By Jamison Cocklin
Deborah Rogers, a former London-based investment banker and financial consultant with Merrill Lynch and Smith Barney, had a hunch one day in 2009 as she listened to former Chesapeake Energy CEO Aubrey McClendon speak at a regional chamber luncheon in Dallas.
McClendon was touting the royalties his company had paid out across the Barnett Shale formation in Texas. He projected that royalties would grow by about 15 percent, while the amount of wells in the play would grow by 85 percent in the coming years.
“There’s something wrong with the declines here,” Rogers said. “You’re getting way too many wells and no more money. I thought, ‘Wait a minute, wait a minute, if those numbers are right, then we’ve passed the rate of diminishing returns in the Barnett.’”
She decided to take a closer look at Chesapeake’s publicly filed financial records and found a company with little cash on its books, heavily indebted and highly leveraged. Chesapeake wasn’t the only company with such problems, and Rogers has been speaking out ever since — to either great fanfare or great disdain.
Rogers is the founder of the Energy Policy Forum, a nonpartisan organization dedicated to the policy and financial issues associated with the oil and gas industry.
She visited Warren on Friday as the keynote speaker of a first-of-its-kind shale-energy conference hosted by the Fresh Water Accountability Project, based in Grand Rapids, Ohio. The conference is taking place at the Raymond John Wean Foundation on West Market Street.
The conference kicked off Friday and will continue today. A group of scientists, doctors, attorneys, researchers and environmental advocates delivered presentations on topics markedly different from those covered at similar industry-sponsored forums.
“It can be very difficult to get questions answered about this industry, whether it’s the companies themselves or the legislative agencies charged with regulating them,” said Lea Harper, a conference organizer with the Fresh Water Accountability Project. “We’re not getting the answers, and much of the industry is shrouded in secrecy. This kind of event will help to educate the public in a way that’s separate from the rhetoric the industry is putting out there, and it will be the first of many to come.”
The heavy levels of capital expenditure incurred by oil and gas production companies, Rogers said, has led to a frenzy of drilling and a corresponding drop in natural-gas prices. When combined with the short-lived life cycle of shale gas wells and the demands of anxious shareholders, those companies are locked into a pattern of increased drilling that poses grave consequences for regional economies, the environment and the country’s energy policies.
“That’s the problem with shales, is that the only way you can keep this going is through a frenzy of drilling,” she said during an interview with The Vindicator. “The billion-dollar question is, can you sustain it and keep production flat for any period of time that’s meaningful? You can’t.”
Based on the current rates of proven production across five of the country’s top-producing shale formations, Rogers’ organization predicts that a majority of wells across these plays will hit “well-stripper” status by 2024 — meaning they will be exhausted of their oil and gas reserves in the next decade or so.
To Rogers, that spells an eventual bust and a slowdown in the economic benefits to each of the areas that the plays are occurring in, such as here in Ohio.
What’s more, the companies themselves might be aware of such trends. Rogers noted the high rate of asset sales and major write-offs, or losses, that companies have incurred recently.
For instance, she said each time a play hits historical production, or the point at which enough data have been collected to pinpoint the actual rate of return on any formation, production companies sell their assets and pull out of certain plays.
Across the country’s five major shale formations it’s estimated that annual decline rates, the rate at which oil and gas reserves are depleted in horizontal, or fracked, wells, stands at between 30 percent and 50 percent, versus a 2 percent to 4 percent decline rate on conventional vertical wells.
For instance, when BHP Energy bought all of Chesapeake’s assets in the Fayetteville Shale play for $4.75 billion in 2011, it was forced to take a loss at 50 percent of the purchase price when it wrote off $2.84 billion because the reserves were far below estimates.
Last year, oil-field service firms — those that provide everything from research, exploration and fracking services, such as Baker Hughes and Haliburtion — increased their research and development budgets by 24 percent from 2010 in an attempt maximize the hydrocarbons extracted from a given formation.
The industry is trying to improve its technology to increase its rate of oil and gas returns.
Too little is known about shale formations to accurately prove reserves, Rogers said, leading to overestimates that eventually drag down shareholder price and force companies to make a quick exit — the numbers, she added, “don’t work.”
A change in rules at the U.S. Securities and Exchange Commission in 2009 allowed E&P companies to expand their definition of reserves, leading to overestimates that such companies can book and borrow money against.
“It begs the question of how much money has been borrowed on assets that don’t exist or products that will never be commercially viable to extract,” she said.
In this way, Rogers drew a comparison between the sub-prime mortgage crisis and the shale-gas boom.
Like other speakers Friday, she was quick to point out that she is not opposed to oil and gas drilling, but cautioned against the hysteria that has seemed to crop up around it.
Friday’s speakers suggested that work continue to be focused on a diverse energy portfolio that combines a mix of shale, conventional and renewable energy sources to protect against any fossil-fuel shortage or price volatility that occurs in the future.