Gold Rush ’11: Natural Gas

 Econintersect:  Just like the California ’49ers and the Yukon prospectors of 1897, hoards of people are pouring into the new gold rush, shale deposits of natural gas.  But, just as previous gold rushes have left many, who were dreaming of riches, penniless and destitute, the current hubbub over vast reserves of natural gas just waiting to be captured by eager “prospectors” may be simply one more rush to lose money.  Today The New York Times referred to the current situation as an “Enron moment.”  Another NYT quote compares the flood of investment in shale natural gas properties, producers and wanna-be producers to the dot.com bubble.

From The New York Times:

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. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles.

“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

Company data for more than 10,000 wells in three major shale gas formations raise further questions about the industry’s prospects. There is undoubtedly a vast amount of gas in the formations. The question remains how affordably it can be extracted.

There are those that disagree with the above asessments.  Also fron The NYT:

Others within the industry remain optimistic. They argue that shale gas economics will improve as the price of gas rises, technology evolves and demand for gas grows with help from increased federal subsidies being considered by Congress. “Shale gas supply is only going to increase,” Steven C. Dixon, executive vice president of Chesapeake Energy, said at an energy industry conference in April in response to skepticism about well performance.

The process for extracting the natural gas from the shale deposits thousands of feet below the surface involves new horizontal drilling technologies and the pumping a water based fluid into the drill holes at high pressure.  The process, known as fracking, has been criticized by many sources as environmentally risky.  The criticisms of fracking have been summarized by Source Watch.org.  

An article yesterday (June 25) in The Wall Street Journal  discusses shortcomings, misinterpretations and actual misrepresentations of data and information about fracking.  Some of the so called scientific claims about fracking appear to be based on less than rigorous studies.

It appears that the science of fracking still has a long way to go.  While there appears to be need for more in depth studies to define exactly what the safety risks are, there are also no scientific studies found yet by GEI News that prove the absence of any specific risks.  Of course, as a general rule the proof that something does not exist is a much tougher challenge proving existence.

In the meantime, natural gas industry investors:  Caveat Emptor. 

Sources: The New York Times, Source Watch.org and The Wall Street Journal