Is Natural Gas the Next Bubble ? Has Fracking Promised More Than It Can Deliver?

This article was published in partnership with GlobalPossibilities.org.

Coal and nuclear power industries in the United States have seen better days. The main culprit, energy industry analysts say, is the low cost of domestic natural gas, coupled with carbon-reducing regulations imposed by the Environmental Protection Agency and the efforts of environmental groups.

Instead of paying the high costs to upgrade coal-fired plants and repair aged nuclear facilities to meet environmental regulations, power companies across the country have been making the switch to natural gas. 

The Los Angeles Water and Power Company just announced a plan to go coal-free within 12 years, selling one coal-fired plant in Arizona and converting another in Utah for natural gas production. Both plants currently power roughly 40 percent of Los Angeles. Last month, in a Clean Air Act settlement, American Electric Power agreed to stop burning coal at its power plants in Ohio, Indiana and Kentucky, and either make the switch to natural gas or retire the coal-fired units. Dozens of coal plants have closed in recent years under the same pressure, in large part, from cheap natural gas.

In February, Duke Energy decided it was more cost-effective to close its Crystal River nuclear plant in Florida and replace it with natural gas turbines than it would be to repair a $1.5 billion crack in its dome. Last year, Dominion Power opted to shutter its Kewaunee reactor in Wisconsin, citing low natural gas prices. Multiple decrepit U.S. nuclear power plants are being faced this same dilemma. 

The American Electric Power settlement was celebrated by smaller grassroots organizations and national environmental groups such the Sierra Club and the Environmental Defense Fund, whose campaigns, respectively, to reduce coal use and to promote safer fracking regulations, are heavily funded by New York City Mayor Michael Bloomberg, an outspoken champion of shale gas drilling.

But while environmentalists are helping to accelerate this move away from coal, the attendant reliance on natural gas – and hydraulic fracturing, or fracking, to obtain it -- offers a garden variety of environmental and health concerns of its own. The slowdown in domestic coal use and its related benefits in carbon reduction may also be offset by the simultaneous explosion of U.S. coal exports to Asia and Europe.

Additionally, nuclear power has glaringenvironmental, safety and health issues. But in relation only to carbon reduction, the switch from nuclear to natural gas – which emits about half the amount of carbon than coal – concurrent with booming coal use overseas, could leave global carbon emissions at roughly the same levels or even increase them. And that's without considering another very problematic greenhouse gas, which is emitted during the fracking process: methane.

But what if cheap, domestic natural gas isn't actually sustainable? What if rosy claims of fracking our way to energy independence is just an industry pitch that Washington has bought?

Two new reports reveal that the natural gas narrative may be more hype than reality and warn that putting too much of our eggs into this energy basket could be detrimental to our future economic health.

Shale Gas Boom or Bust?

Currently, natural gas remains cheap, around $3.50 per thousand cubic feet (Mcf). In the short-term at least, this has been good for consumers, as it has translated into lower energy bills. But in the near-term, it has been deadly for the companies drilling for shale gas and their stakeholders, who are losing their shirts.

"I've spent thousands of hours working through data and consulting and collaborating with very knowledgeable colleagues," said Art Berman, an oil and gas geologist who heads Labyrinth Consulting, a Houston-based geological consulting firm. "Right now, everybody's losing money. And the whole picture is highly tenuous."

Berman, after digging into the true numbers of these shale gas plays a few years ago, was one of the first in the oil and gas industry to publicly question the shale gas boom narrative. What he found was exceedingly high production decline rates from the shale gas wells, which forced operators to maintain a furious drilling pace just to keep up with production targets.

His analysis turned out to be correct. The frenzied drilling eventually led to a glut, or overproduction, of shale gas, which depressed prices and made these projects losing propositions. Today, the overall U.S. gas supply is flat, which it has been for over two years now.

"It looks like an industry that's in big trouble," Berman said in a phone interview. "That's what it looks like to me. You look at the balance sheets of these companies and they're terrible. Most of them don't have any retained earnings from their gas efforts. Giant write-downs every quarter."

As a consequence, he noted, drilling activity has plummeted.

"If you look at plays like Haynesville, there are fewer than 30 rigs running in Haynesville," Berman said. "At one time, there were over 200. Barnett, there are something like 30 rigs. At one time there was something like 185."

A new study by independent geologist David Hughes supports prior findings by Berman and also the U.S. Geological Survey (USGS), which shows operators greatly overestimating actual well production on shale plays throughout the country, from a minimum of a 100 percent to as much as 400 to 500 percent. (A "shale play" is an area of land that companies believe might be productive.)

The Hughes report, published by the Post Carbon Institute in February, performed an analysis on 60,000 shale wells and every play in the U.S. and their numbers corresponded with findings by the USGS.

While Pennsylvania State University professor Terry Engelder agrees that production has plummeted and there is a glut of natural gas, he said it's "a bit of a red herring" to claim that the shale gas wells have vast decline rates.

Engelder, who openly admits his research at Penn State is heavily funded by the natural gas industry, said that industry economic models were always based on those decline rates.

"So everyone who went into this went in with their eyes wide open," he said in a phone interview. "And only later on have the naysayers started then turning around the argument saying, 'Look how fast the wells are declining, this is a losing situation.'"

But Berman strongly disagrees.

"These wells," said Berman, "have decline rates that are just off the charts and that was really not anticipated."

The Coming Consumer Squeeze?

Back in 2009, when Berman started speaking publicly about the realities of the so-called shale gas boom, Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas at the time, found the irate industry response to Berman highly suspect.

"I mean the Chesapeakes and Devons of the world just went ballistic," Rogers, a former Wall Street investment banker and a financial consultant, said in phone interview. "As a financial person at the time, back in 2009, I remember thinking this is very interesting because this reaction is just over the top."

So she began to do some digging herself into well data from shale companies, discovered the numbers didn't add up, and soon became one of the early industry insiders to sound the alarm about the overestimation of shale gas wells.

Further scrutiny led Rogers to realize that Wall Street, similar to its selling of toxic assets during the real estate boom, had worked behind the scenes to manipulate prices in order to facilitate better fees for themselves. 

She explores both of these findings and their implications in a new report, "Shale and Wall Street: Was the Decline in Natural Gas Price Orchestrated," which was released in February.

Rogers reveals how Wall Street drove the shale gas drilling frenzy by overestimating the amount of well returns, which resulted in prices lower than the cost of production for the operators who bought the drilling leases. Consequently, these operators borrowed millions of dollars on assets that either don't exist or may never be commercially viable to extract. Wall Street then also profited greatly via mergers and acquisitions and other transactional fees.

Rogers, founder and executive director of the nonprofit Energy Policy Forum, and a recently appointed primary member to the U.S. Extractive Industries Transparency Initiative for the Department of the Interior, makes clear that the investment banks didn't do anything illegal in performing these shale gas transactions.

Her issue, she said, is that there's absolutely no way the banks didn't realize those wells weren't performing anywhere close to projected numbers.

"Everything they did before the mortgage-backed securities bubble was legal, too," noted Rogers. "And we saw the consequences of that. But that's another good argument for why we need financial reform."

What may be most troubling to analysts like Rogers, however, is that the shale gas bubble won't just hurt operators and their shareholders. They say American consumers are next in line.

Rogers and other energy analysts agree that the industry's plan to export natural gas overseas to countries like China, where they can sell it for much higher prices, will inevitably drive up domestic prices.

In her report, Rogers cites financial analyst calls going back to 2007 and 2008, which reveal this was the natural gas industry's plan all along, while it continues to sell American consumers and utility companies on becoming ever more dependent upon natural gas. 

If successful, she said, "We will have affected essentially exactly the same scenario that we find ourselves in with crude oil now -- much more dependent and at much higher price."

Rogers added, "So we get squeezed, but they make off like bandits."