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Hullabaloo


Wednesday, February 20, 2013

 
Fracking may cause the next big economy-crashing bubble

by David Atkins

Karoli over at Crooks and Liars and Steve Horn at the DeSmogBlog have tremendous posts about the natural gas bubble that deserve wider publication. They're scary as heck, and proves that Wall Street and our great economic gurus haven't learned a thing from the bubbles of the past.

It turns out that the the Post Carbon Institute and the Energy Policy Forum each released reports on the dangerous economic bubble in natural gas at the moment. The first key point is that there isn't nearly as much natural gas and oil under North American soil as we've been led to believe:

The reality, he explains, is that five shale gas basins currently produce 80 percent of the U.S. shale gas bounty and those five are all in steep production rate decline.

And shale oil? More of the same.

Over 80 percent of the oil produced and marketed comes from two basins: Texas' Eagle Ford Shale and North Dakota's Bakken Shale, both of which are visible from outer space satellites.

"[T]aken together shale gas and tight oil require about 8,600 wells per year at a cost of over $48 billion to offset declines," Hughes writes. "Tight oil production is projected to...peak in 2017 at 2.3 million barrels per day [and be tapped by about 2025]...In short, tight oil production from these plays will be a bubble of about ten years’ duration."

But it's the Energy Policy Forum report in particular that should raise serious eyebrows. It's written not by some dirty hippie, but by longtime Wall Street analyst Deborah Rogers. Recall that fracking has led to rapid abundance of natural gas, dramatically lowering its cost. This should strike some terror into the heart of policy wonks:

It is highly unlikely that market-savvy bankers did not recognize that by overproducing natural gas a glut would occur with a concomitant severe price decline. This price decline, however, opened the door for significant transactional deals worth billions of dollars and thereby secured further large fees for the investment banks involved. In fact, shales became one of the largest profit centers within these banks in their energy M&A portfolios since 2010. The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions.

As prices plunged, Wall Street began executing deals to spin assets of troubled shale companies off to larger players in the industry. Such deals deteriorated only months later, resulting in massive write-downs in shale assets. In addition, the banks were instrumental in crafting convoluted financial products such as VPP's (volumetric production payments); and despite of the obvious lack of sophisticated knowledge by many of these investors about the intricacies and risks of shale production, these products were subsequently sold to investors such as pension funds. Further, leases were bundled and flipped on unproved shale fields in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007.
Now, while it's true that oil, gas and shale fields don't have the same economic weight as the nation's entire housing market, they do have two major impacts: first, a stock price drop leading to market instability, and second and more importantly a collapse in natural gas field production that would dramatically raise prices of natural gas and all associated costs. The combination of these two elements could easily lead to economic shock. Worst of all, it would directly parallel the housing bubble from which we have apparently learned no lessons and taken no significant mitigating steps.


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