Sunday, 21 September 2014

Shale Fracking Is a “Ponzi Scheme”

So says Washington's Blog.

Who's losing out?

A review of more than 9,000 wells, using data from 2003 to 2009, shows that — based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well — less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.


The gas rush has … been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.

Well, someone has to be making money from this. Ah, yes, the usual suspects:

Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.


For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon [the CEO of fracking giant Chesapeake] has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil.

Of course, it doesn't really do those who stand to gain any harm if there is a lot of public anti-fracking hype: if anything, it just helps to confirm to would-be investors that Shale gas is the Next Big Thing. So we have landowners and bankers making out like bandits and the general public (in the form of small investors) losing out big time. Hmm, sounds familiar...


Mark Wadsworth said...

I must say, environmental arguments aside, which I think are grossly exaggerated, in economic terms this whole shale gas thing doesn't seem to stack up.

Kj said...

Well, the leases/land were probably priced on the assumption of gas prices that wouldn't fall as much as it actually did after the surge in supply from fracking. Doesn't mean it doesn't syack up, but that there is much less rents in fracking than traditional sources of natgas.