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.
By Karin Jäger
Think Beyond Borders to Protect Species<p>When an animal crosses so many territories, how can it be protected? That's where the Convention of Migratory Species (CMS), sometimes known as the Bonn Convention, comes in. Every three years, the European Union and an additional 129 countries signed up to the CMS meet to discuss cross-border measures to protect eels and other animals on the move.</p><p>In February 2020, the convention met in Gandhinagar, India, where 10 migratory species, including the Asian elephant, jaguar and the oceanic whitetip shark, were added to the international wildlife treaty for the first time.</p><p>Nature's travelers face specific challenges, particularly as humans encroach more on animal habitat and carve up the landscape with roads and settlements, say experts. Wildlife needs to be taken into consideration at the planning stages of such infrastructure projects.</p><p>"Improving connections between habitats is important if we want to stop or even reverse extinctions," said Arnulf Köhncke, an ecologist with conservation group WWF. "You need to look at where an area cuts through as few migration routes and habitats as possible and plan and implement corresponding, cross-border (wildlife migration) corridors."</p><p>Such planning also requires cooperation between states.</p><p>Several bilateral agreements to protect migratory species already exist within the framework of the Bonn Convention. For instance, Chile and Argentina have committed to saving the endangered south Andean deer, which moves up and down the South American Andes, crossing through both countries as it does.</p>
Unprecedented Global Biodiversity Loss<p>Not all animals move across borders of their own accord. International trade in animals also requires international protection efforts. In the case of the eel, considered a delicacy from Europe to Asia, criminals smuggle young European "glass eels" in and out of countries, although international trade is strictly regulated under CITES, an international treaty governing trade in wildlife.</p><p>The trade is in animals caught in the wild. Breeding eels in captivity has so far proved impossible because of their complicated life cycle, which until recently, scientists still knew little about.</p><p>It's a lucrative gig and one that is driving down eel numbers. Although, the trade is regulated, enforcement is often lacking. People should avoid eating the animals, according to WWF. And we should avoid consuming too much fish and meat in general to halt species loss, says the conservation group.</p><p>Veronika Lenarz, who works with the secretariat of the Bonn Convention, agrees. But several major countries, like the USA, Russia and China, aren't party to the convention, while Japan refuses to sign up because of its whaling industry.</p><p>"We are in a crisis that threatens global biodiversity," said Lenarz.</p><p>In a major assessment of the world's wildlife published in September 2020, the UN warned of "unprecedented biodiversity loss" and said the global community had failed to fully achieve any of the 20 biodiversity targets set by the international organization 10 years ago.</p><p>While migratory animals are also impacted, not enough is known about many of the species to gauge to what extent. Researchers estimate there could be anywhere between 5,000 to 10,000 migratory species, ranging from storks and butterflies, to dolphins and wolves.</p>
Climate Change: An Ever-Present Threat<p>Regions in which the climate is changing most rapidly and on a large scale present a particular danger for migratory species. The animals, following a deeply embedded evolutionary instinct, will search for seasonal habitats in search of food and shelter. However, food is increasingly scarce in these places due to climate change.</p><p>Some animals are adapting. Compared to 20 years ago, fewer migratory birds are flying to their wintering grounds. But because these nomads are dependent on the many different habitats they use as resting points on their journeys, they are more vulnerable than their settled counterparts. By staying put, they're also in increased competition for scarce winter food supplies.</p><p>And while animals can adapt, not many can keep up with the pace of climate change.</p><p>"Reports from the UN climate group IPCC show that only a few species can move with the speed of climate change. And often alternative habitats are already occupied by humans," said Köhncke from the WWF.</p><p>The climate crisis and species loss shouldn't be viewed as unrelated issues, because both are damaging to the planet, added Köhncke.</p><p>"Migratory species help to maintain life on Earth. They contribute to the structure and functions of ecosystems as pollinators and seed dispersers, deliver food to other animals and regulate the number of species," said Köhncke. </p>
Creating Conditions to Thrive<p>Ensuring the conditions for the survival of these species should be considered when planning measures for dealing with the consequences of climate change, he added, referring to the WWF study "Wildlife in a Warming World."</p><p>Published in 2018, the study found that around 50% of species in some of the world's key natural regions, such as the Amazon, could disappear if climate change continues unabated.</p><p>Reindeer for instance, some of which migrate in the northern hemisphere, are no longer able to find enough food. Usually in winter, the animals clear snow with their hooves to uncover the lichens and moss they feed on. But temperatures now vary wildly, causing snow to melt or fall as rain instead. When the ground cools again, ice forms and the reindeer cannot get to their grub. </p>
Simple Solutions to Protect Endangered Species<p>Looking to the example of Mexico, the International Fund for Animal Welfare (IFAW) has shown protecting endangered migratory species doesn't have to be complicated.</p><p>Industrial farming has contributed to the jaguar's habitat shrinking by 50% in South and Central America in the last century. As a result, they began roaming near villages looking for food and attacking villagers' dogs. People retaliated by killing them. The IFAW hired community members to build dog houses, meaning the canines are no longer out roaming at night when they could run into big cat predators.</p><p>However, with the global conservation failures of the past decade looming, all eyes will be on the UN Biodiversity Conference scheduled to take place in China in 2021 and whether it can pull off a plan for protecting migratory and non-migratory animals like.</p>
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Marshes are valuable ecosystems, so in some ways, that's positive.
But that migration comes at a cost.
So ghost forests have become eerie symbols of rapid change.
Reposted with permission from Yale Climate Connections.