AKRON, OH – Proponents of shale-gas drilling have said the United States sits on the verge of energy independence amid surging output and what has been described as a 100-year supply of natural gas.
Count Texas-based financial consultant Deborah Lawrence Rogers among those skeptical that the shale energy boom is real or sustainable — fiscally or environmentally.
Rogers, part of a small movement gaining more attention over its views about shale drilling’s long-term prospects, sees a short-term bubble that will bring higher economic and environmental costs.
“There’s a lot of smoke and mirrors here,” she said of America’s shale frenzy in a recent interview with the Beacon Journal.
The drilling industry has overstated the number of jobs shale exploration will create, the volume of natural gas to be produced and the safety of drilling, Rogers contends.
Plenty of natural gas and liquids exist in Ohio’s Utica and other shale formations, Rogers said, but the real question is how affordably the commodities can be extracted.
Projections of huge gas supplies provide a false and unrealistic picture because they don’t adequately account for the cost of production declines of nearly 40 percent a year that come with drilling in shale, she said.
Production from shale wells falls off dramatically after the first year, Rogers said, and drillers will have to spend tens of billions of dollars annually to boost production to make up for those declines.
American energy companies would have to spend $42 billion to annually drill 7,200 new wells to maintain current production as individual shale well volumes drop, she said.
She questions whether companies are overstating the productivity of wells and the size of their reserves.
Rogers says the only way to fight shale development is on “an economic basis.”
There are big questions surrounding the financing of shale operations; the shale drilling mathematics do not add up, she said.
According to Rogers, shale wells show high depletion rates. That means they tend to produce gushers that tail off quickly. Early results look good, but the staying power of the shale is weak.
Wells in the oil-rich Bakken shale of North Dakota have declined by 69 percent in the first year and by 94 percent after five years, according to studies.
Wells drilled before 2012 in the top U.S. shale gas areas indicate an average field decline of 37 percent a year, according to data that geologist J. David Hughes of the Post Carbon Institute compiled. That includes 47 percent in the Haynesville shale, which includes part of Louisiana, and 29 percent in Pennsylvania’s Marcellus shale.
Last May, Rogers told a Senate committee that every shale gas region in the United States has already peaked and is in decline, except for the Marcellus shale of Pennsylvania. (Ohio’s Utica shale was not part of her analysis because it is so new.)
In response, the industry says decline rates the skeptics are citing already have been incorporated into supply estimates.
In order to keep production levels consistent, energy companies are forced to keep adding new wells, Rogers says. Shale wells can cost from $5 million to $10 million each.
Shell CEO Peter Voser, in early August, reported that the shale revolution has been “a little bit overhyped.” His comment came after his company announced a $2.1 billion write-down, mostly due to poor hydraulic fracturing results in the United States.
The company did not identify where its efforts failed, but an official said the shale’s production curve “is less positive than we originally suspected.”
More companies have expressed interest in selling shale acreage or in forming joint ventures to share the financial risk, Rogers said.
Chesapeake Energy, Devon Energy, EV Energy Partners and Anadarko Petroleum, all original players in Ohio’s Utica shale, have indicated they are interested in selling all or part of their leases or in not developing their Utica holdings.
Rogers says companies have been hurt by recent low prices for natural gas. Prices as low as $2 per thousand cubic feet, in 2012, hurt energy companies and their stockholders financially. Prices inched back above $4, only to drop back to today’s $3.65 per thousand cubic feet. It was as high as $10 in 2006 and 2008.
Depressed prices are good for consumers, leading to lower energy bills, but not so good for stockholders in energy companies.
Free cash available to energy companies has been significantly negative, and that’s made shale financing more difficult, Rogers said.
Rogers said Ohio’s Utica shale is deeper and more expensive to tap, creating a break-even price for drillers here at about $10 to $11 per thousand cubic feet of natural gas. That is similar to the break-even point for the Haynesville shale in Texas, Louisiana and Arkansas, she said.
Marcellus shale in Pennsylvania is shallower and less expensive to tap. Its break-even price for drillers is $4 to $5 per thousand cubic feet, she said.
The break-even point in the Barnett shale in Texas is $6 to $7, she said.
“The recent (2012) natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analysts’ production targets,” Rogers wrote in a February report, “Shale Gas and Wall Street.”
“Further, leases were bundled and flipped on unproven shale finds in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downtown of 2007,” she wrote.
Rogers says she is convinced that shale gas and liquids will be depleted in 25 years, not 100 years as the industry says.
The industry has said wells might produce for up to 60 years or longer. Wells might be refracked in the future to boost production totals. That would require additional water for fracking and would produce additional liquid wastes for injection disposal.
Horizontal wells with hydraulic fracturing, or fracking, tap only 5 percent of the available underground resources, experts have said.
Rogers says she is convinced that Wall Street drove the shale drilling frenzy by overestimating the amount of well returns, which resulted in prices lower than the cost of production for operators who bought drilling leases.
She estimates that drillers overestimate well production by a minimum of 100 percent to a maximum of 400 to 500 percent.
A study from the U.S. Geological Survey confirmed overstated well figures.
As a result, these operators borrowed millions of dollars on assets that either don’t exist or might never be commercially viable to extract, Rogers says.
Wall Street also profited greatly from energy mergers and acquisitions and other transactional fees, according to Rogers.
The investment banks did nothing illegal, she said. Her gripe is that the banks knew the shale wells weren’t performing close to projected numbers.
“Everything they did before the mortgage-backed securities bubble burst was legal, too,” Rogers said. “And we saw the consequences of that.”
Eventually, American consumers are likely to be affected by a shale gas bubble, she said.
Rogers got involved in looking at the shale industry in late 2009, after a driller put 21 wells around her Texas farm.
She said few people paid attention to her concerns at the time, but that has changed and the financial press has begun raising more questions about shale drilling.
“We’ve made an impact and people are listening,” she said. “Why our arguments haven’t gotten more attention is a good question … Shale is a very emotional issue, and that makes it hard to fight it.”
“I wish shales worked. It would be fantastic. But they’re not. They don’t make money. Someone is going to pay, and we all know it’s not the industry.”
Bob Downing can be reached at 330-996-3745 or firstname.lastname@example.org. ___