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State natural gas plan is not all it seems

By ROBERT FROMER

Publication: The Day

Published June 28. 2013 4:00AM

In Public Act 13-298, "An Act Concerning the Implementation of Connecticut's Comprehensive Energy Strategy and Various Revisions to the Energy Statutes," Gov. Dannel P. Malloy, DEEP Commissioner Daniel Esty, and the legislature want the public to play Russian Roulette by authoring and promoting the expansion of cheaper natural gas to replace oil as the fuel source for residential and commercial heating systems. This is a fool's game because the decline in natural gas prices was orchestrated by Wall Street's investment banks and the shale gas/oil industry, according to a February 2013 report by Deborah Rogers published in Energy Policy Forum.

In 2011, shale mergers and acquisitions accounted for $46.5 billion in deals and became one of the largest profit centers for some Wall Street investment banks. This anomaly bears scrutiny since shale wells were considerably underperforming in dollar terms during this time. Analysts and investment bankers, nevertheless, emerged as some of the most vocal proponents of shale exploitation. By ensuring that production continued at a frenzied pace, in spite of poor well performance (in dollar terms), a glut in the market for natural gas resulted and prices were driven to new lows. In 2011, U.S. demand for natural gas was exceeded by supply by a factor of four.

Obviously, this price decline opened the door for significant transactional deals worth billions of dollars, resulting in large fees and profits for the investment banks. The recent natural gas market glut was largely effected through overproduction of natural gas to support financial analyst's production targets and to provide cash flow to support operators' imprudent leverage positions.

As prices plunged, Wall Street began executing deals to spin assets of troubled shale companies off to larger players in the industry, which deteriorated only months later and resulted in massive write-downs in shale assets. In addition, the banks were instrumental in crafting convoluted financial products despite the obvious lack of sophisticated knowledge by many of these investors about the intricacies and risks of shale production. These products were subsequently sold to investors, such as pension funds. Further, leases were bundled and flipped on unproved shale fields in much the same way mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007.

According to Rogers, emerging independent information on shale gas in the United States confirms the following:

• Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited handsomely from mergers and acquisitions and other transactional fees;

• U.S. shale gas and shale oil reserves have been overestimated by a minimum of 100 percent and by as much as 400 percent to 500 percent by operators according to actual well production data filed in various states;

• The price of natural gas has been driven down largely due to severe overproduction in meeting financial analysts' targets of production growth for share appreciation coupled by imprudent leverage requiring the need to produce to meet debt service;

• Due to extreme levels of debt, stated "Proved Undeveloped Reserves" may not have been in compliance with Security and Exchange Commission (SEC) rules at some shale companies, because of the threat of collateral default for those operators;

• Industry is demonstrating reticence in further shale investments in spite of public rhetoric proclaiming shale to be a panacea for state energy policy; and

• Exportation is being pursued for the differential between the domestic and international prices in an effort to shore up ailing balance sheets invested in shale assets.

In this roulette game, the politicians and bureaucrats are ignorantly misleading the public on the future price of natural gas. It is imperative that shale be examined thoroughly and independently to assess the true value of shale assets.

By Robert Fromer, who is an environmental consultant residing in Windsor. He formerly lived in New London.

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