Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future (7 page)

A
New York Times Magazine
article (“North Dakota Went Boom” by Chip Brown, January 31, 2013) chronicled the economic and social impact on life in North Dakota as a result of the leasing and drilling frenzy in the Bakken:

It has minted millionaires, paid off mortgages, created businesses; it has raised rents, stressed roads, vexed planners and overwhelmed schools; it has polluted streams, spoiled fields and boosted crime. It has confounded kids running lemonade stands: 50 cents a cup but your customer has only hundreds in his payday wallet. Oil has financed multimillion-dollar recreation centers and new hospital wings. It has fitted highways with passing lanes and rumble strips. It has forced McDonald’s to offer bonuses and brought job seekers from all over the country—truck drivers, frack hands, pipe fitters, teachers, manicurists, strippers.

Meanwhile, back in south Texas, the
Eagle Ford
play has seen substantial production of tight oil as well as shale gas (wells in the southeastern, deeper side of the play yield mainly natural gas while wells on the northwestern, shallower side yield mostly oil). Oil reserves are estimated at 3 billion barrels. Mid-2012 production was 424,000 barrels per day from 3,129 producing wells, with an increasing production trend.

While the Bakken and Eagle Ford together account for over 80% of current US tight oil production, there are other plays that offer varying degrees of promise. The
Granite Wash
formation, straddling the northern Texas-Oklahoma border, produces roughly 41,000 barrels per day from 3,090 active wells with a rising trend. The
Cline
shale, located east of Midland, Texas, in the Permian Basin, produces about 30,000 barrels per day from 1,541 wells; here again, production is increasing. Tight oil is also being produced from the
Barnett
shale in Texas, where 14,871 wells yield only 27,000 barrels per day. In this play the production trend is flat.

The
Niobrara
formation in Colorado and Wyoming presents problems with complex geology and access to water, especially given the severe drought that has gripped much of the United States, and Colorado’s recent catastrophic wildfires. Early comparisons with the Bakken have not borne out, and disappointing well results have led Chesapeake to sell off its Colorado leases. Noble, Anadarko, EOG, Quicksilver, and roughly a dozen other mostly small companies are competing in the play, with about 40 active drilling rigs. However, 10,811 operating wells currently yield a mere 51,000 barrels per day of production, and the production trend is flat.

The
Austin Chalk
play (which reaches across Texas and into Louisiana) and the
Spraberry
play (near Midland, Texas) each produce over 17,000 barrels per day.

The
Monterey
shale in Kern, Orange, Ventura, Monterey, and Santa Barbara Counties in southern California boasts tight oil resources of up to 15 billion barrels—four times the size of Bakken reserves. But resources are not the same as reserves, and so far production amounts to only 8,580 barrels per day from 675 operating wells, with a flat production trend. This could change if drilling picks up, in view of the Monterey’s very high resource endowment.

Elsewhere in the world, geology appropriate for the production of tight oil using fracking technology exists in R’Mah formation in Syria, Sargelu formation in the northern Persian Gulf region, Athel formation in Oman, Bazhenov formation and Achimov formation of west Siberia in Russia, Coober Pedy in Australia, and Chicontepec formation in Mexico. Little is yet being done to exploit these resources.

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 would 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.