Fracking – energy revolution or skillfully marketed mirage?

The New York Times published an article on Sunday, June 26, 2011 titled Insiders Sound an Alarm Amid a Natural Gas Rush. The article quotes a number of emails from natural gas industry insiders, financial analysts that cover the gas industry and skeptical geologists to produce a number of questions about the long term viability of an increasing dependence on cheap natural gas from hydraulic fracturing. The message is that the gas industry has been engaging in hyperbole regarding its capacity to expand production at current prices to meet market demands.

The gas industry has some extremely savvy leaders that recognize that utility executives can be lulled into a false sense of security by a relatively brief period of low natural gas prices.
Though the technique of injecting large volumes of high pressure water and chemicals into shale formations will result in the trapped natural gas being released, the people quoted in the NY Times article do not agree that the technique magically produces low cost gas in unprecedented abundance.

“Our engineers here project these wells out to 20-30 years of production and in my mind that has yet to be proven as viable,” wrote a geologist at Chesapeake in a March 17 e-mail to a federal energy analyst. “In fact I’m quite skeptical of it myself when you see the % decline in the first year of production.”

“In these shale gas plays no well is really economic right now,” the geologist said in a previous e-mail to the same official on March 16. “They are all losing a little money or only making a little bit of money.”

Around the same time the geologist sent the e-mail, Mr. McClendon, Chesapeake’s chief executive, told investors, “It’s time to get bullish on natural gas.”


Aubrey McClendon, whose name is not terribly familiar to people outside of the energy industry, has an enormous financial interest in encouraging customers to become addicted to natural gas so that they will keep buying even if the price shoots up – like it did in the period from 2000-2008. During that time McClendon and his company rode a wave that resulted in growing a company from tiny to huge based on debt-financed investments in leases and drilling rigs designed to produce gas in the midcontinent region of the US. A high portion of the company’s wells were stimulated with hydraulic fracturing.

When the price of natural gas collapsed in 2008, mostly as a result of the contraction in demand caused by the financial crisis and resulting economic recession/depression, McClendon nearly lost control of his company. He had to sell “substantially all” of shares at a dramatically lowered price in order to pay off creditors and meet margin calls.

No U.S. chief executive officer has bought more of his own company’s stock in recent years than McClendon, even as the shares reached all-time highs. His appetite for Chesapeake stock made him “a darling of Wall Street,” Tulsa money manager Jake Dollarhide said. But his purchases were made on margin, meaning he used borrowed money. As the value of the stock fell, McClendon was forced to raise cash to meet margin calls. Recent losses — Chesapeake shares have plummeted 60 percent in the past three weeks — left him unable to fulfill those requirements.

Read more: http://newsok.com/market-slide-wipes-out-ceos-chesapeake-holdings/article/3310107#ixzz1QSst9NnL

McClendon responded vigorously to the NY Times’s suggestion that the gas revolution was more mirage than miracle in a lengthy letter to Chesapeake Energy employees that was published on the company’s public Facebook page. (Note: The timing of this letter with regard to the NY Times article is telling. The article appeared in the Sunday edition of the Times on June 26, 2011. The letter to employees included a time stamp indicating that it was released at 8:37 pm on the same day while the Facebook page indicates that it was posted to the world by 11:27 pm. In other words – there is no rest for the weary in the Internet era.)

McClendon’s letter blamed the NY Times article on environmental activists that proclaim a desire to supply all of the US energy needs from wind and solar energy. It also issued a call to action for Chesapeake Energy employees:

We hope that every Chesapeake employee can be part of our public education outreach. At more than 11,000 strong, we are an army of “factivists” – people who have knowledge of the facts and the personal knowledge and ability to spread them. You can do this by talking to your families, friends and others in your spheres of influence (schools, churches, civic organizations, etc) about the kind of company you work for and the integrity of what we do every day for our shareholders, our communities, our states, our nation, our economy and our environment. You don’t have to be an expert to stand up and tell folks that Chesapeake is committed to doing what’s right – and that commitment is expressed every day by you and your colleagues across the company.

You can also get involved by joining Chesapeake Fed PAC, our political action committee. Our opponents are extremely well funded and organized. We need to make sure our voice is heard in Washington, DC and with elected officials who are making decisions that affect our industry, our company and our ability to operate in the many states in which shale gas and oil have been discovered.

That letter stimulated me to produce Atomic Show #170 – Partnerships between Chesapeake Energy and Environmental Groups. That show includes an audio clip of a talk given by Tom Price to the Colorado Oil and Gas Association during Energy Epicenter 2010. At the time of the talk, Price was introduced as Chesapeake’s Senior Vice President for Corporate Development and Government Relations. (I say it that way because there is no telling if that statement will remain true for much longer.)

After describing how Chesapeake has 125 active drilling rigs and how it has developed a “swat team” with more than 100 employees that works with environmental groups to produce legislation designed to slow the development of new coal fired power plants and to hasten the closure of existing coal plants, Tom Price said the following:

“It’s been said before, but the demand side of the equation is extremely important right now. I mean this really is a zero sum game. I think that there are a number of very progressive utilities out there that recognize the challenges that they are facing with regard to climate change, but the Transport Rule, Clean Air Act and various others.”

I remain convinced that there is a market battle going on between natural gas and nuclear energy. The gas industry has some extremely savvy leaders that recognize that utility executives can be lulled into a false sense of security by a relatively brief period of low natural gas prices. That false sense that gas prices are low and will remain low can lead those executives and their boards to delay investments in new nuclear power plants just at the time that they should be investing aggressively to move the projects to completion. I am not sure that nuclear industry executives are quite so savvy about the sharp elbowed ways of the competitive energy industry.

Aside: By my way of financial analysis, the best time to invest in capital intensive construction projects is when interest rates are low, skilled labor is widely available due to high unemployment, construction commodity prices are low due to low demand and governments are willing to offer incentives for high employment construction projects. End Aside.

Note: As further evidence that there is no rest for the weary in the Internet age when there is an important topic of conversation, Atomic Show #170 was published at 04:32 am EDT on June 27, 2011 and this post will have a time stamp that is earlier than 06:00 am.

About Rod Adams

27 Responses to “Fracking – energy revolution or skillfully marketed mirage?”

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  1. DV82XL says:

    Fracking is under a lot of pressure from environmental groups and has been halted in several places. Here in Quebec it was largely because of leakage of methane from wells. I really wonder, given that the Greens are all over this that it’s going to turn out to be as big as its promoters hope. The fact that they are on the defensive doesn’t bode well for them.

    If indeed they have been behind the FUD against nuclear, (and I don’t doubt they are in large part) then they are reaping what they have sown if the public is in no mood to support risky energy projects.

    • katana0182 (Dave) says:

      Personally, I suspect the green strategy is “attack whatever energy source appears to be winning”, whether nuclear or natural gas or whatever.

      Some greens, in fact, think that they ought to bring about economic collapse in order to save the planet. Don’t believe me? I have links.

      • Rod Adams says:

        @Dave – I remain convinced that the folks that you are describing are either a fringe, powerless segment or they are cleverly disguising their real motive for actions that lead to expensive energy.

        For energy suppliers who are producing at their maximum capacity already, the only way to increase revenue is to drive up the price per unit of energy. Even for those who could increase their capacity with capital investments, a high market price strategy is often far more profitable than increasing supply just to lower the sales price.

        I am a cynic when it comes to humans and money, especially when talking about that segment of the human population that has proven itself to be nearly completely motivated by money. Heck, they are so focused on money that they publish a lot of words indicating that they believe that maximizing the financial return on investment is the only rational way to make decisions.

      • Joel Riddle says:

        There you go describing Exelon to a tee again in that 2nd paragraph of your comment, Rod.

    • Anonymous says:

      The USA has near zero environmental or labor protections. Nukes do not play a significant energy role simply because there are cheaper alternatives from coal to renewables.

  2. Joel Riddle says:

    Rod,

    I don’t see the time stamps on your articles since the move to the new format, but here’s a 0700 am comment.

  3. Hi Rod. Here’s my take on this from my knowledge of gas technologies from my geothermal days.

    A formation is characterized by porosity and permeability. Porosity is “how many holes” (that can contain gas or liquid) and permeability is how well the holes are connected. Permeability determines how fluid can flow. Shale has very low permeability and acts as a barrier between other types of rocks that contain fluid.

    My feeling about shale is that fracking is the major SOURCE of permeability, while in other types of rocks, fracking ENHANCES OR RESTORES permeability. Since there is no significant of permeability “out there” in shale to allow gas to flow into the well, I always thought a shale well would run out quickly. As soon as the gas in the frack-affected area runs out, the well would be finished. There’s too little permeability in the shale to allow gas from further away to move into the well. That seems to be what is happening. They say the wells just decline steadily, instead of reaching a steady state. This is what I would expect.

    My knowledge is many years old (left geothermal energy many years ago and moved to nuclear) so I defer to more knowledgeable people for further comments.

    • John Englert says:

      Sounds similar to what happened at Plowshare sites such as the Project Rulison UGT in Colorado. They got a pulse of gas (along with tritium) then it tapered off. Gas companies in Colorado are asking the DOE if they can drill closer to this site. I would like to see them do it so we could see if they can detect any of the fission products or unburned fuel from the test.

  4. Anonymous says:

    Wind, heat pumps, solar, and conservation (city & family planning) are easily meeting the futures energy demands.

    Oil, Gas, Coal, Nuclear, & SprawL are unnecessary prescriptions for pain either by accident, natural disaster, WAR, climate change, market speculation, or peak supply.

    • Joel Riddle says:

      Anonymous,

      Conservation is obviously not a source of energy. It is, however, a smart thing to do in most cases.

      On a macro scale, efficiency can absolutely increase the overall usage of an energy supply. See the study linked here:

      http://thebreakthrough.org/blog/2011/02/new_report_how_efficiency_can.shtml

      I will grant you that sprawl is far from optimum for energy usage purposes, but sprawl is the entrenched state that is the starting point going forward for the US of A. Suburbia exists and will not be abandoned anytime soon without a whole lot of push back.

    • Rod Adams says:

      What if I do not want to conserve? Are you planning to force that solution on the entire population?

      • John Englert says:

        Not to mention that most of the people on this planet aren’t even at a level of energy use where they can begin to conserve. If we are going to advance as a society, we will be using more, not less energy. Just look at our scientific instruments such as space telescopes, tokamaks or the Large Hadron Collider (LHC).

      • Anonymous says:

        You simply will not be able to not conserve. If the consequences of your actions were properly priced.

    • katana0182 (Dave) says:

      This comment is the standard spiel of a troll (http://www.reddit.com/user/citizenplusplus) from Reddit. They’re attacking here, I see.

      • Anonymous says:

        Nuke power simply cannot grow from 15%->60% of world-wide electrical generation to replace coal due to lack of uranium supplies. There is overwhelming consensus on this issue from the DOE to the IEAE. Even France is no expanding with renewables and only maintaining its nuke infrastructure. And is scheduled to only be using half its current nuke electrical consumption by 2040.

      • DV82XL says:

        @Anonymous:

        a href=”http://web.mit.edu/mitei/docs/spotlights/nuclear-fuel-cycle.pdf”>A 2010 study challenges the assumption that the world is running out of uranium — and suggests that nuclear power using today’s reactor technology with a once-through fuel cycle can play a significant part in displacing the world’s carbon-emitting fossil-fuel plants, and thus help to reduce the potential for global climate change.

  5. Anonymous says:

    Nuke power simply cannot grow from 15%->60% of world-wide electrical generation to replace coal due to peak uranium supplies.

    • Joel Riddle says:

      Anonymous,

      I recommend you do some quick research into Generation IV reactor designs, breeder reactors, and the usage of thorium as a fertile source for some breeder designs.

      If Gen IV Reactors were not a possibility, once nuclear were to reach about 20-30% of world-wide electrical generation, the cost of Uranium would become a much greater concern than it currently is.

      However, Gen IV Reactor designs SHOULD be far enough along in their development by that point that fuel cost will still be far, far from the biggest concern regarding the economics of nuclear power.

      • Anonymous says:

        There has never been a thorium reactor built that did not require a significant amount of uranium/plutonium to keep the reaction breeding. Thorium can be an aid to the cycle, but not by itself fissionable, or even exist in the advertised super-large quantities (most of the advertized thorium supply is in the oceans).

  6. Michael R. Himes says:

    Providing more energy efficiency would seem to be secondary to venture capital driving corporate profits and stock prices. Tooth and claw infighting on Wall Street does however provide a view of how marketing “Just The Idea” needs more substance. In this case natural gas volume production is lacking.

    I have “Just The Idea” and it is free and who fights over something that “Has no value”? It is similar to distant thunder. If you can’t hear it, the lightning can’t strike you or perhaps it did and you are dead already. One can assign value if only one persieves the potential of “The Idea”. In other words, Pay attention!!!!

  7. Podargus says:

    In Australia the fracking fashion is certainly in vogue.Here it is applied to extract coal seam gas,mainly for export.

    The environmental problems are concerning.The number of wells and associated infrastructure have a large footprint.A lot of the coal lies under prime farmland and this is getting farmers as well as environmentalists quite agitated.There have also been attempts to get approval for gas mining very close to urban areas.

    In addition there are valid concerns about the effect on aquifers and the disposal of large quantities of saline water which is produced in the extraction process.

    Add this new insult to the massive disturbance caused by open cut coal mining in NSW and QLD and we have a witches brew of environmental damage all for the sake of greed and short term thinking.

  8. Joel Riddle says:

    Rod et al,

    You might want to go to the Chesapeake facebook page and see if you like my comment or have any desire to join in.

    I elicited a response of “as a matter of policy, we don’t deal in hypotheticals”.

  9. pete says:

    Amazingly, even with all this shale gas, we’re still producing less gas in the U.S. today than in 1973. The natural gas peak still is 1973 at 24.1 tcf. Coal isn’t faring much better. Anthracite peaked in 1914 and bituminous grade coal in 1990. Because the subbituminous and lignite coal that we’re increasingly mining out west is so much lower in energy density, the U.S. actually peaked in energy from coal in 1998! According to Tad Patzek, the global peak in energy from coal will be 2011, and China’s growth bubble will pop thereafter. Nuclear, yes please!

  10. Rick Maltese says:

    Have we found the crack in the frack? This is interesting the idea that the life of many of these wells could be much shorter than projected. It makes sense the idea of disturbing the ground will continuously provide methane gas. How much can the ground continue to set the methane free? It would need an ever expanding area and maybe that explains the vast number of wells being dug (drilled).

  11. Ed F says:

    Careful about biting on this story too hard. Although they work for the Independent Petroleum Association of America, Chris Tucker and Jeff Eshelman (Energy in Depth) do a pretty good job pointing out how the author of the NYT articles, Ian Urbina, really cherry-picks his facts and sources. This is exactly what Jeff Donn, the author of the AP hatchet job on nuclear, did.

  12. Rod Adams says:

    @Ed F

    I am not “biting” too hard on Urbina’s articles. You can do some searching on Atomic Insights to find that I have been beating the drum about the mirage of the hydrofracking induced gas bubble for several years.

    The facts are that the industry is temporarily able to produce gas at a relatively low cost because it is not being required to clean up after itself. Any 10 year old can tell you that it is a lot easier (cheaper) to do any task if you can walk away without cleaning up.

    That cheaply produced gas is being used to hypnotize short sighted, quarterly earnings focused executives into putting nuclear building plans on hold so that the oil&gas industry can capture market share in the electrical power generation industry.

    They like selling gas to power producers because they are price insensitive customers. If gas companies sell to fertilizer manufacturers and the price gets too high, the fertilizer manufacturer has a couple of choices not open to electricity suppliers. They can simply shut their doors for a while and wait for prices to come down. They can move production to a place with lower raw material costs.

    The big story is that even a massive fracking campaign cannot last very long. The TOTAL of proven, probable, possible and speculative natural gas resources in the US was found to be about 2170 trillion cubic feet as of the end of 2010 by the industry sponsored Potential Gas Committee. http://www.potentialgas.org/

    We use 23 trillion cubic feet of natural gas every year ALREADY. Even if we do not increase our consumption, the very last puff will be gone within the possible life expectancy of my already extant granddaughter. Americans are being sold a bill of goods, sponsored by the multinational oil&gas companies and the Independent Petroleum Association of America.

    The nuclear industry leaders are wimps that need to get some gumption and fight back.

  13. Terry Oldberg says:

    The flap over carbon dioxide emissions is a consequence from applications of the equivocation fallacy, as I point out in the peer-reviewed article at http://wmbriggs.com/blog/?p=7923 . When this is realized, the case for regulation of carbon dioxide emissions vanishes. Coal and natural gas become the cheapest of energy sources. Nuclear, wind and solar are losers as they are far more expensive. Nuclear has the added shortcoming of lacking robustness against catastrophic accidents.

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