pipe dreams: what the gas industry doesn’t want you to know about fracking and u.s. energy...

8/6/2019 Pipe Dreams: What the Gas Industry Doesn’t Want you to Know about Fracking and U.S. Energy Independence

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This claim is appealing to federal policymakers whoare hard pressed to nd new energy solutions forthe United States, especially given recent offshoredrilling 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-termenergy strategy,” according to the New York Times,3

and is investigating whether fracking can be a wayto 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 boomThe 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 wisdomin the energy industry was that natural gas production in theUnited States was on the decline; as recently as 2005, LeeRaymond, then-CEO of ExxonMobil, declared, “Gas produc-

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What the Gas Industry Doesn’t Want you to Know

about Fracking and U.S. Energy Independence

Selling domestic gas

Today, 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 representatives

have 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



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 all

around 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 theirattention 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 thatdrilling is not protable for manyproducers.14 After a sharp rise andsharper 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 inorder 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 problemfor many companies is that thewells 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 theproductivity of their wells and the size of their reserves.”17

One email indicated that companies want to show high earlyproduction numbers to investors, but sustained productionat those levels may not be affordable.18 Another analyst fromIHS 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 right

now. 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 people

and that’s why most companies arehaving to sell shares of their as-sets to the Major [sic] internationalcompanies in order to get the capitalnecessary to develop these plays.”24 Similarly, the Houston Chroniclesummarized another industry analyst“Amid low natural gas prices and alargely uneconomic drilling cli-mate, she said highly liquid Chinesecompanies will nd willing partnersamong 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 toactually produce gas. One analystnoted that the companies most likelyto prot are the ones that sell theland based on the hype rather thanthose that drill it themselves.26

According to the Financial Times,Chesapeake Energy has been “most

Top 10 NaturalGas Producers

First Quarter 2011

Company

Production(Million Cubic

Feet/Day)

ExxonMobil 3,904

Chesapeake Energy 2,703

Anadarko 2,412

Devon Energy 1,964

BP 1,905

Encana 1,801

ConocoPhillips 1,589

Southwestern

Energy Co.1,277

Chevron 1,270

Williams Energy

(Barrett Res.) *1,155

* Provides combined quarterly natural gas and

oil production data only.

Source: National Gas Supply Association.

“Top 40 Producers, First Q 2011 Production.”

June 16, 2011.



active in nding partners to bankroll production.”27 In 2011,the company committed to reducing its debt and planned toraise $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 endorsedselling 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 companyis 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 enjoycompetitive 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 Americangas 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 shale

plays (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 Bloombergthat 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 12th largest natural gas producer in the country39— said,

Food & Water Watch has aired an advocacy ad in media markets

throughout New York state asking Governor Andrew Cuomo

to ban fracking. The ad references a New York Times series that

recently brought attention to industry insider emails questioning

the productivity and economic forecasts behind the current rush toopen up new drilling leases in the Marcellus shale and elsewhere.



“Shell has placed a big emphasis on North American gas;it’s an area of growth for us. We’ve invested, something like$15bn since 2004 in the onshore. What you develop here,you’d like to export to the rest of the world.”40 Similarly, theOil & Gas Financial Journal reported, “Liquefying and export-ing shale gas from shale plays like the Haynesville, Barnett

and Eagle Ford to global markets holds major promise as theUS confronts an oversupply of cheap supplies, said analystRick Smead of Navigant Consulting.”41 Some energy analystsare speculating that with shale gas, the United States couldbecome a strong competitor to Australia in exporting its LNGto Asia.42

Some of these companies are motivated to participate in U.S.ventures because they want to gain technical expertise fromworking with American companies that have the most ex-perience with fracking. China, for one, appears interested ininvesting partially so that Chinese companies can learn howto apply the technology back home.43 The Norwegian Statoil-Hydro formed a global partnership with Chesapeake Energy,partially to take advantage of the experience the companyalready has with fracking. 44

While the energy companies are beginning to look aroundthe world for opportunities to prot from shale drilling, playsin the United States remain some of the most attractive in-vestments. According to the Financial Times, “… the US doeshave an edge in that it is well suited for rapid development,with much gas in lightly populated areas and a web of exist-ing infrastructure to bring it to market. And the world expertsat getting to this resource are in the US — something nobodyin the industry is downplaying.”45 The U.S. Energy Informa-tion Administration notes that gas resource development in

Europe faces “substantial hurdles in terms of cost, infrastruc-ture, regulation and public acceptance.”46 Public resistanceis likely to be less of an impediment in China than Europe,47 but China may ultimately have a problem with frackingbecause many of its shale plays are in water-stressed regions,which may not be able to supply the huge quantities of waterneeded to frack shale wells.48

China is especially interested in buying North Americanshale assets to gain access to future imports. In an articleabout a joint venture between EnCana and PetroChina inCanada, the Oil & Gas Financial Journal reported, “… theChinese are willing to pay a premium to secure North Ameri-

can resources necessary to feed the growing Asian economy.Commenting on the deal, IHS Herold’s Christopher Sheehansaid that securing energy supply, rather than price, is the keydriver for PetroChina and the Chinese government.”49 Chinais investing in energy projects across the Americas, includ-ing offshore oil exploration in Brazil, as it is looking for rawmaterials to feed its growing economy.50

Exporting American gas

Depressed gas prices in the U.S. are also encouraging com-panies to seek new markets for their gas—the most lucrativeof which may be overseas.

According to the U.S. Energy Information Administration,natural gas use in the United States is likely to decline be-tween 2007 and 2015 as a result of slow growth in electricitydemand, completion of coal red plants and new renewableenergy.60 But total natural gas consumption worldwide is ex-pected to grow substantially—the EIA predicts a 44 percent

increase by 2035.61

A large amount of this growth is expect-ed to come from Asia.62 Bloomberg reported, “Demand forliqueed natural gas in China and India may surge more thansevenfold by 2025 as the nations boost their use of cleaner-burning fuels, said the chief executive ofcer of Santos Ltd.”63

The government of China is promoting natural gas over coaland other energy sources with the goal of tripling its use sothat natural gas supplies one-tenth of the country’s energy by

Major investments in U.S. shale

by foreign companies

StatoilHydro (Norway): Bought a 32.5 percent inter-est in Chesapeake Energy’s Marcellus acreage inNovember 2008.51

BP (United Kingdom): In 2008, invested more than$3.6 billion in U.S. shale, including $1.9 billion for25 percent of Chesapeake’s Fayetteville shale opera-tions and $1.75 billion for all of Chesapeake’s Wood-ford Shale operations in Oklahoma. 52

Royal Dutch Shell (Netherlands): Paid $4.7 billionfor East Resources and its Marcellus Shale assets in2010.53

BHP Billiton (Australia): Agreed to buy Chesapeake’sArkansas shale assets for $4.75 billion in cash in2011.54

Mitsui & Co. (Japan): Created a joint venture withAnadarko Petroleum Corp, which allowed it to buyinto Marcellus Shale for $1.4 billion. A subsidiary of that same Japanese company, Mitsui E&P USA LLC,will serve as a 32.5 percent partner in the Americancompany Anadarko’s Marcellus Shale assets.55

Reliance Industries (India): In 2010 announced thepurchase of a 40 percent stake in Atlas Energy’s Mar-cellus Shale operation for $1.7 billion;56 also acquired

a 45 percent stake in Eagle Ford shale from PioneerNatural Resources for $1.36 billion, including $210million to Pioneer’s other partner Newpek LLC, a sub-sidiary of Mexican company ALFA SAB de CV.57

China National Offshore Oil Corp (China, govern-

ment-owned): Agreed to pay $2.2 billion for accessto a shale play in south Texas in October 2010;58 agreed to pay $570 million in cash for a third of Chesapeake’s Niobrara shale basin in Colorado andWyoming in January 2011.59



2020.64 Demand for liqueed natural gas may also increasein Japan as the recent nuclear disaster has the country look-ing for alternative sources of energy.65

The Pittsburgh Tribune-Review reported in April 2011 thatsix U.S. companies were considering exporting natural gas.66 According to the Oil & Gas Financial Journal , Chesapeake

Energy wants new markets for natural gas and would supportthe development of export-oriented liquefaction facilities. Tothat end, the company signed a memorandum of understand-ing with Cheniere Energy, which proposed liquefaction at animport terminal in Louisiana.67

Cheniere has been perhaps the most active advocate of ex-porting American LNG to foreign markets. Charif Souki, CEOof Cheniere, wants to retrot import terminals for export, andhas been investing billions of dollars and soliciting commit-ments from other companies, even in the face of skepticismfrom other industry members.68 He believes that exportingLNG could be protable because American gas prices will

be cheaper than European and Asian prices, so companiescould buy American gas and sell it to Europe or Asia fordouble the price.69 The U.S. Department of Energy has ap-proved Cheniere’s application to export LNG,70 and Chenierehas signed a memorandum of understanding with a Chinesecompany to send it 1.5 million metric tons of LNG a year.71 Commenting on the agreement, Souki said, “We are excitedto participate in supplying natural gas to China...”72

While some analysts are skeptical that exports are logisticallyfeasible due to the high cost of liquefying and transportinggas, several additional plans to export are already in motion.Freeport LNG is partnering with the Australian bank Macqua-rie to transform its import terminal on the Texas coast into anexport terminal, most likely to serve Asian markets, althoughthey will also market to Europe.73 The Cove Point LNG re-gasication facility near Baltimore and Sempra Energy’s Cam-eron LNG facility in Louisiana are two other potential LNGexport terminals.74

Fracking America

The industry has billions of dollars at stake in the passage of policies that would allow fracking and create new marketsfor domestic natural gas. One government ofcial wrote inan email exchange published by the New York Times, “The

way I see it is if industry can get congress [sic] behind naturalgas through policy, then industry has the US by the balls interms of allowing development to continue as the shale wellsthat are already drilled rapidly deplete — higher prices, moremoney for industry, and more dependence on drilling.”75 It isno wonder industry representatives are lobbying hard in favorof fracking. The vice president of public and governmentaffairs for the ExxonMobil Corporation said, “Governmentpolicies did not cause the shale gas revolution in this country— but they could stop it in its tracks.”76

But while major multinational and foreign companies arepoised to prot from such policies, American residents who

live near drilling sites would suffer from the health effects of air and water contamination, see declining property values,experience the associated increase in noise and truck trafc,or undergo the consequences of dangerous explosions thatcome along with shale gas fracking.

Today, many residents exposed to toxic air and water pollu-tion from gas drilling feel a sense of injustice by their treat-ment at the hands of the industry and lack of protection from

the government. The mayor of DISH, Texas, for one, movedout of his home to protect his children from air pollutionfrom the fracking industry near his town. Having become anoutspoken critic of the pollution created by gas drilling, hetold the Texas Tribune about his mostly conservative town , “We’re not a group of radical tree-huggers. We’re hardwork-ing, tax-paying honest American Texans, and we’ve beenwronged.”77

For some, using American gas to serve foreign interests addsinsult to injury—especially for those who initially supporteddrilling because they believed it could contribute to Ameri-can energy independence. As one Pennsylvanian told the

“The way I see it is if industry can get

congress [sic] behind natural gas through

policy, then industry has the US by the

balls in terms of allowing development

to continue as the shale wells that are

already drilled rapidly deplete — higher

prices, more money for industry, and more dependence on drilling.”



Pittsburgh Tribune-Review , “I think most residents of Pennsyl-vania believe this was being done for energy independenceand didn’t think of it as exporting.” 78Further, he speculatedthat exporting large amounts of natural gas could changethe minds of some people who were otherwise willing toput aside environmental concerns for the sake of America’s

energy independence.79

American residents concerned about exporting American gasmay also rethink their position if America’s shale assets areowned and operated by foreign companies, which is increas-ingly the case. Many companies investing in U.S. gas aredoing so with a view towards its long-term protability. Ac-cording to one industry insider, “Many view an investment ina U.S. shale play by a global company as one that keeps onpaying dividends long after the initial eld is tapped.”80 Forexample, in an interview with the Oil & Gas Financial Jour-nal , Peter Mellbye, StatoilHydro’s executive vice president forinternational exploration and production, explained why theNorwegian company got involved in a U.S. shale gas play:“The character of this huge resource and the long perspectivein terms of the lifetime of the asset were denitely factors.”81 In its joint venture with Chesapeake Energy, Statoil gainedrights not just to a stake in present Marcellus shale assets butalso to acquire a 32.5 percent share of leaseholds that Chesa-

peake continues to acquire.82 The Chinese company CNOOCmade a similar deal with Chesapeake, buying a one-thirdstake in certain Niobrara shale assets with the option to buya similar share of any additional acreage acquired.83

Ultimately, as more multinational and foreign companiesstake a claim in America’s shale assets, increased drilling

will likely mean increased prots for foreign companies andexports of American gas to foreign countries—while theAmericans that live near drilling sites suffer the toxic conse-quences.

Conclusion

The claims of energy independence and economic securitythat major industry players are using to sell gas to Americanpolicymakers are deceptive. The gas itself and the protsassociated with it are often owing beyond the borders of the United States. What’s more, U.S. policymakers can betterprovide national energy security through aggressively pursu-ing energy efciency and renewable technology, not support-ing the toxic extraction of shale gas. Fracking has been asso-ciated with contaminated water and air pollution that causeadverse health effects. This risky technology poses unaccept-able risks to the American public and should be banned.

Endnotes

1 “The natural gas story: The nation has been given a gift by our energy sector. Let’sunwrap it carefully.” The Houston Chronicle. March 14, 2010; America’s NaturalGas Alliance [website] www.anga.us/why-natural-gas/domestic, accessed July 1,

2011.2 Levy, Marc and Mary Esch. “Feds start snifng around natural gas drilling sites;

Industry fears technique used to release energy faces undue scrutiny.” The Associ-

ated Press. July 25, 2010; Michaels, Dave and Jim Landers. “Contentious start forpanel.” The Dallas Morning News. June 2, 2011.

3 Broder, John. “Energy Dept. Panel to Revise Standards for Gas Extraction.” The

New York Times. May 7, 2011.4 Schwartzel, Erich. “Raucous crowd meets on shale.” Pittsburgh Post-Gazette. June

14, 2011.5 Urbina, Ian. “Insiders sound an alarm amid natural gas rush.” The New York

Times. June 25, 2011.6 McNulty, Sheila. “Shale boom leaves industry considering US gas exports.”

Financial Times. February 1, 2010; McCarthy, Shawn. “Shale gas goes global.” The

Globe and Mail (Ottawa, Canada). January 11, 2011.

7 McNulty, Sheila. “Shale boom leaves industry considering US gas exports.” Finan-cial Times. February 1, 2010.

8 “Exxon says N. America gas production has peaked.” Reuters. June 21, 2005.9 McNulty, Sheila. “Shale boom leaves industry considering US gas exports.” Finan-

cial Times. February 1, 2010.

10 Paton, James and Shani Raja. “BHP to buy Chesapeake shale gas assets for $4.75billion.” Bloomberg. February 22, 2011; Kahn, Chris and David Koenig. “Exxonfacing questions about natural gas push.” The Associated Press. May 25, 2011.

11 Herron, James. “Big oil bands the drum for natural gas.” The Wall Street Journal. February 8, 2011; Montgomery, Carl T. and Michael B. Smith. NSI Technologies.“Hydraulic Fracturing: History of an Enduring Technology.” Journal of Petroleum

Technology. Vol. 62, Iss. 12. December 2010 at 27.12 Choudhury, Santanu and Rakesh Shar. “Reliance spends $1.36 billion on shale

gas stake.” The Wall Street Journal. June 24, 2010.

13 McNulty, Sheila. “US gas market: shale extraction technology leads to oversup-plied market.” Financial Times. March 21, 2011.

14 McNulty, Sheila. “US gas market: shale extraction technology leads to oversup-plied market.” Financial Times. March 21, 2011.

15 Henry Hub Natural Gas Front Month Futures. Markets Data, Commodity Perfor-mance. Financial Times. Available at http://markets.ft.com/tearsheets/performanceasp?s=1069936. Accessed July 11 2011.

16 McNulty, Sheila. “Low US gas prices to reshape industry.” The Financial Times.October 18, 2010.

17 Urbina, Ian. “Insiders sound an alarm amid natural gas rush.” The New York

Times. June 25, 2011.18 “Documents: Leaked industry emails and reports.” The New York Times. Drilling

Down Document Viewer at 45.

19 Urbina, Ian. “Insiders sound an alarm amid natural gas rush.” The New York

Times. June 25, 2011.20 Urbina, Ian. “Insiders sound an alarm amid natural gas rush.” The New York

Times. June 25, 2011.21 Urbina, Ian. “Insiders sound an alarm amid natural gas rush.” The New York

Times. June 25, 2011.

22 “Documents: Leaked industry emails and reports.” The New York Times. DrillingDown Document Viewer at 20.23 “Documents: Leaked industry emails and reports.” The New York Times. Drilling

Down Document Viewer at 22.24 “Documents: Leaked industry emails and reports.” The New York Times. Drilling

Down Document Viewer at 22.

25 Hatcher, Monica. “Chinese oil giant takes big step into Texas shale.” Houston

Chronicle. October 12, 2010.26 “Documents: Leaked industry emails and reports.” The New York Times. Drilling

Down Document Viewer at 42.27 McNulty, Sheila. “Low US gas prices to reshape industry.” The Financial Times.

October 18, 2010.

28 Paton, James and Shani Raja. “BHP to buy Chesapeake shale gas assts for $4.75billion.” Bloomberg. February 22, 2011.

29 “Documents: Leaked industry emails and reports.” The New York Times. DrillingDown Document Viewer at 58.



About Food & Water Watch: Food & Water Watch is a nonprot consumer organization thatworks to ensure clean water and safe food. Food & Water Watch works with grassroots organiza-tions around the world to create an economically and environmentally viable future. Throughresearch, public and policymaker education, media and lobbying, we advocate policies that guar-antee safe, wholesome food produced in a humane and sustainable manner, and public, ratherthan private, control of water resources including oceans, rivers and groundwater.

Copyright © August 2011 by Food & Water Watch. All rights reserved. This issue brief can be viewed or down-loaded at www.foodandwaterwatch.org.


31 Chesapeake Energy Corporation, Securities and Exchange Commission. 10K Fil-

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