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ORIGINAL FRENCH ARTICLE: Marché du gaz : le schiste risque de faire des bulles

by Marie-Noëlle Bertrand

The Market for Natural Gas: Shale Gas Risks Making a Bubble

Translated Thursday 14 July 2011, by Henry Crapo and reviewed by Derek Hanson

Emails exchanged by specialists, and revealed by the New York Times, suggest that the productivity of shale gas, non-conventional hydrocarbons, has been deliberately exaggerated.

And if, after all, shale gas should now be included in the list of rotten investments?

This question is being posed since the day last week when the New York Times revealed the emails exchanged among experts in gas exploitation, suggesting that the potential given to this non-conventional hydrocarbon has been deliberately exaggerated. According to hundreds of messages and documents gathered by the journalist Ian Urbina and published on line on the site of the US newspaper [1] the exploitation of shale gas will not be as economical as officially estimated. On the whole, the productivity of wells and the magnitude of reserves may have been intentionally — and thus illegally — over-estimated by producers, in order to attract investors. Under close inspection these documents, coming from government geologists, business lawyers, economic analysts, and even business leaders, draw attention to a blind speculation on shale gas that could lead to a financial bubble such as that for internet stocks, or that which sank Enron. In 2001, the Texas-based investment firm went belly-up after concealing its losses in the energy market, losses due to speculative operations.

Certain messages suggest the same type of "incident". "[Investors’ ] money is flooding in", while shale gas "is inherently unprofitable", wrote, in February, an analyst for the investment group PNC Wealth Management. And he added, "Remember what happened with the .com (internet) stocks." That same month a retired geologist for a major petroleum company came up with a similar analysis. "These enterprises are in a situation like Enron. They’re shielding the light in order to hide the truth." Scepticism extends right to the heart of these industries. According to a petroleum geologist in Houston, the largest US industrialists are overestimating by 73% to 350% the exploitable reserves in Texas. Another geologist, hired by the company Chesapeake, the market leader, wrote: "Our engineers are projecting that these wells will produce for 20 to 30 years, but it remains to be proven that this is feasible. ... In fact, I’m rather sceptical, given the decline in production already observed in the first year of exploitation."

These are matters that the industrialists are careful not to mention, emphasizes Ian Urbina, pointing to recent messages assuring a promising future for shale gas, in an effort to entice investors. Nevertheless, "it is more profitable to speculate on permits for exploration than to drill wells for exploitation", admits the executive director of Chesapeake in an email dated 2008. In 2009, an analyst for IHS, an energy investment counseling firm, summed things up this way: "What this is leading to is that the shale gas business is just another giant Ponzi scheme". In other words, the industry has no value other than the money brought into it by investors.

This accusation is not the first of its type. The second in command of the giant Russian gas producer Gazprom, Alexandre Medvedev, also compared the explosion, these past ten years, of shale gas production in the United States, to the internet bubble. But this was a representative of Russia, the main competitor of the US in the gas market. Now, suspicions can no longer be discounted as geo-strategic maneuvers. The impact of their revelation is already being felt, reveals the journalist Matthieu Auzanneau in his blog.

Last week, the stock market quotations for several gas producers started to tumble.

[1The site New York Times, and in particular, this article

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