The Shale Gas Boom: Energy Solution or Just Another Bubble?

All this mat­ters because Washington may be mak­ing long-term pol­icy deci­sions for us based on false, or at least shaky, assump­tions. When fed­eral reg­u­la­tors take an overly opti­mistic nat­ural gas indus­try at their word, they risk upping this country’s fos­sil fuel addic­tion and ensure that in due time we’re left stranded again in only a few short years with­out a real­is­tic solu­tion to our energy and cli­mate change woes.

Energy mar­kets as a whole swing like a pen­du­lum, but we can still attempt to untan­gle the mech­a­nisms that have anointed nat­ural gas as energy-savior-du-jour once again—mechanisms that can be as tough to pin down as the odor­less, col­or­less gas itself.

How much gas is there, really?

There is deep uncer­tainty about the amount of nat­ural gas in the ground and what it will ulti­mately cost to extract it. Despite this, drillers typ­i­cally oper­ate on unwa­ver­ing opti­mism that bor­ders on hubris: The com­mon refrain about oil and gas men (they are indeed almost always men) is that they are “often wrong but never doubting.”

After attack­ing any­one who ques­tioned the irra­tional exu­ber­ance sur­round­ing shale gas, these oil and gas men have had to reckon with sev­eral new batches of data—first from the U.S. Geological Survey and then from the Energy Information Administration (EIA)— that offer a more sober pic­ture of this resource. Countless mar­ket ana­lysts and news venues (like here, here, here, and here) have also started cor­rob­o­rat­ing doubts about the industry’s prospects and its early optimism.

The source of the industry’s tank-half-full opti­mism isn’t base­less: No one can deny that there is a hel­luva lot of gas in this coun­try. But there isn’t nearly as much as the indus­try and fed­eral reg­u­la­tors ini­tially predicted—despite the fact that President Obama and oth­ers con­tinue to cite overly opti­mistic fig­ures. It’s also patently obvi­ous that drillers have mis­cal­cu­lated how much of this gas can be extracted with­out going bank­rupt. Even long­time cham­pi­ons like Chesapeake have started scram­bling to cut their drilling way back.

These so-called shale plays may dry up a lot faster than planned or com­pa­nies (and investors and con­sumers) may get taken to the clean­ers try­ing to tap these resources. While com­pa­nies have pre­dicted that the wells will pro­duce gas for as long as 50 years, inde­pen­dent ana­lysts say that, for many wells, the real num­ber may be closer to seven.

How hard is it to get out of the ground, anyway?

Hint: It’s not easy. The oil and gas indus­try doesn’t like to dis­cuss is how hard it is to find the best places to drill for shale gas. Starting about a decade ago, drillers began offer­ing investors some lofty rhetoric about the pro­duc­tiv­ity of shale wells. They argued that they could pump this stuff in a “man­u­fac­tur­ing model” whereby they could drop a well any­where in a drilling zone (called a “shale play”) and it would be equally pro­duc­tive (see also here [PDF, slide 3] or here).

It is now clear that not all areas of shale play per­form the same. Investors, small com­pa­nies, and some landown­ers who expected sky-high roy­al­ties have been disappointed—even in the heart of drilling coun­try. A close look at a recent study from Louisiana State University [sub. req.] shows that the oil and gas indus­try woe­fully over­in­flated its pre­dic­tions for how much gas the nearby Haynesville shale will pro­duce. (Check out other smart analy­sis on this by energy ana­lysts Art Berman, Bill Powers, and Chris Nedler.)

Many drillers wind up in a tough spot because the con­tracts they signed with landown­ers require them to drill wells quickly—if they don’t, they lose their leas­ing rights. Many of these com­pa­nies are deeply in debt; in fact, some of them are so lever­aged that they’re rais­ing eye­brows among fed­eral and state reg­u­la­tors, who ques­tion whether com­pa­nies broke the law by pos­si­bly pro­vid­ing inflated esti­mates to investors for the amount of gas that they could prof­itably bring to market.

Can any­body make any money off of it?

That all depends on the jumpy price of nat­ural gas: If it’s too low, like it is now, com­pa­nies can­not make money drilling for it. They start tak­ing dras­tic steps, like burn­ing it on site rather than deliv­er­ing it to market.

Even the audit­ing com­pa­nies that work for the oil and gas indus­try cite prob­lems. In September, Ryder Scott, one of the biggest firms that checks energy com­pany books, reported [PDF] that only 16 per­cent of the 53 oil and gas com­pa­nies it reviewed were fol­low­ing new fed­eral rules that dic­tate how com­pa­nies are sup­posed to cal­cu­late their esti­mates for investors and the pub­lic. The SEC needs only “sim­plis­tic math” to chal­lenge the esti­mates being put for­ward by some of these com­pa­nies, Ryder Scott concluded.

Eternally opti­mistic, oil and gas com­pa­nies say that they will fig­ure out new tech­nolo­gies that can help make gas wells more pro­duc­tive and prof­itable. They point to the enor­mous vol­umes of gas that they’ve already pro­duced as evi­dence of their success.

But the ques­tion for con­sumers is whether low nat­ural gas prices are sustainable—or even ben­e­fi­cial. In the short term, cheap gas prices are good for the con­sumer but Wall Street investors and com­pa­nies may go belly up. But if gas prices start rebound­ing and drilling com­pa­nies begin mak­ing money, it means gas prices for buy­ers will start rise. That’s bad news for con­sumers or utilities—especially those tied to power plants that spent bil­lions to build nat­ural gas elec­tric­ity plants rather than, say, invest­ing in sus­tain­able and sta­ble solar or wind. This sort of nat­ural gas pric­ing whiplash has hap­pened plenty of times before.

Click here to read the rest of this arti­cle at Grist.org.