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The Market Ticker – Oh, NatGas Isn’t What It Appears?

Mon, Jun 27, 2011

Economy and News

From The Market Ticker

I’m gonna get to raise that flag again?  You know, this one!


Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States.

But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.

In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves.

Now why would do something like that?  Oh, for money of course.

Remember, Boone and his “Pickens Plan” (which he’s been pimping, er, pumping to anyone who will listen, including Congress) along with the others have all been predicated on, of course, their intent to turn a profit.  And there’s nothing wrong in the general sense with turning a profit – indeed, profit is why everyone is involved in business, right?

The real issue however, as I have repeatedly raised, is that Natural Gas has quite a significant delta in price over the last years.  Indeed, it’s more serious than many care to talk about and we’re at the low end of the range.

How would you like a near 300% increase in price once you commit to a given energy technology?

I will remind you that this is more than the recent rise in gasoline – that was only about a double.

 A former Enron executive wrote in 2009 while working at an energy company: I wonder when they will start telling people these wells are just not what they thought they were going to be? He added that the behavior of shale gas companies reminded him of what he saw when he worked at Enron.


Of course if the price of natural gas is forced higher then many of these plays turn out to be profitable anyway – never mind that this comes out of your pocket as a consumer in one form or another.  And if these firms could get big trucking companies, for example, to convert huge fleets of their long-haul trucks to natural gas, well, that’s so sad for those firms but provides the demand base to prop up prices when the rise begins.

If you listen carefully, even the touters give you the truth – you just have to pay attention:

I wouldnt worry about these shale companies, said T. Boone Pickens, the oil and gas industry executive, adding that he believes that if prices rise, shale gas companies will make good money.

There you have it; there will be a run on Vasoline, however, when the consumer (and some investors) figure out that they have once again been had.

Update: Chesapeake Energy has taken umbrage with the article cited in this Ticker, which is not a surprise, and has issued their own statement on it to their employees with permission to reproduce.  It has been posted in the comments of this article; you should read both sides of any controversy, of course, and come to your own conclusions.  My belief is that it’s darn difficult to determine who’s lying and who’s not when it comes to things like depletion rates, reserve calculations and similar things; remember that many said we’d be “out of oil” by the 1990s in the 1970s – and we’re not, of course.  More than one oil company nearly went bankrupt investing in shale production when the price of oil crashed after the Arab embargo, rendering those investments worthless.  These folks do not always get it right – in either direction.

Disclosure: No positions in this sector.

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