Shale fracking carries a political odor all its own, just as food whose genes were modified by primitive people is more acceptable that food modified—gasp—by scientists. As an example, the Massachusetts Sierra Club opposes gas pipeline expansion because “The pipelines are being built to take fracked gas to off-shore facilities in the U.S. and Canada for export.” Like many gas pipeline opponents, they apparently think that natural gas is homeopathic, that is, the methane molecules have a memory of how they were produced.
Two new books attack fracking from different perspectives, Amity and Prosperity by Eliza Griswold and Saudi America: The Truth about Fracking and how it’s Changing America by Bethany MacLean. The first discusses the health and environmental problems in a small town where fracking is being done, the latter argues that “Fracking is such a fragile industry that it is not hard to make it go bust.” (I have ordered but not read both books, and am basing this on two book reviews of the former and an opinion piece written by the author of the latter.)
The first book appears to do little more than relate specific instances of contamination and health problems, apparently taking a human approach rather than an epidemiological one. Possibly it does more than that, but the table of contents doesn’t show a list of figures or tables with graphs. I have no doubt that the family’s travails described in the book are real, but it is not clear (at this point) if the author has proven their causes nor shown their broader relevance. Any number of books can be written about the horrors of living near a pig farm, a daycare center, or a cookie factory, but until I read this, I can’t say if this goes beyond that level of rational analysis. Stay tuned.
The second book, by Bethany McLean needs to be taken seriously, given the author’s track record of exposing the Enron scandal. One would like to think that it is much more analytical, but since it hasn’t been published yet (although Amazon says it’s a bestseller! Kudos), that can’t be judged. On the other hand, the arguments made in her Sunday NYT piece give me cause for concern.
Without a doubt, large amounts of money was poured into the shale industry, a good portion of it without due diligence. However, I have several times listened to financial analysts argue, in the most extreme case, that not a single fracked well is profitable, while industry executives counter that their profits are very large.
Further analysis is needed to parse the dispute, but recall that many in the industry insisted that $80 or $100 a barrel was needed for oil production generally to be profitable, yet lower prices haven’t stopped production expansion from Brazil to Russia. (In 2012, I was called an idiot by a CEO for suggesting the long-term sustainable price was close to $50 than $100 because the latter was the marginal cost of production. About an hour into this video.) And when oil was dropping below $100/barrel in 2014, one prominent bank argued that "[O]n a reserve weighted basis, the average breakeven for unconventional plays in the US is $76- 77/bbl, at an asset level."
The price crash did cause shale oil production to slow, but it has since recovered and is growing rapidly at prices below $70.
The same was true for shale gas. I reviewed a number of estimates for shale gas breakeven costs made before 2014, and the lowest was $4/Mcf. (See figure.) Yet the price has not been above $4 since July 2014, and production has continued to expand. Needless to say, the issue is more complex than can be dealt with in a post, but there is no question that broad brush financial analyses have often missed the target and by a very wide margin.
The point is that production costs can be devilish things. It is all too easy to underestimate or overestimate them, for example, by including the cost of debt taken on to lease unused acreage or by excluding administrative costs. More important, costs are both flexible and cyclical and lower levels of activity usually mean lower per-unit costs as industry inflation declines, while new approaches, such as shale fracking, typically see significant improvements in methods in the early stages.
McLean makes another point that many find appealing, namely that shale wells decline rapidly, but she mistakes this as explaining the “terrible financial results.” The glass half-full observers will note that a rapid decline rate means a rapid extraction of reserves and thus faster reception of revenue. Money soon is better than money later, all else being equal.
One suggestive factor: decline rates is one of those mystical things that peak oil advocates trotted out for years, knowing that most in the audience would not be familiar with them and leave any assertion unquestioned. But the rate of decline in production is only one input in the equation and relying on that as suggestive of future difficulties is like arguing that consumption of oxygen by humans will deplete the Earth’s resources—if you ignore molecular oxygen produced by plants. (I did the calculation, there’s 5.45 million years’ worth at current consumption.)
The decline rate issue is a combination of an omitted variable problem—including that the industry offsets decline with new drilling—and historical ignorance—being unaware of the fact that the argument has been around for decades, but never actually proved very relevant. The figure below shows the number of rigs drilling in Appalachia (primarily the Marcellus shale basin), and although activity collapsed in 2015, production growth continued unabated, high decline rates notwithstanding.
That any given shale producer might not be a good investment might certainly be true, but the issue is a complex one, which appears to require much more in-depth analysis than provided by these books. And the possibility that the books are off-base shouldn’t be a surprise, given the long history of energy writers being led astray by simplistic arguments. Earlier I described how two Nobel-prize winning economists made seemingly logical but incorrect arguments about petroleum, a field in which they were not actually expert.
Any number of books were written about peak oil which simply parroted arguments about the Hubbert Curve, low discovery rates, and yes, the threat of high depletion rates (also known as “the Red Queen’s Curse”), but most of which didn’t examine any of those arguments in detail, as my book on the subject did. (The Peak Oil Scare) Of course, the detail I provided in lieu of alarmist warnings ($20 a Gallon!) and inflammatory titles (Peak Oil Survival: Preparation for Life after Gridcrash) is probably why my book sales didn’t reach four figures. (Assume sad emojicon) I guess being interesting is better than being right.
