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July 25th, 2011:

Insiders Suggest Natural Gas Producers Are Overstating Yields

American Energy Coalition - July 25th, 2011

Natural gas from shale formations might not be as easy and inexpensive to extract as natural gas companies are saying, according to the New York Times. 

The Times recently reviewed hundreds of natural gas industry e-mails and internal documents and discovered a stark contrast between what gas company spokesmen are saying publicly and what insiders are telling each other. 

In e-mails, insiders such as company executives, state geologists and market analysts voiced skepticism about gas production forecasts and questioned whether companies are intentionally overstating the productivity of their wells and the size of their reserves, according to the Times. Many of these e-mails also point out that the industry's bullish public comments contrast sharply with inside information, suggesting the possibility of a financial bubble. 

"Money is pouring in" from investors even though shale gas is "inherently unprofitable," an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. "Reminds you of dot-coms." 

"The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work," an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009. 

Company data for more than 10,000 wells in three major shale gas formations raise further questions about the industry's prospects, the Times reported. There is undoubtedly a vast amount of gas in the formations. The question remains how affordably it can be extracted. 

The data show that while there are some very active wells, they are often surrounded by vast zones of less-productive wells that in some cases cost more to drill and operate than the gas they produce is worth, according to the Times. Also, the amount of gas produced by many of the successful wells is falling much faster than initially predicted by energy companies, making it more difficult for them to turn a profit over the long run. 

If the industry does not live up to expectations, the impact will be felt widely, the Times wrote. Federal and state lawmakers are considering drastically increasing subsidies for the natural gas business in the hope that it will provide low-cost energy for decades to come. 

But if natural gas ultimately proves more expensive to extract from the ground than has been predicted, landowners, investors and lenders could see their investments falter, while consumers will pay a price in higher electricity and home heating bills, according to the Times. 

There are implications for the environment, too. The technology used to get gas flowing out of the ground -- called hydraulic fracturing, or hydrofracking -- can require over a million gallons of water per well, and some of that water must be disposed of because it becomes contaminated by the process, the Times noted. If shale gas wells fade faster than expected, energy companies will have to drill more wells or hydrofrack them more often, resulting in more toxic waste. 

The Times reports that it obtained the e-mails through open-records requests or from industry consultants and analysts who say that the public perception of shale gas does not match reality. In the e-mails, some people within the industry voice grave concerns. "And now these corporate giants are having an Enron moment," a retired geologist from a major oil and gas company wrote in a February e-mail, referring to other companies invested in shale gas. "They want to bend light to hide the truth." 

To read the Times article, click here.

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