EnergyPolicyForum
Shale Promises, Shale Spin?
Deborah Rogers
October 2012
www.energypolicyforum.org
Timeline
• June 2011 - New York Times breaks story on
financial anomalies of shale gas
• July-August 2011 - SEC and NY AG begin
investigations
• August 2011 - USGS slashes estimates for
shale gas in the Marcellus by 80%
• January 2012 - mainstream financial media
begin referring to shale financials as
"Bubblenomics"
Timeline
• January 2012 - Natural gas prices drop to near
10 year lows
• March 2012 - Rolling Stone breaks story on
Chesapeake Energy land grab
• April 2012 - Reuters breaks story on $1.5
Billion in unaccounted loans at Chesapeake
• June 2012 - NGL market tanks due to
overproduction
Timeline
• July 2012 - ITG Investment Research claims
"significant portion of Chesapeake
assets...have no positive value"
• September 2012 - USGS and SPE issue
reports exposing significant shale reserve
overestimations
• September 2012 - massive write downs are
incurred by shale companies - "more on the
way"
• October 2012 - New York Times article
exposing the role of large investment banks in
Difficult Question
• What if the notion that shale gas is abundant
is merely a perception with very little basis in
reality?
• Independent analysis confirms vast
overestimation of reserves
• Income, retail sales and wages in best
counties prove below average
• Stability of supply is highly questionable
Why Reserves Matter
• "Companies are evaluated by its
shareholders...based upon the accuracy of its
reserve reporting. In particular, reserves
reporting directly impact the amount of
capital a company can raise in the market
place...Reserves are at the core of a
company's ability to access the funds needed
to meet these huge [drilling] needs" - Clean
Skies Foundation, Industry funded group [
emphasis mine]
A Recipe for the Capital
Markets
• Claim very high EURs
• Press releases alluding to very high IP (initial
potential)
• Use unrealistic b-factors which distort length of
well life
• Point to rapid growth of production as proof of
success
Two sets of
Economics
• Field Economics - what are the costs,
performance, etc.?
• "Street" Economics - what do the financials
need to look like to attract investment and gain
access to the capital markets?
• Shale = drilling for dollars in the capital
markets
Shale Reality
• Marcellus
- Operators claim
average EUR's
As Confirmed
By USGS
and of
4.2 - 5.7 Bcf. USGS average EUR's are 1.1
SPE
Bcf
• Barnett - Operators claim avg. EURs up to 3.0
Bcf. USGS avg. 1.0 Bcf
• Fayetteville - Operators claim avg. EURs 2.42.6 Bcf. USGS avg. 1.0 Bcf
• Haynesville - Operators claim avg. EURs 5.07.5 Bcf. USGS avg 2.6 Bcf
• Eagle Ford - Operators claim avg. EURs 8.5
Shale Reality
•To put into perspective how ridiculous
Chesapeake's claims of 2.6 Bcf is, consider the
following: of the company's 742 wells
completed on the Fayetteville, only 66 have
produced more than one Bcf and none have
produced more than 1.7 Bcf. Chesapeake's
average Fayetteville well has produced only
541 Mcf." [ emphasis mine] - Powers Energy
Investor, industry publication, 2011
"Proof" of Success?
• Shale wells produce greatest quantity of gas
or oil in first 12-18 months
• Thousands of new wells drilled in the past few
years all of which produce their greatest
quantity of gas in the first year
• Real question should be: Can shale plays
maintain production levels without the need for
perpetual expansion through drilling? Answer:
No
• Market stability will be elusive
Economic Stability
• Most heavily drilled areas have not
experienced promised economic stability in
major shale plays
• Household income below state average
• Retail sales per capita below state average
• Weekly wages below national average
• Jobs stability short lived
"Manufacturing Model"
Debunked
The definition of a core
county
• "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
Source: US Census
Source: US Census
Jobs Creation?
According to Bureau of Labor Statistics
• Total direct industry jobs 2003 appr. 118,000
• Total direct industry jobs YE 2011
appr.186,000
• Net gain of 67,900 over nearly a decade
• Less than 1/20 of 1% of total US labor market
• Hardly a "game changer"
What kind of Jobs?
• Energy industry consulting firm IHS CERA
estimated that the industry produced 150,000
jobs in 2011
• "...but that job count comes from the broadest
possible estimate of oil jobs...it includes
everyone from the roughneck...[to] a stripper
serving the workers..." - Money Magazine,
April, 2012
Source: US Census
Land Use Issues
•
“It is sometimes said...that 20% of
[shale] wells carry a project; the other
80% can easily be uneconomic.”- Dr. John
Lee, University of Houston, Architect of SEC Rule Change
•
"Perpetual expansion [of shale wells]
cannot disguise a serious problem with
the bottom line" - Platt's, December, 2010
Source: Post Carbon Institute
Source: Labyrinth Consulting
Drilling Treadmill
•
•
•
•
•
•
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
revenues at prior levels
Revenues continued decline in 2011
• Gas drilling contributing 42% more VOCs than
all on road mobile sources combined in DFW
region - Texas Commission on Environmental
Quality, December 2011
Health Impacts
• Benzene (known human carcinogen) and
other VOCs detected near gas drilling sites,
most harm within 1/2 mile - University of
Colorado School of Public Health, 2012
• Significant fugitive emissions detected, twice
the inventory given by industry - NOAA and
University of Colorado, Boulder, 2012
• Gas drilling contributing significantly to ozone
Environmental
Degradation
• "The overall landscape effects of natural gas
drilling have been substantial" - USGS, 2012
• "This type of long term habitat conversion has
greater impact...than activities such as logging
or agriculture" - USGS, 2012
• "The evidence suggest that it may not be
possible to fully restore sites..." - European
Union Report, September, 2012
Source: Post Carbon Institute
Why an SEC Investigation?
• 80% of top 50 10-K companies were issued
comment letters by SEC regarding anomalies
in PUD filings - Ryder Scott, 2011
• PUDs converted at "mathematically
impossible" rates
• Only 16% of companies could show with
"reasonable certainty" that PUDs would be
developed within 5 years - Ryder Scott, 2011
Years to develop
PUDs
According to Oil and Gas Journal, 2010
• Devon Energy 9.1 years
• Range Resources 11.8 years
• Chesapeake Energy 13.1 years
• Apache Corp. 15.1 years
• W&T Offshore 104.56 years
• None in compliance with SEC rule
SEC Comments
• "Therefore, at this rate of development, it will
take at least 50 years to develop all of your
PUDs, assuming that no additional PUDs are
added during that time. Tell us how this
complies with Rule 4-10(a)(31)(ii)..."
SEC Comments
• All proved reserves must meet the standard of
reasonable certainty. Therefore, please tell us
the evidence that you have that horizontal
wells in this reservoir for the properties in
question will produce for fifty years and in
some instances longer."
SEC Comments
• "In regards to your response... as we stated...all proved reserves must
meet the standard of reasonable certainty. While a few thousand vertical
wells, a very small subset of the total wells that were drilled fifty or more
years ago, have exhibited long lives, this would appear to support only the
possibility that horizontal wells may exhibit lives of fifty years...By
assuming well lives that only a small percentage of vertical wells have
achieved, it does not appear that your reserve estimate is reasonably
certain to occur. Therefore, please revise your filing to limit the reserves
to well lives that are more reasonably certain to occur."
Financial Co-Dependency
• Wall Street Investment banks have acted as
"chief cheerleader" for shale
• $46.5 Billion in shale gas transactions were
completed in the US in 2011
• Shale has become one of the biggest profit
centers in large investment banks
Energy
Independence?
No,
just
an
Elitist's
• I can assure you that buying leases for x and
selling them for 5x
or
10x
is
a
lot
more
Game
profitable than trying to produce gas at $5 or
$6 mcf." - Aubrey McClendon, CEO
Chesapeake Energy
• "Typically, we represent sellers, so I want to
persuade buyers that gas prices are going to
be as high as possible...The buyers are big
boys — they are giant companies with
thousands of gas economists who know way
more than I know. Caveat emptor.” - Ralph
Why are the Majors
into Shale?
• Field Economics - what are the costs,
performance, etc.?
• "Street" Economics - what do the financials
need to look like to attract investment and gain
access to the capital markets?
• None of the Majors have grown reserves in
over a decade
Shale
Exportation
• “...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
Heading Again toward
Classic Consumer
• Asian gasSqueeze
prices indexed to crude
•
•
•
•
2011 sets record prices for crude
internationally
Current U.S. domestic price about $3
per million BTU
Asian markets currently paying as much
as $16 per million BTU
Significant spread