Journalism in the Public Interest

SEC Loosening of Rule Let Natural Gas Firms Recalculate Reserves, Potential Profits


David McNew/Getty Images file photo

Natural gas has been widely promoted across the political spectrum as a key to solving U.S. energy problems. “The potential for natural gas is enormous,” President Obama said recently, referencing an estimate that the United States has enough gas to supply the country for more than a century.

That’s a contention that’s being challenged by a series of New York Times articles over the past few days that show some U.S. Energy Department officials and energy market analysts questioning whether the much-ballyhooed “natural gas boom” is overhyped, or even a “giant Ponzi scheme.” Emails from officials and industry analysts show them raising concerns about exaggerated estimates of gas reserves making the natural gas business appear more profitable than it really is. (Check out the emails.) According to the Times, the industry’s estimates for how well it will produce gas are based on “limited data and a certain amount of guesswork.”

The debate about overstated reserves isn’t entirely new in the industry, which may be why stocks of natural gas companies haven’t taken much of a hit this morning. For example, in 2009, a petroleum geologist with decades of experience wrote a column for a trade publication questioning natural gas production estimates. He later resigned as contributing editor of the column after getting fierce pushback from within the industry.

But setting aside what appears to be an ongoing debate, it’s clear that a rule change made by regulators in 2008 helped boost the perception that untapped gas reserves—and potential profits—were plentiful. The Times details how the Securities and Exchange Commission, bowing to industry pressure, relaxed the rules on how companies calculate reserve estimates:

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 agency’s rule change sent some gas companies’ estimates of reserves—and the companies’ stocks—soaring, according to the Times. It also made the cost of drilling the wells seem small, relative to the enlarged estimates of the potential payoff. 

We’ve reported extensively on the potential safety tradeoffs of hydraulic fracturing—the method used to blast through layers of rock in order for the purpose of extracting gas. (Don’t understand it? Here’s a graphic and a music video.)

Chesapeake Energy, a major natural gas company, stood by its reserve estimates, stating that the “new modernized SEC rules reasonably reflect the advancements in our industry’s ability to predictably produce oil and natural gas resources from unconventional formations." 

In an email sent on Sunday to employees, the company’s CEO, Aubrey McClendon, said the analysts and geologists casting doubt on the industry have been “a relatively small group.” He noted that their claims run counter to the investments made by leading oil and gas giants such as Exxon, Shell, BP, Chevron, and others, and he urged employees to “get involved by joining Chesapeake Fed PAC, our political action committee."

Interesting … now compare and contrast. When a small group of O&G engineers and scientists break from the mainstream consensus on the true quantity of natural gas reserves they get top billing at the NY Times and ProPublica but when the same happens in the climate science community they are relegated to back pages and labeled “denialists” and publicly attacked.

Conrad Masterson

June 27, 2011, 2:56 p.m.

So what is the real issue?  That they MAY make more money?  This is sensational journalism at its worse.  The gas companies will make what they sell.  Investors might get hurt or helped.  This is not a new situation for oil or gas producers.

Loosening rules and recalculating debt and profit? Didn’t we just go through this with banking industry, bad mortgages and securitized debts?
Just like before this seems like another Ponzi scheme being allowed to happen.

“a rule change made by regulators in 2008”  Why make it sound as if this occurred on President Obama’s watch? As for “what is the real issue”, it is about falsifying reports to increase the value of the corporation’s assets. This will eventually effect stock prices and the corporation’s ability to leverage its assets which if are not as stated could be disastrous for lenders, and the public.

Any number, regarding the length of time for a resource to run out, needs to be viewed with extreme caution.

Everyone needs to watch Dr. Bartlett’s (University Of Boulder, Colorado) lecture on Exponential Growth on: You Tube.

It is billed as “the most important video you will ever see”. I agree, an absolute must for all leaders.

The way I see it, OCEAN acidification is way more threatening than climate change, its potentially NEGATIVE IMPACT is ten times more serious then climate change which is an ATMOSPHERIC issue.
In the larger context the atmosphere is our canary.

Understanding EXPONENTIAL GROWTH as it applies to fossil fuel usage, population growth, and basic resource consumption gives us a wakeup call to question all our present values that will inevitably bring us into head on collision with basic arithmetic.

I must admit Dr. Bartlett had me transfixed.
God bless him.

Another blatant case of regulatory capture, enabling these rapacious corporations to commit fraud.  Unfortunately, this is not new.  The Oil industry has been doing it for decades with the so-called “Oil Depletion Allowance” and has fought to the death (literally, although not their own) to keep it.  It is shameful and anybody who falls for this obvious Ponzi scheme at this point in time, almost deserves what they get. However, if there were any justice in America today which there does not appear to be, the whole lot of them including the corrupt “regulatory” officials at the SEC and Congressional enablers would be put behind bars.  Those days are beginning to seem like another lifetime and another place…

Excellent comment, Mike H., right on the money!

What Ms. Wang doesn’t disclose, for whatever reason is that the traditional shale formations are much more uniform in terms of gas reserves.  Of course the ProPubics couldn’t stick to the topic, having of course to reference Wang’s fellow faux journalist, Lustgarten’s sensational claims, not accurate or objective, just shrill and sensational, about fracting.  Unfortunately in this downturn in the journalism profession the bottom feeders, like cockroaches seem to thrive.

Reading this article reminds me of something an elderly oil man told me when I first started working in the oilfield back in the late ‘70’s.  His statement was “son, just remember this, most people in the oilfield, especially those calling the shots,( i.e, those in managerial positions), are just one step below child molesters.  Remember this and you’ll have a long, safe career in the oilfield.”  Not only was what he said true for the oilfield, but for just about every other industry in existence, i.e, banking, investment bankers, politicians, etc.

This is no “Giant Ponzi Scheme” this is utter"madness” like a mental disorder…

The product (Hydro Fracked Shale Gas) from a new play must make $7 to break “even” but it now sells for only $4 and a quarter, it been around that number since 2008…so Exxon invests Billions…Wall Street says it’s going to get $15?? Do they expect to hold the whole world hostage?

The “Best” fib of all…“Proven Reserves” two wells have the same field, the same depth or the same yield…nobody knows what’s down there @ 9000FT under our water table…this is a Wall Street mugs game but please don’t tell the little people of New York State or the Province of New Brunswick that they are going to make any money out of this, they are not…this is going to cost them money!

Note: Some wells in Western Canada need only a half a million gallons of clean surface water…but one well in British Columbia needed “26” million gallons, that’s 26,000,000,000 gallons of your clean surface water for one well. They, the experts, think for our Eastern Region, it’s about 5 million gallons of fresh, clean, cool, life giving surface water per well dug!

As I read through the comments here, I wonder if those flogging ProPublica are plants by the oil and gas industry.  Furthermore, to the poster above who tries to make the analogy between defecting scientists in this case and those defecting scientists in climate change science, that is a false analogy. Why? The scientists here are in line with the MAJORITY of scientists, where as those defecting in climate science are in a tiny minority.  The real problem in climate science is distinguishing between cause and correlation.  To the readers, do not be fooled by the fallacious reasoning of those attacking ProPublica, which is easily one of the last bastions of investigative journals.  They make fallacies of equivalence by trying to say all journalists are bad, the MSM is bad, so to must ProPublica be bad.  Wrong. Bad reasoning.

Imagine if civil engineers and architects were allowed to play with their calculations.

My analogy for climate change is use your charcoal grill inside your living room and see what happens. Maybe you’ll get by for a time however it will catch up to you.

Heard a report about vertebrate extinctions and causes. One of the causes is habitat destruction. What are humans and what are we hell bent on doing?

James B Storer

June 28, 2011, 9:07 a.m.

This is a great report, ProPublica, as witness the very fine comments it has received.  The comment by CK,:  “As I read through the comments here, I wonder if those flogging ProPublica are plants by the oil and as industry.”  That possibility has crossed my mind occasionally, and I think the culprits involve many more that just oil and gas people.  If true, it is really a testament to the increasing importance ProPublica has achieved in its endeavors.  The “ian” comment on exponental growth “…heading into a collision with basic arithmetic” is perfectly stated.  His tribute to Dr. Bartlett is well deserved, and we should all become and stay acquainted with the ideas of Dr. Bartlett.  The comment referred to by Greg Foreman puts today’s report by M. Wang in a nutshell:  “son, just remember this, most people in the oilfield, especially those calling the shots, are just one step below child molesters.”
I believe the comments we are submitting are tending more and more to really stress and incorporae the interrelationship of these banking, real estate, oil, etc. corruptions with the vast overall topic “Pollution.”
Skartishu,  Granby Mo

Good piece. However I would like to make another statement concerning America’s oil, gas and coal reserves. The corporations will extract at a high cost to the American people (environment and high rates) and you can count on them selling these reserves, what ever they maybe, across the globe. The American people will be duped once again.

“Proven Reserves”...Elgin, New Brunswick, Canada…“Corridor/Apache” fracking with Halliburton Technology identify the “Lead Pipe Cinch!”, the Proven Find, to jump start Shale Gas Fracking in Eastern Canada and your Eastern Seaboard. The two exploration wells, the can’t miss shot, are a bust…but to us deep in our ground, by their own admission, 83% of their dirty proprietary fracking cocktail is left, a gift, as the wells were closed down and “Shut in!” I guess we shall find out their secret formula later in our water!  Apache, who had a major commitment, pull out of New Brunswick!

Correction to my above comment - the second one

“Excellent comment, Mike H., right on the money! “

I realize that I misread Mike’s comment in my hasty scanning of the comments.  I completely agree with CK who is spot on.  The “defecting” climate change scientists should be relegated to the back pages and labeled “denialists”, because that is exactly what they are.  They are a tiny minority and their reasoning does not even make sense.  Their assertions are more akin to articles of faith, than science.  Every one of their specious claims, dressed up as “explanations” for climate change, has been shown to be false and debunked, yet they keep getting repeated in the corporate media (not ProPublica). In addition, they offer NO actual research data/results, much less hypothesis testing to substantiate their claims.  I’m sure that is because they can’t; otherwise, we would already have seen and heard it, ad nauseum.  Many of these “scientists” have been shown to be on the payroll of the oil companies.  Others simply appear to confuse science with religion, and methodical testing and reasoning with belief or faith.  Sadly, critical reasoning skills are sorely lacking in America these days, as well as a robust understanding of science and the scientific method.  I believe this is because of the deliberate dumbing-down of our educational system that so many people are fooled by this, rather obvious, chicanery.

I did not intend to criticize ProPublica’s coverage of climate change and global warming issues.  All of their coverage that I have read has been top notch and objective.  Sorry for the confusion!

In reply to James B Storer’s comment:

“I believe the comments we are submitting are tending more and more to really stress and incorporae the interrelationship of these banking, real estate, oil, etc. corruptions with the vast overall topic “Pollution.” “

Very good point…and also with the vast overall topic of ‘fraud and corruption’ in high places.  If you would like to read an excellent and exhaustively researched and documented book on this subject, I highly recommend Russ Baker’s “Family of Secrets: The Bush Dynasty, America’s Invisible Government, and the Hidden History of the Last Fifty Years”.  He goes back to the murky beginnings of the Bush Dynasty and the shadowy origins of the Anglo-American oil-banking-CIA empire.  In the process, he rigorously researches and documents the available evidence to-date for the most important scandals and tragedies of the past 50 years that have been swept under the carpet, starting with the Kennedy assassination, Watergate, the “October Surprise”, Iran Contra, “W.‘s” mysterious business ventures, like Arbusto and Harkin, and much more.  Connections and funding of dubious and nefarious enterprises by prominent plutocrats (American, Saudi, British) in high places are explored in amazing detail - and the origins of “Enron style accounting/book-keeping” are examined. He spent 10 years researching the book and it shows.  A must read for all Americans who value being well-informed and understanding the real history of their country, in contrast to the fairy tales we are taught to regurgitate in school.  At 500 pages, it is well worth the read!

When I searched for it on Amazon, I saw that the title of the hardcover version is different.  It is “Family of Secrets: The Bush Dynasty, the Powerful Forces That Put It in the White House, and What Their Influence Means for America”.  I don’t know if anything else is different from the paperback that I read, so I would search on/get the paperback, just in case.  It still has the same title and has a red cover with yellow letters.  Don’t let the length of this masterful tome deter you, it is a thrilling read.  Once started, I was not be able to put it down!

For those interested, Russ also has an excellent blog: that is devoted to non-profit, paradigm-shifting journalism.

Actually, exaggerating gas reserves might improve a company’s apparent net worth, book value and borrowing capacity but for the industry as a whole is has negative consequences because it will hold prices down and give buyers more leverage to negotiate prices.  You can only sell gas as fast as you can get it through the pipeline and you can only get it through the pipeline as fast as it can be taken out and used on the other end. Some storage of natural gas is done but it is nothing like storing a liquid such as oil.
The fact is that gas prices have generally decreased significantly except where long term contacts are in effect.  I believe you will see less interest in drilling for gas in the coming years.  However, in those areas where leases are expiring, companies may have a vested interest in trying to get wells drilled so that they can be held by production to keep from losing them.  Unfortunately, shut-in gas wells don’t produce a cash flow and purchasing contracts may be ignored in times of a gas glut - so investors could be stuck with reserves but no immediate return on investment.

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