The Fracking Chickens Are Coming Home To Roost
This won’t be the first time we’ve heard whispers of impending doom for the natural gas fracking industry, but since this one is coming from Bloomberg it’s probably worth a listen, so here’s the deal. Yesterday, Bloomberg reported that the boom in gas field purchasing from 2009 to 2012 has turned into a whopper of a bust, leaving oil and gas companies with a belly load of depressed assets and “disappointing” wells to go with falling gas prices.
As Bloomberg points out, the export market could keep the industry afloat until the next cycle ticks upward, but don’t look for much help from the domestic market as the cost of renewable energy continues to fall.
A Fracking Bust
How bad is the hurt? According to the Bloomberg article, a slowdown in drilling activity and a selloff of “lackluster” properties is reflected in a precipitous drop in U.S. oil and gas deals. All totaled up, activity in the first six months of 2013 fell 52 percent compared to the same period last year, down to $26 billion from a high of $54 billion.
For those of you following financial news in the oil and gas industry over the past year that won’t be much of a surprise. In addition to Bloomberg, signs of a bursting gas bubble have been reported in detail by The Wall Street Journal, The New York Times and Rolling Stone.
The current drop in land values will also have a ripple impact on drilling activity into the future, as some key players in the industry depend on land asset sales to leverage growth.
If that’s starting to smell like a Ponzi scheme, join the Eric Schneiderman club. For the past couple of years Schneiderman, the U.S. Attorney General for New York State, has been looking into financial shenanigans among key players in the gas industry (Schneiderman has also been pressuring the industry to mitigate greenhouse gas emissions, but that’s a whole ‘nother can of worms).
A World Of Pain For Property Owners
Another angle to the industry’s financial woes is revealed in a new report on gas leases by Pro Publica, which documents how gas drillers have been cheating landowners and the U.S, government out of royalties hand over fist:
An analysis of lease agreements, government documents and thousands of pages of court records shows that such underpayments are widespread. Thousands of landowners…are receiving far less than they expected based on the sales value of gas or oil produced on their property. In some cases, they are being paid virtually nothing at all.
In many cases, lawyers and auditors who specialize in production accounting tell ProPublica energy companies are using complex accounting and business arrangements to skim profits off the sale of resources and increase the expenses charged to landowners.
The timing of the report is particularly bad in terms of federal leases, as the industry has been up in arms over proposed fracking rules by the Department of the Interior, which would tighten up regulations on federal property.
As for individual property owners, some of them have gotten themselves into a triple whammy. They’re being shorted on royalties, their property values are being affected by increased evidence of the harmful impacts of fracking, and now comes word that the insurance industry is casting the stinkeye on properties that host drilling operations.
In that regard there are two basic problems. First, though local lenders are still in the game, national banks are reluctant to finance mortgages for properties that host drilling operations, and in some cases for nearby properties as well. The second problem is that many homeowner policies don’t cover drilling operations on residential properties. The result, as predicted by Grist.org, will be a bust in residential properties to go with financial travails on the industry side.
The Natural Gas Export Market
If there’s one bright spot for the fracking industry, that would be the export market. Despite mounting evidence that greenhouse gas emissions from fracking could cancel out any advantage that natural gas has over coal, President Obama is still looking to natural gas as a cleaner “bridge” fuel as the renewable energy industry gears up. That includes an openness to gas exports as well as promotion of the domestic market.
Ironically, this week the President’s pitch for natural gas takes him on a bus tour through upstate New York, where players in the region’s key wine and tourism industries have been raising concerns over a proposal to expand gas storage and transportation facilities.
That leads us to another angle in the fracking picture, which is the purchase of US fossil fuel assets by overseas and global companies, leading to additional pressure on the federal government to permit more natural gas exports.
Even in a slump cycle, for example, Bloomberg reports that the top oil refiner in Asia, China Petrochemical Corp. (aka SINOPEC), bought up half of a Mississippi oilfield owned by the beleaguered US company Chesapeake Energy in a deal valued at more than $1 billion.
To add another wrinkle, the cost of solar power and other renewables has been sinking like a stone in the US, which puts even more pressure on drillers to find new markets overseas.
If the export market continues to open up for oil and gas, we’re now looking at a situation where US communities are forced to bear the public health, environmental and economic downside of fossil fuel extraction, without the full benefit of lower fossil fuel prices for individual US energy consumers and businesses.
Keep that in mind the next time you hear some of those US representatives in Congress lobbying for additional permits to export more gas and oil.
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When insurance companies and Wall Street banks tiptoe to the door, you know you´re in trouble.
In addition to Tina´s good roundup, remember that gas fracking depends on continuous new drilling to make up for the very rapid depletion of old wells: 69% in the first year in the Bakken formation, for one. Once drilling stops, the prospect is a precipitous decline in output. As a “bridge´´ to the renewable future, it´s like one of those contraptions made of old rope and rotting planks the hero crosses in adventure movies.
Your ‘69% in the first year’ link isn’t working for me. It also is not showing as a link in the comment.
For a free markets guy like myself, I have struggled with the question of whether we should allow valuable natural resources like natural gas to be exported from the US. On one hand, we don’t restrict any other industries from exporting their goods unless it relates to national security. On the other, keeping our resources here can benefit a much larger universe of industrial, commercial and residential consumers. And it can make so many job creating industries more competitve globally. Are these private or public resources? While produced from private lands, it is still not totally clear to me.
The irony is that having the ability to export will likely push nat gas prices higher which will better incent renewables.
Rising NG prices will also boost storage. What we need right now are better storage options. With wind at 6c and solar rapidly dropping we need affordable fill-in other than NG.
Wow. This article was well written and pulled together all the essential elements on the supply and demand sides of the equation. It still kind of comes down to technical consideration, i.e. geology and transport of fluids through porous media. Shale gas is not just sinking a well and watching the stuff come out over time for big profits. It requires tons and tons of capital appropriated to drill, fracture, produce and process. Since the decline curves are so steep, the producer needs to get the gas out to market and burned as quickly as possible to pay off investors. That’s why liquid natural gas (LNG) for overseas sales and nat. gas for transportation are so desperately needed for this flywheel.
A possible and hopefully improbable environmental sticking point besides the air and groundwater issues is liability associated with the Comprehensive Environmental Liability and Recovery Act (CERLA or Superfund). Leaseholders (property owners surrounding well fields) may be liable for potential environmental damage (again, potential). Hopefully not. It would be interesting to know this if this is the case.
There is no evidence whatsoever that greenhouse gas emissions from fracking could cancel out any advantage that natural gas has over coal. They have been fracking in the Barnett shale for 30+ years. State and federal agencies have conducted thousands of leakage tests and this has been proven false over and over again. Even liberals like Obama and Kerry believe this. We have greatly reduced are CO2 emissions by switching power plants from natural gas to coal. If we end coal use for power generation we will have much cleaner air. Then we can transition from natural gas to renewable energy as technology advances. Articles like this which make false misrepresentations about natural gas are a welcomed by the coal industry and are helping keep it afloat which is toxic for the environment.
That’s wrong Tom. Articles like this do not alter the fact that coal is no longer economic and that the industry is terminally ill. But the fact that NG spews only 44% less CO2 than coal offers up a slim advantage. Ignore the accidental and purposeful releases and flaring if you prefer, but the sooner we come to grips with the imaginary nature of the glut the better. Why should the US fracture its geology and bear the risks just so a couple multinationals can profit?
Renewable energy technologies are as advanced as they need to be to displace fossil fuels. Why do you prefer to delay the transition?
Tom, you could be right about the specific case you refer to, and the specific geology of the site together with responsible management may be avoiding stray methane emissions in the Barnett shale. This does not however prove that leakage is not occurring from other sites with less favourable geology or less careful operators.
Your argument is rather like saying “automobiles are safe, I know, I have driven one for 30 years and never crashed yet!” – the anecdote does not prove the general case as many other people have crashed in that time.
What is clear is that it takes a lot of energy to fracture rock to release gas, and that in situations where a significant proportion of the released methane escapes through aquifers and around the pipe rather than being collected, that the greenhouse impact is much higher than from a simple traditional gas well with no leakage.
If we use natural gas on a temporary basis to fill in around wind and solar generation then we can tolerate some leakage while we wait for better electricity storage solutions. Smart would be a strong program to minimize the leakage.
Burning NG as a direct substitute for coal does us no good.
I’m sure you’re right – but for some reason I needed to look further into the issue. Here’s a industry friendly website on the Barnett History:
http://www.shaledigest.com/documents/2010/History%20&%20Development%20of%20the%20Barnett%20Shale%20by%20Dr%20Ed%20Ireland%2012-6-2010.pdf
It’s sponsored by the Barnett Shale Energy Education Council so we’re not talking about a bunch of tree hugging liberals here. Here’s a quick history timeline:
1982 – well sunk into the shale – diddley squat came out of the formation for the next 15 years. Number of wells ranged from 1 to 411
1997 – Water fracturing begins. number of wells increases to 570 in two years.
1999 – Refracture simulation. Well count increases to about 3,000 by 2003
2003 – Horizontal fracking begins. well count increases from 3,000 to 6,600 by 2006
2006 – Simo-fracking begins. This is simultaneous fracturing which is the big messy thing we’re talking about here. Well count goes from 6,600 to about 15,000 (as of 2010) its been slowing down since 2010.
So I’d say “fracking” didn’t begin in earnest until 2003 and didn’t really begin until 2006.
A concern about methane leakage, besides of course climate change acceleration contribution, is near surface ozone via methane photo-degradation. Not to mention water supply problems.
I read all of the comments below. Here’s my take. It’s a fact that low natgas prices are leading to the closure of coal plants. It’s also a fact that coal plants pollute more, including small particulates, mercury and CO2. So, therefore, environmentally conscious folks should be happy with this – especially since a closed coal plant will never reopen due to more restrictive regulations. The decline in coal will almost certainly be permanent.
We also know that more information comes to light everyday that leads us to believe that the natgas boom – and associated low prices – cannot be sustained. It’s a fact that fracking causes some big problems and we can certainly expect stronger regulation in the future. We also know that the low natgas prices are diverting investment from drilling wells to opening up the export market. The era of low natgas prices is coming to an end – and higher prices will dampen demand.
So what’s next? Renewables? Contrary to what’s happening in the fossil fuel industry, both wind and solar are expanding rapidly and are experiencing economies of scale price reductions. (Another fact)
Start to watch at 7 minutes: why fracking will pollute groundwater http://www.youtube.com/watch?v=OnlScyEH7_Y
In spite of a growing natgas market the industry suffers from overproduction and low prices. As the price recovers you will see a rebound in drilling. Why? There will be more money in it.
Higher prices will bring more drilling.
They will also bring more wind and solar. Locking down low prices rather than getting jerked around by volatile fuel prices is attractive to utilities.
I believe Natural Gas is a good thing. The reason land values is going down is due to the effects of the recession. The other reason for the value is Fraud by the extreme environmentalist who control property assesments. Those are the only 2 reasons values are going down down down.
The recession ended long ago and real estate prices are climbing in most of the country.
Extreme environmentalists control property assessments?
Perhaps sniffing too much gas has cooked your brain….