THE CLAIMS RUSH
It may be helpful to pause at this point and recall again where we were at the start of the fracking boom. US oil production had generally been in decline for nearly four decades, oil and gas prices were high and rising, and mainstream media outlets were beginning occasionally to mention the possibility that world petroleum output was near its inevitable peak. In this context, rising gas production from north-central Texas, Arkansas, Louisiana, and Pennsylvania, and soaring oil yields in North Dakota and south Texas seemed like answers to a prayer. Here was an opportunity for the industry to beat back its critics—and make a lot of money in the process.
The situation recalls events in the 1970s. Oil price shocks during that decade, along with declining US oil production, provoked discussion about ultimate limits to petroleum supplies. America experienced a natural gas crisis as well: wellhead prices jumped more than 400% between 1971 and 1978, while production declined more than 11%. The oil dilemma was resolved by new discoveries in Alaska and the North Sea: petroleum prices declined in the 1980s and stayed low for over a decade. The US natural gas market was eventually rebalanced by demand destruction, with reduced consumption leading to stable and affordable prices that would last, again, until the early 2000s. Throughout the late 1980s and the 1990s, cheap oil and stable, affordable gas prices enabled Americans to forget about the need for energy conservation and the development of renewable energy sources, and to concentrate on their favorite pastimes—driving and consuming. Might the fracking boom offer similar relief to the oil and gas price spikes of the 2000s? The industry obviously thought so, and it was determined to make the most of the opportunity.
But there was a more immediate, practical motive for oil and gas companies to ballyhoo fracking’s significance: their need for investment capital. Small operators willing to assume substantial risk by developing marginal resource plays using expensive technology have led the fracking boom from its inception. These companies need investors to believe that fracking is the Next Big Thing. As in every resource boom since the dawn of time, hyperbole has become a tool of survival.
The hurricane of hype began in the shale gas fields of Texas, stirred by the charismatic Aubrey McClendon, then-CEO of Chesapeake Energy. McClendon hammered home the same message on every possible occasion—at investment conferences, in government hearings, and in prominent media interviews. For example, in testimony before the US House Select Committee on Energy Independence and Global Warming on July 30, 2008, McClendon had this to say:
America is at the beginning of a great natural gas boom. This boom can largely solve our present energy crisis. The domestic gas industry through new technology has found enough natural gas right here in America to heat homes, generate electricity, make chemicals, plastics and fertilizers, and most importantly, potentially fuel millions of cars and trucks for decades to come.
Another highly visible shale gas booster was Daniel Yergin, chairman of Cambridge Energy Research Associates, an oil and gas industry consultancy. In an April 2, 2011, article in the Wall Street Journal titled “Stepping on the Gas,” Yergin wrote: “Estimates of the entire natural-gas resource base, taking shale gas into account, are now as high as 2,500 trillion cubic feet, with a further 500 trillion cubic feet in Canada. That amounts to a more than 100-year supply of natural gas.”
A century of natural gas! It was a nice round figure, and big enough to banish any fears of looming scarcity. The number came to be repeated so frequently that even President Barack Obama parroted it unquestioningly, as in this public statement on January 25, 2012: “We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.”
But was one hundred years really enough?
Oil billionaire T. Boone Pickens, whose hedge fund had adopted significant positions in the natural gas sector starting in 1997, began running a series of television and print advertisements in 2008 to promote his “Pickens Plan” to “break the stranglehold of imported oil” using domestic natural gas for transportation. In an interview on CNBC in April 2011, he estimated America’s natural gas endowment: “If I announced that we have more oil equivalent than the Saudis do, I would be telling you the truth. . . . I say you’re going to recover 4,000 trillion [cubic feet]. Which is 700 billion barrels.” It turns out that 4,000 trillion cubic feet (tcf) is roughly the equivalent of 160 years of US natural gas production at current rates.2
A hundred years? 160 years? Why not more? So far, Aubrey McClendon appears to have topped all rivals with his claim, in an article on Chesapeake Energy’s website, that America has two hundred years of natural gas.3 In his most widely heard prediction about the importance of shale gas, in a CBS News 60 Minutes interview that aired on November 14, 2010, McClendon told Leslie Stahl: “In the last few years we have discovered the equivalent of two Saudi Arabias of oil in the form of natural gas in the United States. Not one, but two.” As if betting in a poker game, McClendon seemed to be saying, “I’ll see your Saudi Arabia and raise you one! And I’ll double down on that ‘hundred years,’ too!”
As we will see in more detail in the next chapter, even Daniel Yergin’s seemingly conservative hundred-year estimate is unsupportable and overstates supplies by several hundred percent. How could McClendon, Yergin, and Pickens possibly have come up with these super-optimistic shale gas supply forecasts? Simply by taking the highest imaginable resource estimate for each play, then taking the best imaginable recovery rate (based on extrapolating data from the very best-producing wells in the small “sweet spots” in each play), then adding up the numbers. Always the assumption was that the gas could be produced profitably at current prices. Only the most knowledgeable experts would know that the resulting figures were entirely unrealistic.
Fast-moving developments in the shale gas sector came as a surprise to official agencies like the US Department of Energy’s Energy Information Administration (EIA), the United States Geological Survey (USGS), and the International Energy Agency (IEA). None of these agencies had foreseen that high gas prices would lead small producers to apply fracking technology to known shale plays, and with such spectacular results. The EIA quickly sought to catch up to the industry’s achievements—in both production and public relations—by issuing new forecasts for future shale gas production. Borrowing uncritically from the gas producers’ own estimates, the EIA assigned a reserves figure of 410 trillion cubic feet to the Marcellus play alone. Soon the USGS weighed in, suggesting the real figure should be closer to 84 tcf; the EIA quickly backtracked and deferred to the USGS, cutting its own estimate for the Marcellus by 80%.4 The episode simply served to illustrate that ostensibly authoritative reserves and future production forecast numbers were in fact highly speculative, with enormous error bars.
Meanwhile, public perceptions about the prospects for tight oil followed a similar trajectory. Early resource claims for the Bakken play were all over the map. A research paper by USGS geochemist Leigh Price in 1999 had estimated the total amount of oil contained in the Bakken shale at somewhere between 271 and 503 billion barrels.5 Later estimates by Meissner and Banks (2000) and by Flannery and Kraus (2006) ranged all the way from 32 to 300 billion barrels.6
If the amount of oil in place was a matter for dispute, the question of how much of this was recoverable constituted an even more decisive unknown variable. Here the estimates ranged from as little as 1% to as much as 50%. The USGS currently estimates the Bakken to have 3.65 billion barrels of technically recoverable oil in place (the more crucial economically recoverable amount is likely substantially lower).7 That’s still a big number, but it represents only six weeks of current world oil consumption.
Again, the industry, in its public statements, focused only on the largest numbers for both resources-in-place and recovery potential. The Bakken and Eagle Ford were heralded as the biggest developments in the oil world since the invention of the drill bit. Everyone involved would get rich, the boom w
ould last decades, and it would lead America’s energy sector into a new Golden Age of plenty.
The industry’s PR efforts received an enormous boost from Leonardo Maugeri, senior manager for the Italian oil company Eni and senior fellow at Harvard University, who published a seemingly authoritative paper in June 2012 titled, “Oil: The Next Revolution.”8 In it, Maugeri claimed that “The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades.” Published under the imprint of Harvard’s Kennedy School, Belfer Center for Science and International Affairs, the Maugeri report painted a euphoric picture of world oil abundance: “Oil is not in short supply. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no ‘peak-oil’ in sight.”
At the center of this portrait of abundance was US tight oil. While Maugeri managed to identify a few other promising places such as Iraq—where production, he figured, could go from the current rate of 3.35 million barrels per day to over 5 mb/d by 2020 (a highly optimistic notion, given the political realities there)—he saved his biggest hopes for the Bakken, Eagle Ford, and other North American tight oil plays. One phrase from the report leapt out: “. . . the total production capacity of the US could even exceed that of Saudi Arabia.” According to Maugeri, the United States could get an additional 4.17 million barrels per day from tight oil plays by the end of the decade. To put that number in perspective, total US production of crude oil in 2011 was 5.68 million barrels per day. Adding 4.17 mb/d to that number would yield a total almost equal to America’s peak level of production achieved in 1970 and also close to Saudi Arabia’s current production of about 10 mb/d. Energy reporters, taking their cue from Maugeri, began adopting the shorthand term, “Saudi America.”
Maugeri’s report received uncritical notice in major media outlets, including the New York Times, the Wall Street Journal, NPR, and most broadcast and cable news television networks, and his assertions became common wisdom. This happened despite the presence of several pivotal and fairly obvious errors in the report, including Maugeri’s consistent confusion of “depletion rate” with “decline rate,” a serious underestimation of decline rates from existing oil fields, and a simple but decisive math mistake in compounding declines.9 It turned out that the report had not been peer-reviewed or even competently fact-checked. “Oil: The Next Revolution” was thoroughly debunked by experts, but none of the criticisms surfaced in publications that had turned the report into headline news. It wasn’t hard to see why: Maugeri’s twisted tune was music to the ears of the oil industry.
Official agencies began revising their oil reserves numbers and production forecasts. The EIA, in its “Annual Energy Outlook 2013,” noted that US oil import dependency had fallen from 60% of total oil consumed in 2005 to 45% in 2011; assuming further growth in tight oil output, the agency projected oil imports to fall to only 37% of consumption in 2035. The United States would not achieve oil independence, but it would make substantial progress in that direction.
The IEA likewise adopted a more optimistic attitude about future petroleum supplies. The organization’s chief economist, Fatih Birol, even called the surge in US oil and gas production “the biggest change in the energy world since World War II.”10
As with shale gas, Daniel Yergin played a key role in pumping up expectations about the potential of tight oil. “[T]echnology has opened doors people didn’t know were there or didn’t think could be opened,” he told the Wall Street Journal. “We expect to see tight-oil production grow dramatically over the rest of this decade.”11
* * *
Altogether, these were amazing developments. Prior to the fracking boom, the United States had been assumed to be a fully mature oil and gas province. Since the start of the hydrocarbon era, more oil wells had been drilled in the continental US than in all other countries combined. The nation’s peaks in oil and gas production were apparently four decades in the rearview mirror. Yet, led by technology and enabled by the treatment of mineral rights under US property law, a host of small oil and gas companies had unleashed a genie of new production potential.
Nevertheless, there was another way of framing the situation. Soaring fuel prices, resulting from the depletion of giant conventional fields, had led drilling companies to go after some of the last, least inviting oil and gas plays in North America. These operators had invented superior barrel-scrapers, but they were still in essence scraping the bottom of the barrel by producing oil and gas from source rocks.
Figure 18. Oil and Gas Resource Volume Versus Resource Quality. This graphic illustrates the relationship of in situ resource volumes to the distribution of conventional and unconventional accumulations, and the generally declining net energy and increasing difficulty of extraction as volumes increase lower in the pyramid.
Source: J. David Hughes, “Drill, Baby, Drill,” Figure 37.
Every geologist understands the principle of the resource pyramid: the entire pyramid represents the total mineral resource in place. The top portion of the pyramid consists of the concentrated, easy-to-produce portion of that resource base, while lower levels correspond to more abundant but lower-quality resources that have higher production costs and whose extraction implies higher environmental risks. This mental model holds true for copper and iron mines, oil and gas fields, and even commercial fisheries. Shale gas and tight oil plays were far from the top of America’s gas and oil resource pyramids. In addition, each shale gas or tight oil play could be thought of as its own smaller resource pyramid: the best resources within each play would inevitably be targeted for production first, and, as time went on and as producers made their way down the stair steps of the pyramid, well productivity would decline and per-well decline rates would rise. Operating costs would soar. Production potentials that were forecast on the basis of extrapolating the best results from the first wells drilled into “sweet spots” in each play would inevitably prove highly misleading.
But not many analysts wanted to adopt this more realistic view. There was no money in it.
Leonardo Maugeri’s statement that “the shale/tight oil boom in the United States is not a temporary bubble” carries a whiff of resemblance to Nixon’s “I am not a crook” or Clinton’s “I did not have sexual relations with that woman”: the gentleman doth protest too much, methinks. But where lies the truth? Are shale gas and tight oil booms the “new normal” for American energy? Or do they more closely resemble a short-term Ponzi scheme?
Let’s take a closer look.
SNAKE BITES
1. THE US ENERGY INFORMATION ADMINISTRATION (EIA) SAYS:
Enough new shale gas wells will be drilled every year until 2030 to ensure steady production growth.
THE REALITY IS:
Production from shale gas wells typically declines 80 to 95 percent in the first 36 months of operation. Just to maintain the current rate of supply will take massively increased rates of drilling.
2. THE EIA SAYS:
Proved and unproved technically recoverable shale gas reserves will provide a 24-year supply of natural gas at current US consumption rates.
THE REALITY IS:
Given steep shale gas well decline rates and low recovery efficiency, the United States may actually have fewer than 10 years of shale gas supply at the current rate of consumption.
Eventually, horizontal drilling is suspended because operators reach a point where they are just burning cash.
— Robert Smith, operations geologist, International Western Oil
Chapter Three
A TREADMILL TO HELL
The tiny ghost town of Desdemona is situated in Eastland County, Texas, about halfway between Fort Worth and Abilene. It was founded in the mid-19th century as a fort to protect settlers from Indians, its early economy revolving mostly around peanut farming. In 1918, Tom Dees of Hog Creek Oil Company discovered an oil field nearby, and within weeks 16,000 speculators and rig workers c
rowded Desdemona’s dusty streets. Fortunes were quickly made—less often on actual oil production than on the trading of stock shares, which appreciated dramatically in value during the first couple of years of the boom. (Some shares that originally sold for one hundred dollars soon fetched over ten thousand.) Fortunes were just as suddenly lost in gambling or robberies. By 1920, rampant lawlessness had drawn the attention of the Texas Rangers, who at the time operated as a paramilitary organization employing tactics like targeted killing and enhanced interrogation. The Rangers effectively ran Desdemona—but they didn’t stay long. Between 1919 and 1921, oil production rates dropped by two-thirds. The value of oil stocks collapsed. By 1936, Desdemona’s city government had dissolved itself; the town’s lone school closed its doors in 1969, and as of 2013 only two businesses remain.
Booms go bust: it is a story as old as civilization. Historically, most booms have been associated with resource extraction—gold, silver, oil, gas, or coal. Often, financial speculation based on an extravagant (and sometimes deliberate) overestimation of resource potential drives the peak of the boom higher than would otherwise be the case, thus making the bust all the more devastating. Though the pattern is consistent, on each occasion the participants assure themselves and one another that “this time it’s different.”
The current fracking frenzy in the oil and gas fields of Texas, North Dakota, Oklahoma, Louisiana, Arkansas, Colorado, and Pennsylvania shows all the signs of being a boom in the classic sense. How do we know it’s not different this time, that it won’t end in a colossal bust? And if it is yet another instance of the same old story, how soon will the bust come?
Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future Page 6