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The Big Fracking Bubble: The Scam Behind the Gas Boom
A report from Rolling Stone about the financial disaster that lingers beneath the environmental one
A profile of billionaire natural gas tycoon, Aubrey McClendon, by Rolling Stone's Jeff Goodell is out today and it paints a frightening, if not complex, picture of one of the men profiting most from the nation's insatiable appetite for fossil fuels.
Speaking to Goodell over a $100 glass of Bordeaux, McClendon, who is CEO of and co-founder of Chesapeake Energy, challenges the objections to the gas extraction practice known as 'fracking' in which huge amounts of pressurized water and chemicals are pumped down deep into shale formations in the earth to unlock trapped natural gas, forcing it to the surface. "Where is the mushroom cloud?" McClendon asks. "Where are the dogs with one leg? Where are the people that have been maimed or hurt?"
He is referring to environmentalists and homeowners who claim that fracking is inherently dangerous and underregulated and that is leads to contamination of drinking water supplies and creates enormous amounts of surface waste in and around the communities where drilling operations exist. If he really wanted to know where the damage was occuring, he might start with Josh Fox's documentary, GasLand, which has served as a rallying cry for anti-fracking activists.
For someone like McClendon, however, the picture is not of a man searching for answers to troubling questions, but of a man atop the economic food chain, looking out, primarily for his own interests and that of his shareholders. Goodell writes:
McClendon dominates America's supply of natural gas the same way the Tea Party-financing Koch brothers control the nation's pipelines and refineries. Like them, McClendon is an influential right-wing power broker – he helped fund the Swift Boat attacks against John Kerry in 2004, donated $250,000 to the presidential campaign of Rick Perry, and contributed more than $500,000 to stop gay marriage. But unlike his fellow energy czars, McClendon knows how to tone down his politics and present a friendlier, less ideological face to the public. He secretly gave $26 million to the Sierra Club to fight Big Coal, and built a Google-like campus for Chesapeake's 4,600 employees in Oklahoma City, complete with a 63,000-square-foot day care center, a luxurious gym and four cafes manned by cook-to-order chefs. He even voted for Barack Obama because he thought the country needed "an inspirational figure."
The Rolling Stone story, however, finds its reporting strength not in portraying the personality traits or political strategies of McClendon himself, but in revealing "the real nature of the business he's in." As Goodell explains:
Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil. As McClendon put it in a conference call with Wall Street analysts a few years ago, "I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet."
According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. "This is an industry that is caught in the grip of magical thinking," Berman says. "In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down." Like generations of energy kingpins before him, it would seem, McClendon's primary goal is not to solve America's energy problems, but to build a pipeline directly from your wallet into his.
And it's true. Natural gas reserves, which many politicians declare are surging and will solve all our energy problems for 100 years, have actually been repeatedly scaled back from initial claims. Energy expert and author Michael T. Klare, writes at The Nation:
[The US Dept. of Energy's research arm the Energy Information Administration] recently downgraded its estimate of US shale gas reserves by more than 40 percent, from 827 trillion cubic feet to 482 trillion. Even more significant, the Marcellus Shale Formation of the Northeast, widely considered the most promising shale gas “play,” was downgraded from 410 trillion cubic feet in the 2011 estimate to 141 trillion in the 2012 report—an eye-catching drop of 66 percent. These revisions are said to represent greater experience in drilling, which, as noted, tends to produce many dry wells.
Klare, in his report, does not fail to mention the impact that anti-fracking groups have had on possible 'disappointing production figures' and thinks that's a good thing. He writes:
the likelihood of disappointing production figures is the steady growth of the anti-fracking movement in many parts of the country. Not only does the well-drilling disrupt rural communities, producing round-the-clock noise and traffic from heavy tankers and trucks; the use of toxic chemicals to liberate the gas threatens the safety of water supplies in a variety of ways, from the leaking of the toxic fracking water into underground aquifers to the dumping of the returned water (called flowback) into municipal water-treatment systems, which are not equipped to handle them. As these irritants and dangers have multiplied, more and more people are demanding strict county and state regulation of—if not an outright ban on—fracking, and the Obama administration is considering tougher federal standards. The anti-fracking activism will probably not halt the expansion of shale gas production, but it will certainly reduce the number of wells, lowering total output.
These fights over drilling, however, which rest take place in community zoning board hearings, in state legislatures, and between private landowners who want drilling and those who don't, exemplify why so much of the natural gas issue is ultimately about more about land rights and leases than anything else. And that's where McClendon, Chesapeake Energy and other oil giants like Texan billionaire T. Boone Pickens come back to dominate the landscape. Goodell reports:
Chesapeake's land operation became almost as technologically sophisticated as its drilling operation, with a huge databank of property records and mineral-ownership rights across the country. "The goal is not just to pump gas," explains Pickens. "It's also to lock up future reserves." The company's financial statements estimate that it currently holds drilling rights to as much as 100 trillion cubic feet of gas – enough to supply the entire country for five years.
At Chesapeake, McClendon operated more like a land speculator than an oilman. "Our approach is to go in early, quietly and big," says Henry Hood, who directs Chesapeake's land purchases. "We like to get our deals signed before anybody knows what we're up to and tries to run up prices." But buying up such huge swaths of land requires huge chunks of cash – and the money often comes not from gas production, but from selling off land or going into debt. After Chesapeake drills a few wells in a region and "proves up" the reserves, it hawks the leases to big oil and gas companies looking to get into the shale-gas game.
Chesapeake's business model, however, is highly speculative and its use of 'projected future earnings' to finance new purchases resembles to many the kind of Ponzi-style thinking that has led to financial crises in other sectors.
The essential mantra at Chesapeake, writes Goodell, is this: "Everything we do is safe and environmentally responsible. Trust us." But, as his reporting reveals, all does not go smoothly when you force-inject millions of gallons of chemical-laced water thousands of feet beneath the earth's crust to release trapped gas.
The problem with all sophisticated technology, of course, is that things inevitably go wrong. Last April, a Chesapeake well in Bradford County suffered a massive blowout. It was the onshore, natural gas version of what happened to BP in the Gulf two years ago: A wellhead flange failed, and toxic water gushed uncontrollably from the well for several days before workers were able to bring it under control. Seven families were evacuated from their homes as 10,000 gallons of fracking fluid spilled into surrounding pastures and streams. Pennsylvania fined the company $250,000 – the highest penalty allowed under state law.
Well failures, in fact, are fairly common at drilling sites. I ask Anthony Ingraffea, an engineering professor at Cornell University and a former consultant for oil-service firms, to look at the 141 violations levied against Chesapeake in Pennsylvania last year. According to Ingraffea, 24 of them involved failures of well integrity. "When a well loses integrity, it means the seal is broken and something – usually methane, but it could also be flowback water – is leaking out underground," he says. "And it's impossible to know where it is going, or in what amounts."
It's also impossible to know what chemicals are flowing out of the wells, or how toxic they are, because companies like Chesapeake are not required to disclose the compounds they use in fracking operations. Providers of fracking fluids, such as Halliburton, claim that the composition of such fluids can't be revealed without disclosing trade secrets. In 2005, the industry lobbied hard for what's known as "the Halliburton loophole," which exempts it from federal disclosure requirements. In recent months, Colorado, Texas and Pennsylvania have moved to tighten state regulations and require mandatory disclosure of what's in the fracking fluids, but loopholes still remain. "We don't know the chemicals that are involved," Vikas Kapil, chief medical officer at the National Center for Environmental Health, admitted at a recent conference. "We don't have a great handle on the toxicology of fracking chemicals."
And the conclusion Goodell reaches after spending time with the Chesapeake Energy and listening to its CEO defend their vision of a natural gas boom and all the good it would do the economy and the planet?
Much of what McClendon says is misleading – wind power is as cheap as gas in some places and falling fast, and cutting back on gas doesn't have to mean burning more coal. But his plan is clear. He's not going to back off until every last square foot of shale rock in America is drilled and fracked and sucked clean of gas. McClendon may rely on sophisticated new drilling technologies, but at heart, he's driven by the same dream of endless extraction that has gripped oil barons and coal companies since the dawn of the Industrial Revolution. In the end, all his talk of energy independence and a cleaner, brighter future boils down to a single demand, as simple as it is disastrous: Drill, baby, drill.