Daily Times

There have been recent headlines in the international press about an exponential increase in the production of unconventional gas in the US. There have also been reports by respected organisations including the International Energy Agency (IEA) predicting that the US will not only become self sufficient in energy, but will also become the world’s largest oil producer in the next four years. The energy boom in the US comes about entirely from unconventional sources, mainly shale gas and oil. The shale gas industry, as per the claims of a few energy experts, currently supports around 1.7 million jobs in the US. By 2020, this number is expected to double.

In his State of the Union Address in January 2012, Barack Obama claimed that owing to the shale gas revolution, America’s supply of natural gas will last 100 years. It is also claimed that shale gas production will revive American industry and pull the country out of recession. The US will no more be dependent on Middle Eastern oil, which will result in a fundamental policy shift towards the region and the rest of the world.

A development of such enormous geo-political consequence needs more than passing scrutiny. Moreover, the condition of the current global economy is in dire straits, which makes it necessary to properly analyse all the aspects of this phenomenon lest it burst like the property bubble, throwing the world into a deeper economic crisis.

Let us examine the facts.

In 2011, the investigators of a private newspaper discovered that the shale oil boom, as described by the media, contained significant cracks. They also suspected that companies involved in shale extraction may have been intentionally exaggerating the reserves and productivity of their wells. In 2012, Petroleum Review pointed out that the US shale gas reserves had been significantly inflated owing to Securities and Exchange Commission 2009 rules that allowed companies to declare their size of reserves without having them audited.

The shale gas and oil boom is a considerably recent phenomenon. That is why it has, as yet, been spared the scathing scrutiny of the media. Another reason is that the Wall Street giants and large oil companies have vested interests in keeping the shale myth alive. Despite all this, however, the recent long-term extraction data from a number of shale wells has cast new light on the industry’s gloomy prospects.

Shale gas is extracted through the process of induced hydraulic fracturing or fracking. The term means propagation of fractures in rock layers with the help of pressurised fluid, releasing petroleum and natural gas. Experimental hydraulic fracturing was first carried out in 1947. Two years later, the first commercially successful fracking was carried out in 1949. The process allows extraction of hydrocarbons trapped inside shale formations that were previously inaccessible. The process is also referred to as unconventional extraction.

Shale extraction has been going on for decades but the industry boomed after the US Congress passed a law in 2005 exempting hydraulic fracking from the regulatory supervision of the Environmental Protection Agency, thanks to then Vice President Dick Cheney. Immediately after becoming the vice president in 2001, Mr Cheney used his immense political clout and the oil industry’s abundant cash flow to win this exemption. During his tenure, Mr Cheney oversaw significant shale drilling in the US.

After the British Petroleum oil spill in the Gulf of Mexico, Barack Obama formed a Commission, headed by John M Deutch who was a former director of the CIA, to examine the environmental hazards posed by shale extraction. The commission report released in 2011 gave the industry a clean bill of health. No one questioned the neutrality of Mr Deutch who was a Board member of Schlumberger as well as Cheniere Energy, a company that plans to export shale gas from the US.

The regulatory exemption kept intact by the Obama administration enabled the shale industry to make billions in the wake of rising oil and gas prices. However, constant increase in shale gas production decreased its market price that plunged down to almost one-fourth of the pre-exemption price, whereas, in order to be commercially viable, the shale gas price should be triple its current price. It is evident that at the current rates, in the next few months, some of the shale gas producers will be forced to stop drilling.

Another problem with unconventional extraction is the high depletion rate of a shale well which may, just in the first year, deplete by as much as 90 percent. Shale gas companies, hounded by rapidly declining reserves and continuous capital requirement for drilling new wells are trying to sell their assets to naïve overseas buyers. In the coming months, the requirement of injecting more capital will increase dramatically as the best areas for shale extraction are used up. Consequently, gas prices will cease to support the economic viability of extraction.

This may also explain why the shrewd oil industry, knowing well the adverse effect on the price of gas, is still producing at its maximum capacity. Evidently, the industry and its financial backers in Wall Street are simply trying to make as much money as they can before the shale bubble bursts.

Due to the ignorance of the US and international media, the stark facts regarding the shale revolution — which is anything but — have not come to light. In a worst case scenario, large oil companies involved in shale extraction will be simultaneously hit by financial crisis. There will be massive mergers, take-overs and bankruptcies. The money will simply vanish. The shale bubble will burst under its own debt burden. When it does, the world will face another economic crisis of far-reaching consequences.

The writer is an investment banker and a freelance columnist for various publications. He can be reached at syedatifshamim@hotmail.com