Shale and its Discontents
The New York Times still doesn’t get the shale revolution.


Robert Bryce

The shale-gas (and shale-oil) revolution is the single most important development in the North American energy sector since the discovery of the East Texas Field in 1930. But you won’t get that story by reading the New York Times.

Instead, two recent articles by Ian Urbina, the Times’ designated reporter on shale development, claim that the shale business is overhyped. On Sunday, June 25, the paper ran a front-page story that relied largely on anonymous sources who used phrases such as “giant Ponzi schemes,” “inherently unprofitable,” and “an Enron moment” to describe the last few years of shale development in the U.S. The story ended with yet another unattributed quote, which discussed a rather lackluster well that had been drilled into a shale bed in Europe. An employee of an oil-field-services company said the well “looked like crap” and that it would likely be sold to another company. According to the anonymous source, there’s “always a greater sucker.”

But who’s the sucker here?

Believing Urbina’s story entails believing that the industry’s top management and financial analysts — at ExxonMobil and several other major energy companies — are chumps. In late 2009, ExxonMobil paid $41 billion for XTO Energy, a Houston-based company that was sitting atop huge shale-gas assets. According to the president of Shell US, Marvin Odum, the company has invested some $17 billion in shale drilling over the past few years. During a recent presentation at the Aspen Institute, Odum said, “We wouldn’t be doing it if it wasn’t real.” Numerous companies are building huge pipelines into the Eagle Ford shale in South Texas.

Believing Urbina also requires even the most casual observers of the energy industry to disregard the billions of dollars that consumers have saved over the past couple of years due to the reduced price of natural gas — a price drop made possible by a boost in production. The latest spot price for natural gas at the Henry Hub in Louisiana is about $4.40. To make the math easy, let’s call it $4. Over the four-year period from 2005 to 2008, U.S. natural-gas prices averaged about $7 per thousand cubic feet. That price reduction is now saving American consumers about $60 billion per year, or about $180 million per day. 

U.S. natural-gas production is now at, or above, the peaks achieved in the early 1970s. In 2011, we’ve had more than a dozen days in which gross domestic gas production has been as high as 64 billion cubic feet. The last time the U.S. had gas production at that level was in 1971, when gas production averaged 62 billion cubic feet per day.

Nor is the shale push only about gas. According to the Energy Information Administration, over the past five years, U.S. oil production from shale formations has gone from about zero to nearly 300,000 barrels per day. And the continuing exploration of shale will lead to yet more increases in domestic production.

In March, domestic crude production was 5.63 million barrels per day, the highest level since 2003. Amazingly, production is rising despite the Obama administration’s de facto moratorium on drilling in the Gulf of Mexico. And production will likely continue rising from deposits such as the Bakken Shale in North Dakota, where state officials are predicting oil production will double from current levels to about 700,000 barrels per day, by 2018. Indeed, industry analysts are looking at the boom in shale oil and seeing the renaissance of domestic petroleum output. In June, analysts at Bentek Energy predicted that U.S. oil production could increase by as much as 2 million barrels per day by 2016.

A recent report from Norway-based consulting firm Rystad Energy largely agrees with Bentek. Rystad expects that by the early 2020s, the combined output of American oil and gas fields will exceed the peaks hit back in the early 1970s.

Imagine that. The U.S., a region that has been left for dead when it comes to oil production — and was slated to become a major importer of natural gas — is instead poised for a comeback that promises huge supplies of relatively cheap hydrocarbons for years to come.

Despite these facts, industry critics have used Urbina’s coverage to further their anti-drilling agenda. For instance, Rep. Maurice Hinchey, a Democrat from New York who is a co-sponsor of a bill that would put the Environmental Protection Administration in charge of overseeing the process of hydraulic fracturing, issued this statement:

We already knew shale gas drillers were misleading the public about hydro-fracking’s environmental risks. Now we are learning that these companies may be cooking the books and using Enron-like tactics to paint a rosy and unrealistic picture for investors, policymakers and local communities.