Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future

by Richard Heinberg

  Howarth’s conclusions were reported in the New York Times30 and immediately triggered a firestorm of vitriolic criticism from the industry—and from a few environmental organizations. A Forbes article later noted that “almost every independent researcher—at the Environmental Defense Fund, the Natural Resources Defense Council, the Council on Foreign Relations, the Energy Department and numerous independent university teams, including a Carnegie Mellon study partly financed by the Sierra Club—has slammed Howarth’s conclusions.”31

  The critics insisted that Howarth had greatly overestimated leaks from fracked wells. National Energy Technology Laboratory (NETL) scientist Timothy Skone provided evidence for this view in a lecture at Cornell titled “Life Cycle Greenhouse Gas Analysis of Natural Gas Extraction & Delivery in the United States”; soon afterward, Lawrence Cathles, a Cornell geology professor, similarly argued—in a commentary published in Climatic Change—that Howarth’s fugitive methane figures were 10 times too high.32

  How could scientists analyzing the same phenomenon arrive at such starkly different conclusions? Three main variables are keys to understanding the discrepancy. The first is the actual level of methane emissions during the drilling and fracking of a typical shale gas well. This number must be amortized over the total lifetime production of the well in question, as most of the “fugitive” methane escapes during drilling rather than during later production. Hence the second variable: the actual lifetime cumulative production figure for a typical well in the given formation. The third significant number indicates the amount of natural gas that leaks from pipelines on its way to the end user. The total amount of gas leaked to the atmosphere (from all phases of production and distribution) must remain below about 3.2% of all gas produced if natural gas is to have a climate advantage over coal over the next few critical decades, during which society must avert catastrophic climate change.33 In 2012, my colleague at Post Carbon Institute, geologist David Hughes, helped clarify issues in the dispute in a report titled “Life Cycle Greenhouse Gas Emissions from Shale Gas Compared to Coal: An Analysis of Two Conflicting Studies.”34 Hughes found that Howarth’s critics were lowballing per-well methane leaks during drilling and overestimating likely lifetime per-well production figures. He concluded that if these numbers are corrected, “the result is not significantly different from the conclusions of Howarth et al.”

  Some recent measurements of actual methane emissions during drilling have come down strongly on Howarth’s side. A study by the National Oceanic and Atmospheric Administration (NOAA) reported that fully 4% of the methane gas being produced in the Wattenberg field in Colorado was leaking to the atmosphere; in a subsequent study, the same NOAA team found that 9% of produced gas was leaking to the atmosphere in a large natural gas field on mostly Indian land in north central Utah.35 On the other hand, the research arm of ExxonMobil has published a study insisting that fugitive methane leaks from fracking are less than 1% of the gas produced, though this was based on a generous estimate of lifetime production from a typical Marcellus shale gas well.36 The US Environmental Protection Agency recently downgraded its estimates of methane leaks in America’s natural gas production and distribution system, but this action was based on industry-funded studies (like the one just mentioned) rather than new direct measurements, and it did not take into account the recent NOAA data.37

  Fugitive emissions of natural gas from pipelines (the third significant number) are still relatively poorly understood. A recent study of leaks from gas pipelines under Manhattan streets yielded numbers well above previous estimates for distribution leakage; the subsequent report estimated, on the basis of measured pipeline leaks, that the total of production losses and transmission losses for natural gas used in New York City must be above 5%.

  Can drilling, production, and transmission leaks be plugged? Yes, in principle.38 And of course, industry should do everything in its power to reduce fugitive methane emissions. But recent data suggest that both drillers and pipeline operators have a big job on their hands.

  Meanwhile, for the time being, the evidence is strong that current full-cycle greenhouse gas emissions for natural gas—especially from fracking—are worse than those for coal over the first 40 years. From the standpoint of climate stabilization, fracking for gas may be a bridge to nowhere.

  * * *

  We’ve been told that the economic and climate benefits of fracking (the latter in the case of natural gas, not oil) outweigh the risks to the immediate environment and to human health. But if evidence we’ve surveyed in the last two chapters is credible, then the real benefits of this technology have been exaggerated, and the risks substantially downplayed.

  When benefits are systematically hyped and risks are unrealistically minimized, the results are bad investments and bad government policy.

  SNAKE BITES

  1. THE INDUSTRY SHILLS SAY:

  Fracking creates a huge number of jobs.

  THE REALITY IS:

  The industry has massively oversold its jobs record. Since 2003, oil and gas jobs account for less than 1/20th of 1 percent of the overall US labor market. Numerous industry-funded studies count strippers and prostitutes as “new” jobs created by the spread of fracking.

  2. THE INDUSTRY SHILLS SAY:

  Shale gas promises continued economic benefits for decades to come.

  THE REALITY IS:

  A peak in US shale gas production within this decade will prove those promises to be purposefully deceptive lies.

  THE WALL STREET CONNECTION:

  Investment bankers love to inflate bubbles. When they deflate, it’s not the bankers’ money that’s lost—it’s more likely yours. The fracking industry shows all the classic signs of a bubble, including a heavy reliance on debt with revenues from production failing to cover operating costs.

  Chapter Five

  THE ECONOMICS OF FRACKING: WHO BENEFITS?

  In the 1980s, two Oklahoma twentysomethings, named Aubrey McClendon and Tom L. Ward, pooled $50,000 of investment capital and started a natural gas company. They decided to call it Chesapeake Energy, since McClendon (who emerged as the company’s moving force) was particularly fond of the Chesapeake Bay region of Maryland and Virginia. From the start, McClendon focused the business on unconventional gas plays and cutting-edge drilling technologies.

  Fast-forward to the mid-2000s. As the fracking frenzy was starting to sizzle in Texas and Oklahoma, Chesapeake was there turning up the heat. With the Barnett, Fayetteville, and Haynesville plays yielding shale gas in ever-greater amounts, Chesapeake Energy quickly became America’s second-biggest natural gas producer, and a Fortune 500 company with over 13,000 employees. By 2008, Aubrey McClendon was the highest-paid of all CEOs of S&P 500 companies.1 In 2011, Forbes named him “America’s Most Reckless Billionaire” in a cover story detailing his lavish and highly leveraged lifestyle.2 He owned homes in several states, a mansion on “Billionaire’s Row” in Bermuda, and 16 antique boats worth nine million dollars. He also had a habit of using his property as collateral in order to borrow money with which to buy still more.

  Critics began drawing comparisons between Chesapeake and Enron, the energy giant whose infamous bankruptcy in 2001 made it synonymous with galactic-scale accounting fraud. On the surface, they were very different entities: while Enron was a labyrinthine organization with a black-box trading operation and a flotilla of off-balance-sheet shell subcompanies, Chesapeake had real assets in proven and unproven gas reserves and a real product to sell. Still, Chesapeake’s business practices were opaque even to some of its biggest investors, and its cash flow from operations was insufficient to cover exploration and development costs and acquisitions in any of the last 10 calendar years.3

  How was Chesapeake making money? Early in the shale boom, the company bought drilling leases at a pace unrivaled; later, it sold bundles of these leases to other operators, many of them European or Chinese, and usually at a profit. Chesapeake was also adept at entering into partnerships and joint ve
ntures. And it used Byzantine financing methods pioneered by Enron in the 1990s—including derivatives, synthetic credit default swaps, and deals financed with little or no equity.4

  Eventually, crony dealings led to Aubrey McClendon’s resignation as CEO of Chesapeake. News emerged that he had been logging family vacation trips to Europe on one of the company jets as business travel, while Chesapeake employees were doing millions of dollars’ worth of personal work at McClendon’s home. He had put longtime friends on the Chesapeake board and showered them with compensation. He maintained personal stakes in company wells and used these as collateral for $1.55 billion in loans; at the same time, he was borrowing money from a company board member and running a private two hundred million dollar hedge fund from Chesapeake offices.5

  Disgrace couldn’t keep Aubrey McClendon down for long. Since his formal departure from Chesapeake Energy, he has formed a new company called American Energy Partners, with headquarters down the street from his old Chesapeake office in Oklahoma City.6

  Clearly, not all oil and gas companies specializing in fracking mimic Chesapeake’s extravagance and opacity. However, if the analysis in Chapter 3 is even approximately correct, then the shale industry is on shakier ground than many believe. Perhaps the fracking companies’ business model simply reflects the problematic nature of the resources they pursue, and the price and investment structures needed to get those resources out of the ground and to market.

  Chesapeake and other shale gas and tight oil companies have made extravagant claims about how communities, households, and the nation as a whole benefit economically from fracking. There’s no question: a lot of money has changed hands as a result of shale gas and tight oil development during the past decade. Billions of dollars have been spent in drilling, and billions have been returned in sales of oil and gas. In this chapter, we’ll try to answer the question: Who really benefits?

  COMMUNITIES

  The boomtown syndrome is as old as the petroleum industry itself. Once commercial deposits of oil or gas are confirmed, drillers and speculators arrive by the truckload, driving up prices for just about everything. Prostitution and motor traffic proliferate; peace and quiet disappear. Years later, after local citizens have spent their money from drilling leases, the oil or gas begins to peter out. High-paid workers leave town, and the local economy deflates.

  This predictable syndrome tends to characterize fracking operations even more than conventional oil and gas development, because shale gas and tight oil per-well production rates tend to decline so steeply (making the boom briefer and the decline steeper), and also because damage to the environment and to local roads, public health, and community solidarity can be much more serious.

  Here is a typical assessment of the economic boon from fracking, lifted from an industry-funded website:

  Hydraulic fracturing has . . . boosted local economies—generating royalty payments to property owners, providing tax revenues to the government and creating much-needed high-paying American jobs. Engineering and surveying, construction, hospitality, equipment manufacturing and environmental permitting are just some of the professions experiencing the positive ripple effects of increased oil and natural gas shale development.”7

  There’s definitely some truth here. Consider the example of Bradford County, Pennsylvania. In recent years its economy had been in decline as manufacturing jobs moved to China. But now, as Chesapeake Energy and other operators are fracturing the Marcellus shale beneath the county to release billions of cubic feet of natural gas, the economy is flourishing. The county has retired five million dollars in debt and has lowered real estate taxes by 6%. A Bradford County Commissioner has called fracking “an economic game-changer for the entire area.”8

  However, studies that look at the bigger picture reach more nuanced conclusions. A report by the Keystone Center in Pennsylvania found that “the Marcellus Shale is making a small positive contribution to recent job growth in Pennsylvania.”9 New (and often temporary) jobs are being offset by damage to existing industries, including tourism and the Pennsylvania hardwoods industries. In Bradford County, cited above, the Pennsylvania Department of Environmental Protection has recorded upwards of six hundred environmental violations from fracking, and the consequences for farmers have been severe—including contaminated water, plummeting property values, and sickened livestock. Many farmers have simply given up in the face of these challenges. Meanwhile, Pennsylvania research has also found that many of the new jobs go to skilled out-of-state workers who fly in, drill, and fly home. The jobs for locals generated by fracking typically last for only about two to three years.10

  All of this should be fairly predictable and unsurprising. Historically, regions that rely on resource extraction as an economic pillar often underperform when compared to other regions, especially when viewed over the long term. More wealth is typically created in places that use energy and minerals for manufacturing and trade than in ones where resources are mined. For example, coal areas in West Virginia continue to be pockets of poverty despite decades of mining activity. The long-term jobs created there often pay little, and other industries—including agriculture—are driven out by the ensuing environmental damage.11

  In both Pennsylvania and New York, drilling companies are moving into the poorest counties first—and not just because that’s where the shale resources are located. Economically struggling areas are often targeted because the locals are less likely to engage in anti-fracking activism. People who desperately need leasing money or temporary employment may be willing to overlook environmental damage, even if it impacts their own land and homes, and they can also be counted upon to take the industry’s side when community disputes arise over air or water quality.

  Meanwhile, people subsisting on fixed incomes (such as elderly renters) who don’t receive income from drilling leases or truck-driving jobs may have to move out because they can’t afford soaring rents and food prices.

  Local governments benefit temporarily from increased tax revenues during drilling booms. But costs to repair road damage—sometimes running into the millions of dollars—may outweigh that short-term bonus. In 2012, the State of Texas received about $3.6 billion in severance taxes from all oil and gas produced in the state (from conventional wells as well as those in fracked shale). But during that same year, the Texas Department of Transportation estimated damage to Texas roads from drilling operations at $4 billion. Arkansas has taken in roughly $182 million in severance taxes since 2009, but costs from road damage associated with drilling are estimated at $450 million. Roads designed to last 20 years are requiring major repairs after only 5 years due to the constant stream of overweight vehicles ferrying equipment and water to and from fracking sites.12

  The influx of workers also puts pressure on schools and hospitals. Yet it makes little sense to expand these facilities permanently, given the temporary nature of drilling booms. Meanwhile, police have to deal with increased crime rates, including (in Colorado, for example) high rates of methamphetamine usage among drill crews.13

  Disputes about fracking within communities can also strain the very process of democracy. When the city of Longmont, Colorado, enacted regulations to make residential neighborhoods, schoolyards, and the city’s open spaces off-limits to drilling, Governor John Hickenlooper sued, contending that more lenient state regulations took precedence. In response, Longmont citizens launched an initiative to ban fracking altogether within the city. Though overwhelmingly outspent by industry money, the ban initiative carried by a remarkable 60/40 margin. Industry, backed by the state, has sued to overturn the ban.

  As Deborah Rogers points out in her report, “Shale & Wall Street,” the oil and gas companies “are not in business to steward the environment, save the family farm, or pull depressed areas out of economic decline. If these things should by chance happen, they are merely peripheral to the primary mission of the companies.”14 Yet the promise of benefits to communities helps these companies achieve their real
primary goal—which is to extract hydrocarbons as cheaply and efficiently as possible and to sell them at the highest price that can be realized. Expectations of jobs and tax revenues can deter investigations into environmental and health problems, and delay regulations.

  For communities that have endured environmental insults, human health impacts, and costs to road infrastructure, all for the sake of income from fuel production, it is perhaps the bitterest of ironies when oil and gas companies simply refuse to pay promised royalties. This is by no means standard operating procedure within the industry, but it does happen.15 To mention just one example: in 2012 Chesapeake Energy paid five million dollars in settlement of a lawsuit brought by Dallas/Fort Worth Airport over significant underpayment for gas produced from horizontal wells beneath airport property.16

  THE NATION

  In their many opportunities to testify before Congress, oil and gas industry representatives have repeatedly painted a glowing picture of how America is benefiting from expanded shale gas and tight oil development. Here is Daniel Yergin speaking on the topic of shale gas in 2011:

  This abundance of natural gas is very different from what was expected a half decade ago. It was then anticipated that constraints on domestic natural gas production would result in high prices for consumers and the migration of gas-using industries—and the jobs that go with them—out of the United States to parts of the world with cheaper supplies. The United States was also expected to be importing substantial amounts of natural gas in the form of liquefied natural gas (LNG). That would have added as much as $100 billion to our trade deficit. None of that has occurred. Instead, the United States has become, except for imports from Canada, mostly self-sufficient. . . . Gas prices have fallen substantially, lowering the cost of gas-generated electricity and home heating bills. Several hundred thousand jobs have been created in the United States. Gas-consuming industries have invested billions of dollars in factories in the United States, something which they would not have expected to do half a decade ago—creating new jobs in the process. The development of shale has created significant new revenue sources for states—for the state of Pennsylvania and localities in that state, for example, $1.1 billion in revenues in 2010.17