are you'd immediately invoke memorable names like Sandy, Katrina or Harvey. You'd probably even remember something specific about the impact of the storm. But if asked to recall a heat wave, a vague recollection that it was hot during your last summer vacation may be about as specific as you can get.
<div id="ecf36" class="rm-shortcode" data-rm-shortcode-id="c2dcc9d48a6cd61f247df1544539a783"><blockquote class="twitter-tweet twitter-custom-tweet" data-twitter-tweet-id="1290959314132361216" data-partner="rebelmouse"><div style="margin:1em 0">Naming heatwaves is a good idea—making the abstract concrete, the invisible visible. Why should hurricanes and wild… https://t.co/hDWgYb79Ob</div> — Ed Maibach (@Ed Maibach)<a href="https://twitter.com/MaibachEd/statuses/1290959314132361216">1596623660.0</a></blockquote></div>
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