Year 2050: Do Investors Get the Full Ponzi?

April 12, 2017

oil & gas industry

Guest post by Bob Arrington*

In 2010, Shell Chief Executive Peter Voser told attendees at an energy conference in Singapore, that the world will remain heavily reliant on fossil fuels for the next 40 years.

For the sake of argument, let’s take that prediction further and say the year 2050 has become a designated end point when the estimated $1.2 trillion in residual of oil and gas would be become worthless in the face of climate damage so great that any further fossil fuel use would result in a “death penalty” ban.

But what if the residual oil & gas was already used up?

That would be a signal to the corporations to get all of their investment money out now and put ownership of all the “worthless junk” in the hands of investors.

So how do they get investors in the game? By showing high production and big profits right up to the “bubble” burst!

Any investment firms seeking high returns will plow their clients’ money, pension funds, or whatever, into these types of high-riding ventures.

But shale gas production from tight sandstone and shale has an asymptotic fall-off in production. It can be stimulated to prolong production, but the race has been to keep numbers stable by punching in new wells and expanded holdings — or as known in the oil & gas industry the “Red Queen Effect,” [named after the character in Lewis Carroll’s Through the Looking-Glass; the Red Queen lectures Alice: “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”]

This fall-off has led some companies to use log scaling on their production presentations, so while the numbers are accurate, they don’t “look” like anything less than straight line depletion.

Now there is another way to disguise appearances!

They can start stimulation with the start of production and the cost of the stimulation can be offset with savings from the old problem of contaminated frac water disposal and well flowback that de-energizes the gas flow from the wells. They can use that “garbage water” to stimulate the wells by pumping it back down into the well field. It removes the high cost of trucking and makes the operations “look” cleaner and efficient without holding ponds, fumes, and clean-up.

That way the production lines on charts show a straight line instead of a sudden drop-off and that line appears to be in a slower rate of decline indicating a longer life of production.

In reality though, it will just suddenly fall as the asymptotic curve will be pushed to the end of a shorter well life!

Conventional analysis of production viability for investors has become a “bait and switch” that they won’t see up front as it is now.

Of course, the added production means the market price and profits will fall, so the corollary to the axiom is to create more markets and, hence, more pipelines and exports. If the pipelines can squeak out a 30-year lifespan, then they won’t be needed after that or replaced.

And if the money owed on big terminals, liquefaction, and ships is attached to 50-year bonds, only three-fifths will be paid back before bankruptcy takes out the obligation and foreclosure takes possession of worthless “stuff.” Another hit on college funds, banks, pension funds, tax structures, and ad infinitum.

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*Bob Arrington,  PE, is a Battlement Mesa citizen representative on Garfield County’s Energy Advisory Board (EAB). He also represents the Grand Valley Citizens Alliance and the Battlement Concerned Citizens.

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