This claim is appealing to federal policymakers who
are hard pressed to nd new energy solutions for
the United States, especially given recent offshore
drilling and nuclear disasters and continuedconicts with oil producing regions of the world.The Obama Administration hopes that natural gasproduction can be a “linchpin in its long-term
energy strategy,” according to the
New York Times
,
3
and is investigating whether fracking can be a way
to lower the country’s dependence on foreign oil.
4
But these ideas are misleading. In fact, recenttrends in shale production show that fracking isan economically risky endeavor. Today, as theAmerican companies that led the shale gas rushare struggling to make a prot, major multinationalcorporations, including companies from China andIndia, are increasing their stakes in America’s shaleassets.Additionally, despite the “energy security” rhetoric,it seems increasingly likely that the prots fromdrilling America’s gas, as well as the gas itself, willow overseas. Oil and gas companies are focusingon developing U.S. shale gas for export to fuel thegrowing Chinese economy, while leaving Americawith the economic risk from what industry insidershave called “giant Ponzi schemes” and another“Enron.”
5
The shale gas boom
The companies that led the development of the North Ameri
-can shale gas industry were mostly U.S.-based independentproducers.
6
Prior to the unconventional gas drilling boom,most major multinational energy companies were focusingtheir attention overseas.
7
At that point, conventional wisdom
in the energy industry was that natural gas production in the
United States was on the decline; as recently as 2005, Lee
Raymond, then-CEO of ExxonMobil, declared, “Gas produc-
www.foodandwaterwatch.org • 1616 P St. NW, Suite 300, Washington, DC 20036 • info@fwwatch.org
What the Gas Industry Doesn’t Want you to Knowabout Fracking and U.S. Energy Independence
Selling domestic gas
T
oday, the oil and gas industry is loudly promoting natural gas production as a means of increasing American energy independence and national energy security.
1
Industry representativeshave specically used this argument to lobby against federal oversight of hydraulic fracturing, or“fracking,” the harmful technology that drillers hope to use to increase production by tapping intoAmerica’s shale rock formations.
2
Pipe Dreams
2
tion has peaked in North America.”
8
Around that time, a risein natural gas prices coinciding with growing demand anddecreasing access to U.S. supplies had actually led energyanalysts to predict that North America would become theworld’s biggest importer of liqueed natural gas (LNG) by2010, as the industry embarked on what the
Financial Times
called a “concerted drive to build LNG facilities.”
9
But as independent drillers demonstrated that they coulduse fracking to increase production, especially in shale rockformations, the major multinational energy companies turnedtheir attention to shale gas. By June 2010, the same companythat had declared gas in North America a dud had becomethe largest producer on the U.S. gas scene.
10
With the adjustment in outlook due to fracking, ExxonMobilwas not the only major oil and gas company changing itstune. Big energy corporations have begun promoting natu-ral gas as the next big energy source, not just in the UnitedStates, where fracking technology was rst applied, but allaround the world where there are shale gas plays that havenot yet been tapped.
11
In June 2010, the
Wall Street Journal
reported that shale gas had become “one of the hottest in-vestments in the energy sector.”
12
The shale gas bust
As the major players in the globalenergy industry are turning their
attention and money back to gas,
many companies are nding thatfracking is not as protable as theyhad hoped. It turns out that theAmerican gas market is actuallyoversupplied.
13
This means that gasprices have remained so low that
drilling is not protable for manyproducers.
14
After a sharp rise and
sharper fall in 2008, natural gasprices have plateaued and from June 2010 to June 2011, remainedsteady, despite cyclical uctua-tions.
15
Some companies continueto drill because they need to in
order to maintain rights to the
land, or because they are desperatefor cash. Others are simply slow-ing their drilling because it is notworth the money.
16
Perhaps an even bigger problem
for many companies is that the
wells themselves are not producingas much gas as was originally ex-pected. In June 2011, a
New York Times
investigation of hundredsof industry emails it collectedrevealed, “… energy executives,industry lawyers, state geologists and market analysts voiceskepticism about lofty forecasts and question whether com-
panies are intentionally, and even illegally, overstating the
productivity of their wells and the size of their reserves.”
17
One email indicated that companies want to show high early
production numbers to investors, but sustained productionat those levels may not be affordable.
18
Another analyst from
IHS Drilling Data said, “The word in the world of indepen-dents is that the shale plays are just giant Ponzi schemes andthe economics just do not work.”
19
The
New York Times
con
-cluded that internal messages were “in stark contrast to morebullish public comments made by the industry. …”
20
In fact, many of the companies that began the shale gas rushare struggling to make a prot or are going under. An ana-lyst from PNC Wealth Management wrote that shale gas is“inherently unprotable.”
21
A geologist from Chesapeake En-ergy wrote in an email exchange with a federal governmentofcial, “In these shale plays no well is really economic rightnow. They are all losing a little money or only making a littlebit of money.”
22
The geologist later added, “… a lot of smallercompanies have gone under because of these issues.”
23
As American companies are strug-gling, many see major multinationalcorporations as a welcome sourceof cash. The aforementioned Chesa-peake Energy geologist said in anemail, “Also, Wall Street has beenvery pessimistic on nat[ural] gas. Sothey have been much more hesitantto just hand out big money to peopleand that’s why most companies are
having to sell shares of their as
-sets to the Major [sic] international
companies in order to get the capital
necessary to develop these plays.”
24
Similarly, the
Houston Chronicle
summarized another industry analyst:“Amid low natural gas prices and alargely uneconomic drilling cli-mate, she said highly liquid Chinesecompanies will nd willing partners
among onshore oil and gas compa
-nies hurting for capital to drill.”
25
In fact, as drilling itself appears lessprotable, some companies are ap-
parently deciding that it is simplybetter to sell off the land than to
actually produce gas. One analyst
noted that the companies most likely
to prot are the ones that sell the
land based on the hype rather than
those that drill it themselves.
26
According to the
Financial Times
,
Chesapeake Energy has been “most
Top 10 NaturalGas Producers
First Quarter 2011
CompanyProduction
(Million CubicFeet/Day)
ExxonMobil
3,904
Chesapeake Energy
2,703
Anadarko
2,412
Devon Energy
1,964
BP
1,905
Encana
1,801
ConocoPhillips
1,589
SouthwesternEnergy Co.
1,277
Chevron
1,270
Williams Energy(Barrett Res.) *
1,155
* Provides combined quarterly natural gas andoil production data only.
Source:
National Gas Supply Association.“Top 40 Producers, First Q 2011 Production.” June 16, 2011.
3
active in nding partners to bankroll production.”
27
In 2011,the company committed to reducing its debt and planned to
raise $5 billion by selling off holdings in the Arkansas Fay
-etteville shale, as well as stakes in two companies.
28
Chesa-peake CEO Aubrey McClendon has explicitly endorsed
selling off assets rather than drilling as a key part of the
company’s business model; during a call with investors inOctober 2008, he said, “I can assure you that buying leasesfor X and selling them for 5X or 10X is a lot more protablethan trying to produce gas at $5 or $6 mcf.”
29
The company
is intentionally selling off properties that now seem uneco-nomical to drill, such as the Fayetteville holdings, which acompany geologist described as “one of the more difcultshales in the country to work,” noting, “There is a reasonwe just sold all our Fayetteville assets to BHP.”
30
In its 2010annual report, Chesapeake Energy boasts, “… we embarkedon an aggressive lease acquisition program, which we havereferred to as the ‘gas shale land grab’ of 2006 through 2008and the ‘unconventional oil land grab’ of 2009 and 2010.We believed that the winner of these land grabs would enjoy
competitive advantages for decades to come as other com
-panies would be locked out of the best new unconventionalresource plays in the U.S.
We believe that we have executed our land acquisition strategy with particular distinction
” (em-phasis added).
31
U.S. plays, global players
As companies are selling off their holdings, major interna-
tional players are increasing their ownership in American
gas shales. In 2010, for example, ExxonMobil bought XTOEnergy Inc. for $34.8 billion.
32
Already in 2011, the top
10 producers of natural gas in the United States includedExxonMobil, Chevron, ConocoPhillips, and two major mul-tinational corporations based outside of the United States:British BP and the Canadian company Encana.
33
By March 2011, an analyst told London’s
Daily Telegraph
that the world’s major multinational energy corporations“all seem to be ghting over the acreage at the moment.”
34
BP of the United Kingdom, StatoilHydro of Norway, theAustralian mining giant BHP Billiton, Japan’s Mitsui & Co.,Reliance Industries of India and government-owned ChinaNational Offshore Oil Corp. are just a few of the foreigncompanies pouring millions of dollars into American shaleplays (see box on page 4). In 2010, drilling projects in southTexas alone included nearly $5 billion in investments fromother countries, including China.
35
These new players in America’s shale gas have a range of prot motives that have nothing to do with American energysecurity; in fact, some run counter to it.Some corporations are willing to speculate on frackingbecause they believe the market for gas in the U.S. willimprove. As one analyst at ING told London’s
Daily Tele- graph
, “The US gas market is pretty weak at the moment, butthe longer term outlook is that gas will play a major role.”
36
Another energy analyst concluded, “… despite current lowprices, the long-range forecasts show real upsides to pursuingshale-gas projects.”
37
An investment manager told
Bloomberg
that a major shale investment by BHP Billiton was “a bet onlong-term U.S. gas prices going higher.”
38
Others see a potential to make prots selling American gasoverseas. For example, an executive at Royal Dutch Shell —
the 12
th
largest natural gas producer in the country
39
— said,
Food & Water Watch has aired an advocacy ad in media marketsthroughout New York state asking Governor Andrew Cuomoto ban fracking. The ad references a
New York Times
series that
recently brought attention to industry insider emails questioningthe productivity and economic forecasts behind the current rush toopen up new drilling leases in the Marcellus shale and elsewhere.
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Pipe Dreams: What the Gas Industry Doesn’t Want you to Know about Fracking and U.S. Energy Independence
Today, the oil and gas industry is loudly promoting natural gas production as a means of increasing American energy independence and national energy security. Industry representatives have specifically used this argument to lobby against federal oversight…
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