Fracking Boom a Ponzi-Inflated Bubble About To Pop? Rolling Stone Sure Thinks So.

Categories: Biz

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Or can it?
Is the United States the "Saudi Arabia of natural gas," as President Barack Obama has said? Or has the energy industry used fuzzy math to hype its estimated reserves to entice buyouts and Wall Street investment? Tough to say for sure, but last month the U.S. Energy Information Administration scaled down its estimate of shale gas reserves ... by half. That's huge. And its implications for this industry could be seismic.

Not that they aren't already in a tight spot. The frackers did a magnificent job of cracking the Barnett Shale. They've been ruthlessly efficient in extracting the gas. And that, dear readers, is their biggest problem. They glutted the market. Now the market price makes it almost pointless. Gas production in the Barnett, apparently, is at an all-time high. But the number of rigs punching new holes in North Texas' hide has dropped. Instead, they're working the liquid-rich shale plays while the price of oil is good.

The falling price of natural gas has exposed some systemic weaknesses.

That is, in part, the subject of a Rolling Stone piece centered around shale cheerleader Aubrey McClendon and his industry juggernaut Chesapeake Energy. As almost anyone with land on the Barnett Shale knows, his company came in hot and heavy during the early days of the shale boom, snapping up vast tracts before too many of its competitors wised up.

The shale play heralded the democratization of the oil field. Shale rock is fairly evenly distributed, so companies relied less on geologists to pinpoint reserves. Instead, they launched blitzkrieg, Wall Street-fueled land-grabs. "Chesapeake was the first gas-exploration company to issue high-yield junk bonds, which gave it a steady cash flow to pay for leasing and drilling," writes RS's Jeff Goodell.

Chesapeake made its real money not by pumping natural gas, but buy flipping leases to bigger outfits at outlandish premiums. The model made him one of Fortune 500's highest-paid execs. But it came with a price: To feed the machine, Chesapeake had to acquire more and more land, and that land had to produce. Before long, it became the biggest leaseholder in America. But if it didn't drill that land in three years, Chesapeake had to forfeit it. So the company drilled and drilled, taking on vast amounts of debt, glutting the market and driving down the price of natural gas in the process.

Certainly here in the Barnett Shale, but now in Pennsylvania and New York State, Chesapeake also encountered more obstacles. As fracking moved out of the expansive pastures and into close-quarter cities, the industry ran face-first into tougher city-by-city ordinances regarding spacing from houses and schools, effectively shrinking the amount of acreage they could frack (Or, in cases like Southlake, the subject of a November cover story, stopping them from doing it entirely). Coupled with low gas prices, it made whole swaths of the shale uneconomic to produce. Ultimately, for these reasons, McClendon's model is unsustainable. Goodell quotes Texas energy consultant Arthur Berman as say, "In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down."

Wow.

IMoody's Investors Service recently downgraded Chesapeake's $11 billion in debt it used to finance its leasing and drilling binge. In apparent distress, the company put its Permian oil fields in West Texas on the auction block last month. In January, Chesapeake announced it was shifting its rigs from shale gas plays to oil-rich fields. It's even selling future oil and gas production on a field in the Texas Panhandle for cash.

If none of Chesapeake's gambits pan out -- and the price of natural gas doesn't rise from its $2.50 per mmBTU depths -- as Rolling Stone points out, it won't just be their stockholders left holding the bag. Chesapeake and companies like it could face the mineral equivalent of a margin call. And shale gas's promise as a game-changing bridge fuel may turn out to be as vaporous as vented methane.

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31 comments
Marc
Marc

Aubrey McClendon from Chesapeake Energy stated it as clearly as anybody needs to state it. From the Rolloing Stone story, "McClendon has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil."

This is what McClendon said in his own words"

 As McClendon put it in a conference call with Wall Street analysts a few years ago, "I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet."

zengzow
zengzow

Sounds to me like that dude may well be onto something dude.Total-Privacy dot US

Mike1
Mike1

An economic bubble is not a Ponzi scheme. Before writing an article, you might try understanding the definition of the supposed fraud you analyze. As for stopping fracking, you can forget that also. As export facilities get built and usage turns over to gas, demand will rise. The gas is not going anywhere in the meantime.

The real story here is what a discredited story Peak Oil has become. We will be burning hydrocarbons for many generations at very reasonable prices.

claytonauger
claytonauger

So for this, Dallas should sacrifice its Parks? 

Chain Hand
Chain Hand

We will continue to use natural gas and the price will go up as Chesapeake fails until others see the rising price as an attractive entry point into stepping up drilling activities. Not really anything 'vaporous' about that.

Mike
Mike

We should support American companies like Chesapeake.  We need to find alternatives to relying on the Middle East for future energy supply.

pak152
pak152

"The falling price of natural gas has exposed some systemic weaknesses."and what are those weaknesses? when supply increases beyond the demand prices fall?

one way to get around the low prices is to export the gas to regions that are paying a higher price.but why would one expect the Rolling Stone to understand free market economics. The big question is when did the RS become an expert on the O&G industry? I thought they were experts on the music industry. next thing we'll see the Oil and Gas Daily publishing music reviews while writing exposes about the music industry which we all know is fair and honest in the payment of royalties

Marc
Marc

Aubrey McClendon, Chairman and CEO of Chesapeake Energy: "I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet."

WOW! I just re-read what McClendon stated and something jumped right of the page at me. Natural gas prices are based on mcf (thousand cubic feet) not mmcf (million cubic feet.) McClendon does not appear to even know the units he is marketing, which may explain part of why Chesapeake is so deeply indebted.

Current rates for natural gas in the US are around $2.50 per mcf. If they were at $2.50 per mmcf, as McClendon stated, then NOBDOY would be exploring for the stuff because it would NEVER be profitable! If the head of the world's second largest natural gas company does not even know what he is selling, then that should tell all intelligent people that the guy is a fraud!

Marc
Marc

Okay, let me explain it to you so you will know why the natural gas industry is a Ponzi scheme.

A Ponzi scheme is one where you lure in investors and use their money to start your scam. Then, when profits are not coming in and you need to keep the money flowing so that you don't get sued for luring investors on false promises you lure in additional ivnestors to pay off the first investors so that it appears that the scam is profitable. THAT is a Ponzi scheme.

The natural gas indsutry promoted a vastly over-inflated reserve of available, recoverable natural gas. That estimate was used to lure in investors with the promise of high profits. The profits have not been realized. The price has dropped from over $11 per mcf in 2008 to less than 25% of that rate today, and profits are not being produced. But, the industry needs to keep making money to finance lease acquisitions and drill more wells to secure their leaseholds, so they keep using lies to promote the "future of natural gas" in order to lure in more investors since the first ones are starting to get edgy about not making any money.

The US EIA has downgraded the estimate of recoverable reserves twice in the last year, now cutting the last downgraded estimate by 50%. Meanwhile, Rick Perry told the nation (during his short bid for the presidency) that we have a "300 year supply of natural gas under our feet." Nothing could be further from the truth, but it did not stop Perry from making that false claim. The real estimate of what is actually recoverable may be as short as 12-40 years, and even that would require massive fracturing that would result in earthquakes and sinkholes all over the country.

But, the REAL game is not selling natural gas. As Professor Marc Durand, University of Quebec at Montreal (who holds a doctorate degree is applied geological engineering) and Professor Anthony Ingraffea, Cornell University (who holds doctorate degrees in fracture mechanics and geological engineering) have stated, the game is to sell gas companies. THAT is a part of the Ponzi scheme. People like Aubrey McClendon and Chesapeake Energy know their scam is going to fail, so they are looking for others to buy them out before the bubble bursts. Chesapeake is already 25% owned by Communist China, and they are looking for new ways out of the scam before the shit hits the fan.

THAT is how and why this is a Ponzi scheme, and use of that terminology is completely accurate. I hope this helps you understand the issue more clearly so that you will comprehend why people refer to it as a Ponzi scheme.

Mike
Mike

So, not to try new ways, we should continue to support Saudi Arabia parks?

Marc
Marc

Obviously, your knowledge about energy in the US is zilch! It is either an illiterate, or else patently false, claim that we "rely" on Middle East energy. This has been stated MANY times, but people with an agenda either cannot comprehend the truth, or else choose to ignore it in pursuit of their false claims that the US is dependent upon the Middle East for energy.

China, India and Europe are dependent upon Middle Eastern energy. We get the bulk of ours from Canada and Mexico. The last time I checked Canada and Mexico had not packed up and moved to the Middle East. Did you fail georgraphy, or something?

bj9mac
bj9mac

And Canadian Oil. We need to stop relying on Canada to supply our oil since they are socialists. America hates socialists and Muslims!

Seriously, auto manufacturers are improving the mileage on vehicles and battery technology is getting better. So Chesapeake can fail as far as I care.

claytonauger
claytonauger

Except that they're exporting the American gas to China and India to raise the price....

Marc
Marc

An idiot ike you, who parrots the industry line all the time, is just plain two-faced! First, guys like you and Edgar tell us how natural gas is going to "free us from Middle East energy imports" when we are already free of Middle East energy imports - Canada and Mexico are our two largest sources of foreign energy - and you tell us how domestic natural gas is going to lower the price at the pump for gasoline, which is bullshit considering the fact that we have a glut of natural gas AND higher gas prices.

Now, you tell us that free market economics, being what it is, and all, will allow the producers of natural gas to ship it overseas where they can get a higher price for it, which does not benefit the US in ANY way at all, does not decrease our "dependence on foreign energy" in the least, and damned sure does nothing to bring down the price of gasoline, while producers make out like bandits after polluting our water, air and soil, dropping people's property values, sickening us and causing all sorts of financial distress to municipal, state and federal governments that WE pay for with our tax dollars.

Do you and Edgar even stop to think about the crap you spout, or are you just so damned robotic that tripe drivels off your tongues and fingers in defense of the O&G industry without so much as an iota of common sense and logic?

The US EIA just reduced the amount of recoverable shale gas estimate by 50% from what industry has been claiming, proving once again that industry is comprised of liars like Aubrey McClendon, pak152 and Edgar who don't care about the truth and who lie like rugs anytime it benefits themselves to do so. Just like people in the financial sector, these "champions of energy" scream bloody murder about welfare, but will be the first to pursue corporate welfare when their bubble bursts and they are about to be bankrupted by truth and reality.

But, I will say one thing for you and Edgar - you guys are consistent (unlike any of the GOP candidates for president), even when you contradict yourselves by making whatever statement fits your needs today. It is amazing to read how illiterate (or else just plain old morally bankrupt and ethically challenged) you guys are when on the one hand you argue for natural gas as the salvation to America's energy needs, and on the other hand tell us how industry can make their profits by selling our natural gas overseas for a higher rate because they have over-exploited the domestic market and cut their own throats.

Whatever you do, pak 152, DON'T STOP posting the crap that you do because it shows everybody just how dishonest, and amoral the industry and its supporters are. You guys are your own worst enemy. You make our work easy because you give us so many credible arguments to use against allowing natural gas production in our cities.

Edward
Edward

I believe that is what is already happening. For some strange reason, we Americans seem to live in this fantasy that "our" oil companies are here to produce and distribute energy to us. But that isn't the case. They are here to produce and distribute energy to make the most profit–so if they can make more money exporting "our" energy, that's exactly what they will do, and are currently doing.

We could drill Alaska until it sinks, but if China or India is paying more for that energy,  we won't see any of it.

MushMouth1
MushMouth1

 RS has long been noted for it's investigative reporting. And yes they have reported many times on artists/label royalties issues.

Might want to check with ExxonMobil shareholders about the XTO acquisition too.

Edgar
Edgar

From the page you linked: "WE WAIT FOR THE CITY OF DALLAS TO REVEAL VIA MAPS/ADDRESSES THAT SHOW THE ENTIRE SCOPE OF THE 4800 ACRES OF LAND."

Seriously?  Do it yourself.  It's not the taxpayers' job to pay for your research.  The property descriptions are free online.

JessicaPitt23
JessicaPitt23

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Mike1
Mike1

How can you claim over inflated reserves, a possible condition for a Ponzi scheme, when the current situation is an oversupply of that resource in the face of weak demand? Again, you cannot have a Ponzi Scheme when you overproduce the base product. The problem here is that estimates of price per unit with all that gas coming on market were wrong. That is not fraud. That is just not being market wise.

If the problem was promising lots of gas, taking investors' money, and then not producing gas, now that is a Ponzi Scheme. Investors got exactly what was promised, production of huge amounts of natural gas.

Again, not every business venture that at least temporarily does not do well is a Ponzi Scheme. Sometimes it is just overestimating market demand.

claytonauger
claytonauger

Saudi oil and Texas natural gas don't do the same jobs. They are not the equivalent. And when it gets exported to China, what impact does it have on "energy independence?" 

Darrd
Darrd

You've been watching too many natural gas commercials.

bj9mac
bj9mac

Exactly. Just look at the keystone pipeline. The reason prices in the Rockies and the mid-west are lower than everywhere else is because the oil from Alberta can't make it to the Gulf. So the supply is growing in the mid-west, but if the pipeline is expanded, say bye bye to that oil. It will reach the world market. And prices in Colorado will rise.

Wes Scott
Wes Scott

By law, it is required that governmental bodies provide comprehensive information about the actions it takes with taxpayper property and taxpayer money, and taxpayers ALWAYS pay for it. What part of that do you not understand?

Wes Scott
Wes Scott

Well then, I guess that you get the last word on the subject and I will just say "Thank you!"

Edgar
Edgar

They're also MY tax dollars.  Use the free website.  Our tax dollars already paid for it.

Wes Scott
Wes Scott

No, it is about my getting my money's worth from my tax dollars. Those government officials are MY employees, and they have an obligation to provide the information I want and need. It should not require an FOIA to get that information except in a Fascist world.

My government works FOR me, and should never work AGAINST me. I pay my government with my tax dollars. Apparently, that is lost on you.

Edgar
Edgar

Okay, go ahead and put in your FOIA request.  While you're waiting, if you had a clue, you could be looking it up for free online through the Dallas County Clerk.  Incidentally, comprehensive information about the locations of the leases has already been provided because they've been recorded in the county clerk's office.  (What part of that do you not understand?)  This is about you being lazy.

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