The Marcellus Shale Industry May Now Be Too Large to Fail

by S. Tom Bond on August 13, 2012


Is The Shale Industry Too Big to Fail, Now?


    The shale drilling industry is obviously overbuilt. Over production of natural gas saturated the market and the price of gas has declined to the point many wells already drilled are now not economic to produce. But the drilling goes on, because the companies have sold investment and borrowed money to drill wells. The excess capacity grows daily.

    The technology never had a chance to mature. It went from a single example by Mitchell Energy to a vast industry in three or four years, without undergoing the usual scale-up in other industries. There was no scientific observation of effects on the surrounding landscape or of the health of workers and people living in the neighborhood of drilling. Everybody simple mindedly followed Mitchell, who had been subsidized by the federal government and followed a scheme worked out by the Morgantown Energy Research Laboratory. The only changes to the procedure up to the present have been minor ones involving mechanics or chemistry.

    The great victory of the industry was over legislation. The states are tied hand and foot to give any help, including a great deal of irrational “help,” to shale drilling. Local governments have been overwhelmed. The federal apparatus for health and safety have been attacked tooth and nail. Regulators have been attacked not only for what they do, but personally. This part of the project alone has soaked up a lot of investor’s money, a considerable part of which came from overseas. Much went into denigrating the competition, coal, solar, windmills and nuclear.

    The whole thing was moved by several forces. These include claims of vast reserves in shale; the undeniable need for huge energy supply in the future with the world’s rapidly increasing population and demand for a higher standard of living; the desire to tie up as much land as possible by each of the individual companies since the resource is finite; and the unlimited acquisitiveness of investors.

    This made it possible to spin a story, a myth, unfettered by quantitative or reasonable considerations. The reserve has been downsized, and is still huge, but talk ranges from a few years to 100 years of supply for the U.S. It will give us energy independence, but on the other hand, we should ship it overseas for ready money. Even with endless evidence belying the claims, the public is told that there is no harm from the drilling. Production of wells for decades is part of the myth. Most are no longer economically viable beyond seven to 10 years.

    Economic projections have about the same reality as daydreams. There is no denying local prosperity for areas being drilled. The habit of cultivating small service companies spreads the wealth and increases the political influence, but these are temporary. Dollar damage, even such hard dollar items as property depreciation, health care costs, increased cost of public services such as roads and law enforcement are always left out of economic assessments. It’s like a balance sheet with no costs considered.

    Insurance companies are claiming they do not cover “industrial damage,” read shale development, in farm and home insurance. Much of the wages and profit go elsewhere at every stage. When only production is left, the jobs will mostly be low paying. The costs of plugging the wells is never considered.

    So how big is the industry? There is shale drilling in more than 30 states and a dozen or so foreign countries. Investment in the United States comes from Norway, China, India, Netherlands, France, Australia and the United Kingdom. Each has an investment in the billions. The industry’s story has many believers. When you consider investors’ good faith, and when you look at the confidence with which the story was told to state governments, as well as the effect on legislators, is the industry too big to fail?

    In the beginning, the business plan was to sell investment and lease land. Then the plan was to sell the need for favorable legislation. Now the plan is to sell the need for additional use of natural gas. Will the next big sell be for a government bailout? Several times as much money has been put into shale drilling as into home loans. There is no question the industry is over-invested and over-built now. How will it work out?

    With opposition growing across the nation and the world, is shale drilling too big to fail? How can a government that is already sinking financially bail out an industry using such huge amounts of capital? What happens when solar, wind and wave energy becomes cheaper, as it surely will, because these electricity generating methods have growing efficiency?

S. THOMAS BOND is a retired teacher with a Ph.D. in inorganic chemistry. He is a member of the Guardians of the West Fork and the Monongahela Area Watersheds Compact. He lives on and maintains a 500-acre farm near Jane Lew. This commentary should be considered another point of view and not necessarily the opinion or editorial policy of The Morgantown Dominion Post.

{ 1 comment… read it below or add one }

Bob in Philly August 17, 2012 at 8:13 am

Mr. Bond is able to do what so many adherents of hydraulic fracking either cannot do or will not do, which is connect the dots for the real big picture of reality.

Few people in the northeast United States understand just how aggressive and hostile the culture of the Texas and Oklahoma oil and gas culture really is. They are a “say anything and do anything” crowd obessed to get what they want and once they do, they leave their messes behind for everyone else as they skip off to do damage in the next “better” oil or gas play.

In their country clubs and on their golf courses, the executives of the companies view everybody and everything as for sale and continue to justify whatever they do or want under the banner of the Divine Province of Manifest Destiny.

As more actual production data comes in its increasing clear shale gas is a money loser and its going to take much higher market prices to be economically viable. More than likely at such high market prices, it will remain an ongoing victim of its own price demand destruction of its use.

For those here who tout jobs and economic benefit, history has shown the oil and gas industry is nothing but an ongoing cycle of boom to bust. The United States is littered with virtually deserted and abandoned oil and gas boom towns all created on the pipedreams of industry jobs and development. None of it having been sustainable in the remotest sense of the word.

Mr. Bond knows of what he writes about. Let’s hope there are a lot more people up here like him before the Texas and Oklahoma oil and gas crowd turn the northeast U.S. into a giant cesspool of industrial wastes.


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