Groundbreaking Reports Show Fracking is a Risky Short-Term Bubble
Energy Policy Forum and Post Carbon Institute have released two groundbreaking reports that belie energy industry claims of U.S. energy independence as a result of newly accessible shale gas and shale (tight) oil.
The report findings are based on an unprecedented analysis of more than 60,000 U.S. shale oil and gas wells and an investigation of the role of Wall Street investment banks in the explosive growth of fracking for natural gas.
Drill Baby Drill: Can Unconventional Fuels Usher in a New Era of Energy Independence? by J. David Hughes takes a critical look at the prospects for shale gas, shale/tight oil and other unconventional fuels.
Shale & Wall Street: Was the Decline in Natural Gas Orchestrated? by Deborah Rogers uncovers the role of Wall Street investment banks in inflating the natural gas bubble to their advantage.
"The main point for me is that the investment bankers heavily promoted shale and put pressure on the companies to meet production targets," said Rogers. "This in turn helped create a glut in the market as we didn't have demand in place. Prices then plunged which opened the door for large transactional fees for the banks. It is highly unlikely that market savvy bankers didn't recognize such an opportunity very early on. In fact, I think they created it.
"Exporting is a last ditch effort to shore up a failing balance sheet. Exportation will drive the price higher in the U.S. There's no doubt about it. The question is how high will it go. When you are producing a commodity and have produced it to such a high extent, you want to find someone who will buy it, and in this case, it will be the Asians.
"The irony of this is that we used to exploit other areas of the globe to provide energy security for the U.S. and now the U.S. is being exploited to provide energy security to Asia."
Together, the independent reports reassess current common wisdom about the tight oil and shale gas booms that are sweeping America. The reports comprise a thorough and up-to-date analysis of data on U.S. oil and gas wells, and a comprehensive review of the financial status of the companies leading the charge.
What emerges from the data:
- Overall field decline rates are so steep that 30-50 percent of shale gas production and 40 percent of shale oil production must be replaced annually to offset declines.
- High productivity shale plays are not ubiquitous. Just six plays account for 88 percent of shale gas production and two plays account for 80 percent of shale oil production. Furthermore the most productive areas constitute relatively small sweet spots within these plays.
- Maintaining production requires high rates of high-cost drilling—8,600 new wells annually for shale gas and oil. This will increase as sweet spots are drilled off.
- High drilling rates require extremely high rates of investment—$48 billion a year to maintain shale gas and oil production considering drilling costs alone—much more if full cycle costs are included. These costs will increase dramatically as plays age.
- Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees.
- Shale gas has become one of the largest profit centers in some investment banks, in direct parallel with the decline of natural gas prices.
- Due to extreme levels of debt, stated proved undeveloped reserves (PUDs) may have been out of compliance with SEC rules at some shale companies because of the threat of collateral default for some operators.
Hughes and Rogers suggest the fracking boom may be a costly, risky, short-term “fix” for America’s long-term dependency on depleting oil and gas. Rather than offering the nation a century of cheap energy and economic prosperity, fracking may instead present us with a short-term bubble that comes with exceeding high economic and environmental costs.
For more information visit the new Shale Bubble website.
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