Well this boom didn’t take long to go boom. The politicians and mega-corp CEOs like Aubrey McClendon promised riches and hundreds of thousands of jobs for the poor people in rural Pennsylvania. We didn’t need to tax them or put any safety regulations on their fracking. Natural gas is selling for $2.17 per MMBtu this morning. It costs approximately $8 per MMBtu to extract shale gas through fracking. Hmm. What do you think is going to happen? How about bankruptcies, writeoffs, massive losses, no new jobs, no new riches, and contaminated pools of fracking solution left behind for the fine people of rural PA. The Wall Street slime and weasels like McClendon are still selling the leases to clueless dupes, promising them riches beyond their dreams. I’ve learned that whenever McClendon opens his big mouth, be sure that the exact opposite will occur. This douchebag borrowed millions to invest in his own stock in 2007 before the collapse and ended up wiping out almost his entire net worth.
This slow motion collapse will pick up speed in the next year. I love the name Marcellus. Just don’t say WHAT AGAIN.
Marcellus Shale: A house of cards
The gas industry scored a major public relations coup in 2009 when it commissioned two Pennsylvania State University professors to extol its position in a research paper published by the university.
Essentially, the state was persuaded to give up a finite commonwealth asset, worth hundreds of billions of dollars, in return for unsubstantiated promises of jobs and taxes from drilling service industries. Only a small portion of the promised “multiplier” benefits have materialized. A study by Penn State Extension and Pennsylvania College of Technology looked at how lessees in Bradford and Tioga counties spent their bonuses and royalty money in 2009. Only 15.3 percent of how they used this income would have added jobs in the state.
Gas corporations compete to lease acreage, leases which are time sensitive and require active exploitation within a few years. That, and satisfying investors with production, has caused a rush to drill. The state, to get its promised rewards, became a partner in expedited drilling. The industry quickly overproduced its market which has caused the price of gas to plummet.
Shale gas is expensive to exploit. A 2008 Bank of America NYMEX analysis put the average break-even point for drillers at $8 per thousand cubic feet which is more than three times its current market value. With gas value decoupled from its high production cost, gas companies are experiencing large negative cash flows, $6 billion for Chesapeake Energy alone last year. There is a distinction between technically recoverable and economically recoverable natural gas. At the moment, it is likely that none of the gas in Pennsylvania’s Marcellus shale is economically recoverable.
Unable to make money from selling gas, corporations rely on their investors and the sale of assets to carry them through. Investors count on in-ground reserves to underpin their confidence which is problematic because estimates vary wildly and there is suspicion of hype by corporations. Arthur Berman, a geologist and investment analyst, has been warning that some of these investments are already under water.
The need to book in-ground reserves has created a commodity market for shale acreage independent of the price of natural gas. Selling in-ground assets to other corporations has often become the core business. Aubrey McClendon, Chesapeake Energy’s CEO, bragged that flipping acreage is much more profitable than selling gas. Foreign companies, some state owned, helped drive this market, investing $56.4 billion dollars last year. Sven Del Pozzo, a senior equity analyst at IHS Inc. worries that this market, which is fetching around $15,000 per acre, has become a bubble.
Drilling rigs are beginning to leave the “dry gas” region of northeast Pa. in flight to “wet gas” regions. They won’t all go because of the need to secure leases and show production to anchor stock prices. Gas production will continue and even increase in the short term as already-drilled wells are connected to the distribution network.
Small business owners who have invested in providing services to the drilling industry believed in the decades of prosperity that their government, their university, and their business leaders promised. Now, just two-and-a-half years later, they are in great danger of being hurt.
Jon Bogle is a Professor Emeritus at Lycoming College. A founding member and first president of the Responsible Drilling Alliance in Williamsport, Pennsylvania he has testified before state legislative committees on shale gas economics and environmental issues.