A mountain-top take on the flood: If Montana is a microcosm of the world, one message to glean is that we are not in the midst of a decades-long flood of oil supply in the United States, as many suggest. Instead, the red lights are blinking across the exuberant U.S. oil patch. As you recall, much has been made in recent months about the momentous prospects for U.S. oil and gas, which are said to be leading a global fossil fuel revolution, with meaningful implications for fortune-hunters and geopolitical players alike: North America will be independent of outside oil producers, the U.S. will experience an industrial revolution, and OPEC will drift into laggardly inconsequence. So what to think about the latest news from folks approaching the punch bowl with bad intentions?
Let's start with Montana, and the now-legendary Bakken shale oil formation. Bob Brackett, an analyst with Bernstein Research, studied a dozen years of shale oil drilling data for this mountainous state bordering Canada. What he found was a steep oil production increase through 2006 -- surpassing 100,000 barrels a day -- followed by a fast, 40 percent decline to about 60,000 barrels a day today. The plummet is counterintuitive because the time frame coincides with a capital spending binge by the industry -- tens of billions of dollars poured into the new innovations and technology that have opened up the Bakken and other shale plays. So why has Montana's production dropped? "Resource plays," Brackett writes in a note to clients today, "have limited/finite drilling locations. The best locations get drilled early, the less economic ones later, and once they are drilled, operators move on." In other words, Brackett told me in a followup email, "industry drilled the low hanging fruit first, and now can't find the same quality of opportunity."
But surely this is just Montana, right Bob? You don't mean to suggest that the entire Bakken formation, including North Dakota -- on which so many North American projections centrally rely -- is in trouble, too? Sadly, that is precisely what Brackett means. In fact, he has quantified the Bakken's production trajectory. The key number is six - that is the longevity of a Bakken well before it turns into a "stripper," industry argot for a worn-out nag producing just 10 or 15 barrels a day, from 400 barrels a day at its peak. Right now, just 200 modern Bakken wells are strippers. But in roughly six years, there will be 4,000 of them, Brackett says. "All good things in the oil patch come to an end," Brackett told me. "In the case of North Dakota, that is a long time -- years -- off, but even that too will suffer the same fate" as Montana.
Even now, the fortune hunters among us are suffering. ExxonMobil, the biggest player on the U.S. natural gas patch, made its second quarter numbers yesterday only by selling off $7.5 billion in hard assets such as its Japanese refining unit. In Pennsylvania, a court yesterday rejected the state's right to compel localities to allow oil and gas drilling. What does this tell us? That just because you pick up the scent of oil and gas, a load of other factors affect how much will actually be produced, and for how long. Says Brackett in our email exchange: "There is an emerging view of a wave of oil production (from shale and otherwise) coming. I just want to point out the difficulties in an exuberant view."
Go to Part II of the Wrap.
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The four squabbling fiefdoms in China's shale-led political transition
By Sophie Lu
The writer is a consultant with Regester Larkin Energy
For those tracking China's factional politics in this year of momentous transition, a telling indicator will be a coming brawl over its apparently gargantuan shale gas resources. In the arena of political power, where China's shale goes, so shall China.
Shale gas -- locked into barely porous rock deep within the Earth, and released through a method called hydraulic fracturing, or fracking for short -- has fundamentally disrupted the global energy balance, and changed geopolitics: American shale gas has undermined Moscow's political influence in Europe by reducing the dominance of Russian natural gas, and reverberations in the Middle East and elsewhere are likely in coming years.
The shakeup appears especially likely to strike China, which has the world's largest estimated reserves of shale gas. In August, the government will hold its second auction of shale reserves, and already we can make out the shape of a titanic struggle for them.
The shale brawl mirrors China's larger political currents. In the Fall, China will undergo a once-in-a-decade transition of power in which seven out of nine members of the country's top decision-making body, the Standing Committee, will be replaced. The struggle for who ends up on top pits two competing factions -- the reformists against the statists. Who are they, and what makes them tick? And how will their destiny be reflected on China's shale gas patch?
First, take a look at these two charts. The first juxtaposes the recent trajectory of U.S. shale gas production with China's own plans -- Beijing, as you see, hopes by 2020 to reach what the U.S. was producing four years ago.
This second chart details China's year-by-year plans.
Go to the Jump for the rest of China's shale brawl.
Charts by Sophie Lu
Just months after an enormous discovery of natural gas off the coast of Israel, a local company has reported another potentially big strike -- an estimated 1.4 billion barrels of oil, in addition to more natural gas. The company, Israel Opportunity Energy Resources, says it will start drilling by the end of the year. All of a sudden, Israel has found itself a focus of the world's hydrocarbon interest.
Energy experts are tittering about a prodigious new golden age of oil and gas in the Eastern Mediterranean, where Israel and Cyprus could become substantial oil and natural gas exporters, in addition to some other surprising places including French Guiana, Kenya, North Dakota, and Somalia. All in all, say increasingly mainstream projections, the world is moving into a period of petroleum abundance, and not the scarcity that most industry hands embraced just months ago. Plus, the United States, or at least North America, may be on the cusp of energy independence while OPEC's days of über-influence are numbered.
What these experts have not said, however, is that while this new golden age may indeed shake up the currently rich and powerful and create new regional forces, it could also accelerate the swamping of the planet in melted Arctic ice. So much new oil may flood the market that crude and gasoline prices might moderate and lessen consumer incentives to economize. "In the absence of U.S. leadership, I tend to agree with NASA's James Hansen that it is 'game over for the planet,'" Peter Rutland, a professor at Wesleyan University, told me in an email exchange.
This unspoken flaw in the golden-age scenario suggests it might not unfold so smoothly. The projected turnaround of oil's sagging fortunes may indeed herald economic salvation for the U.S. and global economies. But the environmental consequences could also trip up its full realization.
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This is the first stage in what could be a very lengthy process to sell our share in TNK-BP. It is far too early to say what we will do with the money. All we have done today is announce an intention to look further at expressions of interest in purchasing some or all of our stake in TNK-BP. It is not about Arctic or other businesses in Russia, current or future.
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In New Paltz, N.Y., 80 miles north of Manhattan, Richard Parisio laments the disturbance of the "sweet pure song of the white-throated sparrow." The culprit? Hydraulic fracturing, Parisio writes in the New Paltz Times -- "noise, night and day, from droning compressors, clanging drilling rigs, roaring gas flares."
Parisio worries that not just sparrows, nor their human appreciators, will be left the lesser for this state of affairs. There are the hermit and wood thrush, who could be "driven from their breeding grounds, unable to hear each other's songs, so crucial to courtship and the establishment of territory." And what about the bats? Will they manage to "find their food by echolocation amid all the background noise"? Parisio fears the answer may be no, which could trigger unknowable consequences such as a rise in the population of mosquitoes when their bat predators are fewer.
The new age of energy is making our lives less tranquil. Writer Robert Bryce has discussed the whoop-whooping of wind turbines, the "headaches, ear pain, nausea, blurred vision, anxiety, memory loss, and an overall unsettledness" suffered by those who live near them, not to mention the "fatigue, apathy, and depression, pressure in the ears, loss of concentration [and] drowsiness." This is a global phenomenon, says Bryce over at the National Review, a malady in "Missouri, Oregon, New York, Minnesota, Wisconsin, Britain, Australia, Canada, Taiwan, and New Zealand."
One can shake one's fist at windmills (pictured above, Copenhagen), but business is generally a cacophonous thing. Going back as far as one would like, merchants have probably always barked out the virtues of their wares, and some economic activities have been noisier than others. As we know, for instance, the racket of horse-drawn wagons in 18th and 19th century London was so ear-splitting that one simply could not speak audibly on the street.
Alas, the horses are gone, but the din remains. Across the globe, we are subject to disrespect of tender ears. At the Economist, there is gnashing over the defiant rustling of papers and cell-calling in the quiet cars of commuter trains across the Commonwealth, from Great Britain to Australia. Even in the joyfully raucous bazaars of Istanbul, there is a feeling that the shouting of merchants may have gone too far, reports the Wall Street Journal.
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Apart from the entertainment value, what is the big deal about the saga of Aubrey McClendon, the CEO of Chesapeake Energy, and his use of the company as a piggy bank? The big deal is that, more than any single individual apart from the innovator George Mitchell, McClendon is responsible for the shale gas boom that is shaking up geopolitics. Of course, McClendon's hijinx do not change the geopolitical shakeup, but they are a window into the type of personalities who make up the wildcat boom (pictured above, McClendon, left, owns the Oklahoma City Thunder professional basketball team along with Clayton Bennett, right). As with most such revelations, the kernels and sometimes the whole kit-and-kaboodle are detailed in the fine print of a company's annual 10-K filing with the Securities and Exchange Commission. The thing is, few people bother to read such material -- apart that is from the folks over at footnoted.org, whose whole business is to do so. The footnoted folks have been talking about McClendon for awhile now (such as here, here and -- from today's Website -- here). I asked footnoted's Theo Francis for some insight into Chesapeake. His reply follows.
O&G: What could and should a Chesapeake investor, given an ordinary read of the company's 10-K annual reports, have known about Aubrey McClendon's compensation package, perks and financial dealings in recent years? As a followup, if that same investor elected to dig deeper and follow the trail of citations, what would he or she have been able to know?
Theo Francis: Piecing it together can take some work and patience, but it's there, mostly in the annual proxy filing, with updates scattered across other filings over the course of a year.
A snapshot of McClendon's compensation in 2011 (primarily from an April 30 amendment to the company's 10-K filing) illustrates what's available: Salary of $975,000; a $1.95 million discretionary bonus -- meaning it isn't based on any kind of performance measures, but just on the board's general sense of how well he's done; $13.6 million in stock awards; and $1.3 million in perks and retirement-plan contributions. Those perks are telling too: $500,000 in free personal trips on company aircraft (on top of another $650,000 in jet rides for which he reimbursed the company), $250,000 in personal accounting services provided by company employees (about which more in a moment), and $121,570 in personal security benefits. Total for 2011: $17.9 million. Over the last three years, McClendon's compensation has added up to more than $57 million. Plus, Chesapeake doesn't even count some perks, because there's ostensibly no incremental cost to the company, including for an unknown number of tickets to sporting events. McClendon has also built up $7.5 million in a deferred-compensation plan, a kind of IOU from the company.
Which brings us to the related-party transactions, the ones that the company did disclose: Buying McClendon's map collection for $12.1 million in 2008 (a transaction that was ultimately unwound after a lawsuit); paying the Oklahoma City Thunder basketball team, in which McClendon personally owns a 19.2% stake; $2.9 million to $4.1 million a year for more than a decade for stadium naming rights, plus another $36 million over 12 years for sponsorship and advertising costs; and $4.6 million on tickets and games in 2011-12. There's also the board's decision in 2009 to ease the stock-ownership requirement and front McClendon $75 million toward his investments in the company's drilling operations, after he had to sell pretty much all his Chesapeake shares in a margin call the year before.
And then, of course, there's the long-standing "Founder Well Participation Program," which allowed McClendon to invest alongside Chesapeake in its drilling operations, and which is what's at the heart of the current series of embarrassments for the company. The disclosure about the program in last year's proxy was 1,500 words, which sounds like a lot, and there is a fair amount of detail: How the program works (very generally), why the board does it (with extra business clichés) and so on, as well as an estimate of the present value of McClendon's interests in the wells ($308 million at the time) and a table showing annual revenues, capital and operating expenditures, along with cash-flow from the program for McClendon. But there was an awful lot that wasn't disclosed. Since the original Reuters report, the news of an informal SEC inquiry, the company's decision to wind down the well participation program, and so on, the company has produced a lot more information about the program, McClendon's borrowing and other details, in a series of filings and statements.
The bottom line, I think, for any reasonable outside observer -- and I'm talking about before the Reuters bombshell -- is that Chesapeake feels like a company run by McClendon, for McClendon and his buddies. As long as the company delivered for shareholders, there was a good chance that things could proceed with only minimal reforms for quite a while. But there's very little sense here that these people ever stopped and thought, ‘You know what, we're playing with other people's money; maybe we should rein it in a little.'
And as we've seen time and again over the years, that certainly sets the stage for a revelation like the one we got from Reuters.
Same framework -- what went undisclosed that we've learned about in recent weeks?
Quite a bit, and that's why you've seen shareholders react so badly.
For me, Chesapeake had the feel of an insouciant bad boy: It seemed like it was being pretty brash and up-front about its extremes, and that shareholders were for the most part shrugging it off. We always worry about what's not disclosed, and on one level, when a company flouts conventions to the degree that Chesapeake has, you have more to worry about (with Enron being perhaps the ultimate modern-day example). But after a while, it's easy to think, ‘OK, look, they almost got away with the map thing, and although they had to unwind the sale, there wasn't too much of a fall-out; if I were they, I'd just lay it all out and shrug when the good-governance types whine.' Maybe that's what they're doing -- you don't want to count on it, but heck, I don't own the stock, so I can let it lie.
Instead, the new revelations suggest there was, and is, a lot more lurking below the surface. There's a single line in last year's proxy that suggests McClendon might be borrowing under the Founder Well Participation Program, saying the program "does not restrict sales, other dispositions or financing transactions" involving his interests in it. What's missing is any indication that he might have more than $1 billion in borrowing backing the program, that his lenders might also do business with Chesapeake (putting him in a potentially awkward situation, to say the least), or that -- as the original Reuters article suggests -- his personal loans might require him to take certain actions that put him in conflict with Chesapeake's shareholders. That's a lot.
Now there's a suggestion, in an article by The Wall Street Journal's excellent Russell Gold, that Chesapeake may not have fully disclosed some $1.4 billion in off-balance-sheet arrangements of its own. That would seriously ratchet up the disclosure failures, in my view.
Go to the Jump for more of Theo Francis and the rest of the Wrap.
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Let's say you are hired to watch Aubrey McClendon, the titan of Oklahoma City. George Mitchell technically enabled the shale gas boom with his technological improvements in hydraulic fracturing. But it was uber-gambling, go-for-broke McClendon who, sweeping up millions of acres of land, putting down rigs and drilling before almost anyone else had risen from their chair, parlayed Mitchell's invention into the global, game-changing industry it is today. He single-handedly made his company, Chesapeake Energy, the king of the shale gas patch.
The thing is, McClendon (pictured above, left, with Jack Nicklaus) has a few ... ummmm ... eccentricities. Like the glutton in the sweet shop, the cash-minded McClendon cannot resist a taste of potentially profitable ventures to which he takes a hankering. He wants to run a hedge fun, for instance, not to mention a professional basketball team, a cattle ranch -- and let's have some restaurants! Every now and then, McClendon requires personal cash infusions in the tens of millions of dollars to cover bad investment bets. You are paid to patrol those gorging instincts, as described by the Wall Street Journal's Russell Gold, yet what to do when he simply goes on being ... being, well, Aubrey McClendon? He is your charge. Yet he is so ... entertaining. And successful!
Until he isn't, and don't you look flat-footed, and downright unseemly, when you shout about McClendon's excesses, and threaten his throne?
So we have the current narrative of McClendon. Three weeks ago, McClendon was broad-sided by a Reuters expose regarding his unusual contractual right to invest side by side with Chesapeake in shale gas wells, and borrow money to do so from Chesapeake partners. Today, Chesapeake's main investor, an investment firm called Southeastern Asset Management, is demanding that McClendon curb his speech, and who he meets with -- or else. By else, Southeastern means Chesapeake could be sold to the highest bidder. Already, Southeastern is partly responsible for McClendon losing his title as chairman, leaving him solely CEO. That's not a huge deal, but given the choice, most senior executives would prefer to be both.
But is the board, Southeastern or anyone close to the matter truly surprised by McClendon's behavior?
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On the shale gas patch, the twain decidedly do not meet: Shale gas drillers, on the receiving end of two years of withering attacks by anti-fracking elements, have launched a counter-offensive. A special-purposed group of 11 big industry players including ExxonMobil, Shell, Chevron and Anadarko issued an eight-page code of conduct for hydraulic fracturing in Pennsylvania and New York (pictured above, outside the town of Waynesburg, Pa.). I spoke with Anadarko CEO James Hackett, a leader of the group, before the Obama administration's release today of somewhat stiff rules governing fracking on federal land. As I wrote at EnergyWire, Hackett said the group wished to "set a good example" -- a high bar for all operators on the patch in order to reassure public opinion. But Hackett's vituperative description of critics suggests little room for conciliation between the sides. In a nutshell, Hackett sees himself as a patriot, and his critics as anti-science extremists, and worse.
The industry embarked on the standards as part of studies requested by the Department of Energy and a diverse group called the National Petroleum Council. But it was all against the backdrop of hyper-critical media like "Gasland," Josh Fox's much-watched 2010 documentary on fracking. The companies felt that shale gas "can be developed responsibly, but you had a slew of articles coming out from the New York Times. Whether they were fact-based or not didn't seem to matter," Hackett told me. "The Cornell study, the Duke study, the hysteria that people were trying to create around hydraulic fracturing, which was scientifically misplaced."
So there was industry interest in counter-attacking, Hackett said. But once they were into the process, the CEOs started thinking more broadly that they had something to gain by conceding to regulation. Hackett:
There was a feeling that this could be a useful way for us to proceed long term, because the truth is that the technology does keep changing and the practices keep changing. And we have every bit or more a stake of how the regulatory process evolves and society's acceptances of our industry. We have a bigger stake than I'd say than anyone else but the citizenry that we want to make sure is educated about what the benefits of this are so that they don't just say, ‘You lose your license to operate,' without understanding what it means when they say that.
Read on for more of James Hackett, and the rest of the Wrap.
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In our now half-decade-old era of regularized black swans, a few energy thinkers are cautioning against a bubble of wishful enthusiasm with regard to U.S. oil -- a widely embraced paradigm shift that, if true, would disrupt geopolitics from here to the Middle East and beyond. A shift is afoot, but not a new world, says Dan Pickering, co-president of Tudor, Pickering, Holt, a Houston-based energy investment firm.
The new abundance model goes like this: Americans currently consume about 18.5 million barrels of oil a day, of which about 8.5 million barrels are imported. But in coming years, the U.S. will have access to another 10 million to 12 million barrels a day of supply collectively from U.S. shale oil, Canadian oil sands, deepwater Gulf of Mexico, and offshore Brazil. Add all that up, and account for dropping U.S. consumption, and not only do you get hemispheric self-sufficiency, but the U.S. overtaking Saudi Arabia and Russia as the biggest oil producer on the planet.
Pickering calls this calculus "a pipedream" founded on the extrapolation of data. Excluding Brazil, whose numbers he finds difficult to nail down, he is forecasting a lift in North American production of around 2.5 million barrels a day -- up to 1.5 million barrels a day from shale oil, and another 1 million barrels a day from Canada. In 2020 and beyond, he says, the U.S. will still be importing some 6 million barrels a day from outside North America.
Technically, that does not make Pickering an outlier: The official U.S. Energy Information Administration also says the U.S. will remain a big importer into the next decade; the EIA import number overshadows Pickering's -- 7.5 million barrels of oil a day in 2020, or 40 percent of U.S. supply (see here, page 11).
Yet in practice Pickering morphs into a contrarian because, according to cacophonous oil CEOs and industry analysts, the trouble with the EIA is that it is sluggish: The EIA shale oil numbers are far too conservative, assert these folks, just as the agency -- like many others -- underestimated the U.S. shale gas boom that has glutted the market and changed part of the global energy calculus.
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Shale gas fever has overtaken America, but we have seen this sort of mania before.
In 2003 and 2004, a "hydrogen economy" was touted as the Next Big Thing. The United States was poised to run its 240 million cars and trucks on it some day, and wean itself off of oil. California would lead the way, putting half a million hydrogen vehicles on the road and building 200 fueling stations by 2010. Today, after the expenditure of around $2 billion of public funds, the U.S. has just two-dozen fueling stations and 500 hydrogen vehicles, plus only modest progress in fuels cells. There is no longer mainstream discussion of a hydrogen economy.
Then Americans became drunk on ethanol. More than $20 billion in subsidies was spent over a three-decade period ending Dec. 31 that ultimately turned nearly 40 percent of the U.S. corn crop into less than 10 percent of the country's fuel needs by volume, and less than 7 percent by energy content. In 2009, the U.S. taxpayer subsidized 75 percent of the price of each gallon of gasoline replaced with ethanol.
Now the U.S. has gone batty for natural gas. President Barack Obama and key members of Congress have cited a humongous estimate for the natural gas supply supposedly possessed by the United States -- nearly 2,200 trillion cubic feet of the fuel, the equivalent of 379 billion barrels of oil, which if accurate would exceed the crude oil reserves of Saudi Arabia, and satisfy U.S. gas demand at current levels for around a century. Only, that widely published figure represents what are called "possible" reserves, not the more certain categories known as "proved" and "probable" -- gas that is more likely to be producible under current technological and market conditions. When discussing proved reserves, the U.S. Energy Information Administration says the U.S. possesses just one-twelfth of that volume, or 273 trillion cubic feet of gas, the equivalent of 47 billion barrels of oil. That is still a lot but, at the country's 2010 rate of consumption of 24 trillion cubic feet a year, it's just an 11-year supply. Even if we assume a very optimistic 50 percent recovery factor for the estimated 550 trillion cubic feet of probable gas, we would still have just a 31-year supply.
A lack of good data, in addition to an apparent bias toward optimistic data, underlies this perception gap. Consider a new, well-by-well analysis by Houston-based petroleum geologist Arthur Berman. Berman, a long-time doubter of mainstream gas estimates, writes that, contrary to popular belief, gas production is not growing under current conditions; instead, 80 percent of the country's shale gas production (pictured above, shale gas operation in Springville, Pa.) has flattened out or declined over the past year. Total U.S. gas production has been on an "undulating plateau" since the beginning of 2009, Berman says, as new shale gas output struggles to compensate for a 32 percent-per-year decline in conventional gas production. This picture is missing from the EIA's data because the U.S. agency bases its reporting on shale gas data only for 2008 and 2009, and does not do well-by-well sampling.
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Natural gas is roiling global geopolitics, but the latest news -- a bad result in Europe -- is that the tsunami is still very much solely U.S.-based.
The U.S. shale gas boom has shaken up geopolitical presumptions by challenging Russia's gas-led hold on Europe, and threatening to crush far-dirtier rival fuels such as coal around the world. The thinking has been that Europe -- specifically Poland -- might be next in unleashing big, new shale gas supplies, an event that would make life even more difficult for Russia's petro-ruler, Vladimir Putin.
But ExxonMobil yesterday announced that its Polish drilling efforts (pictured above, drilling in the eastern Polish village of Grzebowilk) thus far have failed, reports Bloomberg's Joe Carroll. Exxon, the world's largest publicly owned producer of natural gas, said two exploratory wells in eastern Poland failed to produce sufficient gas to be profitable. This comes on top of a slew of bad signs about Europe's gas prospects: Over the last two years, drilling by three wildcatters -- Lane Energy, 3Legs Resources and BNK Petroleum -- produced only small volumes in northwest Poland, Bernstein Energy said in a note to clients this morning. Last year, Shell announced similar negative results in Sweden, and in 2010 Exxon declared its Hungarian shale-gas efforts a failure. On top of this, France and Bulgaria have banned hydraulic fracturing, the method used to produce shale gas.
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Texas, the deliriously pro-oil birthplace of modern hydraulic fracturing -- the method used to crack open shale and extract its gas and oil -- is about to force all drillers by law to do what many opposed: mandatorily disclose many of the chemicals that they inject into the Earth. As of Feb. 1, drillers must also reveal how much water they use, writes Kate Galbraith in the Texas Tribune. The question is to what degree Texas' move - six other U.S. states also require disclosure, writes NPR's Scott Detrow -- will defuse critics who portray the fracking industry only a bit less demonically than Salem did its witches.
Of all the ways devised to provide energy to the world, none today seems to excite greater passions than hydraulic fracturing, known for short as fracking. The practice has generated a frenzied gas rush in the United States, reports Bloomberg, creating both great wealth and geopolitical turbulence as an unexpected bonanza has shifted the global energy balance. At once, the U.S. has shifted from a gas deficit to a huge surplus, cutting electricity prices last year in half, according to Bloomberg, and China may go the same way. Russia's powerful gas primacy in Europe has been undermined.
Against this, fracking has sparked a robust protest movement that accuses drillers of poisoning drinking water, triggering earthquakes, and ruining roads and landscapes. Bulgaria last week, for instance, issued a moratorium on fracking (Sofia protest pictured above), joining France and Quebec as places stopping the practice. Such resistance has been egged on by intense industry secrecy, along with the traditional fierce independence of the oil patch.
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Is there an exaggerated quality to the extraordinary projections and tens of billions of dollars pouring into shale gas, the newly available fuel that has shaken up markets and geopolitics? The answer is yes -- estimates for global shale gas reserves and future production are all but certainly over the top; likewise, the world's major energy companies -- ExxonMobil, Shell, Total, Sinopec, Statoil, and so on -- have probably committed excessive sums to this new source of energy.
Are we surprised? The answer is no -- students of hydrocarbon bonanzas know that, going back to the 19th-century frenzies of Baku and Pennsylvania, reserve assertions in the heat of the boom are not reliable. Such outbreaks of exuberance, regardless of whether fundamentally legitimate, include con artists (hence suckers), cooked books (more suckers), and out-and-out fraud (ditto). In the Caspian era of the 1990s, for instance, the Clinton administration, relying on lobbying reports from Amoco, justified a supercharged policy effort with estimates of 200 billion barrels of oil; the actual figure as of today is closer to 50 billion barrels. Yet companies and individual investors proceed anyway because they do not want to potentially miss out.
Which is what makes one puzzled by the war-like reaction to two long, ambitious, but fairly run-of-the-mill pieces in the New York Times ("Insiders Sound an Alarm Amid a Natural Gas Rush" and "Behind Veneer, Doubt on Future of Natural Gas") by Ian Urbina. In 5,300 words, plus a splash of leaked memos and emails, Urbina reports that U.S. natural gas prices are too low to justify much of the drilling and that companies have been possibly permitted by the Securities and Exchange Commission to overstate their gas reserves (the latter by far the best of the three pieces). Today, Urbina adds a piece with federal lawmakers calling for an investigation.
In Texas, the shale gas industry has banded together to try to halt the terrible PR that threatens it in the United States and elsewhere globally -- last Friday, Gov. Rick Perry signed a law requiring industry disclosure of many of the chemicals used to extract the gas. "We have seen the light," Aubrey McClendon, CEO of Chesapeake Energy and probably the loudest critic of shale gas critics, said earlier this month. Coming in the birthplace and home of modern-day fracking, the move ought to quiet shale gas doubters. Right?
From China to eastern Europe to the United States, shale gas has seemed poised to shake up the economic and geopolitical status quo. It's seemed clear that this hitherto out-of-reach, relatively clean fuel could help reduce China's future reliance on choking coal. It could break Russia's monopoly hold on the natural gas market in some parts of Eastern Europe. As for the United States, a shale gas glut has already much-bettered the prospect of lowering projected emissions of heat-trapping CO2.
Yet there has been popular concern regarding how the gas is extracted. Called hydraulic fracturing, or fracking, the method sends intense jets of a water, sand and chemical mixture into underground shale, thus breaking it up and allowing encased gas to be drawn out. Residents of some communities where the process has been carried out have complained of possible groundwater contamination, air pollution and general disruption.
In response, France has outlawed fracking. So has the city of Pittsburgh. Quebec and the state of New York have issued moratoria. Over the weekend, a group of protesters concluded a month-long march to Montreal seeking to extend Quebec's moratorium to 20 years. Meanwhile the U.S. Environmental Protection Agency is studying whether fracking should be regulated from Washington.
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The shale gas industry might brush up on its John Lennon ("Life is what happens while you're busy making other plans."). Alerted numerous times of fast-coming federal regulation unless it goes transparent and begins to police itself, the industry's hard-liners have dug in under the assumption that -- as has befallen so many other seemingly inevitable business reforms -- this one too will die of its own accord.
There are signs that the industry may be left only with a rearguard action: The Obama Administration has assigned a team to examine the regulation of wastewater produced by hydraulic fracturing, or fracking. The Environmental Protection Agency is stopping the use of diesel fuel in fracking fluid. And -- in a decision announced last week -- the administration has a team studying how to "harness these resources safely," said Energy Secretary Steven Chu.
Yet the industry stays its placid course. For an understanding of why the shale gas actors may have solid logic behind their let-the-chips-fall-where-they-may strategy, consider what has happened with financial regulation. Between 2005 and 2007, our largest investment banks as a group nearly brought down the entire global economy by betting one-way on an inexorable rise in housing prices, and the capacity of budget-stretched Americans to pay escalating mortgage payments. None of them read -- or if they did, they did not choose to apply the lessons of -- Nassim Taleb's The Black Swan, or for that matter Sebastian Junger's A Perfect Storm. The main message in those books is that highly improbable events do happen, to devastating effect.
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It's been clear for awhile that the hydraulic-fracturing industry must get in front of the moving train of public opinion, and show that the natural gas extraction method is as safe as it claims. If it does not, such as by proactively disclosing the ingredients of the cocktail of chemicals in frakking fluid, it could face PR problems worse than have befallen BP, only unlike the British oil company the frakking folks can't run and hide in Russia. But a slew of resolutions against the companies by their own shareholders shows that time may be running short to effectively carry out such a voluntary public-relations exercise.
Natural gas has been the biggest story in energy over the last couple of years -- so much of the fuel is sloshing around the globe that it is shaking up geopolitics, along with the climate change calculus: Russia is much friendlier because of the gas, and power-generation could become much cleaner. But this shift has always been on shaky ground -- it is founded largely on the fresh availability of gas in the United States due to frakking, in which water laced with chemicals and sand is forced through shale, thus releasing the gas contained within. There has been an essential tension between frakking enthusiasts and the communities where it's done. Last year, for example, documentary maker Josh Fox won a prize at the Sundance Film Festival for Gasland, a powerful takedown of frakking.
One of the key accusations is that frakking contaminates ground water, which the companies say is not the case as long as the work is done right. Critics have said assurances are all well and good, but have sought disclosure of what's in frakking fluid. Almost all the companies refuse to disclose the ingredients on the grounds that doing so would put them at a competitive disadvantage.
The way PR best works is that you recognize a potential or glaring weakness before the public does, and make it into a strength. In this case, the companies might want to very publicly agree to the disclosure request before they face the super-disadvantage of being banned from frakking.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.