The New York Times had a great piece today called “Insiders Sound an Alarm Amid a Natural Gas Rush,” which quotes from among hundreds of industry e-mails and insider documents suggesting that shale gas isn’t as easy or inexpensive to extract from the ground as claimed. Some of the e-mails compare the current shale-gas lovefest to a dot-com bubble destined to burst, or to a giant Ponzi scheme because the economics don’t work. I’m sure the economics do work on a certain percentage of wells, but when companies talk generally about the productivity of shale-gas wells or the size of their reserves are they exaggerating reality? Are they pumping up their stocks and duping investors? And if so, are we grossly overestimating the true contribution — environmental problems aside — shale gas can make to our energy future?
This reminds me of some comments Jeff Rubin made during a chat we had in December. Rubin, former chief economist at CIBC World Markets and author of Why Your World Is About to Get a Whole Lot Smaller, compared the current path of the shale-gas industry to what we saw with the sub-prime mortgage market. Here’s what he had to say, taken from a Q&A that ran in the Toronto Star:
The debate is about the real cost. If you exclude the natural gas liquids that come with most shale projects, is the real cost $4 per Mcf (1,000 cubic feet) or is it $8? If the real cost is $8 then a lot of people, like Chesapeake Energy, the biggest gas producer in the U.S., have a big problem. Is shale gas the sub-prime mortgage market of the natural gas market? Is this one giant con and investors are being conned into thinking there’s a huge supply of gas at $4 when it really costs $7 or $8 to bring it to market? In the fullness of time economics will assert itself, just as it did in the sub-prime mortgage market.
The question is, when will that time come?