Though fracking enabled the U.S. to finally re-achieve the long held conservative dream of energy independence, the ever-increasing volume of fracked fossil gas flowing out of the U.S., has led to an international glut as prices continue to fall. Now neck-deep in debt and historically unprofitable, pure play gas frackers are starting to struggle. Mass bankruptcies, shut-ins, and layoffs are likely. But Trump’s evisceration of environmental protection laws combined with ludicrously low liability bonds virtually ensures the public will be stuck with the clean up bill. Michael Buchsbaum explains.
With foreign policy led by the former CEO of Exxon-Mobile, Rex Tillerson, it’s no surprise the nation’s Dealmaker-In-Chief aimed much of his first term leveraging favorable future trade agreements against long-term Liquid Natural Gas (LNG) import contracts. The European Union, including the U.K., was swift to accept terms—becoming an unwitting partner in a potential catastrophe.
Ever since 1859 when the first well in Pennsylvania started gushing, America’s oil and gas industry has been furiously drilling (and recklessly abandoning) wells and pipelines nationwide.
First developed in 1949, as fracking technologies matured in the first years of the new millennium, North Dakota, huge swaths of Pennsylvania and most of Appalachia have been swept up in an oil rush of epic proportions. Led by Exxon, BP, Anadarko, Chesapeake Energy and thousands of independents, and turbo-charged by Wall Street’s bailed-out casinos, investors quickly unlocked an ocean of black gold. With bankers eager to lend, drillers grabbed the cash and fanned out westward towards Texas, California and the Rockies, drilling, boring and fracking everywhere they went.
As of 2015, over 1.7 million fracked wells were producing in the U.S.—a number that has only grown in the years since. Each new well coming on-line joins the others in feeding gas and oil into un-mapped millions of miles of new flow lines, pipelines, thousands of new refineries and all manner of other industrial facilities.
Nevertheless, even after unleashing a flood of hydrocarbons, gas fracking has never been profitable. Instead it’s generated a sea of new debts.
The Wall Street Journal reported in August that while the industry had “only” $9 billion in debt maturing over second half of 2019, a whopping $137 billion will come due between 2020 and 2022.
Worse, despite the oil taps flowing harder than ever, at the other end of the tubes, Wall Street is cutting off the frackers’ spigots. With gas prices only anticipated to fall, endless debt-fueled drilling has simply become too hard to justify. Unable to access more credit, many analysts are predicting a sector-wide fracking collapse.
Few are worse off than producers focused almost exclusively on gas, such as those in Appalachia. A new Institute for Energy Economics and Financial Analysis (IEEFA) report found that seven of the largest producers there burned through some half-billion dollars in the third quarter of 2019 alone. “Despite booming gas output, Appalachian oil and gas companies consistently failed to produce positive cash flow over the past five quarters,” they commented.
Making it worse for Appalachian drillers, their Texan counterparts see their gas as at best a little extra “cream” on top of their oil—which remains their main goal. So much gas is flowing there that prices in the Permian, the largest fracking play in America, have plunged close to zero, even at times turning negative. In other remote western fields in North Dakota and the Rockies, gas is so cheap that many producers haven’t even bothered to extend flow lines all the way to their wellheads. They just flare the gas off right there—at a safe distance, of course, from the crude oil.
Just the same, whatever gas is captured, keeps flowing. This dynamic translates into an entrenched glut, with banks and commodities traders holding onto an ever-growing supply. Industry pioneer and former Wall Street darling, Chesapeake Energy, recently warned investors that there was “substantial doubt about our ability to continue as a going concern.” Once worth billions as the nation’s second biggest fracker, its junk level stock is now trading below $1 per share.
Looming reclamation crisis
When the whole fracking and shale boom goes bust, environmental groups warn taxpayers will likely be forced to pay for the plugging of abandoned wells and the reclamation of impacted lands.
Legally, companies are required to set aside money to pay for well cleanup costs, a process known as bonding. These requirements vary by state and for public lands, but in all cases, the amounts required are so small as to be practically irrelevant. New Mexico requires a blanket bond of $250,000 for drillers with 100 or more wells, which at best secures $2,500 per well. A recent Government Accountability Office (GAO) report reviewed the status of bonds held by the Bureau of Land Management BLM) for the over 100,000 active wells on public lands. It found that the average bond per well in 2018 was worth only $2,122.
The GAO report noted that “low-cost wells typically cost about $20,000 to reclaim, and high-cost wells typically cost about $145,000 to reclaim.” In North Dakota, State Mineral Resources Director Lynn Helms, estimated wells there cost $150,000 to plug and reclaim.
Perhaps embarrassed by the GAO’s reminder that Federal bonding requirements haven’t been updated since the 1950s and ’60s, the BLM swiftly agreed with the report’s conclusion that bond prices should be raised.
Asleep at the switch
The Western Organization of Resource Councils summarized bonding requirements by state, and none of them even came close to being adequate to cover the necessary estimated costs. As the first waves of recently fracked wells enter their second decade of production, now at much reduced “stripper” volumes, regulators are beginning to worry.
“It’s starting to become out of control, and we want to rein this in,” Bruce Hicks, Assistant Director of the North Dakota Oil and Gas Division, said in August about companies abandoning oil and gas wells.
If North Dakota’s regulators, some of the most industry-friendly in the country, are sounding the alarm, then the rest of America needs to sit up and take notice.
Admittedly overwhelmed, Pennsylvania’s Department of Environmental Protection (DEP) admits that although it can only properly document 8,000 orphaned and abandoned wells, it estimates the state has actually over a half million. “We anticipate as many as 560,000 are in existence that we just don’t know of yet,” DEP spokesperson Laura Fraley told StateImpact Pennsylvania. “There’s no responsible party and so it’s on state government to pay to have those potential environmental and public health hazards remediated.”
Another thing fracking may end up shattering: records for clean up costs.