|“It's time to get bullish on natural gas," said Aubrey K. McClendon, left, chief executive of Chesapeake Energy. "This could have profound consequences for our local economy," said Deborah Rogers, a committee member at the Federal Reserve Bank of Dallas.(New York Times) |
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, to a contractor in a February e-mail wrote. “Reminds you of dot-coms.”
“The word in the world of independents is that the shale plays are just
giant Ponzi schemes and the economics just do not work,” an analyst from
IHS Drilling Data, an energy research company, in an e-mail on Aug. 28, 2009 wrote.
Company data for more than 10,000 wells in three major shale gas
formations raise further questions about the industry’s prospects. There
is undoubtedly a vast amount of gas in the formations. The question
remains how affordably it can be extracted.
The data show that while there are some very active wells, they are
often surrounded by vast zones of less-productive wells that in some
cases cost more to drill and operate than the gas they produce is worth.
Also, the amount of gas produced by many of the successful wells is
falling much faster than initially predicted by energy companies, making
it more difficult for them to turn a profit over the long run.
If the industry does not live up to expectations, the impact will be
felt widely. Federal and state lawmakers are considering drastically
increasing subsidies for the natural gas business in the hope that it
will provide low-cost energy for decades to come.
But if natural gas ultimately proves more expensive to extract from the
ground than has been predicted, landowners, investors and lenders could
see their investments falter, while consumers will pay a price in higher
electricity and home heating bills.
There are implications for the environment, too. The technology used to
get gas flowing out of the ground — called hydraulic fracturing, or
hydrofracking — can require over a million gallons of water per well,
and some of that water must be disposed of because it becomes
contaminated by the process. If shale gas wells fade faster than
expected, energy companies will have to drill more wells or hydrofrack
them more often, resulting in more toxic waste.
The e-mails were obtained through open-records requests or provided to
The New York Times by industry consultants and analysts who say they
believe that the public perception of shale gas does not match reality;
names and identifying information were redacted to protect these people,
who were not authorized to communicate publicly. In the e-mails, some
people within the industry voice grave concerns.
“And now these corporate giants are having an Enron moment,” a retired geologist from a major oil and gas company in a February e-mail wrote about other companies invested in shale gas. “They want to bend light to hide the truth.”
Others within the industry remain optimistic. They argue that shale gas
economics will improve as the price of gas rises, technology evolves and
demand for gas grows with help from increased federal subsidies being
considered by Congress. “Shale gas supply is only going to increase,”
Steven C. Dixon, executive vice president of Chesapeake Energy, said at
an energy industry conference in April in response to skepticism about
Studying the Data
“I think we have a big problem.”
Deborah Rogers, a member of the advisory committee of the Federal
Reserve Bank of Dallas, recalled saying that in a May 2010 conversation
with a senior economist at the Reserve, Mine K. Yucel. “We need to take a
close look at this right away,” she added.
A former stockbroker with Merrill Lynch, Ms. Rogers said she started
studying well data from shale companies in October 2009 after attending a
speech by the chief executive of Chesapeake, Aubrey K. McClendon. The
math was not adding up, Ms. Rogers said. Her research showed that wells
were petering out faster than expected.
“These wells are depleting so quickly that the operators are in an
expensive game of ‘catch-up,’ ” Ms. Rogers wrote in an e-mail on Nov.
17, 2009, to a petroleum geologist in Houston, who wrote back that he
“This could have profound consequences for our local economy,” she explained in the e-mail.
Fort Worth residents were already reeling from the sudden reversal of fortune for the natural gas industry.
In early 2008, energy companies were scrambling in Fort Worth to get
residents to lease their land for drilling as they searched for
so-called monster wells. Billboards along the highways stoked the
boom-time excitement: “If you don’t have a gas lease, get one!” Oil and
gas companies were in a fierce bidding war for drilling rights, offering
people bonuses as high as $27,500 per acre for signing leases.
The actor Tommy Lee Jones signed on as a pitchman for Chesapeake, one of
the largest shale gas companies. “The extremely long-term benefits
include new jobs and capital investment and royalties and revenues that
pay for public roads, schools and parks,” he said in one television
advertisement about drilling in the Barnett shale in and around Fort
To investors, shale companies had more sophisticated pitch a.
With better technology, they had refined a “manufacturing model,” they
said, that would allow them to drop a well virtually anywhere in certain
parts of a shale formation and expect long-lasting returns.
For Wall Street, this was the holy grail: a low-risk and high-profit proposition. But by late 2008, the recession took hold and price of natural gas plunged the by nearly two-thirds, throwing the drilling companies’ business model into a tailspin.
In Texas, the advertisements featuring Mr. Jones disappeared. Energy
companies rescinded high-priced lease offers to thousands of residents,
which prompted class-action lawsuits. Royalty checks dwindled. Tax
The impact of the downturn was immediate for many.
“Ruinous, that’s how I’d describe it,” said the Rev. Kyev Tatum,
president of the Fort Worth chapter of the Southern Christian Leadership
Mr. Tatum explained that dozens of black churches in Fort Worth signed
leases on the promise of big money. Instead, some churches were told
that their land may no longer be tax exempt even though they had yet to
make any royalties on the wells, he said.
That boom-and-bust volatility had raised eyebrows among people like Ms.
Rogers, as well as energy analysts and geologists, who started looking
closely at the data on wells’ performance.
In May 2010, the Federal Reserve Bank of Dallas called a meeting to
discuss the matter after prodding from Ms. Rogers. One speaker was
Kenneth B. Medlock III, an energy expert at Rice University, who
described a promising future for the shale gas industry in the United
States. When he was done, Ms. Rogers peppered him with questions.
Might growing environmental concerns raise the cost of doing business?
If wells were dying off faster than predicted, how many new wells would
need to be drilled to meet projections?
Mr. Medlock conceded that production in the Barnett shale formation — or
“play,” in industry jargon — was indeed flat and would probably soon
“Activity will shift toward other plays because the returns there are
higher,” he predicted. Ms. Rogers turned to the other commissioners to
see if they shared her skepticism, but she said she saw only blank
Some doubts about the industry are being raised by people who work inside energy companies, too.
“Our engineers here project these wells out to 20-30 years of production
and in my mind that has yet to be proven as viable,” wrote a geologist
at Chesapeake in March 17 e-mail a
to a federal energy analyst. “In fact I’m quite skeptical of it myself
when you see the % decline in the first year of production.”
“In these shale gas plays no well is really economic right now,” the geologist said in previous e-mail to the same official on March 16 a. “They are all losing a little money or only making a little bit of money.”
Around the same time the geologist sent the e-mail, Mr. McClendon,
Chesapeake’s chief executive, told investors, “It’s time to get bullish
on natural gas.”
In September 2009, a geologist from ConocoPhillips, one of the largest producers of natural gas in the Barnett shale, warned in e-mail to a colleague an
that shale gas might end up as “the world’s largest uneconomic field.”
About six months later, the company’s chief executive, James J. Mulva,
described natural gas as “nature’s gift,” adding that “rather than being
expensive, shale gas is often the low-cost source.” Asked about the
e-mail, John C. Roper, a spokesman for ConocoPhillips, said he
absolutely believed that shale gas is economically viable.
A big attraction for investors is the increasing size of the gas
reserves that some companies are reporting. Reserves — in effect, the
amount of gas that a company says it can feasibly access from its wells —
are important because they are a central measure of an oil and gas
Forecasting these reserves is a tricky science. Early predictions are
sometimes lowered because of drops in gas prices, as happened in 2008.
Intentionally overbooking reserves, however, is illegal because it
misleads investors. Industry e-mails, mostly from 2009 and later,
include language from oil and gas executives questioning whether other
energy companies are doing just that.
The e-mails do not explicitly accuse any companies of breaking the law.
But the number of e-mails, the seniority of the people writing them, the
variety of positions they hold and the language they use — including
comparisons to Ponzi schemes and attempts to “con” Wall Street — suggest
that questions about the shale gas industry exist in many corners.
“Do you think that there may be something suspicious going with the
public companies in regard to booking shale reserves?” a senior official
from Ivy Energy, an investment firm specializing in the energy sector,
wrote in 2009 e-mail a.
former Enron executive wrote in 2009 A
while working at an energy company: “I wonder when they will start
telling people these wells are just not what they thought they were
going to be?” He added that the behavior of shale gas companies reminded
him of what he saw when he worked at Enron.
Production data, provided by companies to state regulators and reviewed
by The Times, show that many wells are not performing as the industry
expected. In three major shale formations — the Barnett in Texas, the
Haynesville in East Texas and Louisiana and the Fayetteville, across
Arkansas — less than 20 percent of the area heralded by companies as
productive is emerging as likely to be profitable under current market
conditions, according to the data and industry analysts.
Richard K. Stoneburner, president and chief operating officer of
Petrohawk Energy, said that looking at entire shale formations was
misleading because some companies drilled only in the best areas or had
lower costs. “Outside those areas, you can drill a lot of wells that
will never live up to expectations,” he added.
Although energy companies routinely project that shale gas wells will
produce gas at a reasonable rate for anywhere from 20 to 65 years, these
companies have been making such predictions based on limited data and a
certain amount of guesswork, since shale drilling is a relatively new
Most gas companies claim that production will drop sharply after the
first few years but then level off, allowing most wells to produce gas
Gas production data reviewed by The Times suggest that many wells in
shale gas fields do not level off the way many companies predict but
instead decline steadily.
“This kind of data is making it harder and harder to deny that the shale
gas revolution is being oversold,” said Art Berman, a Houston-based
geologist who worked for two decades at Amoco and has been one of the
most vocal skeptics of shale gas economics.
The Barnett shale, which has the longest production history, provides
the most reliable case study for predicting future shale gas potential.
The data suggest that if the wells’ production continues to decline in
the current manner, many will become financially unviable within 10 to
A review of more than 9,000 wells, using data from 2003 to 2009, shows
that — based on widely used industry assumptions about the market price
of gas and the cost of drilling and operating a well — less than 10
percent of the wells had recouped their estimated costs by the time they
were seven years old.
Terry Engelder, a professor of geosciences at Pennsylvania State
University, said the debate over long-term well performance was far from
resolved. The Haynesville shale has not lived up to early expectations,
he said, but industry projections have become more accurate and some
wells in the Marcellus shale, which stretches from Virginia to New York,
are outperforming expectations.
A Sense of Confidence
Many people within the industry remain confident.
“I wouldn’t worry about these shale companies,” said T. Boone Pickens,
the oil and gas industry executive, adding that he believes that if
prices rise, shale gas companies will make good money.
Mr. Pickens said that technological improvements — including
hydrofracking wells more than once — are already making production more
cost-effective, which is why some major companies like ExxonMobil have
recently bought into shale gas.
Shale companies are also adjusting their strategies to make money by
focusing on shale wells that produce lucrative liquids, like propane and
butane, in addition to natural gas.
Asked about the e-mails from the Chesapeake geologist casting doubt on
company projections, a Chesapeake spokesman, Jim Gipson, said the
company was fully confident that a majority of wells would be productive
for 30 years or more.
David Pendery, a spokesman for IHS, added that though shale gas
prospects had previously been debated by many analysts, in more recent
years costs had fallen and technology had improved.
Still, in private exchanges, many industry insiders are skeptical, even
cynical, about the industry’s pronouncements. “All about making money,”
an official from Schlumberger, an oil and gas services company, wrote in
July 2010 e-mail a
to a former federal regulator about drilling a well in Europe, where
some United States shale companies are hunting for better market
“Looks like crap,” the Schlumberger official wrote about the well’s
performance, according to the regulator, “but operator will flip it
based on ‘potential’ and make some money on it.”
“Always a greater sucker,” e-mail the concluded.
Source: New York Times