Hype Catching Up with Natural Gas Industry;

Message “Not Working,” Says President

of Colorado Oil & Gas Association

Meanwhile, Industry Shifts Gears:

Now It’s Unconventional Oil!

Frac Hype Game Begins Again

Deborah Rogers, Pittsburgh Summit (click to enlarge image)

The hype and “fantastic claims” for shale gas extraction are catching up with the natural gas industry.

Even the industry’s environmental safety claims for its controversial slick water, hydraulic fracturing are “not working,” according to a gas industry executive.

Tisha Schuller, President of the Colorado Oil & Gas Association, told attendees at the recent NAPE Expo (formerly the North American Prospect Expo) in Houston on Feb. 16, that it’s time for a new strategy, according to a report in the Houston Chronicle‘s Fuel Fix blog.¹

The shale gas industry’s credibility is precarious says Deborah Rogers, who brings years of experience in the financial markets in Europe and the U.S., to a tough analysis of the Barnett Shale in Texas.

Rogers’ shared her analysis of the economics of shale gas extraction in a presentation given at a summit in Pittsburgh, PA, in November and sponsored by the EARTHWORKS Oil and Gas Accountability Project.  In addition, she has been good enough to share her notes with this blog.²

The Barnett Shale is the icon of the shale gas industry.  The first gas well ever fractured using the current slick water fracturing technology was developed in the Barnett Shale in 1997.³ It is the benchmark upon which much of the hype is based.

But as Deborah Rogers pored over real production history versus early projections and claims for the Barnett Shale, significant discrepancies emerged between what the shale gas companies said and projected about recoverable reserves, production life of wells and other key indicators, including toxicity issues.

For details on Rogers’ analysis, refer to Part 1 of Shale Gas or Shell Game at this blog’s previous post: http://www.spectraenergywatch.com/blog/?p=1057

Reality Is A Big Wrench

Eventually, historical production records from the Barnett Shale replaced pie-in-the-sky projections.

As Rogers points out:  “Numbers now could be verified and they were not as pretty as initially believed.  Geologists, engineers and even financial analysts began to seriously question the economics of shale gas in a public forum.”

“Behind the scenes, monies were drying up for these [shale gas] companies,” Rogers says.  “Some investors were growing more cautious about past assumptions on shale gas.  They no longer saw the upside.”

The problem for the industry, she notes, was that, “These same operators had crushing debt loads and it was imperative that they continue to have access to the capital markets or they could find themselves in debt breach or perhaps even bankruptcy.”

Fitch downgraded Chesapeake Energy as being at risk for debt breach in late September 2009, according to Rogers.

From Unconventional Gas to … Unconventional Oil!

Based in its history of hype and “fantastic claims,” perhaps the industry’s response was predictable.  Rogers notes:  “Unconventional gas had not brought ‘unconventional’ performance.  A new vehicle was need to raise monies and it was needed quickly.”

The wizards from Oz needed a new shtick – presto, from unconventional gas to unconventional oil.

And so in 2010, Aubrey McClendon, CEO of Chesapeake Energy, was talking up unconventional oil.

“We’re going to take what we learned in unconventional gas and apply it to unconventional oil,” McClendon said to investment analysts in October, according to various reports such as Oil & Gas Financial Journal, Platts Energy Week and others.⁴

“‘We’re on the verge of an unconventional oil revolution,’ he predicted,” as reported in National Gas Intelligence.⁵

Shale Gas Makeover?

But Deborah Rogers concludes this is merely a “shale gas makeover,” not a new revolution.  She connects the dots this way:

“Unconventional oil had the same capital intensiveness as shale gas.  It currently can cost up to 20 times more to drill an unconventional oil well than a conventional well.  It has the same water wastage, same toxic emissions and environmental degradation.  In some ways, it makes shale gas look more attractive in that unconventional oil is very carbon intensive and is the least efficient hydrocarbon in terms of fuel.”

A reasonable person could argue that the same hype, cloaked with a curtain of less disclosure, is now being drawn around the subject of unconventional oil – just as it had been for unconventional gas.  As CEO McClendon said in his Letter to Shareholders (emphasis added):

“Because early drilling results need to remain confidential as we acquire more leasehold in these new oil plays, we are being guarded with our oil drilling results disclosures.  As 2010 progresses, however, we look forward to revealing more about the potential of Chesapeake’s oil upside. I believe these oil discoveries could prove to be the most significant value creation uplift for the company since our gas shale discoveries of the past few years.“

Chesapeake Annual Report (p. 9) Aubrey K. McClendon’s Letter to Shareholders, March 31, 2010⁶

“How very convenient,” Rogers says.  “Once again we will not be able to verify the numbers for some period of time until one of these fields has enough historical production data.”

“And the game begins anew,” she adds.

Links & Resources

¹ Fracking message isn’t working, says industry exec – By Tom Fowler, February 16, 2011, Houston Chronicle Fuel Fix blog http://fuelfix.com/blog/2011/02/16/fracking-message-isnt-working-says-industry-exec/

² About Deborah Rogers – Deborah Rogers brings both financial and business experience to her analysis of the shale gas industry.  Her financial career began in London where she worked in venture capital financing.  Returning to the U.S., she worked as a broker with Merrill Lynch and Smith Barney.  In addition, she has served on the six-member Advisory Committee for the Federal Reserve Bank of Dallas.  In 2003, she started her own company, Deborah’s Farmstead, producing award-winning artisanal cheeses.

“Shale Gas or Shell Game” - Presentation given by Deborah Rogers at EARTHWORKS Oil and Gas Accountability Summit in Pittsburgh, PA on November 20, 2010.  Pdf file:  deborahrogers-shalegasshellgame1

The natural gas industry’s “fantastic claims” are cited by Arthur Berman in his article, “Lessons from the Barnett Shale suggest caution in other shale plays,” by Arthur Berman, August 10, 2009, Association for the Study of Peak Oil & Gas – USA:  http://www.aspousa.org/index.php/2009/08/lessons-from-the-barnett-shale-suggest-caution-in-other-shale-plays/ Or pdf file:  lessons-from-the-barnett-shale-suggest-caution-in-other-shale-plays-__-aspo-usa_-association-for-the-study-of-peak-oil-and-gas1

³ Barnett Shale Information – Railroad Commission of Texas (RRC) website – the RRC is charged with regulating the oil and gas industry in Texas: http://www.rrc.state.tx.us/barnettshale/index.php

See especially the page dealing with “Water Use in the Barnett Shale.” In the fourth paragraph under the subhead Hydraulic Fracturing, it says (emphasis added): “In 1997, the first slick water frac (or light sand frac) was performed and found to be very successful in stimulating the Barnett Shale.”

Page link: http://www.rrc.state.tx.us/barnettshale/wateruse_barnettshale.php

^{4, 5} Aubrey McClendon, Chairman & CEO, Chesapeake Energy, on “Unconventional Oil”

“We’re going to take what we learned in unconventional gas and apply it to unconventional oil,” he [McClendon] said.  Oil & Gas Financial Journal:  “Chesapeake Energy wants to export LNG,” by O&GF Staff, published Oct. 14, 2010. http://www.ogfj.com/index/article-display/6421909998/articles/oil-gas-financial-journal/unconventional/chesapeake-energy.html

Chesapeake Energy touts shift from shale gas to shale oil – Platts Energy Week, Oct. 14, 2010 – http://www.plattsenergyweektv.com/story.aspx?storyid=115557&catid=293

“‘We’re on the verge of an unconventional oil revolution,’ he predicted,” as reported in National Gas Intelligence. Silicon Investor carries the article from Natural Gas Intelligence (NGI), originally published November 4, 2010, under this headline:  “Chesapeake CEO: Gasifying Transport System ‘Holy Grail’ of Industry” - http://siliconinvestor.advfn.com/readmsg.aspx?msgid=26937047

⁶ Annual Report for Chesapeake Energy – pdf file:  request-2009chkannualreport