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Michael Miller

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By Michael Miller
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Is The Gas Bubble Bursting?

Bradford County, Pennsylvania, lies along the border with New York, several thousand feet above the gas-infused rock formation called the Marcellus Shale and less than a half-hour drive from the cities of Corning, Elmira and Binghamton. Last week, three Bradford County families reached a $1.6 million settlement with Chesapeake Energy of Oklahoma City (“America’s Champion of Natural Gas”), compensation for the ruination of their water wells by methane gas migrations from nearby high volume hydraulic fracturing (“fracking”) operations. This is the first time ever that details of a Marcellus Shale settlement have been revealed to the public, at the insistence of the families.

Meanwhile, thousands of residents around the Binghamton area say the unproductive leases they signed with gas drillers several years ago have expired, but the drilling companies are claiming that the leases may be unilaterally renewed because the state’s fracking moratorium is akin to a natural disaster or act of God.

The fracking bonanza isn’t turning out the way many people were promised. It is not difficult to find serious industry analysts who are calling the entire thing a “bubble” and even a “Ponzi scheme.”

Even with a major rally in natural gas prices due to the heat wave and an increase in “cooling degree days,” the market “spot price” is about half of what it was a year ago ($2.77 per million British Thermal Units as of this writing). Gas companies sold large chunks of “futures” last year at more than $5 per million BTU. Even if they’re still doing well on paper, these prices are far below the cost of production. Chesapeake Energy now leases drilling rights on over 15 million acres of land (more than eight times the area of Nassau and Suffolk counties) and makes its profits mostly by flipping properties. In 2010, the company sold land it had purchased in Texas for $2,000 an acre to a large Chinese oil company for $11,000 an acre, making a profit of $2.2 billion.

Chesapeake, Encana and other large natural gas producers have been so successful at producing gas from “unconventional” (fracked) gas wells that they’ve oversupplied the market. The book value of their reserves is eroding, as is the industry’s cash flow and profitability. Natural gas wells can’t compete for investment capital with oil wells, which have a much higher “Energy Returned On Energy Invested” ratio (after only several months, sometimes only several weeks, production from fracked wells falls off the table and levels off at about 10 percent of initial production).

That’s why gas companies are flooding daytime television and the halls of the State Capitol in Albany with millions of dollars in advertising and lobbying power, trolling for small investors and warning off politicians who might be tempted to meddle.

And this has been working. Many of us, exposed to the incessant propaganda, think that America is poised to become the energy-exporting powerhouse it once was, if only the government would get out of the way. In fact, the natural gas industry as we know it wouldn’t exist without massive subsidies and tax breaks. Last week, it was reported that since its founding 23 years ago, Chesapeake Energy has paid only $53 million on its $5.5 billion in profits.

The U.S. Department of Energy has cut its estimate of gas available in the Marcellus Shale by nearly 70 percent. A Colorado School of Mines report estimates that the U.S. has a recoverable gas supply of 23 years, not the “near 100-year supply” that President Obama still talks about as a centerpiece of his energy plan.

Recently, a coalition of 55 institutional investors with over $1 trillion in assets called on companies involved with shale gas fracking to police themselves and reign in the tactics that are turning off America and putting everybody’s money at risk. T. Boone Pickens, the billionaire who toured the country promoting natural gas as the answer to our country’s energy problems, announced in May that he was “out of the natural gas stocks…We didn’t like natural gas.”

The money is talking.

There are no easy answers to our energy, climate and fiscal situations, and fossil fuels are made mostly of carbon, not magic.

Michael Miller is a freelance writer, designer and strategic consultant who has worked in state and local government. Email: millercolumn@optimum.net