A lot has been made lately of the Shale Gas Rush such as the Marcellus, which have held out the promise of “100 years of gas” for the US and driven down US natural gas prices even as oil prices persisted at relatively high levels.

But you probably didn’t hear much about how rapidly production declines for shale gas wells (constant drilling keeps the gas flowing but is a killer for profitability and for EROEI – Energy Returned on Energy Invested), nor about the flawed cost accounting and the SEC’s dubious role, all of which together lead to public-company operators fleecing their own shareholders and drilling at a loss while racking up debt, enriching the operators’ management and E&P subcontractors. All of which sounds depressingly similar to the shenannigans in the financial industry. Is this yet another unsustainable get-rich-quick scheme?

Unfortunately, evidence shows that the hype surrounding shale gas plays may be an essential part of a widespread scam. Arthur Berman, an independent consulting geologist, has written an excellent indictment of what is going on, posted today by The Oil Drum under Shale Gas – Abundance or Mirage? Why the Marcellus Shale Will Disappoint Expectations.

An excerpt from this must-read post follows below:

Shale gas plays in the United States are commercial failures and shareholders in public exploration and production (E&P) companies are the losers. This conclusion falls out of a detailed evaluation of shale-dominated company financial statements and individual well decline curve analyses. Operators have maintained the illusion of success through production and reserve growth subsidized by debt with a corresponding destruction of shareholder equity. Many believe that the high initial rates and cumulative production of shale plays prove their success. What they miss is that production decline rates are so high that, without continuous drilling, overall production would plummet. There is no doubt that the shale gas resource is very large. The concern is that much of it is non-commercial even at price levels that are considerably higher than they are today.

Recent revisions to SEC rules have allowed producers to book undeveloped reserves that questionably justify development costs based on their own projections in public filings. New reserves are being booked at the same time that billions of dollars in existing shale gas development costs are being written down because the projects are not commercial. Concerns about the logic of ongoing gas-directed drilling while prices collapse have been partly diffused by a shift to liquids-rich plays like the Eagle Ford Shale in Texas. These new ventures, however, produce significant volumes of gas which is partly why gas prices continue to fall.

By Arthur Berman. From The Oil Drum post 'Shale Gas - Abundance or Mirage?', October 2010

Keep in mind that shale gas EROEI at the wellhead, though impaired by the nonstop drilling and rapid declines, can still be quite high. But the EROEI of all gas production plummets once we factor in the energy costs of compressing and distributing gas to end users.

By Charles Hall and David Murphy. An estimate of natural gas EROI, at the well head and at the point of use. Prof. Hall made the observation that the EROIs are declining so much, and the difference between the EROI at the point of calculation and where the energy is delivered is so large, that coal may be what is running the US economy.

The bottom line is that serious homework needs to be done on the EROEI of shale gas before one buys into the hype concerning its economic viability. The Oil Drum article linked above is doing exactly that, and reveals yet another web of carefully disguised fraud or stupidity. Arthur Berman’s serious homework stands in stark contrast to the apparent “logic” of the shale gas players. The latter was laid bare by Rigzone in September 2008, when they published the following list of 25 reasons why the lemmings were rushing off the shale gas cliffs:

Are Marcellus gas producers all lemmings looking for a cliff? A number of people are beginning to seriously question the gas shale phenomenon given the continuing, and projected to continue, low gas price outlook. These critics recognize that many producers, especially the publicly-traded companies, are being pressured to engage in group-think by institutional investors. In fact, several friends have compiled a list of reasons why this group-think exists and we list them below. The authors of the list suggest it does not include all rationales and welcome any additions.

1. Bravely defend the leases
2. Add reserves
3. Grow production and be a good employee
4. Grow production to prolong the illusion that this is profitable
5. Grow your bonus and the value of your stock options
6. They made me do it (the investment bankers)
7. An investment in the future when gas prices are higher
8. Technology will save the day
9. Optionality
10. The land is the play
11. Greater fool theory: live another day to flip the company
12. Cash flow to pay debt service
13. Playing God: I think I’m flying
14. I can’t admit that I was wrong
15. No better ideas
16. Charles Prince at the Dance
17. Market share
18. Relatively low rate of dry holes
19. Fear of litigation when the whole game ends
20. Continued access to capital
21. Peer pressure
22. Vast number of enablers (bankers, analysts, service companies)
23. Still more shales to declare “great”
24. Government allowance seen as source of tax revenue, jobs
25. “I am an E&P company”; what else would you expect?”