Sub-prime energy situation

Fracking in the UK

Fracking in the UK

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Cat Turner reflects on a question raised in June’s Tynwald session


Fracking: even the name sounds like an assault, and when you find out what’s actually involved it’s clear that’s the case.

So when I saw the qestion to Economic Development Minister John Shimmin last week (‘What research is being undertaken into shale gas resources in Manx Territorial Waters?’) I was anxious to hear his response.

Anxious, because from Speaker of the House of Keys Rodan’s comments in the May sitting, you’d think it was something we should be pursuing with all possible haste (it was held out as having transformed the energy landscape in the US, driving down the costs of power,and potentially offering rich rewards for us too).

This time, the response was a little – but only a little – more measured. Mr Shimmin noted that compared to onshore efforts, ‘any offshore developments in Isle of Man territorial waters . . would be more challenging and expensive’. But he went on to say that the Government ‘will consider all projects . . that can be economically viable and have a benefit for the island’. He also confirmed that the Government is ‘certainly convinced that there is a deposition of shale gas around the Isle of Man and we are looking very closely’ – and that discussions had already been opened with certain operators.

Readers might have seen last week’s BBC2 screening of a Horizon programme, which highlighted the health problems many people are having near to fracking sites, due to the many carcinogenic and otherwise toxic chemicals used in the process. Here, though, I wanted to test out some of the economic myths that seem to be flying around.

A speculative financial bubble has arisen in the US, due to huge over-estimates of reserves, and it’s apparent that the current low price of gas will have to rise sharply, and soon. Why do I say that? In June 2011, a New York Times investigation disclosed insider industry correspondence showing that state geologists, industry lawyers and market analysts were privately questioning ‘whether companies intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves’. One 2009 email from an official at HSI Drilling said ‘the word of independents is that shale plays are just giant Ponzi schemes and the economics do not work’ . In another, a Phillips geologist said ‘it looks to me that the hype about these plays is creating a false sense of security for the American public’.

That was then. But it gets worse – this year, former Wall Street banker Deborah Rogers and geologist David Hughes verified those worries. Hughes in particular showed that individual shale well ‘decline’ rates are massively higher than the companies projected – decreasing by 79 – 95 per cent after three years. Gosh.

But despite this, shale gas companies have increased production. This is partly because many have made plays on the futures markets and are protected from price falls, and partly because as prices started to fall (because of the overhyped and in fact illusory glut of gas), there was still a backlog of wells coming online.

More perversely, many of the land leases they’d taken out required that they start drilling within a set time, or lose the lease – so they had to get going, even though it was no longer economic. But possibly the biggest issue has been that with the companies so highly ‘leveraged’ (in debt), they’re having to keep drilling to generate income to pay down those debts, and compensate for the fallen gas price – victims of their own myth-telling!

We’ve also seen huge, and I mean huge, slashing of estimates of reserves. In 2012, the US government cut estimates by 42 per cent, and just one year earlier the Marcellus shale field (the US’s biggest) was downgraded by a whopping 80 per cent. In fact, Deborah Rogers’ research asserts that reserves across the country have been over-estimated by a minimum of 100 per cent, and in some cases 400-500 per cent, by operators.

US shale production actually plateaued in December 2011, and Hughes points out that it will take $42 trillion of annual capital investment to maintain current production. But in 2012, shale gas worth only $32,5bn was actually produced. Does that make sense to you? Nope, me neither. Nor, in fact, does it make sense to the Joint Research for the European Commission – who recently pointed out that as expected US constraints kick in, prices will be forced to at least double.

So these proposals need a huge amount of caution, even before we get into the environmental vandalism they involve. BP wrote down its shale assets by a massive $4.8bn last year, and Chesapeak by $42bn. If we welcome smaller operators into Manx waters, and one goes bankrupt, who will pay for the inevitable cleanup of dry and worthless wells full of toxic chemicals? And the influx of people to our already burdened health system, as those chemicals take their toll?

The information’s all available to us, and we would be wise to take it on board before rushing in. After all, while it’s good to learn from your own mistakes, it’s surely better to learn from those of others!

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