From: Malo Herry, Worldwatch Institute, More from this Affiliate
Published June 27, 2013 06:48 AM

Are We Living Through a Shale Bubble?

On May 24th, J. David Hughes and Deborah Rogers gave a briefing to summarize the findings of two new reports dismantling the myth of a "shale revolution". We've heard about it in the media, on both sides of the political aisle: shale gas and oil are the future of US energy. Indeed, natural gas prices dropped thanks to hydraulic fracturing (or fracking) and horizontal drilling, which helped lower the country's carbon emissions by reducing coal consumption. In January, Barack Obama said that: "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." This myth led to a gas drilling frenzy that have benefitted Wall Street investment banks, one that evidence suggests can't be sustained for very long.


In her report, Rogers explains that Wall Street is in part responsible for the huge decline in natural gas prices. Investment banks put pressure on companies to produce a lot to keep shares high by meeting financial analysts' production targets. It creates a surplus in gas production leading to prices lower than the cost of production. Investment banks profit from this trend through various transactional fees. For instance, in 2011, shale mergers & acquisitions (M&A) accounted for $46.5 billion, one of the most important profit centers for some investment banks. In August 2011, Neal Anderson of Wood Mackenzie said: "It seems the equity analyst community has played a key role in helping to fuel the shale gas M&A market, acting as chief cheerleaders for shale gas plays."

Gas is not sustainable also because of its low EROEI (energy returned on energy invested), which is basically how much energy it takes to produce energy. For instance, the average EROEI of oil fell from 100:1 in the 1920s to 20:1 today. Natural gas is 10:1, tar sands oil 5:1 and shale gas 3-5:1—and companies know it. In her report, Rogers notes that some can't sell their plays and sometimes have to declare bankruptcy, such as Norse Energy. In the Bakken (North Dakota), the shale industry recently abandoned a plan to build a pipeline to carry shale oil. It is interesting because a pipeline is an expensive investment and must carry a consistent stream of oil or gas to recoup initial capital outlays. Then, as Rogers says, it becomes a "real cash cow." The abandonment of its plans suggests the industry isn't all that confident in the long-term viability of the play. Why haven't environmentalists done the same? We need to create and then communicate ecophilosophies that offer humanity an ethical code to live by.

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