Apples and oranges and other deceptions.
Is it possible that what the International Energy Agency (IEA) calls the golden age of natural gas may by all hype or is it possible that special interest are trying to stop the natural gas revolution? Yesterday the New York Times created quite the stir when it reported that some natural gas companies may be taking advantage of new rules on reporting shale gas reserves and "questioned whether some companies are overstating, perhaps intentionally, the amount of gas they can economically produce in a given period. This practice, known as overbooking, is illegal because it misleads investors trying to assess a company's strength and banks that use reserves as collateral for loans."
The New York Times says that, "Previously, companies were allowed to count gas only from areas close to their active wells as part of their ‘proved’ reserves, the amount of gas that a company estimates to investors it will tap. This was meant to prevent companies from claiming reserves of gas based largely on guesswork. After the rule change, companies were allowed to include gas located farther from producing wells in their reserves estimates, using modeling methods to predict how much gas could be produced from these yet-untapped areas. But the S.E.C. said that the companies, for reasons of trade secrecy, did not have to disclose precise details about the technology they used to estimate reserve sizes. Though the commission considered requiring third-party audits to verify the reserve estimates, the idea was dropped in the end. The rule change was especially helpful to shale gas companies because it approved the use of new technology and modeling techniques that these companies rely on more heavily than traditional oil and gas companies."
The Times goes on, "Among 19 of the largest shale companies reviewed by The New York Times, at least seven increased — some by more than 200% — the amount of undeveloped reserves they reported in their federal filings immediately after the rule took effect, according to their S.E.C. filings. Investors cheered the rule change as it was adopted, and in the following months they sharply bid up the stocks of five of the seven companies. The rule change also allowed these companies to reduce one of the costs that investors often rely on to compare the performance of energy companies: Their finding and development costs. These costs now appeared drastically lower because they were being divided across a much larger reserve estimate. Five of the seven shale companies also reported huge decreases in their finding and development costs — by as much as 86%, according to a review by The Times of their federal filings. The average decrease in these costs for the oil and gas industry on the whole was about 48 percent for the year. "
Yet the Times charges that, "In internal e-mails and documents, many industry executives and federal officials have questioned whether some companies are overstating, perhaps intentionally, the amount of gas they can economically produce in a given period… ‘There is now plenty of production data available from the states to show that these wells are nowhere near what these guys are touting,’ an official with a Texas oil and gas company who formerly worked at Enron wrote on Nov. 7 2009 comparing the practices of shale companies to Enron's. ‘I have discussed this numerous times with analysts that are friends of mine — they agree with me and then just shrug their shoulders.’”
The Times warn that, "Some industry experts say they think they are seeing a replay of events from last decade. In 2004, the oil and gas industry faced one of its most embarrassing scandals. After whistle-blowers reported concerns about the size of Royal Dutch/Shell's reserves, the company surprised investors by slashing reserve estimates. ‘I am becoming sick and tired about lying,’ Walter van de Vijver, a senior executive at Royal Dutch/Shell, wrote in a November 2003 e-mail made public shortly after his company's problems came to light. The episode led to the ouster of several of the company's top executives and an investor lawsuit worth more than $350 million, and helped propel the S.E.C. rule change."
Still how strong is the New York Times case? If this is true that the natural gas reserves that we have are not living up to expectations, then why are smart people across the entire industry betting big on shale gas?
The EIA denied the story saying, "June 27, 2011, New York Times article, "Behind Veneer, Doubt on Future of Natural Gas" focuses on the Energy Information Administration's (EIA) consideration of shale gas. EIA was contacted by a Times reporter in advance of the story, and provided a response that described the agency's approach to developing its shale gas projections. Those interested in EIA's views on shale gas, which differ in significant respects from those outlined in the June 27 article, may want to review the EIA response to the inquiry from the Times. Which read...
This email is in response to your recent inquiry to the Energy Information Administration (EIA) regarding shale gas. My name is Michael Schaal and I am the director of the Office of Petroleum, Natural Gas and Biofuels analysis within EIA's office of Energy Analysis. All of EIA's short term natural gas forecasts (out to 2012) and long term natural gas projections (out to 2035) are developed by EIA analysts and modelers who work in my office. The attachment provides a quick overview of our approach to the shale gas issue, including material that addresses your specific questions. One guiding principle that we employ is, "look at the data." It is clear the data shows that shale gas has become a significant source of domestic natural gas supply. Prior to 2005 shale gas constituted only 4% of natural gas production and had grown to become 23% of production for 2010. EIA's continued monitoring of the situation indicates that growth in shale gas production continues and that shale gas has exceeded 30% of total marketed natural gas production through May of this year. Don't hesitate to contact me if you have any further questions."
The EIA goes on to say that, "The continuing discussion regarding estimates of technically recoverable shale gas resources among Energy Information Administration (EIA) staff at all levels is a part of a healthy analytical process that considers both the shorter term dynamic of the industry and the longer term implications. Ultimately, senior analysts and managers in EIA's Office of Energy Analysis decide how to characterize technically recoverable resources for EIA's annual report."
Oil's big rebound on Greece hopes and the promise of rising interest rates in Europe set the stage for further upside recovery. Yet the upgrading of a tropical disturbance in the Gulf of Mexico added to the run. While Tropical Storm Arlene, the first of the season in the Gulf, is not expected to do much damage, just the thought of the storm was enough to not want to be short.
Later we also received supportive data from the American Petroleum Institute showing a surprise drop of 2.7 million barrels of crude supply and a drop of 91,000 in gas and 945,000 in distillate. EIA and Greece again will be key today.
A great article by Reuters Roberta Rampton telling the story of the EIA oil release. Roberta writes "- It was on May 2, the day U.S. oil prices peaked at nearly $115 a barrel, that President Barrack Obama put into a motion a controversial plan that would lead to the biggest-ever sale of U.S. emergency oil stocks. Even as oil prices fell from that high, a core team of Obama officials pressed ahead with diplomatic efforts to rally other consuming nations behind a plan they felt would aid to the faltering global economy, while ensuring key OPEC allies were consulted, an administration official told Reuters. ‘This was done very carefully and quietly with very significant pros and cons presented,’ the official said, describing the behind-the-scenes talks that led up to the third-ever release of global stockpiles. The picture that emerges is of a lengthy but determined march toward a measure that many analysts say marks a turning point in energy policy favoring more active use of reserves to combat high prices. The United States and other oil-consuming nations agreed on Thursday to release a total of 60 million barrels of oil from reserves -- half of that from the United States -- sending crude prices tumbling." A must Read on Reuters!