The Smear Campaign Continues

Today, Mr. Kenneth Boehm, Chairman of the National Legal and Policy Center, wrote an e-mail to Arthur Brisbane,The New York Times Public Editor, in which he made false and unsubstantiated statements about my professional work and conduct:

http://nlpc.org/stories/2011/07/07/ny-times-asked-investigate-shale-gas-bubble-series

Mr. Boehm,

I demand a public correction and apology for the unethical, un-researched and un-investigated statements that you made about my professional activities and positions in your e-mail to Arthur Brisbane, Public Editor of The New York Times, and that are now reproduced on the NLPC website.

"Arthur Berman makes his living providing investment advice based upon his own position as a shale gas critic."

Your reference is to a news report on a technical talk that I gave pro bono two years ago that in no way supports your claim that I make my living providing investment advice.

In fact, I do not.

I am a petroleum geologist and have spent all of my thirty-three year career making maps, interpreting subsurface data, evaluating drilling prospects and advising clients on the technical risks of petroleum systems. I am a licensed geoscientist in the State of Texas and have held numerous unpaid positions as an officer in professional geological societies.

I have no experience as a financial advisor and have never given any client investment advice as you claim.

I have no position as a shale gas critic. I evaluate a broad spectrum of oil and gas opportunities in my work and have no bias toward any of them. If the petroleum system risk, reserve, rates and economics of a prospect or play do not meet threshold criteria, I provide this interpretation.

The fact that shale gas plays fail to meet these standard criteria does not make me a shale gas critic but, rather, an honest broker of objective data.

"The truth is that Mr. Berman is a very lonely proponent of this view. As much as he has tried for over three years, he has garnered virtually no scientific support."

Your reference is to a technical report that I published in World Oil, a respected industry journal (re-printed on my blog) that it no way supports your comments.

I suggest that you poll the thousands of technical professionals in the oil and gas business who have filled my invited pro bono technical presentations at professional societies all over the country for many years. Any rudimentary research would reveal that my publications and public lectures cover a spectrum of petroleum subjects of which shale gas is only part. Perhaps you should poll my many clients about the degree to which they find scientific merit in my work.

"In these emails, Mr. Berman appears to be corresponding with, among others, investors who missed out on the boom in shale gas and stand to gain, financially, from a devaluation of the natural gas industry."

You provide no reference for this ridiculous statement so it is obviously nothing more than unethical conjecture to support a bias that you appear eager to forward.

"Mr. Berman offers his views regularly to media outlets which service the investment community, consistently espousing views supportive of short sellers."

Your reference is to a blog by someone who I have never heard of who apparently heard a presentation that I made and summarized my conclusions. I never gave this person an interview and have no idea about his business. Your reference does not support your specious speculation.

I have no interest in or knowledge of short sellers. My business is geology not finance. I have never taken a short position and, frankly, would have to ask how to do it.

I called you today to discuss these and other matters but, since you did not give me the courtesy of a return call, I must write my comments.

Your written comments to Mr. Brisbane are in direct violation of the NLPC's stated purpose:

"NLPC promotes ethics in public life through research, investigation, education and legal action."

Your statements reflect a profound lack of ethics, research or investigation.

I have no interest in defending or otherwise taking the side of The New York Times about its article on shale gas. I do have deep interest in preventing people from making false and damaging statements about me while pursuing some agenda also outside of my interest.

I look forward to a swift rectification of your incorrect and unsubstantiated statements.

Sincerely,

Arthur E. Berman

The Smear Campaign to Distract From the Truth That Shale Plays Are Commercial Failures

There is a carefully organized smear campaign orchestrated by powerful corporate interests (http://nlpc.org/stories/2011/07/07/ny-times-asked-investigate-shale-gas-bubble-series) to distract from my central argument that the shale gas plays are commercial failures.

I have a clean conscience about all of this and am willing to discuss it with anyone.

I told no one beyond my closest circle of family and friends about the upcoming New York Times article and I did not make any investments, nor did any of my clients or friends, make any investments that I know about based on the timing of its publication.

I was not shown any advance versions of the article and read it for the first time late Saturday, June 25 when it was published online.

I have no active investments in stock and have not for several months. Most of my investments are in REITs, bonds, or commodity funds.

Anyone who thinks that e-mails are confidential only needs to pay attention to the international news (WikiLeaks or any number of discovery cases) to realize that everyone should be careful about what is put in e-mail communications. I am not pleased about how the New York Times published e-mails that supposedly came through me, but I also think that those who believe that this kind of communication is secret and confidential must wake up to the real world.

I will fight the claims of wrong doing to the extent that this is productive, and believe that my record speaks for itself.

The real issue here is the truth about the economics and conduct of shale plays by the independent E&P companies.

All of the media innuendo is calculated to distract from the truth that the shale plays to date are non-commercial and that the companies involved have not been truthful about this.

Jon Entine forced to re-write his post, "Natural Gas "Bubble" Report: Market Tinkering or Shoddy Reporting?"

Because of my objections, RealClear Politics forced Jon Entine to "update" his post, "Natural Gas "Bubble" Report: Market Tinkering or Shoddy Reporting?"

http://www.realclearpolitics.com/articles/2011/07/01/natural_gas_bubble_report_market_tinkering_or_shoddy_reporting.html

Entine's post remains objectionable because it relies on unsubstantiated speculation rather than evidence or data.

It is indeed curious and ironic that one of Entine's recent articles is titled, "When Science is Unfavorable, Attack the Scientist."

What do you think that you just did, Jon?

Letter to George Mason University re: Jon Entine's post-Natural Gas "Bubble" Report: Market Tinkering or Shoddy Reporting?

Dear Sir or Madam,

Jon Entine has posted an article called "Natural Gas "Bubble" Report: Market Tinkering or Shoddy Reporting?"(http://www.realclearpolitics.com/articles/2011/07/01/natural_gas_bubble_report_market_tinkering_or_shoddy_reporting.html) in which he represents himself as a staff member and representative of George Mason University. At the end of his post he identifies himself as "directing the Genetic Literacy Project and as a senior fellow at STATS and the Center for Health and Risk Communications at George Mason University."

His post contains errors, exaggerations and untrue statements that cannot be substantiated, and thereby jeopardize George Mason University's legal position and reputation as an honest broker of information.

I demand that Mr. Entine post public corrections to the many incorrect and unsubstantiated claims that he makes in this post. I further request that he write to me directly acknowledging that his post contained the many incorrect and undocumented claims that I specify below. He never contacted me or my clients to verify these claims and, apparently, did no research to document his many specious allegations.

My work with Indiana Gasification (IG) as an expert witness is a common and legitimate role for experienced oil and gas experts. I demand that he state in his correction that there is nothing unusual about my relationship as a paid expert witness for IG or any other entity.

I demand that he correct the statement that my testimony was about "buying natural gas made from coal instead of hydraulic fracturing." My written and oral testimony is on public record for anyone to read. I did not discuss coal or hydraulic fracturing in my written or oral testimony before the Indiana Electric Utility Commission (IEUC). My testimony was about natural gas supply, demand and price expectations. I demand that he explains in his correction that my testimony contained no statements about "buying natural gas made from coal instead of hydraulic fracturing."

His statement, "The coal industry fears getting crushed by the cleaner, natural gas movement, and Berman backed coal" is speculation by him, and does not reflect testimony that I gave to the IEUC.

I did not make this statement and did not comment in my written or oral testimony about the concerns of the coal industry concerning natural gas. I did not "back coal" and I demand that he corrects this mis-representation. I demand that he states in his correction that my testimony contained no statements that "The coal industry fears getting crushed by the cleaner, natural gas movement, and Berman backed coal."

Mr. Entine writes that I have a direct conflict of interest with Middlefield Capital in Toronto, and claims that I am compensated as a shale gas skeptic. My role with The Middlefield Group (Middlefield) is founded in a contract to conduct client presentations as well as television, newspaper and other media interviews that provide my analysis of oil and gas supply, demand and price trends.

My contractual relationship with Middlefield involves a quarterly retainer payment, and I receive no compensation other than this. I receive no direction from Middlefield on the topics of my quarterly presentations, and have never featured an "anti-shale gas investment outlook" in my association with Middlefield and its clients.

I demand that he corrects the statement "Berman not only has an indirect financial interest playing the role of shale gas skeptic, he has a direct conflict of interest."

I demand that he explains in his correction that I have no financial interest playing the role of a shale gas skeptic in my relationship with Middlefield. I demand that he explains in his correction that I have no direct or indirect conflict of interest in my relationship with Middlefield.

I demand that he explains in his correction that I receive no compensation from Middlefield other than a fixed quarterly fee, and that I receive no direction from Middlefield on the subjects of my quarterly presentations to their clients.

He states that "Berman is reportedly also a consultant and paid speaker with the Canadian Imperial Bank of Commerce (CIBC)."

I gave a paid talk in July 2010 for CIBC and have no other business relationship with that organization. I demand that he corrects the statement that "Berman is reportedly also a consultant and paid speaker with the Canadian Imperial Bank of Commerce." I demand that he explains in his correction that I have no business relationship with CIBC beyond the paid presentation that I made in July 2010.

He states that "Moreover, if any of their clients, or indeed the fund managers at Middlefield, knew that the Times story was coming out, they could face charges of market manipulation under Canadian and U.S. securities law." I never told Middlefield or any other entity that the New York Times article was going to be published. I did not have advanced access to the New York Times article and did not read the article until its publication on June 26, 2011 when I bought a copy of the newspaper.

I demand that in his correction he explains that I did not tell Middlefield or any other entity that the New York Times article was going to be published. I further demand that he explains in his correction that I or Middlefield do not face charges of market manipulation under Canadian and U.S. securities law.

He wrote "Did Berman tell his strategic partners and clients, and directly profit from the Times story? Did Middlefield's funds or clients or CIBC's clients with knowledge of the Times’ piece hold short interest in shale stocks or long interest in competitors' stocks? Did the Canadian oil sands industry, which includes Middlefield Capital, seek to influence the U.S. fracking debate, which could be a potential violation of the Foreign Agents Registration Act? Did Middlefield's funds or clients or CIBC's clients have short interest in shale stocks ahead of the Times report? Is the Times' key source dealing in inside information?"

I demand that he corrects the statement implying that I profited from the New York Times article. I have not. I demand that he explains in his correction that I did not tell my clients about the New York Times article. I demand that he explains in his correction that neither my partners, clients nor I profited from the New York Times story. I demand that he explains in his correction that I had no knowledge of any clients' interests in stock positions. I demand that he explains in his correction that I gave no advice about oil sands or any other investment to any client.

I demand that he correct the statement that states that I gave Middlefield's fund or clients or CIBC or CIBC's clients information that resulted in them taking short positions with knowledge of the New York Times article since I did not tell them about the New York Times article, and am unaware of any positions that Middlefield or CIBC have, and have had no contact with CIBC in this regard since my paid presentation one year ago.

I demand that in his correction that he explains that I did not give Middlefield any information about any position that they may have on any investment based on any statement that I made about the New York Times article.

I demand that he corrects the incorrect statement that I influenced Middlefield on the Canadian oil sands industry or the U.S. "fracking debate."

I demand that he explains in his correction that I gave no information or advice to Middlefield about Canadian oil sands or hydraulic fracturing although, as a general case, providing advice for a fee as an energy expert is appropriate and legitimate.

I look forward to the publication of these corrections and explanations.

All the best,

Arthur E. Berman

View my interview on CNBC Kudlow's Money Politics

Here is the link to Kudlow's Money Politics 27 June 2011

http://www.msnbc.msn.com/id/21134540/vp/43556438#43556438

Why I Support Hydraulic Fracturing

Some of you have asked if I am for or against hydraulic fracturing (fracking). I support it

The oil and gas industry has been using this stimulation technique commercially since 1949. Among the tens of thousands of wells that have been hydraulically fractured, there are few documented cases in which contamination of shallow aquifers has occurred. In those rare instances, the cause has been overwhelmingly because of improper pumping procedures or pipe specifications that have allowed parting of the conductor casing and cement that protects the aquifer. In other cases, contamination of aquifers occurred because natural gas liberated by the fracturing process found its way into improperly plugged vertical wells nearby. These unfortunate situations are preventable.

The Environmental Protection Agency (EPA) published a report in 2004 which concluded that hydraulic fracturing of coal-bed methane wells had minimal effect on groundwater quality. Since coal-bed methane wells are generally very shallow, they have higher likelihood of affecting aquifers than oil and gas wells drilled thousands of feet deeper. EPA is currently studying the impact of hydraulic fracturing on shale gas wells. The conclusion of research is expected by the end of 2012 and the study should be published in 2014.

I respect the concerns of people living in the vicinity of oil and gas wells that have been or will be hydraulically fractured. At the same time, it is difficult for me to imagine that fluids injected thousands of feet underground can migrate through multiple sealing rock formations into aquifers a few tens or hundreds of feet below the surface. The pressure requirements to do this are far beyond any pumping technology.

Hydraulic fracturing is critical to unlock the oil and natural gas found in low permeability reservoirs. There are risks associated with this stimulation technology. Those who fear the potential negative effects of fracturing must balance their concerns with their need for a continual supply of electricity generated by burning natural gas. They should also weigh the more negative impact of burning coal, the only viable alternative at least for the short term.

On the other side, the oil and gas industry should be more sensitive to the public's fears, and should be more forthcoming with information about the chemicals pumped into oil and gas reservoirs. We should also willingly undertake stricter self-regulation anticipating the less desirable but inevitable government intervention if we do nothing.

EIA Annual Energy Outlook 2011: Don’t Worry, Be Happy.

See my post on The Oil Drum: http://www.theoildrum.com/node/7285

We no longer have to worry about energy supply or prices. That is the message from the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook (AEO) 2011. Cheap energy will characterize the world for most of the next decade, according to the report. Oil will not reach $100 per barrel until 2017 and natural gas will remain below $5 per thousand cubic feet (mcf) until 2022 (Figure 1).

Despite four decades of oil shocks and natural gas price spikes, the future looks stable with supply and demand comfortably balanced (Figure 2). Wasn’t it just two-and-a-half years ago that $147 per barrel oil helped push the world into the current global recession? The EIA forecast is as troubling for the smooth and gradual progression of oil and gas prices as it is for the improbably low values of those prices. The history of oil and gas price, supply and demand is characterized above all by volatility but the EIA projection does not reflect this characteristic. Don’t worry, be happy.

Natural Gas

The headline of the AEO 2011 Early Release Overview (http://www.eia.gov/forecasts/aeo/) published December 16, 2010 is that shale gas resources in the U.S. have more than doubled since last year’s report. The current estimate is 827 trillion cubic feet (tcf) of gas, up 474 tcf from last year’s assessment of 353 tcf. The new figure is 25% higher than the Potential Gas Committee’s (PGC) 661 tcf from shale in its June 2009 report (http://www.mines.edu/Potential-Gas-Committee-reports-unprecedented-incre...). Notably, the PGC also presented a “probable” case of total gas resources of 441 tcf. Shale gas represents approximately one third of this estimate and is 17% of the EIA estimate (147 tcf). We hope to get more detail on how the EIA determined total and shale gas resources, along with other aspects of the EIA Outlook when the full AEO 2011 is released in March.

Technically recoverable resources should never be confused with reserves because resources do not take commercial considerations into account. These may be in accumulations so small or so deep that the gas may never be drilled or produced at any price, or may be in areas that are off limits or impractical to drill. It includes plays and basins that are, as yet, untested.

A resource assessment begins by estimating a total resource in place based on assumptions about gas richness, shale thickness, thermal maturity and areal distribution. A technically recoverable resource is a sub-set of the total resource that is determined by eliminating areas where one or more of these factors are marginal. There is great uncertainty involved in both of these estimated volumes. The expectation of future production based on as yet uncertain current production decline models is a key factor. For North America, The Baker Institute estimates 583 tcf of technically recoverable shale gas resources. Other estimates include Navigant Consulting (900 tcf), the Potential Gas Committee (661 tcf), and ARI (1000 tcf).

Given the variations in these recent evaluations (2008-2010) by credible organizations, resource estimates should not have much bearing on future production volume or price forecasts. The EIA, however, takes a different view. Slide 27 in Richard Newell’s December 26 unveiling of the AEO 2011 states, “Natural gas price projections are significantly lower than past years due to an expanded shale gas resource base” (Figure 3).

For the EIA, increased estimates for U.S. shale gas resources equate to higher production volumes, lower prices, and decreased imports of natural gas with shale gas accounting for 45% of total supply by 2035 (Figure 4). Average annual gas prices are 20-25% lower than predictions made a year ago in AEO 2010.

The only volume that really matters is proved developed reserves. While the EIA’s estimate of resources has doubled since last year, proved reserves only increased 2.5% in 2010 (EIA AEO 2011). Much of this increase will likely be proved undeveloped reserves (PUD) thanks to revisions in Securities and Exchange Commission definitions for 2009. Clearly, the commerciality of undeveloped reserves is more questionable than proved developed reserves.

The EIA fails to grasp that the exploration and production business succeeds or fails based on earnings and profit, and not on production growth, resource or even reserve additions. Natural gas operators require at least $7.00 per mcf on average to break even in the shale plays (Figure 5).

Favorable hedge positions over the past five years have carried companies through fluctuating and, more recently, low product prices. With futures strips now below $5.00/mcf for the next twelve months, hedges fail to guarantee the marginal cost of production.

While shale play enthusiasts have claimed profitability at gas prices below $5/mcf in recent years, these half-cycle economics do not include significant “fixed” and “sunk” costs such as debt service and overhead. With the flight to liquids-rich plays in recent months, the truth about true cost is being revealed. Chesapeake Energy, the paragon of shale operators, states in their most recent investor presentation that they do not intend to drill anything other than obligation wells in gas plays “until natural gas prices rise above $6.00 per mcf” (Figure 6). This reveals their commercial threshold despite past claims of profit at lower gas prices.

The EIA gas price forecast, therefore, implies that operating companies will continue to drill and produce gas at a loss for the next decade. This cannot happen. Because of the high decline rates of shale gas wells, drilling must continue at current rates just to maintain production rates.

Because some large operators in the Barnett Shale stopped drilling new wells in 2010, we can determine true portfolio decline rates, and they are substantially greater than predicted hyperbolic decline models. Figure 7 shows that the portfolio production decline rate is more than 40% for Barnett Shale wells operated by Encana, ConocoPhillips, Range Resources and Williams.

For shale gas production to double and reach 45% of total U.S. supply as the EIA predicts by 2035 (Figure 4), rig counts will have to more than double. This cannot happen unless gas prices rise substantially beyond EIA predictions regardless of improvements in drilling efficiency and economies of scale.

The most likely average natural gas spot price for 2011 will be $4.10/mcf (J. M. Bodell, personal communication). Toward the end of the year, it is possible that gas prices will strengthen toward $5.00 as drilling to hold land by production decreases.

Crude Oil

The EIA’s assessment of crude oil supply, demand and price is similarly puzzling by its departure from current data and considerable informed opinion that oil price will rise in the near term. The projection that oil prices will remain below $100 per barrel until 2017 conflicts with every credible source on the topic. The U.S. military, the world's largest single consumer of oil, has publicly stated its belief that there may be a liquid fuel shortage by 2012 (Joint Operating Environment (JOE) Report, 2010:http://www.jfcom.mil/newslink/storyarchive/2010/JOE_2010_o.pdf).

Oil closed at $91.51 on Friday, December 24, 2010 and will probably end 2010 at an average price of about $79.50 per barrel, yet the EIA estimate for the year is $78.03. Many experts predict that oil prices will exceed $100 per barrel in 2010, but my sources indicate that West Texas Intermediate crude oil prices will average $88 per barrel (J. M. Bodell, personal communication) but will increase to $95 or $100 per barrel later in the year.

The main factor that will control crude oil prices in 2011 is demand from the developing economies of countries outside of the OECD (Organization for Economic Cooperation and Development). Demand is expected to increase 3.6% (IEA) among developing nations and this should challenge OPEC (Organization of the Petroleum Exporting Countries) spare capacity. Because of subsidized oil and motor fuel prices in all OPEC countries, crude oil demand is largely insensitive to price. In contrast, the IEA predicts that oil demand in OECD countries will decrease 0.5% in 2011.

The EIA AEO 2011 report features a 14% increase in U.S. crude oil and lease condensate production from 2011 to 2020 (Figure 8) despite an 8 percent decline in production over the past decade and a 44% decrease since the 1970 U.S. production peak (Figure 9).

It further implies that unprecedented increases in nuclear, hydroelectric, biofuels and renewable energy sources will magically materialize to meet growing U.S. energy demand. EIA forecasts also imply that global liquids production will reach 115 mmbopd before 2035 while other estimates, including those by the IEA (International Energy Agency), do not anticipate that production can exceed 100 mmbopd (Figure 10), and many doubt that it can even reach that level. In any case, the price of oil would have to be substantially higher than EIA estimates to reach the production levels that it predicts.

Conclusions

It is understandable that the EIA, as a branch of government, must produce an annual report that is politically expedient and that supports a view that meets public policy expectations. The EIA approach takes a long-term economic view and is, therefore, not concerned with the fluctuations that characterize the real world of petroleum supply, demand and price. At the same time, it is not useful that this report is in conflict with industry best practices and opinion as well as trend data available to the public.

The EIA’s resource estimate of technically recoverable gas from shale is interesting but not relevant to future price or production volume forecasts. The Potential Gas Committee’s 2009 report is the benchmark of credibility, and we hope that the full EIA report in March will explain why we should accept unwarranted and insupportable upward revisions to PGC resource estimates and how these might translate to energy reserves and price. The EIA treats shale gas just like conventional gas in its forecasting and does not acknowledge the much higher decline rates and, therefore, great number of wells required to maintain supply.

Exploration and production companies involved in shale gas production have presented a position that emphasizes production and reserve growth over earnings or profit. It is confusing that the EIA has assumed that market forces and improving efficiencies will save the day for oil and gas prices. It would be more appropriate to frame the problem in the context of reasonable expectations that would be useful to public understanding of the shale gas phenomenon and its potential contribution to natural gas volumes and price. It is unsettling that the EIA has not acknowledged the belief by the U.S. military and other credible sources of an impending liquid fuel shortage that confronts the United States and the world (e.g. Hirsch, Benzdek and Wendling, 2010; JOE Report) . Instead, the EIA has provided an unrealistic view of future oil and gas supply and price that will inevitably not serve public understanding or promote reasonable planning for resource availability or price.