The Shale Gas Industry and its Manipulation by Wall Street
by Jeff Abbas - www.AllamakeeCountyProtectors.com
One would think the human species, being the sole creature on this planet capable of speech, rational thought and all things that make for a “higher order”, would be capable of employing the simplest paradigm of all living things – learning from one's mistakes.
The lessons learned from mistakes or wrong choices come in many forms. Instinct is defined as an “inborn pattern of behavior often responsive to specific stimuli”. In 1931, Ivan Pavlov's famous studies with dogs made to salivate at the sound of a ringing bell proved that even conditioned responses are a form of learning from previous events. And who hasn't seen film clips of a chimpanzee successfully navigate a maze to receive a reward at the exit. It is not only the higher primates that can navigate a maze successfully. Scientists have employed these types of studies with everything from Paramecium to Pachyderms with the same successful results for all manner of critters, save one. The one glaring exception, the single life form on this planet that is bewilderingly determined to refuse to learn from the history of its bad choices is us – man.
One of the most obvious peculiarities of man is his proclivity to war. Man has battled over territory, wealth, religion, water, rights and myriad reasons beyond my limited comprehension. Man has even waged warfare for no apparent reason other than there seemed to be nothing better to do at the moment. War fought for any reason is costly. The price paid by those who are killed in war is incalculable, though it is often glorified by such lofty sentiments as “making the ultimate sacrifice for freedom” or “freedom isn't free”. No matter how you paint it, being killed in war is senseless and it has been senseless in every one of the thousands of wars fought throughout the history of the world. It is still senseless.
Have we learned anything from the senseless slaughter of war? Nope. Does it appear we ever will? Nope. Lets just look at the last 100 years here in the United States. Since 1913, we have sacrificed approximately 432,710 men and women to war. There are 36,500 days in 100 years. Simple math tells us we have lost 11.89 individual souls every day of every week of every year in the last 100 years.
God only knows what those figures would be on a global scale, but it clearly defines one thing. We take the concept of not learning from our mistakes to the level of an art form. We ignore the lessons we should be learning from our past in orders of magnitude that defy common understanding. We are flat-ass stupid.
Remember the housing bubble of 2005 – 2006? What was it?
A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts.
We all remember the effects of the housing bubble. Big banks failed, people lost their homes, the economy tanked and already disgustingly rich people got disgustingly richer. As simply as these effects are listed here, it is still blatantly apparent that these should be pretty powerful lessons to be gleaned from a very real disaster.
Here we are, seven years down the road from that system-wide collapse proving once again we are masters of our own demise by ignoring the past we should be learning from. (Flat-ass stupid sounds better all the time, doesn't it?)
Even though we have not yet fully recovered from the bursting of the housing bubble, we are in the process of allowing another bubble to be created by the disgustingly rich. And we're doing nothing to stop it. (It's kind of like that old joke where a guy walks into a doctor's office and says, “Doc, it hurts when I do this. What should I do?” In this case, we walk out before the Doc tells us that we “should just stop doing it.”)
Several years ago, big oil companies like Chesapeake and Mobil began making vastly inflated predictions of the amounts of oil and gas available from newly-discovered shale-plays in Ohio, New York, Texas, North Dakota and elsewhere across the country. These deposits would be made profitable by the extreme extraction method known as hydraulic fracturing, or “fracking”.
The IEA (International Energy Association) took those over-inflated estimates and began touting America's new position in the global economy as being the number one oil-producing nation in the world. They were claiming the deposits found in the shale plays were the equivalent of “two Saudi Arabias” and other such over-hyped, grossly inflated phrases of free-flowing wealth, all under the dangerously seductive heading of “energy independence”.
Once the IEA made their self-serving predictions based on the self-serving predictions from big oil and gas, the US Government got involved with a huge campaign claiming “we can free ourselves from foreign oil once and for all with resources available to us from our own lands. In a few short years, we will be the world's leader in oil production for both domestic consumption and export.”
Once the government was firmly on board, big banks began loaning huge amounts of money to big oil and gas so they could expand their operations and began extracting enough oil and gas to turn the United States into a “land of milk and honey”.
As the money began flowing into big oil and gas, speculators realized their opportunity and began selling over-inflated futures based on the over-inflated estimates from the government based on over-inflated estimates from the IEA based on over-inflated estimates from big oil and gas. Once the speculators got involved, Wall Street and the big banks began buying up those futures based on over-inflated estimates from the speculators based on over-inflated estimates...and so on and so forth.
Now comes the crushing blow of reality, the Housing Bubble Redux - Wall Street is now of the opinion, the estimates they based their investments on “may have been somewhat over-inflated”. What in the hell could they be saying! How can this be!
In 2011, the single largest “profit prospect” for some of the Wall Street investment banks was shale-play mergers and acquisitions. The shale-plays were already showing negative paybacks, but that didn't deter these mighty monetary warriors. Never allowing under-performance of their investments to stand in their way, investment bankers continued to tout immense profits that could be realized in American oil and gas extraction from the shale-plays. Over-stating their expectations ensured production in the shale-plays would continue unabated, in spite of poor performance when compared to the original over-inflated projections. These actions by Wall Street resulted in a glut in the market for natural gas and prices for natural gas began dropping to historic lows. For all of 2011, the demand for natural gas in the US was quadruple the physical supply.
Don't think for a moment that these bankers, bankers who pride themselves on their knowledge of the markets, didn't know exactly what they were doing. By stimulating the over-production of natural gas, they would create a market glut on natural gas that would simultaneously create a big drop in the price of gas. By creating the desired price decline, they essentially paved the way for massive market transactions valued in the billions of dollars. With those transactions being a sure thing, the investment banks found themselves in the position of reaping huge profits in the form of fees associated with the market transactions. Current research shows the profits the investment bankers gained from these market transactions, actually made their investments in the shale-plays the most profitable energy market acquisitions in their portfolios since 2010.
The easiest way to explain the previous paragraph is this: the current natural gas market glut was created by the over-production of natural gas, simply to meet the investment bankers' analysts' production predictions and to provide the necessary cash flow to bolster the oil and gas companies' heavily leveraged financial positions.
As the gas prices began reaching new subterranean levels, Wall Street began selling off the assets of the financially troubled oil and gas-drilling companies to industry players with much deeper pockets and seemingly infinite supplies of cash. Most of these deals fell apart after a few months and the result was massive write-downs (reductions in the book value of an asset) in shale-play assets.
In order to counteract the write-downs, investment banks began creating bogus financial products (VPP's or Volumetric Production Payments). Knowing full well their investors knew little or nothing about the risks of shale-play production, investment bankers were nonetheless able to sell their investors “VPP's” on little more than the basis that they sounded good. Just as it was with the housing market before it collapsed, most of these scams were eagerly sold to pension funds. Add to this the “bundling and flipping” of leases on unproven shale-plays in exactly the same way mortgage-backed securities (based on questionable mortgage assets) were bundled and sold prior to the 2007 downturn and it really begins to smell a little fishy.
In all honesty, I hate economics. I find it hard to understand, even harder when convoluted and bastardized by the industries that take advantage of the system the most, the speculators and the investment bankers. Up to this point, I felt as if I was beginning to get a handle on this whole scenario, but even writing it down in my own words based on what I am referencing, still leaves more than a little muddled. Let's try it in a single-sentence, bullet-point list and see if that helps -
Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production, in turn giving them enormous profits derived from mergers and acquisitions & other transactional fees.
U.S. shale gas and shale oil reserves have been overestimated by a minimum of 100% and by as much as 400-500% by operators according to actual well production data filed in the various states where shale-plays are located.
Shale oil wells are following the same steep decline rates and poor recovery efficiency observed in shale gas wells.
The price of natural gas has been driven down largely due to tremendous overproduction in order to meet financial analysts’ targets of production growth for share appreciation, coupled and exacerbated by imprudent leverage and thus requiring a need to produce more just to meet the required debt service.
Due to extreme levels of debt, proven undeveloped reserves (PUDs) may not have been in compliance with SEC rules at some shale companies because of the threat of collateral default for those operators.
Industry is demonstrating great reluctance to engage in further shale investment, abandoning pipeline projects, IPOs and joint venture projects in spite of public rhetoric proclaiming shale-plays to be a panacea for U.S. energy policy (“energy independence”).
Major exportation of oil and gas is being pursued for the differential between the domestic and international prices in an effort to shore up ailing balance sheets invested in shale assets.
It is imperative that shale-play deposits (both gas and oil) be examined thoroughly and independently to assess the true value of their true assets, particularly since policy on both the state and national level is being implemented based on production projections that are blatantly optimistic (and therefore unrealistic) and wells that are significantly under-performing based on their original projections.
In every paragraph above, substitute the phrase “housing market” for the phrase “shale-plays” and the correlations become eminently clear. This is the same kind of “bubble and burst scenario” that brought our country's economy to its knees in 2007. The power of greed and parasitical disease of market-manipulation madness on the part of Wall Street, speculators and investment bankers is setting it all up again...same old, same old.
We are apparently genetically predisposed to not learn from the previous Wall Street-manufactured disaster of 2007 we are still paying for today. We're going to let it happen again, even though the evidence is right here in front of us.
Are we flat-ass stupid, or what?
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