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EnergyPolicyForum

EnergyPolicyForum. Shale Promises, Shale Spin? Deborah Rogers October 2012 www.energypolicyforum.org. Timeline. June 2011 - New York Times breaks story on financial anomalies of shale gas July-August 2011 - SEC and NY AG begin investigations

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EnergyPolicyForum

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  1. EnergyPolicyForum • Shale Promises, Shale Spin? • Deborah Rogers • October 2012 • www.energypolicyforum.org

  2. Timeline • June 2011 - New York Times breaks story on financial anomalies of shale gas • July-August 2011 - SEC and NY AG begin investigations • August 2011 - USGS slashes estimates for shale gas in the Marcellus by 80% • January 2012 - mainstream financial media begin referring to shale financials as "Bubblenomics"

  3. Timeline • January 2012 - Natural gas prices drop to near 10 year lows • March 2012 - Rolling Stone breaks story on Chesapeake Energy land grab • April 2012 - Reuters breaks story on $1.5 Billion in unaccounted loans at Chesapeake • June 2012 - NGL market tanks due to overproduction

  4. Timeline • July 2012 - ITG Investment Research claims "significant portion of Chesapeake assets...have no positive value" • September 2012 - USGS and SPE issue reports exposing significant shale reserve overestimations • September 2012 - massive write downs are incurred by shale companies - "more on the way" • October 2012 - New York Times article exposing the role of large investment banks in shale gas boom and bust

  5. Difficult Question • What if the notion that shale gas is abundant is merely a perception with very little basis in reality? • Independent analysis confirms vast overestimation of reserves • Income, retail sales and wages in best counties prove below average • Stability of supply is highly questionable

  6. Why Reserves Matter • "Companies are evaluated by its shareholders...based upon the accuracy of its reserve reporting. In particular, reserves reporting directly impact the amount of capital a company can raise in the market place...Reserves are at the core of a company's ability to access the funds needed to meet these huge [drilling] needs" - Clean Skies Foundation, Industry funded group [ emphasis mine]

  7. A Recipe for the Capital Markets • Claim very high EURs • Press releases alluding to very high IP (initial potential) • Use unrealistic b-factors which distort length of well life • Point to rapid growth of production as proof of success

  8. Two sets of Economics • Field Economics - what are the costs, performance, etc.? • "Street" Economics - what do the financials need to look like to attract investment and gain access to the capital markets? • Shale = drilling for dollars in the capital markets

  9. Shale RealityAs Confirmed By USGS and SPE • Marcellus - Operators claim average EUR's of 4.2 - 5.7 Bcf. USGS average EUR's are 1.1 Bcf • Barnett - Operators claim avg. EURs up to 3.0 Bcf. USGS avg. 1.0 Bcf • Fayetteville - Operators claim avg. EURs 2.4-2.6 Bcf. USGS avg. 1.0 Bcf • Haynesville - Operators claim avg. EURs 5.0-7.5 Bcf. USGS avg 2.6 Bcf • Eagle Ford - Operators claim avg. EURs 8.5 Bcf. SPE avg. 2.0 Bcf.

  10. Shale Reality • To put into perspective how ridiculous Chesapeake's claims of 2.6 Bcf is, consider the following: of the company's 742 wells completed on the Fayetteville, only 66 have produced more than one Bcf and none have produced more than 1.7 Bcf. Chesapeake's average Fayetteville well has produced only 541 Mcf." [ emphasis mine] - Powers Energy Investor, industry publication, 2011

  11. "Proof" of Success? • Shale wells produce greatest quantity of gas or oil in first 12-18 months • Thousands of new wells drilled in the past few years all of which produce their greatest quantity of gas in the first year • Real question should be: Can shale plays maintain production levels without the need for perpetual expansion through drilling? Answer: No • Market stability will be elusive

  12. Economic Stability • Most heavily drilled areas have not experienced promised economic stability in major shale plays • Household income below state average • Retail sales per capita below state average • Weekly wages below national average • Jobs stability short lived

  13. "Manufacturing Model" DebunkedThe definition of a core county • "There was a time you were all told that any of the 17 counties in the Barnett Shale play would be just as good as any other county. We found out there are about two or two and half counties where you really want to be.” - Aubrey McClendon, CEO Chesapeake Energy, Bloomberg, 2009

  14. Source: US Census

  15. Source: US Census

  16. Jobs Creation?According to Bureau of Labor Statistics • Total direct industry jobs 2003 appr. 118,000 • Total direct industry jobs YE 2011 appr.186,000 • Net gain of 67,900 over nearly a decade • Less than 1/20 of 1% of total US labor market • Hardly a "game changer"

  17. What kind of Jobs? • Energy industry consulting firm IHS CERA estimated that the industry produced 150,000 jobs in 2011 • "...but that job count comes from the broadest possible estimate of oil jobs...it includes everyone from the roughneck...[to] a stripper serving the workers..." - Money Magazine, April, 2012

  18. Source: US Census

  19. Land Use Issues • “It is sometimes said...that 20% of [shale] wells carry a project; the other 80% can easily be uneconomic.”- Dr. John Lee, University of Houston, Architect of SEC Rule Change • "Perpetual expansion [of shale wells] cannot disguise a serious problem with the bottom line" - Platt's, December, 2010

  20. Source: Post Carbon Institute

  21. Source: Labyrinth Consulting

  22. Drilling TreadmillCity of Ft. Worth • Audited gas revenue 2008 - $50M appr. • Audited gas revenue 2009 - $19M appr. • Audited gas revenue 2010 - $38M appr. • Number of wells more than quadrupled between 2008-2010 • Four times more wells cannot keep revenues at prior levels • Revenues continued decline in 2011

  23. Health Impacts • Gas drilling contributing 42% more VOCs than all on road mobile sources combined in DFW region - Texas Commission on Environmental Quality, December 2011 • Benzene (known human carcinogen) and other VOCs detected near gas drilling sites, most harm within 1/2 mile - University of Colorado School of Public Health, 2012 • Significant fugitive emissions detected, twice the inventory given by industry - NOAA and University of Colorado, Boulder, 2012 • Gas drilling contributing significantly to ozone formation - Houston Advanced Research Center, September, 2012

  24. Environmental Degradation • "The overall landscape effects of natural gas drilling have been substantial" - USGS, 2012 • "This type of long term habitat conversion has greater impact...than activities such as logging or agriculture" - USGS, 2012 • "The evidence suggest that it may not be possible to fully restore sites..." - European Union Report, September, 2012

  25. Source: Post Carbon Institute

  26. Why an SEC Investigation? • 80% of top 50 10-K companies were issued comment letters by SEC regarding anomalies in PUD filings - Ryder Scott, 2011 • PUDs converted at "mathematically impossible" rates • Only 16% of companies could show with "reasonable certainty" that PUDs would be developed within 5 years - Ryder Scott, 2011

  27. Years to develop PUDsAccording to Oil and Gas Journal, 2010 • Devon Energy 9.1 years • Range Resources 11.8 years • Chesapeake Energy 13.1 years • Apache Corp. 15.1 years • W&T Offshore 104.56 years • None in compliance with SEC rule

  28. SEC Comments • "Therefore, at this rate of development, it will take at least 50 years to develop all of your PUDs, assuming that no additional PUDs are added during that time. Tell us how this complies with Rule 4-10(a)(31)(ii)..."

  29. SEC Comments • All proved reserves must meet the standard of reasonable certainty. Therefore, please tell us the evidence that you have that horizontal wells in this reservoir for the properties in question will produce for fifty years and in some instances longer."

  30. SEC Comments • "In regards to your response... as we stated...all proved reserves must meet the standard of reasonable certainty. While a few thousand vertical wells, a very small subset of the total wells that were drilled fifty or more years ago, have exhibited long lives, this would appear to support only the possibility that horizontal wells may exhibit lives of fifty years...By assuming well lives that only a small percentage of vertical wells have achieved, it does not appear that your reserve estimate is reasonably certain to occur. Therefore, please revise your filing to limit the reserves to well lives that are more reasonably certain to occur."

  31. Financial Co-Dependency • Wall Street Investment banks have acted as "chief cheerleader" for shale • $46.5 Billion in shale gas transactions were completed in the US in 2011 • Shale has become one of the biggest profit centers in large investment banks

  32. Energy Independence?No, just an Elitist's Game • I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 mcf." - Aubrey McClendon, CEO Chesapeake Energy • "Typically, we represent sellers, so I want to persuade buyers that gas prices are going to be as high as possible...The buyers are big boys — they are giant companies with thousands of gas economists who know way more than I know. Caveat emptor.” - Ralph Eads, Jefferies and Co.

  33. Why are the Majors into Shale? • Field Economics - what are the costs, performance, etc.? • "Street" Economics - what do the financials need to look like to attract investment and gain access to the capital markets? • None of the Majors have grown reserves in over a decade

  34. Shale Exportation • “...the Chinese are willing to pay a premium to secure North American resources necessary to feed the growing Asian economy.” - Oil and Gas Financial Journal, 2011 • “Shell has placed a big emphasis on North American gas; it’s an area of growth for us. We’ve invested something like $15B since 2004 in the onshore [sector]. What we develop here, [we’d] like to export to the rest of the world.” - Royal Dutch Shell, 2011

  35. Heading Again toward Classic Consumer Squeeze • Asian gas prices indexed to crude • 2011 sets record prices for crude internationally • Current U.S. domestic price about $3 per million BTU • Asian markets currently paying as much as $16 per million BTU • Significant spread

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