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Shale Gas Is Not a Ponzi Scheme: XOM, CHK, EOG

June 29, 2011 | About:

The New York Times came out with this article questioning whether the shale gas revolution isn’t much less than it has been advertised to be:


The article got a lot of attention on the business networks and in the press. If you haven’t read it you have likely at least heard it referred to.

I watched some of the coverage of the issue on television before I read the article. When I did read the article I was shocked by how much attention it had received.

I was expecting some serious data and facts to support a negative opinion on shale gas. What I found was an article that provided no facts but rather references to a series of e-mails from anonymous industry insiders that stated that shale gas was not going to be the great asset for America as advertised. The e-mails themselves provided no data or facts, rather just suggestions of problems. The article also made sure to refer to Enron several times as well as the financial collapse and the dot-com bubble.

I then made sure to listen to the opinions of several top executives in the energy industry who spoke out about this article and its accusations. For those interested in hearing what they have to say I’ve recapped the information here as I think it is important to not get swept up by the press who obviously love a Big Oil conspiracy theory.

Aubrey McClendon — Chesapeake Energy

If there was one executive I would be a little leery of trusting on this issue it would be McClendon as CHK basically is shale gas as they are pioneers in this area. Chesapeake would be more motivated than other more diversified energy concerns to hide a problem with shale gas. McClendon appeared on CNBC and I thought the points he raised were all rational.

Here are my notes and the video:

Cramer question: Why do you think the media is targeting the industry?

McClendon answer: Not entirely clear to me but I think this particular reporter and this particular paper has probably been captured by environmental extremists.

There were some e-mails yesterday by the — or on Sunday rather by some environmental groups claiming credit for having coached this particular reporter into saying that's completely not true.

How in this world when gas prices are at a seven-year low in the US, where we have passed Russia to be the largest producer of natural gas, when gas supply and demand are all-time highs in our country and you come out now and say that wait a minute, there's not as much gas as we think — it's ludicrous.

Every part of the market, every bit of science is out there that says that we're at the very beginning of the shale gas revolution. And in fact as you said in your intro we think we are absolutely understating the amount of gas because all we can really talk about publicly is the amount of proved reserves that we have. And the proved reserves are dwarfed by the unproven reserves or reserves that we'll be developing for decades to come.

This one reporter, it seems like, has chosen to ignore all of the evidence and also to say that he — a handful of unnamed critics of the industry and a goat cheese farmer from fort worth and a third-tier geologist who considers himself a reservoir engineer, that somehow they know more about the shale gas revolution in America than companies that have combined market caps of almost $2 trillion and have spent hundreds of billions of dollars to develop these new resources. I mean, it's ludicrous. We're not debating the origin of the universe when no one really knows what happens. We're debating whether or not the US Has as many gas reserves reserves as is evident and being produced every day. And the reality is we're understating because we don't even get to count all of the unproven resource potential that our company and other companies have.

Cramer question: Asks why the Times had an e-mail from a Chesapeake geologist that suggested that he was skeptical of the accuracy of predicting production from these shale wells forward for the next 20 or 30 years. Isn't this the smoking gun I would want if I wanted to win the Pulitzer?

McClendon Answer:

If you wanted to win the Pulitzer for fiction, I guess you probably could. The young man was less than one year out of school when he wrote the e-mail, he's one of almost 200 geologists that we have. He's not worked here very long. Yes. If you go on to read the full context of the e-mail, his comments are basically in the context of in low gas prices it's tough to make money drilling natural gas.

And that is true and why we've been moving more toward a liquid base and waiting for natural gas demand, the revolution in natural gas demand, something that will underpin an American industrial renaissance for demand to pick up and gas prices to pick up a little bit.

Cramer question: The reporter who wrote the article was on CNBC earlier and was asked if the energy companies were inflating reserves to try and increase share prices. But a government company like KNOC has invested in shale gas and they have no motivation to overstate reserves, just an interest in producing gas.

McClendon Answer:

Yes, that's a crazy comment. For starters, if we were to overstate reserves, obviously we have ourselves half a million shareholders. We have 34 analysts who cover us. We have peer companies that look at what we do. We have the US Government through the SEC that looks at what we do. And remember, our engine — our reserves are really calculated by third party — right. But not you. They're not us. They're third party. Plus do you really think that Exxon (NYSE:XOM) and Chevron (NYSE:CVX) and shell (NYSE:RDS.A), I mean, all these companies are clueless and that a handful of people quoted in the article know what they are doing? And by the way, to create a fantasy that there's more gas than is actually out there actually depresses our stock prices. Because we do better if gas prices were higher. So if the New York Times article was true, then our stock should skyrocket because it means that the gas prices are certainly going to move up. So any way you approach that article, it's completely illogical. It's ludicrous. And honestly, I’ve been reading the New York Times for 30 years. It is an incredibly sad commentary about a once venerable newspaper.

Video link:


Mark Papa – EOG Resources

Second up is Papa who is well known for being a straight shooter.

Papa Comments:

In my opinion, the article is completely misleading.

If the Times did an article — an objective article relating to indigenous North American natural gas they would have pointed out through the addition of horizontal drilling we can lower the cost of gas to the entire nation to the tune of $50 billion a year.

I would say pretty much everything in the article I would disagree with except they said that profit margins at current gas prices are pretty low, and that is true.

The reserves are real.

What really has happened here is there's been a surplus of natural gas created, and I believe it's going to last for several years. Consequently, you see a lot of the industry move towards more liquids rich plays.

This same concept applies to oil, believe it it or nor not, oil, believe it it or nor not, from shale. I think that's the next new trend in the industry. You'll see a dramatic increase in total US Oil production due to the same technology that has worked for natural gas.

To put it into context, in the US Today we produce about 5.5 million barrels of oil a day total. That's the whole country includes Alaska, Gulf of Mexico. I believe that this revolution in unconventional oil from horizontal oils and shales is liable to increase our oil production by about 1.5 million barrels a day by 2015. That's going to be the largest oil increase in the last 40 years that we've seen in the united states.

So the New York Times article is directionally I think very incorrect relating to gas, and it's a surprise to me to see such an article from such a prestigious paper.

Earlier on your show there was some conversation about if the New York Times article was right, it would be bullish for natural gas companies in the US Unfortunately, I believe the New York Times article is wrong, and probably we're going to have low gas prices in the US For at least the next three or four years.

Consequently, a company like EOG (NYSE:EOG) is shifting a lot more towards oil and away from natural gas because of our expectations of low natural gas prices.

Link to video:


Exxon Mobil

I think the most useful response though comes from Exxon. This is a company that came late to the shale gas party and was not built around the success of shale gas. Exxon had only one reason to spend $40 billion on XTO in 2009 and that was because they analyzed XTO’s shale properties and decided this was an attractive investment. What better vote of confidence do you need than the smartest oil and gas engineers voting with $40 billion?

Here is the Exxon response:

You really have to wonder why the New York Times is campaigning against cleaner-burning, domestically produced natural gas.

In the latest installment (stories published yesterday and today), the Times questions the value of our country’s vast shale gas resources with little more than anonymous sourcing, two-year-old emails and analysis unsupported by fact. Ironically, author Ian Urbina did not call ExxonMobil, the largest natural gas producer in the United States, for comment. You would think an investigative journalist for one of the world’s great newspapers would have been curious to know why the world’s largest publicly traded energy company has invested billions of dollars in a so-called “Ponzi scheme.” Of course we’re doing no such thing, no matter how hard the article works to imply otherwise.

What does the Times have against an industry that supports more than 2.8 million American jobs and contributes $385 billion annually to the US economy? In Pennsylvania alone, more than 48,000 jobs were created in 2010 because of the development of the Marcellus Shale resources there. US natural gas production in 2010 was at its highest level since 1973 thanks to industry breakthroughs in shale gas production EOG facts which the Times fails to mention.

Though he did not bother talking to us, the writer did seem to put a lot of weight on the word of a retired geologist who just two years ago wrote that it was “difficult to imagine” that the “Haynesville Shale can become commercial.” Ironically, the Haynesville Shale is now the largest gas producer in the United States.

The writer also invokes the Federal Reserve to try to lend credibility to his premise that the shale gas revolution is a flash in the pan like the dot-com bubble and built upon misleading or even illegal accounting practices — in this case reserves reporting — like the Enron scandal.

A closer read and a quick Google (GOOG) search shows that the person he is quoting from the Fed was appointed to the Dallas Fed’s advisory committee and is a long-time shale gas opponent. The writer conveniently omits a report issued last year by economists who actually work for the Dallas Fed that notes that “the Texas experiment in the Barnett Shale proved the technical feasibility of shale gas development and brought costs within bounds that promise to give shale gas an important role in global energy supplies for decades to come.”

The current low price of natural gas, which may indeed make certain wells for some companies uneconomic to drill at this time, is in part a result of increased supply on the market. And that’s a function of the industry’s ingenuity in applying technology to tap resources that had been uneconomic to develop before. These increased supplies of domestic natural gas enhance US energy security and economic competitiveness.

Risks are inherent in the oil and natural gas business. There is no guarantee that oil and gas will be found in quantities that will make it economic to produce. There is always uncertainty in predicting ultimate recoveries, particularly in the early stages of development. The US oil and gas industry is experienced in reducing this uncertainty through studies and the integration of production histories and other data. For example, in the Bakken Formation of North Dakota and Montana, the US Geological Survey now says 3 billion to 4 billion barrels of undiscovered oil are available — 25 times more than the original estimate made in 1995.

If the writer had bothered to call us, we would have told him that ExxonMobil’s investment approach is disciplined and based on a long-term view of global market conditions. We invest through market cycles and are not driven to hasty decisions because of day-to-day commodity market volatility. It was this long-term vision that led to the acquisition of XTO and subsequent shale gas ventures. Today, we are the largest producer of natural gas in the United States, and we are positioned to double our US unconventional production over the next decade with an inventory of approximately 50,000 drillable well locations. We have strong positions in the Barnett, the Woodford, the Haynesville, the Fayetteville, the Eagle Ford, Marcellus and the Bakken Shales.

Technology development and application are and will remain key elements in maximizing the full value of these large, long-life resources. Here are some examples: Unconventional production from Haynesville increased four-fold in 2010, while production in Fayetteville doubled in 2010. The Barnett Shale, where we currently have gross production of approximately 900 million cubic feet per day of gas, is another good example of value creation through technology. We have been able to maximize long-term ultimate recovery with longer lateral lengths and improved drilling and completion efficiency. And our net unit development cost in this shale play is about $1 per thousand cubic feet equivalent, a 50 percent improvement in the last five years, which is yielding attractive drilling program returns. Our confidence in per-well recoveries in the Barnett is underpinned by a decade of production history of early vertical wells drilled in the play — hardly a flash in the pan.

On the Enron allegation, reserve filings with the Securities and Exchange Commission are taken very seriously by the oil and gas industry and come with serious consequences for misreporting. ExxonMobil takes a rigorous and methodical approach to booking proved reserves. All reserve additions are subject to a long-standing, thorough management review process regarding the reasonable certainty of recovery, which is the standard set by the SEC.

It is unfortunate that the words “rigorous” and “methodical” can’t be applied to the New York Times’ recent articles. Understanding the facts surrounding the potential for development of our nation’s energy resources is every American’s business. Our economic recovery, environmental progress and energy security depends in part on a sound, stable and sensible policy and regulatory framework informed by honest, fact-filled debate. The Times’ current campaign undermines this debate and is a disservice to its readers.

Link to response:


About the author:


Rating: 4.0/5 (27 votes)


LwC - 6 years ago    Report SPAM
Well I read the NYT articles and I have a different take on them. While I can appreciate that companies like CHK and EOG who have staked a substantial share of their resources in the shale gas plays are concerned that their judgement and even their veracity is being called into question, it is more difficult to disregard XOM. After all XOM is the gold standard in managing O&G investment over the long term. The simple fact is that many companies and oil patch investors have made a lot of money in shale gas. But they haven't made it by producing gas; they made it by being into the plays early and then selling to the new comers at multiples of their original investments when the plays got hot. This is a time honored traditional way to make money in O&G.

To simply dismiss out of hand the anecdotal evidence provided in the quoted emails, etc is IMO possibly just self serving. After all we now know that similar types of emails in the banking industry shed light on what the mortgage syndicators were actually thinking as opposed to what was being stated for public consumption and for sell side sales materials. References in the articles to similar types of emails in Enron IMO simply illustrate that this kind of thing has happened before, is not new, and therefore we ignore such information at our peril. We've learned that when there's a lot of money at stake people don't always do the right thing. At the very least IMO the existence of internal emails that appear to be contrary to the public stance of the players should put one on guard.

IMO XOM's dismissal of Art Berman as just a "retired geologist" has no basis in reality, or is misleading at best. Yes he is "retired" in that he no longer works for a major oil company, like he did for more than 20 years, but he has continued to work in the industry as he has done for more than 30 years. He apparently has a lot of experience in the oil patch, and AFAIK there is not even one published report that systematically and coherently undermines his reports about the shale gas industry point by point. Why not? There are plenty of personal attacks though, mostly from industry players that stand to lose a lot if he turns out to be right.

Here is a link to a recent presentation by Art Berman. A year or so ago I read a much more detailed study that he produced about the Barnett shale gas play for which he studied the production profiles of literally thousand of wells (IMO no one can argue that he didn't do his homework), but this presentation IMO might give some insight to the interested reader:

Shale Gas—A View from the Bottom of the Resource Pyramid

Arthur E. Berman Labyrinth Consulting Services, Inc.

Danby, New York March 31, 2011


To be sure I don't know how this will play out over the next 10 to 20 years. Art Berman may prove to be absolutely right, McClendon and Papa and their ilk may turn out to be right, or more likely the reality will turn out to be somewhere in between. It promises to be interesting though.

Disclosure: I'm long oil and gas

AlbertaSunwapta - 6 years ago    Report SPAM
So given this debate, what are the best "picks and shovels" alternatives to buying the reserve owners?

Any suggestions for drillers, enhanced recovery technologies, etc.

Chip2000 - 6 years ago    Report SPAM
Ponzi gas is just a new wrinkle of overstating the productivity of horizontally hydrofracked wells. Which has been going on since the first wells were fracked in the Austin Chalk in the '80's. It is very easy to deceive investors and the public - if you do not understand how it works.

This Brain Shark Power Point explains how Ponzi Gas Fracking works:


Slobko premium member - 6 years ago
I agree that NYTimes does not appear to have done their homework. I was disappointed in the article myself. I am a HUGE NYTimes fan.

However, you cite nothing except oil/gas company executives. Hardly unbiased sources.

What does T. Boone Pickens think? How about Ken Peak? (Yes he's an industry insider but VERYexpert and Very unbiased and Very honest - ask any analyst that knows him.).

I am not an expert on shale plays, but there have to be some out there. Check with big time hedge funds to find one - ask Carl Icahn.

Finally, your article sounds as if the big oil/gas companies paid you to write it. In particular, why did these folks agree to talk with you? I can't believe they grant interviews to anyone who calls.

Sivaram - 6 years ago    Report SPAM

Interesting situation. There is a lot of money being thrown around so there is always a possibility of some these shale gas plays being hyped beyond reality. As LwC points out above, the question is what supermajors like ExxonMobil see. It's hard to imagine them investing in marginal assets.
Kevin Graham
Kevin Graham - 6 years ago    Report SPAM
Wow, in the NYT article it states that reserves are important in valuing an O&G company. When I did that for PBN and PBG here on gurufucus everyone laughed at me. I don't find it funny that a lot of investors have lost a lot of money PBG and PBN because of your article "PBG outstanding risk/reward scenario."

Now, anyone in the O&G industry know these shale gas wells aren't economic so technically they aren't really reserves. They are simply drilling to retain the land and the resource for when gas prices recover.



Jhodges72 - 6 years ago    Report SPAM
If they are overstating the gas reserves and production numbers, I hope they continue in doing so because they keep sending me monthly checks for my mineral interest in amounts that equal what they've been stating in their quarterly and annual reports. So, it's working out great for me. I think the average and often times the above average investor doesn't have a clue what they're doing. Ask a mineral rights owner, me, if they're overstating the numbers. You'll the get the truth from someone who actually has the numbers and has been paid the checks.

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