Energy: Addressing the Rising Fracas Over Fracking

The media seem to be fighting increasingly hostile wars over hydraulic fracturing. But extant data make a few points clear.

(Editor's Note: This article does NOT recommend individual securities; any securities mentioned below are simply examples of a broader theme we wish to highlight.)

With most new technologies, especially energy sources, comes debate between those excited by the potential and those fearful of possibly harmful ramifications or overstatement of the future scale. In our perusal of recent major news publications, Fisher Investments MarketMinder sees a timely example in the debate between major news publications surrounding shale gas extraction.

The combination of shale gas (a long-known resource containing huge amounts of recoverable natural gas) and two old techniques (hydraulic fracturing-"fracking"-and horizontal drilling) has created a virtual energy boom in recent years. In states like Pennsylvania, New York, North Dakota, Oklahoma, Louisiana and Texas, frack wells are being drilled with increasing frequency-and many of them are closer to where folks reside than, say, Alaska's conventional oil wells by contrast.

We won't reiterate Fisher Investments' views of shale resources (you can review them here). But what's most interesting recently is the debate triggered by the boom and often-cited ramifications. Usually, this debate centers around fracking's potential environmental impact-which the government is presently studying. That's a fair point and one we'd welcome an even-handed and broad investigation of, relying on a sufficiently sizable dataset to attempt to draw conclusions.

But a recent New York Times article went further-attempting to discredit those bullish on the future of shale resources by citing unnamed sources within the US Energy Information Administration (EIA). The article focuses on several perceived problems: Rapid production decline, accounting issues at fracking companies and overstatement of the resource's potential. Essentially, suggesting fracking represents a bubble. This article, much ballyhooed at the time, has not gone unnoticed by the industry, other media sources or the EIA itself. Meanwhile one can certainly debate some aspects of the shale gas story that are, as yet, not conclusively proven.

First, the day following the article's publication Constellation Energy CEO Aubrey K. McClendon drafted an email response to employees (that he requested be shared outside the company, so we're not scooping anything that isn't public) refuting the piece. In Mr. McClendon's sharp retort, he raises interesting points that should call into question the validity of many of the article's central points:

Here's Mr. McClendon regarding the potential of shale gas plays:

But I wanted you to know that this reporter's claim of impending scarcity of natural gas supply contradicts the facts and the scientific extrapolation of those facts by the most sophisticated reservoir engineers and geoscientists in the world. Not just at Chesapeake, but by experts at many of the world's leading energy companies that have made multi-billion-dollar, long-term investments in U.S. shale gas plays, with us and many other companies. Notable examples of these companies, besides the leading independents such as Chesapeake, Devon, Anadarko, EOG, EnCana, Talisman and others, include these leading global energy giants: Exxon, Shell, BP, Chevron, Conoco, Statoil, BHP, Total, CNOOC, Marathon, BG, KNOC, Reliance, PetroChina, Mitsui, Mitsubishi and ENI, among others. Is it really possible that all of these companies, with a combined market cap of almost $2 trillion, know less about shale gas than a NYT reporter, a few environmental activists and a handful of shale gas doubters? I seriously doubt it and I expect you do as well.

Mr. McClendon also stated the accounting practices of his company are in accordance with industry standards and are audited by third parties, which have turned up no irregularities. So where did the NYT reporter source this from? And what is the unnamed source's expertise? Without any way to verify the claim, statements about accounting problems shouldn't be taken at face value.

Commodities markets also have spoken loud and clear on the subject. Natural gas prices today are extremely cheap relative to recent history. US spot gas prices sit at roughly a 50% discount to European sources (where shale gas is far less developed at this time) and are actually at a record 16% discount to coal (which few question the abundance of). The reason for these extremely cheap gas prices isn't fictional: It's highly elevated supply, largely due to strong production from fracking companies.

Furthering the valid points raised by Mr. McClendon was the EIA itself. Following the article's publication, the EIA publicly stated the conclusions drawn in the New York Times' article were at odds with the data they provided the reporter. While editorial latitude isn't a terrible thing in journalism or media and there are aspects of the shale gas story that are fine to question, selective reporting using vague sources does no one involved in the fracking debate any good. In Fisher Investments' view, the NYT generally is a good news organization (though like any, we may disagree with some of their conclusions). But in this case, despite the article's assertions, available data indicating fracking has boosted gas production massively is beyond dispute.

This article constitutes the general views of Fisher Investments as of July 2011 and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.