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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