Shale Fracking Is a “Ponzi Scheme” … “This Decade’s Version of The Dotcom Bubble” … “A Lot In Common With the Subprime Mortgage Market Just Before It Melted Down”

A Losing Bet

In 2011, the New York Times wrote:

“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.


“And now these corporate giants are having an Enron moment,” a retired geologist from a major oil and gas company  wrote in a February e-mail about other companies invested in shale gas.


Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, [and a]  former stockbroker with Merrill Lynch … showed that wells were petering out faster than expected.

“These wells are depleting so quickly that the operators are in an expensive game of ‘catch-up,’ ” Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed.


A review of more than 9,000 wells, using data from 2003 to 2009, shows that — based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well — less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.


“Looks like crap,” the Schlumberger official wrote about the well’s performance, according to the regulator, “but operator will flip it based on ‘potential’ and make some money on it.”

In 2012, the New York Times pointed out:

The gas rush has … been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.


Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.


Now the gas companies are committed to spending far more to produce gas than they can earn selling it. Their stock prices and debt ratings have been hammered.

Rolling Stone reported the same year:

Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon [the CEO of fracking giant Chesapeake] has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil. As McClendon put it in a conference call with Wall Street analysts a few years ago, “I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.”

According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don’t pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. “This is an industry that is caught in the grip of magical thinking,” Berman says. “In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down.


In February, Chesapeake announced that, because of low gas prices, its revenues will fall $3.5 billion short of its expenses this year.

Jim Quinn noted last year:

Royal Dutch Shell is one of the biggest corporations in the world, with financial resources greater than 99% of all the organizations on earth. Their CEO [Peter  Voser] probably knows a little bit more about oil exploration than the Wall Street systers and CNBC bimbos. His company has poured $24 billion into shale exploration in the U.S. It has been a huge failure. They have already written off $2.1 billion. They are trying to sell huge swaths of land in the Eagle Ford area. They are losing money in the shale oil and gas business. If Shell can’t make it profitable, who can?

Bloomberg noted in February:

Independent producers will spend $1.50 drilling this year for every dollar they get back.

Oil Price reported in March:

Shell’s new boss, Ben van Beurden, said bets on U.S. shale plays haven’t worked out for his company.


“Some of our exploration bets have simply not worked out,” Shell’s Chief Executive Officer Ben van Beurden said. It was bad management policy to commit close to $80 billion in capital on its North American portfolio and still lose money. Now, he said, it’s time to cut the loss and slash exploration and production investments by 20 percent for 2014.


Shell’s problems say more about the difficulties of shale exploration than they do about the company itself.

The Wall Street Journal pointed out in April:

These newly public companies are spending more than they make ….

Bloomberg wrote in May:

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”


In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock.


Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.


“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”

And Tim Morgan – former global head of research at Tullett Prebon – explained last month at the Telegraph:

We now have more than enough data to know what has really happened in America.


If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US.

The key word here, though, is “initial”. The big snag with shale wells is that output falls away very quickly indeed after production begins. Compared with “normal” oil and gas wells, where output typically decreases by 7pc-10pc annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60pc or more in the first 12 months of operations alone.

Faced with such rates of decline, the only way to keep production rates up (and to keep investors on side) is to drill yet more wells. This puts operators on a “drilling treadmill”, which should worry local residents just as much as investors. Net cash flow from US shale has been negative year after year, and some of the industry’s biggest names have already walked away.

The seemingly inevitable outcome for the US shale industry is that, once investors wise up, and once the drilling sweet spots have been used, production will slump, probably peaking in 2017-18 and falling precipitously after that. The US is already littered with wells that have been abandoned, often without the site being cleaned up.

Meanwhile, recoverable reserves estimates for the Monterey shale – supposedly the biggest shale liquids play in the US – have been revised downwards by 96pc. [Background and here; and see this.]  In Poland, drilling 30-40 wells has so far produced virtually no worthwhile production.

In the future, shale will be recognised as this decade’s version of the dotcom bubble. In the shorter term, it’s a counsel of despair as an energy supply squeeze draws ever nearer.

This entry was posted in Business / Economics, Energy / Environment, Politics / World News. Bookmark the permalink.
  • mark

    no wonder the powers that be are pushing the middle east into a flash point- hoping oil prices will go up, and gas prices follow. but,… this could easily be the trigger factor for a full rickards style global meltdown,..? frackers go under with massive debts, then the leveraged investors fall over, exacurbating the drama

  • Probably won’t see the pain in these companies till the next recession when the funding dries up. Until then, banks and investors will stay behind them and the companies will be able to continue drilling new wells. Once the economy hits it’s next major slowdown, it could be very serious problems for the unprofitable companies in this space.

  • Outreach Shizel BeezleyBub


    Our “green” energy hi-tech future requires:
    ► conflict minerals,
    ► rare earth elements,
    ► heavy metals,
    ► nano metals and graphite.

    Search for “rare earth mining in China” on YouTube and see what special hell your solar panels and wind turbines produce in Mongolia. China can do this because they have undercut all the world’s production of rare earth elements with low wages, low currency and no environmental enforcement. They can do this because they just ignore the radioactive thorium waste that comes with mining high-value, heavy rare earth elements. They just dump this radioactive waste into tailings ponds forming man-made toxic lakes just like the tar sands, except worse. Rare Earth elements are approaching the limit on their energy return on energy invested. Rare earth elements can’t profitably be mined outside of China without burning radioactive thorium, which is the mining by-product always found with rare earth elemenets almost anywhere.

    Graphite is used in all of our so-called “green” powered batteries and is mined in China emitting deadly fine air particles resulting in a lethal smog that washes down from the skies in an ash laden rain that covers crops and water. China recently shut down several graphite mines because of the pervasive smog. Graphene, a nano-material produced for batteries, is water soluble and can cut through human/animal cells. Both graphite dust and graphene are deadly to humans because of their small size. You don’t want to breathe this stuff. Molten salt and liquid metal batteries are equally ecologically destructive.

    Solar cell manufacturing produces 3 green house gases that are over 10,000 times worse than C02. They require all kinds of deadly liquid acids to manufacture. Solar panels lose efficiency at the rate of 1% per year lasting 20-25 years, after which they become toxic waste. The expensive inverters they require have to be replaced every 5 to 10 years up to 4 times over the life of the panel. The new thin cell panels use nano materials and are even more toxic with shorter lifespans. It doesn’t matter how “clean” the latest experimental solar panels are because existing manufacturing plants will stay open to recoup major investments. Manufacturing just five wind turbines produces 1 ton of radioactive residue and 75 tons of toxic, acidic water used to leach out the required neodymium. Wind turbines only work at 25% of their rated capacity 90% of the time. Over 2 million children died in the Congo for the conflict minerals green energy needs. Thousands of people die in Chinese mines every year for the minerals green energy needs. Prof. Jian Shuisheng of the Jiatong-University estimates the production of just 6 solar panels requires one ton of coal. Since green power is intermittent, it would take at least 10 times the rated amount of “green” energy to displace just one equivalent unit of 24/7 fossil energy because your so-called 100 Watt solar panel delivers zero Watts at night and batteries are heavy toxic $energy hogs. One company in the U.S. cut down 5 acres of trees to build a solar farm to power the production of plastic bags. Green power will not be enough. Part-time energy and billions of toxic batteries adds up to death to all life on earth just from their destructive ecological inertia.
    Ozzie Zehner explains about “green” energy illusions.
    Tim Garrett explains why one dollar equals 10 milliwatts.

    Here’s why “green” energy will fail
    ► 10,000 years ago humans and our livestock occupied just 0.01% of all the land-air vertebrate biomass on earth.
    ► Now humans and our livestock occupy 97% of all land-air vertebrate biomass.
    ► Humans and our livestock now consume over 40% of earth’s annual green land biomass production.
    ► 1 million people born every 4½ days. People live longer.

    What does this mean?
    ► 50% of All Vertebrate Species will be gone by 2040.–Facing-the-Mass-Extinctiony

    What have we done?
    ► 90% of Big Ocean Fish gone since 1950.
    ► 50% of Great Barrier Reef gone since 1985.
    ► 50% of Fresh Water Fish gone since 1987.
    ► 30% of Marine Birds gone since 1995.
    ► 28% of Land Animals gone since 1970.
    ► 28% of All Marine Animals gone since 1970.
    ► 50% of Human Sperm Counts gone since 1950.
    ► 90% of Lions gone since 1993.
    ► 90% of Monarch Butterflies gone since 1995.
    ► 93 Elephants killed every single day.
    ► 2-3 Rhinos killed every single day.
    ► Bees die from malnutrition lacking bio-diverse pollen sources.
    ► Extinctions are 1000 times faster than normal.

    What’s going to happen to us?
    ► Ocean acidification doubles by 2050.
    ► Ocean acidification triples by 2100.
    ► We are on track in just 13 years to lock in a near term 6°C earth temp rise.
    ► Mass Extinction will become unstoppable and irreversible in 40 years.
    ► Permian mass extinction of 95% of life took 60,000 years 250 million years ago.
    ► Dinosaurs mass extinction took 33,000 years after asteroid impact.
    ► Anthropogenic mass extinction will take 300 years max.
    ► This mass extinction is 100x faster than anything before us.
    ► Antarctic meltdown now irreversible and unstoppable.
    ► Arctic methane burst is irreversible and unstoppable within current system.
    ► World Bank says we have 5-10 years before we all fight for food and water.

    What are we doing right now?
    ► It takes 10 times as much rated “green” energy to displace 1 unit of fossil energy.
    ► Efficiency and conservation only causes more growth within our current system.
    ► We combine bacteria DNA with plant DNA and eat it.
    ► We are eating stuff that never, ever existed on earth before.
    ► We put man-made, computer designed, synthetic DNA into our food.
    ► We put nano metals and nano particles into our food.
    ► We put poisonous pesticides and herbicides directly into our foods.
    ► There are thousands of different chemicals in our foods.
    ► We are turning into genetic mutants because of our food.
    ► We are wiping out all life on earth because of our food.
    ► After mass extinction, genetically modified trees may be all we leave behind.

    Did you know that the new $2 billion Ivanpah solar plant in the Mojave desert is a death ray that ignites birds in mid flight? When their bodies fall to the ground, they leave smoky trails in the sky called streamers. These birds are attracted to the bugs who are attracted to the shiny, pretty lights, just like us. It is estimated as many as 30,000 birds per year will die this way during huge migrations at just this one green power plant. Bigger solar plants of the same type are in the works including one near Joshua Tree, next to a wildlife sanctuary. During Ivanpah’s construction, up to 3,000 endangered desert tortoises suffered a temporary loss of legal protection and were allowed to be killed by heavy diesel equipment and materials. Thousands of slave workers die in China’s mines every single year to help produce the exotic minerals used in its construction. This is referred to as the “Green Economy”. If we changed the whole planet to green power, we would kill the earth we call home.

    Civilization is slowly collapsing while the earth is quickly dying. My credentials? I cut grass in a trailer park in Canada.

    • jadan

      Thanks for your thoughtful presentation.
      Are you recommending a new breed of nuclear reactors built around thorium as a sustainable energy source?

      • Tara Connor

        France already does that; they have so much extra energy,they sell it to England.

        • kimyo

          there are no production thorium reactors in operation today, not in france, nor anywhere else. as far as i know, thorium based nuclear power has never provided electricity to the grid anywhere in the world.

          • jadan

            That’s what I thought…’s being considered as next gen nuke power…

    • Nathanael

      It’s trivial to make graphite in a responsible fashion; we don’t
      HAVE to buy it from China, it’ll add something like half a penny to the
      cost of production.

      It’s perfectly possible to clean up the thorium from rare earth mining. We don’t HAVE to buy it from China, it’ll add something like a few pennies to the cost of production. (Sigh.) Also, rare earth elements aren’t needed for solar panels, they’re mostly used for magnets and some batteries.

      Everything in solar panels is fully recyclable, and fairly cheaply. We just have to do it.

      • Nathanael

        …I’m not arguing about the high likelihood of mass extinction due to global warming & ocean acidification. We probably will go extinct. I’m just saying if we weren’t, collectively, fools, we could avoid it; birth control and solar panels really do work.

  • ashermiller
  • Luke Smith

    The sky is falling. The sky is falling. Or is it?

    Let me get this right. Because Shell Oil has trouble with its US onshore horizontal programs, while Marathon, Hess, Continental and others run successful programs, means that it’s a Ponzi? Please.

    • evangelical

      No, the drillers treadmill means it is a ponzi scheme.

  • jadan

    In discussions of energy resources, there is never mentioned “energy from the vacuum” championed by Col. Tom Bearden and others who question current theoretical dogma. Nor does established hydrogen fuel technology come into the picture as the basis for decentralized energy generation. It’s always oil vs “green” energy, the solar and wind options,. as though there were nothing else out there. Tesla was experimenting with the wireless generation/transmission of electrical energy, which is what his famous Wycliffe tower was all about. It’s not an energy crisis we have, but a failure of imagination. We’re trapped in a paradigm and can’t seem to shake loose of it. If the billions invested in fracking were directed to non-traditional sources, we might discover a technology that right now just seems like magic, that is, unreal……

  • Tara Connor

    I heard about the cars that run on “vacum air”-run-engine, from a cab driver, I couldn’t believe it.This is because powerful people and companies make billions off oil; they are not going to give that up. Would you?Monopolies are that way,because they can’t stand the competition.Hence, we have oil -gasoline monopoly and they would kill any alternative car engines,that have different energy source.So?You won’t have electric,or other type of cars unless you find ways of nullifying oil companies FIRST.THEY are your problem you would have to attack first.

    • kimyo

      compressed air vehicles are a viable option. however, energy, typically fossil based, is still required to ‘fuel’ them. they don’t ‘run on air’. there aren’t cars which ‘burn water’. hydrogen for fuel cell vehicles is produced (typically) using grid power (ie: coal/nuclear/natgas).

      unfortunately, there are no ‘alternative car engines’ which ‘have different energy sources’. you’re confusing ‘energy storage’ with ‘energy production’.

      • Nathanael

        Grid == hydro/nuclear if you’re in several parts of the country. Usually there’s a little gas. It’ll be solar/wind pretty soon at the rate Swanson’s law is going.

        • kimyo

          75% of u.s. electricity came from coal/nuclear/natgas in 2013.

          perhaps swanson’s ‘law’ is more akin to a ‘guideline’?

          What is U.S. electricity generation by energy source?

          In 2013, the United States generated about 4,058 billion kilowatthours of electricity. About 67% of the electricity generated was from fossil fuel (coal, natural gas, and petroleum), with 39% attributed from coal.

          In 2013, energy sources and percent share of total electricity generation were

          Coal 39%
          Natural Gas 27%
          Nuclear 19%

          Hydropower 7%
          Other Renewable 6%
          Biomass 1.48%
          Geothermal 0.41%
          Solar 0.23%
          Wind 4.13%
          Petroleum 1%
          Other Gases < 1%

  • WAM

    Yes…. You tell it to the guys involved in the exploration of Bazhenov Basin, West Siberia. Same SHELL and EXXON. It is true about GAS in US – an overproduction from the shale (that is why gas is being now exported as LNG from USA – to prop-up the internal prices); long time ago SHELL (with some help from EU, by a mean of establishing a sulphur content limit in fuels) found a way to get more bucks from GAS – a manufacturing of non-sulphur diesel oil through GTL (Gas-To-Liquid) technology, now implemented in Quatar (Pearl installation) and Malaysia. Now the real money is made by extraction of SHALE OIL (aka tight oil), again there are oceans of this stuff in Bazhenov Basin.

  • Geoman

    Look, this is a bit of a stupid analyses. The problem with fraking is that it is much more expensive than traditional drilling. All geologists know this. After success in the Bakkan and Eagle Ford lots of companies rushed in and created over supply in the U.S. The full cycle cost of gas, where you amortize in all your costs, is probably between $6-$8/mcf range. Strictly operational costs, not amortizing in land costs are probably $3-$4/mcf. So when gas was $14/mcf fraking was enormously profitable. Gas is hovering around $4/mcf in the U.S. right now, which means fraking is generally unprofitable. What is supporting the industry now is equity – people investing (and burning) capitol. Which means, after some period of time, if the prices doesn’t go up, some companies will use up all their equity and go out of business. Then what happens? Less supply, and the price gas up, and suddenly fraking is profitable again. One way to fix the problem right now is to allow the export of gas from the U.S. – natural gas prices in Europe are $8/mcf, in South America and Japan they are $14/mcf. So the picture changes radically once you allow gas exports. In summary, banks and gas companies are placing a bet on 1) they can hold out longer than the other guy, and 2) Congress will allow LNG exports. Either bet could be very profitable.

    • Nathanael

      Here’s the problem with your analysis.

      At a bit less than $5/mcf (50 cents/ccf), it becomes cheaper for residential and commercial locations to heat with electricity, based on average US electricity prices. (It’s about 50 cents/ccf for delivery of gas.) So at this price, people rip out their gas heaters and put in electric heaters.

      Electricity prices are DROPPING due to a number of effects (deployment of solar and wind, lighting efficiency improvements, etc.) Demand for gas for heating is therefore CAPPED long-term. Gas is used for electricity generation as well, of course, but that will
      largely be displaced by solar as solar gets cheaper (which it will
      according to Swanson’s law). Obviously there will still be industrial demand for gas for non-heating purposes, and gas will probably be used for some peaking load electrical generation at night, but that’s a fraction of the heating demand.

      In Europe, South America, and Japan, the price already favors electricity and solar over gas, and residents and businesses are responding accordingly.

      Basically, gas can’t stay at the high prices where fracking is profitable, because it causes people to shift to solar-powered electricity, which brings the price of gas back down.

  • Joan Tvedt