Salon.com published an article on Monday, April 1, 2013 titled Fracking: The next bubble?. The article includes an intriguing section that almost qualifies as a smoking gun in a somewhat convoluted way. The article suggest that the low natural gas prices that have prevailed in North America during the period from mid 2008-2013 have been partially due to financial manipulation. Here is a sample quote:
She explores both of these findings and their implications in a new report, “Shale and Wall Street: Was the Decline in Natural Gas Price Orchestrated,” which was released in February.
Rogers reveals how Wall Street drove the shale gas drilling frenzy by overestimating the amount of well returns, which resulted in prices lower than the cost of production for the operators who bought the drilling leases. Consequently, these operators borrowed millions of dollars on assets that either don’t exist or may never be commercially viable to extract. Wall Street then also profited greatly via mergers and acquisitions and other transactional fees.
Reading that article gave me a flashback sensation. Fortunately, Atomic Insights includes a decent search feature, so I was able to find out that I had written several articles on a similar theme.
Aside: When you do most of your writing during the wee hours of the morning before going to a day job, you can sometimes forget what you wrote and when you wrote it. I am so thankful for computers and search engines. End Aside.
For example, in November 2012, I published a post titled Why are North American natural gas prices so much lower than rest of world? that included a discussion with a financial analyst who claimed that the US had a 600 year supply of natural gas. At the time, I suggested to him that natural gas suppliers were engaging in what amounts to a price war to drive out effective competition in anticipation of being able to raise prices later.
I did not realize at the time that the analyst with whom I was conversing might have a more direct interest in pumping up the volume on shale gas development.
From the Salon.com article, I clicked on a link that led to even more details about the financial industry’s participation in the shale gas bubble. One of the more sobering items found at Shalebubble.org is a report titled Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated. It is scary reading for anyone who recognizes that energy is perhaps more important to the American economy than housing; finding manipulation in that market has the potential to be even more damaging to the economy than what most Americans experienced in 2007-2008.
It is highly unlikely that market-savvy bankers did not recognize that by overproducing natural gas a glut would occur with a concomitant severe price decline. 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. The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions.
There is one facet of the story that Ms. Rogers misses. The precipitous decline in natural gas prices in the United States has had a major negative impact on the Nuclear Renaissance that was in full swing up until 2008. I cannot imagine that market-savvy petroleum company decision makers did not recognize the threat to their business posed by a nuclear industry revival. I continue to suspect that at least some players in the great game took purposeful action to deal with the imminent threat of rapid nuclear plant construction.
When natural gas prices collapsed to levels not seen since the mid 1990s, nuclear plant construction projects were – not surprisingly – shelved, despite the fact that large construction projects are more economical when both energy prices and interest rates are low. Here is a quote from a recent Ken Silverstein (@Ken_Silverstein) column in EnergyBiz titled Eyes Wide Open to Nuclear Power, who also does not seem to recognize that the price collapse might have been orchestrated to purposefully handicap a significant, long-term competitor.
The so-called nuclear renaissance got its wind about a decade ago. That’s when the scientist and energy policymakers started to give the early warnings about global warming. It’s before the whole shale gas rush and it’s before coal started getting clobbered. Until recently, many people were willing to give nuclear energy a fresh look. After all, the fuel form is relatively emissions free and the uranium used to fire the reactors is ample.
The widely repeated myth that shale gas abundance is a long term prospect rather than a short term blip has worked to the great advantage of the natural gas suppliers in their effort to capture market share. It has succeeded in slowing the construction of nuclear power plants that can generate reliable electricity for many decades without purchasing any natural gas. In one unusual circumstance, the natural gas glut has contributed to an ill-advised decision to permanently shut down a well-maintained nuclear plant with more than 20 years remaining on its operating license.
The smart money in the game that Ms. Rogers describes is held by the patient oil and gas majors. Several of them have purchased enough US shale leases to sustain the boom long enough to push nuclear plant construction projects onto the back shelf where they will take many years to move to an operational status. Major oil and gas companies like ExxonMobil and Chevron have plenty of staying power.
SEC rules do not require them to write down the value of their leases if they use internal models to predict higher prices at the time they plan to exploit the resource. They are in no risk of going bankrupt. They can simply hold onto acreage to drill in better times – which for oil and gas companies are those times when all of the rest of us are suffering under the burden of excessively high prices.
In conclusion, my answer to the question I posed in the headline is “all of the above”.