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.
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.