Everybody likes good news. But perhaps nobody likes good news as much as exuberant traders and financial advisers who are in the business of selling willing investors on making a quick buck off the next greatest thing to come rolling down the pike.
Such is the case for American shale gas, which, to hear it from some analysts, offers a Saudi Arabia on American soil, or rather, 11—count them—11 Saudi Arabias of natural gas just a waitin’ to be primed for a payday. The implication? Poke a stick in the ground and call it a day, you just struck gold, son.
But after more than a few years of Wall Street touting bubble after bubble and at-home e-traders jumping on for the ride, a little caution now goes a long way. So says Arthur Berman.
Though he says he has no particular penchant for being the bearer of bad news, Berman, a geologist and the owner of Houston-based Labyrinth Consulting Services says there’s good reason to be wary about big promises on unconventional gas. In his presentation to the ASPO conference, “Shale Gas—Abundance or Mirage,” he set out to make the case.
Jumping Jack flash it’s a gas, gas, gas
Of course Berman doesn’t mind being the bearer of good news, too. When called in to analyze the potential of an oil or gas well, the long-time oil industry insider (formerly of Amoco) says he wants to provide his clients with reliable information on the viability and potential profitability of a well or play—and if that’s good news for the client, so much the better. But if there are concerns on production capability, technological challenges, a history of poor performance in the area, or other issues in recovery, he says he calls it like he sees it, no candy coating.
Does any honest investor really want any less?
Maybe not so the unwitting investor, but what about the investor’s fund manager, on whom the investor relies? Or the investor’s financial advisor? Or TV stocks personalities like Jim Cramer of Mad Money, whose push on short term bull trades belies the long-term strategy that reliable energy infrastructure investment needs for stability?
That doesn’t really bother Berman, who says investment businesses are just doing what they’re set up to do.
“The investment companies, I’m not accusing them of being dishonest or doing anything illegal, but they have a conflict of interest,” explains Berman. “They make money by promoting and selling stocks to their client…Their research departments are set up to help promote the business. That doesn’t offend me, it’s just how it works. They’re putting out a message that benefits the business they’re in.”
But that conflict of interest is further complicated when, like Cramer’s, the analysis is driven by a Pavlov’s dog response to W-shaped charts and daily charts which don’t tell you a thing about the longer term performance of not only the stock, but of the larger issues surrounding the commodity it represents.
“Most of the people who are doing that kind of research, their backgrounds are in economics and finance and business,” says Berman. “They haven’t worked in the oil and gas business, they don’t understand the costs, they’ve never had to explain a dry hole to their bosses or to a client. It’s very difficult for people who haven’t participated in the nuts and bolts of the operations to understand it. The companies come to them and say, ‘These are our costs, these are our reserves,’ and they just accept that information.”
And that, says Berman, is neither a recipe for wealth, nor a plan for reliably bringing more natural gas on line.
But energy companies aren’t always much better. Most of them, Berman says, “can’t turn back. They’re way too far down this road. They’ve committed themselves so heavily to this, they don’t have any options. They’ve made themselves just a shale company. I don’t think a lot of these companies are particularly interested in getting more information. They must know, they’re not stupid, but are hoping that something will save then, higher prices, or who knows?”
Running on empty
Berman has seen his share of controversy, precisely for swimming against the prevailing tide that sees shale reserves as undisputed pay dirt for both investment firms and the oil and gas industries. In contrast, Berman says that some of the biggest and most touted shale plays in North America ultimately underperformed, are set to under-perform, are likely plagued with hidden costs, or that companies such as Chesapeake Energy, which are heavily invested in shale plays, are coming up with negative balance sheets on prospects that stand to deliver iffy returns on investment at best.
But saying such things in a financial culture where making a carny pitch for exuberant growth often trumps evidence on the ground ain’t so popular. For this reason, a 2009 article Berman wrote for the trade journal World Oil was quashed by its publishers at the behest of the companies involved, says Berman. The article was slated to downplay the significance of the Barnett and other plays and was eventually published on the ASPO website.
As of press time we had not heard back from World Oil, but a 2009 article in the Houston Chronicle quotes the president and chief executive of Gulf Publishing, John Royall, as saying that Berman had written repetitively on the issue for a year and that it, “was time to move on.” Berman maintains the he had been writing about gas plays worldwide and that his article covering the Barnett play, which was rejected by the magazine, contained new information not published previously.
Is Berman just a skeptic, as he says his critics contend?
“Most of my work is geological,” explains Berman. “I help clients decide where to drill, mostly natural gas, but also oil wells. Seventy-five percent of my work is interpreting subsurface information, seismic data, production data to choose places to drill or evaluating drilling operations that are brought to my clients and they want to understand the business and technological risks. That’s my day job. The rest of the 25% is mostly spent with other clients who are in the financial-services sector, fund managers and even some hedge fund people who are vitally interested in predicting future supply issues.”
As a scientist, and one with a long track record in the oil industry, Berman says he relies on data to drive his analyses and predictions. As a consultant, he’s interested in parleying that record into investment successes for his clients as well, so there’s some self-interest at work. Bad advice, or being overly bearish just for the sake of it won’t win him new clients or help his firm establish credibility on the industry.
At issue, says Berman, is not whether there is natural gas to be extracted in the US. The issue, he says, is the commercial viability of the plays, which he calls, “marginal at best.”
One of the problems is that when prospectors define an area they cast a wide net, but after the real resource recovery shakes out, Berman says it often represents a mere 10-20% of the resource initially claimed, as was the case in the Haynesville play which shrunk down from 1.5 million acres to 110,00 acres due to the limits of drilling such as, uh, that’s my house, or Main Street, or a dry hole.
Add to those factors environmental regulations, community opposition, high recovery and production costs, and exponential decline curves and the picture looks bleaker still. For these reasons Berman says the “Marcellus Shale will disappoint expectations.”
But just try telling that to the guys at Developing Unconventional Gas East, or DUG East, the big convention in Pittsburgh this week with sessions such as “The Shale Revolution” and “The Eastern Advantage.” Former Bush administration political operative Karl Rove is also delivering an address there, titled “An update on mid-term elections and their impact on the gas industry.” That ought to be interesting, I wonder what difference there will be for shale operations if the GOP wins a majority in the House?
We put in a request for comment by DUG East spokespersons for this article but again, had not heard back as of press time.
Another big claim that follows hard on the heels of the amazing quantity of natural gas cited by companies and analysts is that such a series of finds means that America has a boon of 100 years or more of natural gas from these pregnant wells.
Not so fast, says Berman, who says he prefers it when people do the math. He also likes it when they recognize that technically recoverable resources are not reserves, calling the real number in years from these wells about seven after all factors are considered.
Berman’s ASPO presentation “Shale Gas—Abundance or Mirage” shows how easy it is for companies to self-report reserves under new SEC rules and what really happens when the net present value of the gas is measured against the estimated ultimate recovery. When 80% of the plays are undeveloped (or are economically unfeasible), and the reserves are overstated, there’s a problem. And the one who loses the most in this, says Berman, is the shareholder, who is seeing losses while basically subsidizing cheap energy for the rest of us.
What the frack?
Hydraulic fracturing, or hydrofracking, to release natural gas from shale deposits has its environmental critics too, who contend that the process uses too much water and creates too much water pollution. Environmental critics claim that poisoned water from hydrofracking sites has leaked into surrounding aquifers, or that nearby residents can light their faucets on fire from the natural gas pouring out of them. This has lead to a raft of legal cases and some state moratoriums on fracking.
Though Berman is enough of a conservationist to take a bus to work while claiming that he tries to live with as light a carbon footprint as he can, he disagrees with the case environmentalists are making.
“There’s no conclusive evidence that any aquifer in Pennsylvania or West Virginia has been contaminated by hydrofracking. There is anecdotal evidence, and I’m completely on board with saying that we need to look into it further. But whether we like the oil and gas companies or think they’re criminals, they’ve been drilling for fifty years with a minimum of pollution.”
And, says Berman, we’re not getting off fossil fuels any time soon. “We do need the natural gas. And we need the jobs.”
The problem, he says, is the unknown. “People are afraid of what they don’t understand. Colonel Drake drills his well in Pennsylvania in 1859 because oil is seeping to the surface naturally. And if it is, then it’s seeping into the aquifer too. So it’s possible that nobody recognized that they had a minor problem until somebody brought in a drilling rig. Does that means it’s related? Maybe or maybe not.”
Science is Berman’s starting position, and his fallback. If it makes him a skeptic, it makes him an equal opportunity one, criticizing both the industry and environmentalists from time to time. But it does help bolster his case for data-driven evidence, weighing the merits of acquiring the cleaner burning natural gas that we need to make the transition from fossil fuels to clean energy against real issues in the commercial viability of unconventional gas. All while evaluating environmental concerns in an even-handed way.
That’s a caution I, for one, can live with. It has the familiar ring of the now-fashionable sanity. It may also be the starting point to bridge the opposition between industry and the environment that may be hamstringing unconventional development at a time of overall fossil fuel decline.
Can there be compromise? We shale see.