Ilargi: The Darker Shades Of Shale

By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth, Cross posted from Automatic Earth

No, I wasn’t going to write a third article on shale in 2 weeks, absolutely not. But what I’ve read these past few days doesn’t leave me much choice. It turns out that the entire plethora of doubts I have raised in Shale Is A Pipedream Sold To Greater Fools and London Is Fracking, And I Live By The River are now also being raised on a larger scale: the media are – belatedly as usual – waking up. But that doesn’t mean they understand what’s going on. They’re clueless.

What we see in for instance an article from Bloomberg, and an editorial from the Guardian, is that they do not understand the effect of depletion rates; it’s not even mentioned. Neither do they understand how much of a straightforward and outright speculation scheme bubble shale has been to date. Instead, they seem to think that lower than expected reserves are the main topic, or at best environmental concerns.

Neither is true; they are important, but the main question may not be whether fracking is environmentally safe, but if it’s economically safe. The economic case for fracking, and the entire shale oil and gas industry, is so shaky it would be criminally stupid to let it continue and risk any environmental damage. Shale is not about energy, it’s about speculation. Looking at the numbers, it’s obvious the returns don’t justify the levels of investment -and I’m not even talking energy returns -, and that means it’ll all be over soon. Bloomberg:

Shale Grab in U.S. Stalls as Falling Values Repel Buyers

Oil companies are hitting the brakes on a U.S. shale land grab that produced an abundance of cheap natural gas – and troubles for the industry.

The spending slowdown by international companies including BHP Billiton and Royal Dutch Shell comes amid a series of write-downs of oil and gas shale assets, caused by plunging prices and disappointing wells. The companies are turning instead to developing current projects, unable to justify buying more property while fields bought during the 2009-2012 flurry remain below their purchase price, according to analysts.

The deal-making slump, which may last for years, threatens to slow oil and gas production growth as companies that built up debt during the rush for shale acreage can’t depend on asset sales to fund drilling programs. The decline has pushed acquisitions of North American energy assets in the first-half of the year to the lowest since 2004. [..]

North American oil and gas deals, including shale assets, plunged 52% to $26 billion in the first six months from $54 billion in the year-ago period, according to data compiled by Bloomberg. During the drilling frenzy of 2009 through 2012, energy companies spent more than $461 billion buying North American oil and gas properties, the data show.

Prior to this year, oil and gas transactions ranked among the top two in total deal values every year since 2005, except 2008 when they were fourth. So far this year, oil and gas isn’t among the top five.

Bloomberg notes the numbers, but has no idea what they mean or where they come from. Which may not be all that surprising given that the industry itself is only just finding out, but Bloomberg journalists should do their homework.

The land grab began more than a decade ago when improved drilling methods and a process called hydraulic fracturing, which cracks rock deep underground to release oil and natural gas, opened up new production in previously untappable shale fields.

The rush accelerated in 2004 as more shale fields in North Dakota, Pennsylvania and Ohio were identified, opening new troves of petroleum and the prospect of energy independence in North America.

There was never any such prospect. From the very beginning, it was a manufactured illusion designed to make huge profits on land and assets sales.

As overseas buyers moved in, booming production soon led to oversupplies, and gas prices plunged to a 10-year low in 2012, forcing companies to write-down the value of some of their assets. Companies were also hurt when some fields thought to be rich in oil proved to contain less than anticipated.

That shortfall caused Shell to write down the value of its North American holdings by more than $2 billion last quarter. Shell, based in The Hague, paid $6.7 billion for North American energy assets in seven transactions since 2009, according to data compiled by Bloomberg.

The company told investors this month that it expects its North American oil and gas exploration to remain unprofitable until at least next year. “The major acreage deals are behind us now,” Shell Chief Executive Officer Peter Voser said in a conference call with analysts.

BHP said it would cut the value of its Arkansas shale assets by $2.8 billion. During a May 14 conference presentation, CEO Andrew Mackenzie said capital and exploration spending will “decline significantly” to around $18 billion in 2014, and continue to fall after that.

Firms depending on asset sales to help finance drilling may not have enough money to pay for higher oil and gas production, said Eric Nuttall, who oversees C$70 million ($68 million) at Sprott Asset Management LP in Toronto. That could slow output growth, especially as companies try to avoid taking on more debt. “A lot of companies have let leverage get out of hand,” he said, speaking about Canadian firms.

Leveraged bets. I smell Wall Street. We’ll get back to that. First, a little problem in Ohio, as noted in New Scientist:

Fracking operations triggered 100 quakes in a year in Ohio

Protests against proposed fracking operations in southern England culminated today with the arrest of Caroline Lucas, a Green Party member of parliament. Meanwhile, new geophysical research concludes that over 100 small earthquakes were triggered in a single year of fracking-related activities in one region of Ohio.

[..] The Ohio quakes, centred around Youngstown, were triggered by the disposal of wastewater from fracking operations in the neighbouring state of Pennsylvania rather than by the fracking process itself.

The new geophysical research, by Won-Young Kim at Columbia University in Palisades, New York, is the latest to suggest that the main risk of earthquakes associated with fracking relates to the way the water used in the operations is disposed of afterwards. In Ohio, the wastewater was injected into a deep well. This raised the pressure of water within the rock and triggered 109 small quakes between January 2011 and February 2012. The largest, on 31 December 2011, had a magnitude of 3.9.

And how can you not love this angle?

Church of England ‘land grab’ for rights to minerals under THOUSANDS of homes and farms fuels fears of controversial fracking

The Church of England is fighting to claim the rights to minerals beneath thousands of homes and farms, it emerged last night. Legal action has already begun, raising fears the Church could try to cash in on the controversial process of fracking.

Under a new law, landowners have until October to assert their rights over minerals. Residents across the country have now started receiving letters from the Land Registry, informing them that the Church is seeking to register the mineral rights to the earth beneath their property. Church Commissioners – who manage the Church’s investments – are trying to assert ownership of 500,000 acres of land, an area roughly the size of Sussex.

The claim, which lawyers believe could allow the Church to profit from fracking, is being made under laws dating back to the Norman Conquest. The age-old laws give ‘lords of the manor’ the rights to extract anything of value from the earth underneath property on their estates. The Church still holds these rights in several parts of England. These include some places where geologists believe energy can be extracted by fracking – the controversial process of extracting oil and cash by fracturing underground rocks with water and chemicals.

[..] … the commissioners have started sending legal letters to residents informing them of the Church’s ‘unilateral’ right to benefit from any mines and minerals under their land. One recipient spoke of his concerns that the Church’s claim could be linked to future fracking projects. Dr Richard Lawson, a retired GP who lives in the Mendip Hills in Somerset, said: ‘It’s an ethical question for the Church – will they use their mineral rights to block fracking or to make money out of it?’

[..] … the Church has released a statement insisting that they have ‘no particular plans to mine under any property,’ adding: ‘This is confined to registering what the Commissioners have owned for many years. There is absolutely no link with fracking.

Meanwhile, at the Guardian:

Energy policy: how not to win an argument

The UK government, by appearing to rush to judgment in favour of fracking for gas, has lost any power of persuasion it might have had in the more measured debate that remains necessary but now seems increasingly unlikely. Similarly, by choosing its first exploratory oil drilling site in the south in a picturesque village within easy reach of London just as the politicians go on holiday, the energy firm Cuadrilla has predictably aroused the kind of alliance between celebrities, environmentalists and not-in-my-back-yard Tory voters that has barely been seen in a generation. This is no way to resolve a complex question that could shape the cost and security of the UK’s energy supplies for decades.

Taken together, a chancellor with a reputation as hostile to the green agenda as Mr Osborne’s, and a department for energy and climate change torn between the greenie Lib Dem secretary of state, Ed Davey, and a business minister, Michael Fallon, who is openly sceptical about key aspects of climate change policy like setting specific objectives to cut carbon emissions, the coalition is always going to struggle to sound open-minded.

Yet it has a case to make. Look at the report the government commissioned from the Royal Society and the Royal Academy of Engineering which concluded in June last year that, given tight regulation and monitoring then in technical health and environmental terms, fracking is safe. The risks of earthquakes, polluted water tables and air pollution were either negligible or capable of management. But what the report also said – and few picked up on – was that the report’s authors drew particular attention to the fact they had not considered the impact on climate change objectives of either extracting or burning shale gas.

No depletion rates, no land speculation, but “the cost and security of the UK’s energy supplies for decades”. The Guardian’s editorial staff really has no idea what they’re talking about. And THAT, messieurs et mesdames, is “no way to resolve a complex question”. Like Bloomberg, the Guardian should do its homework. That is, unless its sees its role as kowtowing to a deluded government and a less-than-honest industry.

Wall Street is not done yet, not by a long shot. You got a good sting, you export it. We already saw earlier how shale is being promoted in China. Here’s some South America cheerleading from

Here’s The Next Thing in Shale

We’ve talked about unconventional gas drilling underway in Chile. Now it appears another Latin American nation wants to get in on the act: Brazil. U.S. Energy Secretary Ernest Moniz talked shale during a visit to Brazil this weekend. Moniz noted that U.S energy companies are eager to use their unconventional expertise to help exploit Brazil’s resources.

There is certainly geologic potential here. Earlier this year, state hydrocarbon agency ANP estimated that Brazil may hold over 500 trillion cubic feet of unconventional gas reserves. [..] The gas market here is reasonable. With Brazil in fact looking to increase domestic supply and move away from expensive LNG. With all these pluses, this might be a place where shale can work. We’ll see what the bidding is like November 28 to 29. Here’s to the new shale frontiers.

And it’s not as if it all the information need be new to these folk. Forbes published this Robert Ayers piece last May, and again it’s about the numbers:

Shale Oil And Gas: The Contrarian View

[US ] investment in shale in 2010 and 2011 was apparently a trillion dollars, with another $600 billion scheduled for 2012.

Indeed, it does appear at first glance that the kinds of shale deposits that contain recoverable gas and oil are very large. The Bakken and Eagle Ford shales under Montana and North Dakota contain up to 700 billion barrels of fluid oil bound tightly into sandstone. According to the current wisdom of the U.S. Geological Survey, 3 to 4.3 billion barrels of the oil will be recoverable, amounting to 6 months or so of current U.S. consumption. Even if the recovery rate is doubled or quadrupled, it would take care of perhaps two years of current US consumption.

Complicating the issue is the fact that shale gas (and oil) wells peak and decline much more rapidly than conventional wells. The Bakken play declined about 69% in the first year, 39% in the second year, 26% in the third year, etc.

[..] … drilling for gas in the US trebled from 2000 to 2009, while the quantity of gas recovered remained virtually constant. Drilling for oil in the US in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled. [..]

There will surely be a boomlet in shale gas and oil, but my opinion, for what it is worth, is that the fracking boom is partly – perhaps largely – hype, and that a lot of the small investors now being solicited by various investment publications will lose their shirts. I think the head of the IEA has been quite irresponsible in attaching her institution’s good name to such a dubious proposition. To put it in quantitative terms, I accept David Hughes’ conclusion that the peak of shale oil will occur (circa 2020) but will be around only about one third of the IEA’s 10 million bbl/day estimate for natural gas liquids and a similar fraction of Citi-Group’s bloated estimate of about 4 million bbl/day for U.S. shale oil.

But my favorite this week comed form close to home, from Nassim, a commenter at the Automatic Earth, who played around with the North Dakota government’s proprietary Historical Bakken Oil Stats:

[Here’s] the last 6 months of data – to get a bigger sample.

Number of additional wells = 840

Number of additional barrels/day = 52,828

Average increase in barrels/day/well = 62.89

If it costs $8 million per well, that works out at a capital cost of $127,205 per barrel/day. If their profit margin – just for the sake of argument – is $30/barrel, this suggests that it takes $11.6 of investment to make $1/year of return.

In the table, the average oil production per well is 129 barrels/day. The numbers above suggest it is more like 62 barrels/day for the newer wells. Really scary stuff.

If you want to dig deeper into the role Wall Street plays in the shale bubble, I suggest you read energy banker Deborah Rogers at Energy Policy Forum. Here’s is the executive summary, click the link to read the rest.

Shale and Wall Street: Was the decline in natural gas prices orchestrated?

In 2011, shale mergers and acquisitions (M&A) accounted for $46.5 billion in deals and became one of the largest profit centers for some Wall Street investment banks. This anomaly bears scrutiny since shale wells were considerably underperforming in dollar terms during this time. Analysts and investment bankers, nevertheless, emerged as some of the most vocal proponents of shale exploitation. By ensuring that production continued at a frenzied pace, in spite of poor well performance (in dollar terms), a glut in the market for natural gas resulted and prices were driven to new lows. In 2011, U.S. demand for natural gas was exceeded by supply by a factor of four.

It is highly unlikely that market-savvy bankers did not recognize that by overproducing natural gas a glut would occur with a concomitant severe price decline. This price decline, however, opened the door for significant transactional deals worth billions of dollars and thereby secured further large fees for the investment banks involved. In fact, shales became one of the largest profit centers within these banks in their energy M&A portfolios since 2010.

The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions. As prices plunged, Wall Street began executing deals to spin assets of troubled shale companies off to larger players in the industry. Such deals deteriorated only months later, resulting in massive write-downs in shale assets.

In addition, the banks were instrumental in crafting convoluted financial products such as VPP’s (volumetric production payments); and in spite of the obvious lack of sophisticated knowledge by many of these investors about the intricacies and risks of shale production, these products were subsequently sold to investors such as pension funds. Further, leases were bundled and flipped on unproved shale fields in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007.

So, can we stop talking about shale and move on to more serious topics? Have I sufficiently made the case that shale is a source of waste and nonsense, not of energy? Probably not, right? And it seems so simple, all these people should take one good hard long look at shale in Poland, and they’d understand.

“We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.” President Barack Obama

It won’t even last 10 years. Far too little recoverable carbon has been bought with far too much borrowed money.

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  1. Skeptic

    On the Index of Rot that Church of England bit tops the list.

    “Archbishop of Canterbury’s ‘role’ in £6b mission to snap Nigeria’s oil riches

    Posted by: Our Reporter in News March 11, 2013

    With a modesty befitting his holy office, the Archbishop of Canterbury has always played down his past life as a young oil company executive.

    But a Mail on Sunday investigation has found that far from working on the margins of Elf Aquitaine, Justin Welby was one of its finance ‘sharks’ – and employed on a morally questionable plan to protect the firm’s oil interests in Nigeria in the early Eighties.

    Named Bonny LNG, the plan involved persuading the country’s leaders that Elf and other major oil companies were poised to invest £6 billion in an energy project that had scant hope of being realised.

    Throughout this period, the French state-owned company – which later became synonymous with corruption and scandal – was allegedly committing human rights abuses against the people of the oil-abundant Niger Delta.

    Mr Welby, who made regular visits to the country’s capital for meetings at the time, strenuously denies being aware of the claims – or the true motivation for the Bonny LNG project.”

    So the MSM story line goes that Injustin Welby had a “calling” to the Ministry, Ministry of Energy, I guess. So, the Fox now right in the henhouse blessing the soon to be fracked chickens.

    He should be a great Protestant Bookend for Catholic counterpart Pope Frankie and his murky relationship with the Junta in Argentina.
    Holy Badabing!

  2. from Mexico

    Well it looks like the wheels are finally starting to come off the shale gas ponzi scheme. I wonder when the stampede to the exit door will begin.

    There’s a corollary to this sad story, and that is that is a counterfactual to the mantra of the neoliberal/neoclassical true believers that “markets always know best.”

    The hallowed shale play sarted in serious in 2000 in the Barnett Shale Field near Dallas/Fort Worth, Texas. Here’s a graph that shows the number of drilling permits issued 1993-2013.

    So it’s been almost 13 years now, and the highly irrational speculative bubble is still afloat, even though it’s beginning to lose some air.

    The irrationality has lasted longer in the shale gas ponzi scheme than it did in another infamous speculative bubble of recent vintage — subprime lending.

    1. susan the other

      There is a big political push going on between the US and the new Mexican government to change the Mexican constitution so that PeMex can join a North American consortium (be virtually taken over by the big oil companies?). The blurb on BBC was that it was going to be a deal to rival the Middle East and would make North America a top producer. Not a word about all the wonderful shale, sand and gas resources. Just good old fashioned oil. No doubt these guys have their sights on Venezuela too. So did Uncle Warren just buy a pig in a poke in that big shale deal? I certainly hope so.

      1. from Mexico

        ExxonMobil, the largest private international oil company (IOC) in the world, has approximately 25 million barrels of oil reserves.

        PEMEX has something like 110 million barrels, and as you say, they all come from conventional reservoirs..

        The private oil companies are desperate for reserves. As a group, their oil production has fallen by 26% in the last 9 years, and their reserves have likewise plummeted. Without new reserves, it’s lights out for the IOCs. Since the Iraq adventure turned sour, the private oil companies had to look elsewhere for reserves.

        If this deal goes through, it will probably be as detrimental to the welfare of everyday Mexicans as what NAFTA was.

  3. Aussie F

    The economics are irrelevant. Shale is undeniably a source of waste and nonsense. The banks and large parts of the economy are a source of waste and nonsense, But so what? If ‘shale’ starts to lose the government will step in with tax breaks, lucrative subsidies, and if necessary outright bailouts for all involved. After all, it’s a question of ‘energy independence’and ‘national security.’ That means Shale has a very long future, whatever it costs.

    By the time they run out of excuses to fund this crap we will all be drinking Ethyl Benzene cocktails courtesy of Halliburton.

    Remember, we live in a state capitalist economy. Markets and rationality are invoked rhetorically, but have no real impact on policy. The public can always be reliably ripped off, so why shoud policy makers care about the ‘real cost’ of Shale?

    1. Emma

      Exactly Aussie F.
      “Shalefinger” is an earthbuster and its’ filfth merchants have “Licence to Kill” as long as “Casino Shale” is played on the gravy train.

  4. Texas Analyst

    I enjoy reading Naked Capitalism because your take on the financial services industry is often spot on.

    This article, however, is a joke. I’m sure these guys want to demonize fracking and the oil and gas industry to support their eco-friendly view of the earth, but this article is ridiculous.

    First, the decline in value for assets purchased 2-4 years ago is due to the fact they were focused on natural gas. As recently as 5 years ago it looked like the US was running out of natural gas. Investors, Exxon included, underestimated the productivity of new gas fields and over paid for companies with gas fracking capabilities. The new gas production has caused the price of gas to collapse from $14 in 2008 to $4 today. The price decline is due to the abundance of U.S. gas. Terminals that were authorized to import gas in 2007 are now being reconfigured to export gas. There was a bubble in gas prices but it was popped by a permanent increase in the availability of recoverable gas, not bankers manipulating the market(that doesn’t mean they don’t).

    Second, the numbers in this article are not even close. The article states there are only 3-4 billion barrels of recoverable oil in the Bakken and Eagle Ford formations(the Eagle Ford is in Texas, not Montanna or Dakota). In fact each has at least 10 billion barrels and they are only the tip of the iceberg. These are two specific formations and there are dozens of others. One new formation in Texas, the Cline, could have at least 20 billion barrels. Additionally, technology is driving up production and driving down cost.

    Finally, you should drive through South Texas or the Permian Basin and talk to the folks making a living in these areas. The development is creating real jobs that pay real wages. Blue collar workers can make $50-100k working on rigs, driving trucks and supporting the infrastructure build. Obviously, this boom will bust eventually. But if the choice is drilling in West Texas or the West Africa, where would your invest your money?

    Ultimately, this is a technology revolution, but it’s not sexy and sterile like the internet boom. Hoping it will go away by citing a few articles and attacking random institutions like the Church of England is myopic. I guess it would be better to sink billions into more failed green energy programs in the misguided hope of a utopian world with benevolent dictators keeping the lights on for free.

    1. McMike

      No, it is a deregulation revolution, whereby an unimaginably toxic industry is given carte blanche to destroy communities and the environment (yes, while providing a few short term jobs to a few gypsies along the way). It leaves a huge wake of steamrolled communities and permanently contaminated water behind.

      The difference is this sort of thing only used to happen in Africa. Now it is coming home to roost.

      I’d ask you to cite the source for your figures, but it is easy enough to find a hack that back whatever inflated SWAG projections you ask for.

      The anecdote of overdrilling pushing down gas prices is in fact EVIDENCE of the investment bubble. It is a sign of an industry not responding to market signals, but instead riding the wave of hyped investment and hot money from the Fed. Over-supplied by several orders of magnitude for the demand infrastructure is proof that the prospectuses did not bother to address whether they could actually sell the stuff, and instead were moving forward on something besides fundementals.

      The industry’s need for perpetual motion is further evidence of a investment-led bubble. As is the industry’s desire to void its previous self-justification (energy independence) and replace it with a new imperative (expand exports to raise prices) – which of course in fact harms the broader domestic economy.

      Mind you, I am not calling the timing for the bubble to pop. The government has proven itself more than willing to prop up Wall Street bubbles and subsidize the oil industry for far longer than one would have thought permitted by the law of gravity.

    2. LillithMc

      Keep your fracking in Texas where the environment is already in bad shape. California is organized to fight it.

    3. Crazy Horse

      Things sure look rosy when you ignore things like depletion rates for existing wells and declining flow rates for new wells drilled in an existing field.

      And of course defining recoverable reserves without reference to cost of recovery helps to keep that Texas spirit flowing.

      1. from Mexico


        The ponzi scheme operators can parrot their claim 10 times, 1,000 times or 1,000,000 times, but that will not make drilling shale gas wells a commercially economic venture. The only thing that will make it true is if somewhere in the future shale wells all of a sudden start producing many times the amount of gas they have in the past.

        The averge cumulative production of a Barnett Shale well is only a little bit north of .5 BCF.

        Most of these wells were drilled between 2001 and 2011, so have been producing for anywhere between 2 and 12 years. The Barnett was the first, is the oldest, and likely will remain the biggest shale gas play in the United States.

        How much is .5 BCF worth to the producer? If we estimate a 20% royalty, 6% wellhead severence tax, and $1.60 per MCF in operating, ad valorem and other expenses, with today’s NYMEX Henry Hub gas price of $3.35 per MCF, that means .5 BCF is worth a whopping $440,000 net to the producer. If we estimate total reserves at 1 BCF, a very optimistic outlook indeed, then at today’s gas price we may hope to have our average Barnett shale well produce natural gas worth a total net to the producer of $880,000.

        Now here’s the rub. Those wells cost somewhere between $3 and $5 million each to drill, depending on leasehold cost. And we all know about the sky-high prices being paid for leases in these plays. If you call investing $5 million to get back $880,000 “economically viable,” then man do I have some wonderful investments for you.

        So let’s play with gas prices a bit. If we assume a future natural gas price of $10 per MCF, with all the other inputs being the same, now our 1 BCF of reserves is worth $5.8 million. So at $10 per MCF, drilling the average Barnett Shale well is only slightly better than a break-even proposition. And that is not the discounted present value of that income stream, but total future income.

        So what happens an $18 per MCF gas price, which was the highest price that LNG has ever reached?

        With $18 per MCF and all the other inputs being the same, now our 1 BCF of reserves is worth $11.7 million. So at $18 per MCF, drilling the average Barnett Shale well is a very marginal venture, economically speaking.

        So the bottom line is this: To make these wells “economically viable,” one must assume some very high gas prices, or that these wells will somehow in the future produce one hell of a lot more gas than they have in the past, or both.

        Let me throw some more data at you.

        When the Barnett Shale play was really hot back in 2005 to 2008, the corporations drilling these wells were throwing around reserve figues like 5 BCF per well.

        Now they are more modest, with “many industry estimates of at least 2 billion cubic feet (bcf) of gas and as much as 3 bcf per well.”

        However, “the U.S. Geological Survey last year put a 1 bcf estimate on Barnett wells.”

        But here’s the crux of the matter, that maybe even a layman that is not a petroleum engineer can get their head around:

        But what about producers’ estimates of 2 bcf or even 3 bcf?

        Only 512 wells in the Barnett Shale, or less than 3 percent, have produced 2 bcf or more in their lives, according to the Railroad Commission/ Powell Shale Digest data. A mere 70 wells [out of more than 16,000 wells drilled through June, 2011], less than 1 percent, have hit 3 bcf or more.

        Read more here:

  5. Crazy Horse

    Spot on, Mexico.

    It doesn’t take a rocket scientist to understand that with sophisticated methods of determining prime drilling sites, the best sites will be drilled first. And, surprise, surprise, later wells will have lower flow rates and total yields bringing the average down into prime ponzi range even before you factor in 40% depletion rates.

    1. McMike

      .. which is why the industry is always more excited about new fields and new wells, and about acquiring real estate, than about the ongoing productivity of exiting wells.

      The ponzi money for the banks is made when they first do the deal. [*cough* subprime MBS *cough*]

      Whenever the bubble does pop, we can find out how Wall Street made money shorting it; then we can learn how they lied to the investment trusts they sold packages to; then we can learn how they ripped off landowners on lease payments; then we can learn how they are screwing a bunch of end user commodity hedges and drill-country munipalities through arcane tax forward debt and interest rates swaps that go south.

  6. Paul Tioxon

    Planned natural-gas power plant acquired by Texas private-equity firm

    A Dallas, Texas, private-equity firm, Panda Power Funds, is acquiring Moxie Energy’s planned Liberty Generating Station in Bradford County, Pa., billed as the first power plant developed to use natural gas from the Marcellus Shale formation. The 829-megawatt plant will produce enough power to supply 1 million homes. Panda will immediately start construction on the 33-acre site in Asylum Township and expects operations to begin by early 2016. The plant will contain twin combined-cycle Siemens gas turbines, manufactured in North Carolina. The generators will be cooled with air rather than water, eliminating the plant’s potential impact on the Susquehanna River. Panda did not disclose a purchase price. It said the plant will contribute an estimated $1.2 billion to the area’s economy during construction and the first decade of operation. About 500 jobs will be created to construct the plant, which will employ 27 people to operate.

    27 real jobs to supply 1 million homes. How many bullshit jobs needed to afford a house with electricity in the coming decades?

    1. Crazy Horse

      Quite interesting to look at the life cycle emissions of a natural gas energy system.

      —start with the methane gas released during drilling.
      —then add in all the wells in North Dakota that are just flared off because they don’t produce enough to justify building a pipeline to connect them.
      —now build a compressor station every 100 or so miles along the pipeline, equipped with multiple 747 sized jet engines running 24/7 just to overcome friction and keep up with pipeline leaks. Total energy lost: at least 10%.
      —then introduce an added hidden nightmare by using it to power millions of vehicles. Each time a vehicle is refueled the lines are purged by venting into the atmosphere.

      Clean and Green it ain’t.
      But what the Frack, the bonuses have already been paid.

  7. Chauncey Gardiner

    Thank you for this post. Setting aside the very serious long-term environmental issues, Wall Street’s involvement, and related debt leverage concerns for a moment, since 2009 production by domestic U.S. oil producers has been able to outpace declining production from existing oil fields. [See:

    However, as the character the Red Queen said in the novel “Through the Looking-Glass”, by Lewis Carrol (who was also a mathematician and logician): “Now, here, you see, it takes all the running you can do, to keep in the same place”.

    As Ilargi observes in this article, and using the Bakken field in North Dakota as a proxy for shale/tight oil, it is questionable whether the spike in domestic production since 2009 can be sustained, let alone whether production will continue to increase:
    From that linked mid-2012 article: … “[T]he reference to the Red Queen was found to be an apt analogy to describe why technology and/or price cannot overcome the inevitable fact that field size and well productivity declines in most plays, whether in shale or any other plays. Put in a different way: shale plays do not get a pass on the laws of physics or the history of play and basin developments. The potential and technology for extraction (production) of shale/tight oil has been around for several decades.”

  8. allcoppedout

    I’ve just noticed in a university database search, that they frack for uranium – how comforting. All a fairly diligent search produced was the absence of any compelling arguments on yes or no.
    Yves’ piece and Mexico’s latter above increase my antipathy to the fracking project. I’m long convinced we should not use any further fossil fuels other than as raw materials, not energy. I felt this, in ignorance, as a boy with my first chemistry set.

    Geological surveys seem accurate – but even this is irrelevant as they say nothing reliable about what percentage can be extracted at what cost.

    Fracking will probably start in Britain under my feet. Osbourne has fingers in the Quadrilla pie, so that’s that. Whether it is all a Ponzi and the ‘reserves’ salted I don’t know. BBC coverage is at the level of lighting water taps with a match in America. looks at the physical chemistry – and demonstrates chemists don’t know much economics.

    One possible saviour for fracking is ethane for plastic manufacture and where this is in decent percentage, I might go with fracking. UK fields don’t seem to have it, except as a nuisance. Our government has made up its mind, as evident in a number of glossy publications. This is based on an 18% extraction rate.

    I no longer believe economics can make sensible decisions on energy and I’m against fracking because we should be doing real green work. I’d have to put a huge amount of time in to know what the standard economic case is and whether investors are being had. The claim fracking produces gas that is cleaner than burning coal is probably untrue. The rest looks like typical argumentative machine stuff seeking support not ful evidence.

  9. baldski

    So,is this why they are building liquifaction trains on the Sabine river by Cheniere LNG to try to recoup their costs by selling the product to the Japanese for 17 dollars a million BTU? And by pulling a massive amount of gas off the US market by this action, will this not drive up the cost here?

  10. Crazy Horse

    Interesting. 20 people comment on Illargi’s great series of articles exposing the shale gas/oil ponzi.

    263 join the heated debate about what constitutes a “bullshit” job.

    Which subject do you think will determine the health of the US economy in the decade 2020-2030? And drive the wars that the US foments to try to make up the deficit.

    Given that the NC audience is probably 1000 times more knowledgeable than the general public what does that say about the possibility of the public having the slightest clue about where the future is taking them?

    1. Lambert Strether

      I have some sympathy for position. It is, however, possible that most NC readers see shale gas as a scam en passant; non-controversial posts rarely garner lots of comments.

      As far as “bullshit jobs”… You don’t feel that the workplace, and the supply chain, have any tactical or strategic significance?

      1. Crazy Horse

        Did I say “that the workplace, and the supply chain, have (no) tactical or strategic significance”? Please don’t put words in my mouth that I didn’t say or even think. Not up to your usual excellent standard of editorship.

  11. Nicole Foss

    At The Automatic Earth we have been warning about the shale energy ponzi scheme for a long time. In addition to Ilargi’s recent article series, see:

    Get Ready for the North American Gas Shock (

    Unconventional Oil is NOT a Game Changer (

    A Dialogue with George Monbiot (
    The Second UK Dash for Gas – A Faustian Bargain (

    Nicole Foss (Stoneleigh)

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