Are we in the middle of a Shale Gas Bubble? Two new reports say ‘Yes’

• February 20, 2013
A US shale gas drilling well

Creative Commons: Justin Woolford, 2011

In his 2012 State of the Union address earlier this month, US President Barack Obama made expanding natural gas drilling a centrepiece of his ‘all of the above’ energy policy. In particular he repeated this popular talking point, one he has continued to use at least fourteen times in the past 10 months.

“This country needs an all-out, all-of-the-above strategy that develops every available source of American energy – a strategy that’s cleaner, cheaper, and full of new jobs. We have a supply of natural gas that can last America nearly one hundred years, and my Administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade.”

Unfortunately, it seems those 100 years will be over much sooner than expected.

Two new reports from the Post Carbon Institute and the Energy Policy Forum argue that the boom in natural gas hydraulic fracturing is only temporary, and could quickly collapse. How bad is it? Here’s the report summary on

“The Reality is that the so-called shale revolution is nothing more than a bubble, driven by record levels of drilling, speculative lease & flip practices on the part of shale energy companies, fee-driven promotion by the same investment banks that fomented the housing bubble, and by unsustainably low natural gas prices. Geological and economic constraints – not to mention the very serious environmental and health impacts of drilling – mean that shale gas and shale oil (tight oil) are far from the solution to our energy woes.”

Drill Baby, Drill”, the report from the Post Carbon Institute, looks into the rates of production and development at 65,000 active shale gas wells across the United States. Author J. David Hughes discovered that while shale gas production now accounts for nearly 40% of all US gas development, production has plateaued since December 2011.

Additionally, much of the shale gas development is highly localized, with 80% of production happening on 5 ‘plays’ (or drilling fields). Keeping the plays profitable  requires massive injections of capital–an estimated $42 billion annually—to drill the 7000 wells that will help maintain production levels.

Map of output reduction in shale gas wells

Courtesy: Post Carbon Institute, 2013

Drill Baby, Drill acknowledges that increased shale gas drilling has given the United States some ‘breathing room’ as it attempts to wean itself off foreign oil, the idea that these technologies can provide endless growth and allow the U.S. to become a substantial net exporter of energy, are entirely unwarranted and frankly, impossible.

Slippery Math on Wall Street

The Energy Policy Forum looks at the bubble from a financial perspective in its report “Shale Gas and Wall Street’’. Author Deborah Rogers, who has her own background in finance and accounting, reveals that the shale mergers and acquisitions accounted for $46.5 billion in Wall Street investment during 2011. Investors, eager to increase returns, pushed up production to the point where the US natural gas supply exceeded demand by a factor of four.

Rogers reports:

“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. …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.”

All together, the research from both reports points to financial and industrial practices dangerously similar to the ones that created the pre-2008 housing market. The only question that remains is whether the shale industry and its financial backers can deflate the shale bubble before it bursts.

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