David Stockman: "We've Been Lied To, Robbed, And Misled"

Tyler Durden's picture

Submitted by Adam Taggart of Peak Prosperity,

Then, when the Fed’s fire hoses started spraying an elephant soup of liquidity injections in every direction and its balance sheet grew by $1.3 trillion in just thirteen weeks compared to $850 billion during its first ninety-four years, I became convinced that the Fed was flying by the seat of its pants, making it up as it went along. It was evident that its aim was to stop the hissy fit on Wall Street and that the thread of a Great Depression 2.0 was just a cover story for a panicked spree of money printing that exceeded any other episode in recorded human history.


David Stockman, The Great Deformation

David Stockman, former director of the OMB under President Reagan, former US Representative, and veteran financier is an insider's insider. Few people understand the ways in which both Washington DC and Wall Street work and intersect better than he does.

In his upcoming book, The Great Deformation: The Corruption of Capitalism in America [37], Stockman lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few. And when trouble arises, these few are bailed out at the expense of the public good.

By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct.  And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued -- in full -- at all costs. 

Of course, history shows that our markets and economy would have been better off had the system been allowed to correct. Most of the "too big to fail" institutions would have survived or been broken into smaller, more resilient, entities. For those that would have failed, smaller, more responsible banks would have stepped up to replace them - as happens as part of the natural course of a free market system:

Essentially there was a cleansing run on the wholesale funding market in the canyons of Wall Street going on. It would have worked its will, just like JP Morgan allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the AIG bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan [Stanley], and they should not have been.


As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games, such that Goldman Sachs got $10 billion dollars for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs generated what I call a $29 billion surplus – $13 billion of net income after tax, and on top of that $16 billion of salaries and bonuses, 95% of it which was bonuses.


Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system. These firms are supposed to come and go, and if people make really bad bets, if they have a trillion dollar balance sheet with six, seven, eight hundred billion dollars worth of hot-money short-term funding, then they ought to take their just reward, because it would create lessons, it would create discipline. So all the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values – which for most of these partners is tens of millions, hundreds of millions – when they formed a new firm, I doubt whether they would have gone back to the old game. What happened was the Fed stopped everything in its tracks, kept Goldman Sachs intact, the reckless Goldman Sachs and the reckless Morgan Stanley, everyone quickly recovered their stock value and the game continues. This is one of the evils that comes from this kind of deep intervention in the capital and money markets.

Stockman's anger at the unnecessary and unfair capital transfer from taxpayer to TBTF bank is matched only by his concern that, even with those bailouts, the banking system is still unacceptably vulnerable to a repeat of the same crime:

The banks quickly worked out their solvency issues because the Fed basically took it out of the hides of Main Street savers and depositors throughout America. When the Fed panicked, it basically destroyed the free-market interest rate – you cannot have capitalism, you cannot have healthy financial markets without an interest rate, which is the price of money, the price of capital that can freely measure and reflect risk and true economic prospects.


Well, once you basically unplug the pricing mechanism of a capital market and make it entirely an administered rate by the Fed, you are going to cause all kinds of deformations as I call them, or mal-investments as some of the Austrians used to call them, that basically pollutes and corrupts the system.


Look at the deposit rate right now, it is 50 basis points, maybe 40, for six months. As a result of that, probably $400-500 billion a year is being transferred as a fiscal maneuver by the Fed from savers to the banks. They are collecting the spread, they've then booked the profits, they've rebuilt their book net worth, and they paid back the TARP basically out of what was thieved from the savers of America.


Now they go down and pound the table and whine and pout like JP Morgan and the rest of them, you have to let us do stock buy backs, you have to let us pay out dividends so we can ramp our stock and collect our stock option winnings. It is outrageous that the authorities, after the so-called “near death experience" of 2008 and this massive fiscal safety net and monetary safety net was put out there, is allowing them to pay dividends and to go into the market and buy back their stock. They should be under house arrest in a sense that every dime they are making from this artificial yield group being delivered by the Fed out of the hides of savers should be put on their balance sheet to build up retained earnings, to build up a cushion. I do not care whether it is fifteen or twenty or twenty-five percent common equity and retained earnings-to-assets or not, that is what we should be doing if we are going to protect the system from another raid by these people the next time we get a meltdown, which can happen at any time.


You can see why I talk about corruption, why crony capitalism is so bad. I mean, the Basel capital standards, they are a joke. We are just allowing the banks to go back into the same old game they were playing before. Everybody said the banks in late 2007 were the greatest thing since sliced bread. The market cap of the ten largest banks in America, including from Bear Stearns all the way to Citibank and JP Morgan and Goldman and so forth, was $1.25 trillion. That was up thirty times from where the predecessors of those institutions had been. Only in 1987, when Greenspan took over and began the era of bubble finance – slowly at first then rapidly, eventually, to have the market cap grow thirty times – and then on the eve of the great meltdown see the $1.25 trillion to market cap disappear, vanish, vaporize in panic in September 2008. Only a few months later, $1 trillion of that market cap disappeared in to the abyss and panic, and Bear Stearns is going down, and all the rest.


This tells you the system is dramatically unstable. In a healthy financial system and a free capital market, if I can put it that way, you are not going to have stuff going from nowhere to $1.2 trillion and then back to a trillion practically at the drop of a hat. That is instability; that is a case of a medicated market that is essentially very dangerous and is one of the many adverse consequences and deformations that result from the central-bank dominated, corrupt monetary system that has slowly built up ever since Nixon closed the gold window, but really as I say in my book, going back to 1933 in April when Roosevelt took all the private gold. So we are in a big dead-end trap, and they are digging deeper every time you get a new maneuver.

Click the play button below to listen to Chris' interview with David Stockman (56m:33s):


Click here to read the full transcript

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Long-John-Silver's picture

and there is nothing we can do about it.

IridiumRebel's picture

I know.....I mean I'm doing what most here are doing by circling the financial wagons, but WTF does it matter if the whole thing goes down? 

caconhma's picture

By F. William Engdahl, author of Myths, Lies and Oil Wars 13 March 2013

At a time when much of the world is looking with a mix of envy and excitement at the recent boom in USA unconventional gas from shale rock, when countries from China to Poland to France to the UK are beginning to launch their own ventures into unconventional shale gas extraction, hoping it is the cure for their energy woes, the US shale boom is revealing itself to have been a gigantic hyped confidence bubble that is already beginning to deflate. Carpe diem!

Part I: America: The New Saudi Arabia?

If we’re to believe the current media reports out of Washington and the US oil and gas industry, the United States is about to become the “new Saudi Arabia.” We are told she is suddenly and miraculously on the track to energy self-sufficiency. No longer need the US economy depend on high-risk oil or gas from the politically unstable Middle East or African countries. The Obama White House energy adviser, Heather Zichal, has even shifted her focus from pushing carbon cap ‘n trade schemes to promoting America’s “shale revolution.”i

In his January 2012 State of the Union Address to Congress, President Obama claimed that, largely owing to the shale gas revolution, “We have a supply of natural gas that can last America nearly 100 years.” ii

Renowned energy experts like Cambridge Energy Research’s Daniel Yergin in recent Congressional testimony waxed almost poetic about the purported benefits of the recent US shale oil and gas exploitation: “The United States is in the midst of the ‘unconventional revolution in oil and gas’ that, it becomes increasingly apparent, goes beyond energy itself.” He didn’t explain what exactly energy going beyond energy itself means. He also claimed that “the industry supports 1.7 million jobs – a considerable accomplishment given the relative newness of the technology. That number could rise to 3 million by 2020.”iii Very impressive numbers.

Mr Yergin went on to suggest a major geopolitical dimension of America’s shale oil and gas industry, saying “expansion of US energy exports will add an additional dimension to US influence in the world…Shale gas has risen from two percent of domestic production a decade ago to 37 percent of supply, and prices have dropped dramatically. US oil output, instead of continuing its long decline, has increased dramatically – by about 38 percent since 2008. Just the increase since 2008 is equivalent to the entire output of Nigeria, the seventh-largest producing country in OPEC...People talk about the potential geopolitical impact of the shale gas and tight oil. That impact is already here…”iv

In their Energy Outlook to 2030, published in 2012, BP’s CEO Bob Dudley sounded a similar upbeat projection of the role of shale gas and oil in making North America energy independent of the Middle East. BP predicted that growth in shale oil and gas supplies—“along with other fuel sources”—will make the western hemisphere virtually self-sufficient in energy by 2030. In a development with enormous geopolitical implications, a large swath of the world including North and South America would see its dependence on oil imports from potentially volatile countries in the Middle East and elsewhere disappear, BP added.v

There’s only one thing wrong with all the predictions of a revitalized United States energy superpower flooding the world with its shale oil and shale gas. It’s based on a bubble, on hype from the usual Wall Street spin doctors. In reality it is becoming increasingly clear that the shale revolution is a short-term flash in the energy pan, a new Ponzi fraud, carefully built with the aid of the same Wall Street banks and their “market analyst” friends, many of whom brought us the 2000 “dot.com” bubble and, more spectacularly, the 2002-2007 US real estate securitization bubble.vi  A more careful look at the actual performance of the shale revolution and its true costs is instructive.

Part II: Halliburton Loopholes

One reason we hear little about the declining fortunes of shale gas and oil is that the boom is so recent, reaching significant proportions only in 2009-2010. Long-term field extraction data for a significant number of shale gas wells only recently is coming to light. Another reason is that there have grown up huge vested corporate interests from Wall Street to the oil industry who are trying everything possible to keep the shale revolution myth alive. Despite all their efforts however, data coming to light, mostly for the review of industry professionals, is alarming.

Shale gas has recently come onto the gas market in the US via use of several combined techniques developed among others by Dick Cheney’s old company, Halliburton Inc. Halliburton several years ago combined new methods for drilling in a horizontal direction with injection of chemicals and “fracking,” or hydraulic fracturing of the shale rock formations that often trap volumes of natural gas. Until certain changes in the last few years, shale gas was considered uneconomical. Because of the extraction method, shale gas is dubbed unconventional and is extracted in far different ways from conventional gas.

The US Department of Energy’ EIA defines conventional oil and gas as oil and gas “produced by a well drilled into a geologic formation in which the reservoir and fluid characteristics permit

the oil and natural gas to readily flow to the wellbore.” Conversely, unconventional hydrocarbon production doesn’t meet these criteria, either because geological formations present a very low level of porosity and permeability, or because the fluids have a density approaching or even exceeding that of water, so that they cannot be produced, transported, and refined by conventional methods. By definition then, unconventional oil and gas are far more costly and difficult to extract than conventional, one reason they only became attractive when oil prices soared above $100 a barrel in early 2008 and more or less remained there.

To extract the unconventional shale gas, a hydraulic fracture is formed by pumping a fracturing fluid into the wellbore at sufficient pressure causing the porous shale rock strata to crack. The fracture fluid, whose precise contents are usually company secret and extremely toxic, continues further into the rock, extending the crack. The trick is to then prevent the fracture from closing and ending the supply of gas or oil to the well. Because in a typical fracked well fluid volumes number in millions of gallons of water, water mixed with toxic chemicals, fluid leak-off or loss of fracturing fluid from the fracture channel into the surrounding permeable rock takes place. If not controlled properly, that fluid leak-off can exceed 70% of the injected volume resulting in formation matrix damage, adverse formation fluid interactions, or altered fracture geometry and thereby decreased production efficiency.vii

Hydraulic fracturing has recently become the preferred US method of extracting unconventional oil and gas resources. In North America, some estimate that hydraulic fracturing will account for nearly 70% of natural gas development in the future.

Why have we just now seen the boom in fracking shale rock to get gas and oil? Thank then-Vice president Dick Cheney and friends. The real reason for the recent explosion of fracking in the United States was passage of legislation in 2005 by the US Congress that exempted the oil industrys hydraulic fracking, astonishing as it sounds, from any regulatory supervision by the US Environmental Protection Agency (EPA) under the Safe Drinking Water Act. The oil and gas industry is the only industry in America that is allowed by EPA to inject known hazardous materials - unchecked - directly into or adjacent to underground drinking water supplies.viii

The 2005 law is known as the "Halliburton Loophole." Thats because it was introduced on massive lobbying pressure from the company that produces the lions share of chemical hydraulic fracking fluids - Dick Cheneys old company, Halliburton. When he became Vice President under George W. Bush in early 2001, Cheney immediately got Presidential responsibility for a major Energy Task Force to make a comprehensive national energy strategy. Aside from looking at Iraq oil potentials as documents later revealed, the energy task force used Cheneys considerable political muscle and industry lobbying money to win exemption from the Safe Drinking Water Act. ix

During Cheneys term as vice president he moved to make sure the Governments Environmental Protection Agency (EPA) would give a green light to a major expansion of shale gas drilling in the US.

In 2004 the EPA issued a study of the environmental effects of fracking. That study has been called "scientifically unsound" by EPA whistleblower Weston Wilson. In March of 2005, EPA Inspector General Nikki Tinsley found enough evidence of potential mishandling of the EPA hydraulic fracturing study to justify a review of Wilsons complaints. The Oil and Gas Accountability Project conducted a review of the EPA study which found that EPA removed information from earlier drafts that suggested unregulated fracturing poses a threat to human health, and that the Agency did not include information that suggests "fracturing fluids may pose a threat to drinking water long after drilling operations are completed."x Under political pressure the report was ignored. Fracking went full-speed ahead.

This diagram depicts methane gas and toxic water contaminating the drinking water as the fracturing cracks penetrate the water table.

The Halliburton Loophole is no minor affair. The process of hydraulic fracking to extract gas involves staggering volumes of water and of some of the most toxic chemicals known. Water is essential to shale gas fracking. Hydraulic fracturing uses between 1.2 and 3.5 million US gallons (4.5 and 13 million liters) of water per well, with large projects using up to 5 million US gallons (19 Million liters). Additional water is used when wells are refractured; this may be done several times. An average well requires 3 to 8 million US gallons of water over its lifetime.xi Entire farm regions of Pennsylvania and other states with widespread hydraulic fracking report their well water sources have become so toxic as to make the water undrinkable. In some cases fracked gas seeps into the home via the normal water faucet.

During the uproar over the BP Deepwater Horizon Gulf of Mexico oil spill, the Obama Administration and the Energy Department formed an Advisory Commission on Shale Gas, ostensibly to examine the growing charges of environmental hazards from shale gas practices.

Their report was released in November 2011. It was what could only be called a "whitewash" of the dangers and benefits of shale gas.

The commission was headed by former CIA director John M. Deutch. Deutch himself is not neutral. He sits on the board of the LNG gas company Cheniere Energy. Deutch’s Cheniere Energy’s Sabine Pass project is one of only two current US projects to create an LNG terminal to export US shale gas to foreign markets.xii

Deutch is also on the board of Citigroup, one of the worlds most active energy industry banks, tied to the Rockefeller family. He also sits on the board of Schlumberger, which along with Halliburton, is one of the leading companies doing hydraulic fracking. In fact, of the seven panel members, six had ties to the energy industry, including fellow Deutch panel member and shale fracking booster, Daniel Yergin, himself a member of the National Petroleum Council. Little surprise that the Deutch report called shale gas, "the best piece of news about energy in the last 50 years." Deutch added, "Over the long term it has the potential to displace liquid fuels in the United States." xiii

Part III: Shale gas -- Racing against the clock

With regulatory free-rein, now also backed by the Obama Administration, the US oil and gas industry went full-power into shale gas extraction, taking advantage of high oil and natural gas prices to reap billions in quick gains.

According to official US Department of Energy Energy Information Administration data, shale gas extraction ballooned from just under 2 million MCF in 2007, the first year data was tracked, to more than 8,500,000 Mcf by 2011, a fourfold rise to comprise almost 40% of total dry natural gas extraction in the USA that year. In 2002 shale gas was a mere 3% of total gas.xiv

Here enters the paradox of the US “shale gas revolution.” Since the days of oil production wars more than a century ago, various industry initiatives had been created to prevent oil and later gas price collapse due to over-production. During the 1930’s there was discovery of the huge East Texas oilfields, and a collapse of oil prices. The State of Texas, whose Railroad Commission (TRC) had been given regulatory powers not only over railroads but also over oil and gas production in what then was the world’s most important oil producing region, was called in to arbitrate the oil wars. That resulted in daily statewide production quotas so successful that OPEC later modeled itself on the TRC experience.

Today, with federal deregulation of the oil and gas industry, such extraction controls are absent as every shale gas producer from BP to Chesapeake Energy, Anadarko Petroleum, Chevron, Encana and others all raced full-tilt to extract the maximum shale gas from their properties.

The reason for the full-throttle extraction is telling. Shale Gas, unlike conventional gas, depletes dramatically faster owing to its specific geological location. It diffuses and becomes impossible to extract without the drilling of costly new wells.

The result of the rapidly rising volumes of shale gas suddenly on the market was a devastating collapse in the market price of that same gas. In 2005 when Cheney got the EPA exemption that began the shale boom, the marker US gas price measured at Henry Hub in Louisiana, at the intersection of nine interstate pipelines, was some $14 per thousand cubic feet. By February 2011 it had plunged amid a gas glut to $3.88. Currently prices hover around $3.50 per tcf.xv

In a sobering report, Arthur Berman, a veteran petroleum geologist specialized in well assessment, using existing well extraction data for major shale gas regions in the US since the boom started, reached sobering conclusions. His findings point to a new Ponzi scheme which well might play out in a colossal gas bust over the next months or at best, the next two or three years. Shale gas is anything but the “energy revolution” that will give US consumers or the world gas for 100 years as President Obama was told.

Berman wrote already in 2011, “Facts indicate that most wells are not commercial at current gas prices and require prices at least in the range of $8.00 to $9.00/mcf to break even on full-cycle prices, and $5.00 to $6.00/mcf on point-forward prices. Our price forecasts ($4.00-4.55/mcf average through 2012) are below $8.00/mcf for the next 18 months. It is, therefore, possible that some producers will be unable to maintain present drilling levels from cash flow, joint ventures, asset sales and stock offerings.” xvi

Berman continued, “Decline rates indicate that a decrease in drilling by any of the major producers in the shale gas plays would reveal the insecurity of supply. This is especially true in the case of the Haynesville Shale play where initial rates are about three times higher than in the Barnett or Fayetteville. Already, rig rates are dropping in the Haynesville as operators shift emphasis to more liquid-prone objectives that have even lower gas rates. This might create doubt about the paradigm of cheap and abundant shale gas supply and have a cascading effect on confidence and capital availability.” xvii

What Berman and others have also concluded is that the gas industry key players and their Wall Street bankers backing the shale boom have grossly inflated the volumes of recoverable shale gas reserves and hence its expected supply duration. He notes, “Reserves and economics depend on estimated ultimate recoveries (EUR) based on hyperbolic, or increasingly flattening, decline profiles that predict decades of commercial production. With only a few years of production history in most of these plays, this model has not been shown to be correct, and may be overly optimistic….Our analysis of shale gas well decline trends indicates that the Estimated Ultimate Recovery per well is approximately one-half the values commonly presented by operators.” xviii In brief, the gas producers have built the illusion that their unconventional and increasingly costly shale gas will last for decades.

Basing his analysis on actual well data from major shale gas regions in the US, Berman concludes however, that the shale gas wells decline in production volumes at an exponential rate and are liable to run out far faster than being hyped to the market. Could this be the reason financially exposed US shale gas producers, loaded with billions of dollars in potential lease properties bought during the peak of prices, have recently been desperately trying to sell off their shale properties to naïve foreign or other investors?

Berman concludes:

Three decades of natural gas extraction from tight sandstone and coal-bed methane show that profits are marginal in low permeability reservoirs. Shale reservoirs have orders of magnitude lower reservoir permeability than tight sandstone and coal-bed methane. So why do smart analysts blindly accept that commercial results in shale plays should be different? The simple answer is found in high initial production rates. Unfortunately, these high initial rates are made up for by shorter lifespan wells and additional costs associated with well re-stimulation. Those who expect the long-term unit cost of shale gas to be less than that of other unconventional gas resources will be disappointed…the true structural cost of shale gas production is higher than present prices can support ($4.15/mcf average price for the year ending July 30, 2011), and that per-well reserves are about one-half of the volumes claimed by operators. xix

Therein lies the explanation for why a sophisticated oil industry in the United States has desperately been producing full-throttle, in a high-stakes game laying the seeds of their own bankruptcy in the process—They are racing to offload the increasingly unprofitable shale assets before the bubble finally bursts. Wall Street financial backers are in on the Ponzi game with billions at stake, much as in the recent real estate securitization fraud.

Part IV: 100 Years of Gas?

Where then did someone get the number to tell the US President that America had 100 years of gas supply? Here is where lies, damn lies and statistics play a crucial role. The US does not have 100 years of natural gas supply from shale or unconventional sources. That number came from a deliberate blurring by someone of the fundamental difference between what in oil and gas is termed resources and what is called reserves.

A gas or oil resource is the totality of the gas or oil originally existing on or within the earth’s crust in naturally occurring accumulations, including discovered and undiscovered, recoverable and unrecoverable. It is the total estimate, irrespective of whether the gas or oil is commercially recoverable. It’s also the least interesting number for extraction.

On the other hand “recoverable” oil or gas refers to the estimated volume commercially extractable with a specific technically feasible recovery project, a drilling plan, fracking program and the like. The industry breaks the resources into three categories: reserves, which are discovered and commercially recoverable; contingent resources, which are discovered and potentially recoverable but sub-commercial or non-economic in today’s cost-benefit regime; and prospective resources, which are undiscovered and only potentially recoverable.xx

The Potential Gas Committee (PGC), the standard for US gas resource assessments, uses three categories of technically recoverable gas resources, including shale gas: probable, possible and speculative.

According to careful examination of the numbers it is clear that the President, his advisers and others have taken the PGC’s latest total of all three categories, or 2,170 trillion cubic feet (Tcf) of gas—probable, possible and purely speculative—and divided by the 2010 annual consumption of 24 Tcf. To get a number between 90 and 100 years of gas. What is conveniently left unsaid is that most of that total resource is in accumulations too small to be produced at any price, inaccessible to drilling, or is too deep to recover economically.xxi

Arthur Berman in another analysis points out that if we use more conservative and realistic assumptions such as the PGC does in its detailed assessment, more relevant is the Committee’s probable mean resources value of 550 (Tcf) of gas. In turn, if we estimate, also conservatively and realistically based on experience, that about half of this resource actually becomes a reserve (225 Tcf), then the US has approximately 11.5 years of potential future gas supply at present consumption rates.

If we include proved reserves of 273 Tcf, there is an additional 11.5 years of supply for a total of almost 23 years. It is worth noting that proved reserves include proved undeveloped reserves which may or may not be produced depending on economics, so even 23 years of supply is tenuous. If consumption increases, this supply will be exhausted in less than 23 years.xxii

There are also widely differing estimates within the US Government over shale gas recoverable resources. The US Department of Energy EIA uses a very generous calculation for shale gas average recovery efficiency of 13% versus other conservative estimates of about half that or 7% in contrast to recovery efficiencies of 75-80% for conventional gas fields. The generously high recovery efficiency values used for EIA calculations allows the EIA to project an estimate of 482 tcf of recoverable gas for the US. In August 2011, the Interior Department’s US Geological Survey (USGS) released a far more sober estimate for the large shale plays in Pennsylvania and New York called Marcellus Shale. The USGS estimated there are about 84 trillion cubic feet of technically-recoverable natural gas under the Marcellus Shale. Previous estimates from the Energy Information Administration put the figures at 410 trillion cubic feet.xxiii

Shale gas plays show unusually high field decline rates with very steep trends, a combination giving low recovery efficiencies. xxiv

Part V: Huge shale gas losses

Given the abnormally rapid well decline rates and low recovery efficiencies, it is little wonder that once the euphoria subsided, shale gas producers found themselves sitting on a financial time-bomb and began selling assets to unwary investors as fast as possible.

In a very recent analysis of the actual results of several years of shale gas extraction in the USA as well as the huge and high-cost Canadian Tar Sands oil, David Hughes notes, “Shale gas production has grown explosively to account for nearly 40 percent of US natural gas production. Nevertheless, production has been on a plateau since December 2011; 80 percent of shale gas production comes from five plays, several of which are in decline. The very high decline rates of shale gas wells require continuous inputs of capital—estimated at $42 billion per year to drill more than 7,000 wells—in order to maintain production. In comparison, the value of shale gas produced in 2012 was just $32.5 billion.”xxv

He adds, “The best shale plays, like the Haynesville (which is already in decline) are relatively rare, and the number of wells and capital input required to maintain production will increase going forward as the best areas within these plays are depleted. High collateral environmental impacts have been followed by pushback from citizens, resulting in moratoriums in New York State and Maryland and protests in other states. Shale gas production growth has been offset by declines in conventional gas production, resulting in only modest gas production growth overall. Moreover, the basic economic viability of many shale gas plays is questionable in the current gas price environment.”xxvi

If these various estimates are anywhere near accurate, the USA has a resource in unconventional shale gas of anywhere between 11 years and 23 years duration and unconventional oil of perhaps a decade before entering steep decline. The recent rhetoric about US “energy independence” at the current technological state is utter nonsense.

The drilling boom which resulted in this recent glut of shale gas was in part motivated by “held-by-production” shale lease deals with landowners. In such deals the gas company is required to begin drilling in a lease running typically 3-5 years, or forfeit. In the US landowners such as farmers or ranchers typically hold subsurface mineral rights and can lease them out to oil companies. The gas (or oil) company then is under enormous pressure to book gas reserves on the new leases to support company stock prices on the stock market against which it has borrowed heavily to drill.

This “drill or lose it” pressure typically has led companies to seek the juiciest “sweet spots” for fast spectacular gas flows. These are then typically promoted as “typical” of the entire play.

However, as Hughes points out, “High productivity shale plays are not ubiquitous, and relatively small sweet spots within plays offer the most potential. Six of thirty shale plays provide 88 percent of production. Individual well decline rates are high, ranging from 79 to 95 percent after 36 months. Although some wells can be extremely productive, they are typically a small percentage of the total and are concentrated in sweet spots.” xxvii


One estimate of projected shale gas decline suggests the peak will pass well before the end of the decade, perhaps in four years, followed with a rapid decline in volume

The extremely rapid overall gas field declines require from 30 to 50 percent of production to be replaced annually with more drilling, a classic “tiger chasing its tail around the tree” syndrome. This translates to $42 billion of annual capital investment just to maintain current production. By comparison, all USA shale gas produced in 2012 was worth about $32.5 billion at a gas price of $3.40/mcf (which is higher than actual well head prices for most of 2012). That means about a net $10 billion loss on their shale gambles last year for all US shale gas producers.

Even worse, Hughes points out that capital inputs to offset field decline will necessarily increase going forward as the sweet spots within plays are drilled off and drilling moves to lower quality areas. Average well quality (as measured by initial productivity) has fallen nearly 20 percent in the Haynesville, the most productive shale gas play in the US. And it is falling or flat in eight of the top ten plays. Overall well quality is declining for 36 percent of US shale gas production and is flat for 34 percent.xxviii

Not surprising in this context, the major shale gas players have been making massive write-downs of their assets to reflect the new reality. Companies began in 2012 reassessing their reserves and, in the face of a gas spot price that was cut in half between July 2011 and July 2012, are being forced to admit that the long-term outlook for natural-gas prices is not positive. The write-downs have a domino effect as bank lending is typically tied to a company’s reserves meaning many companies are being forced to renegotiate credit lines or make distress asset sales to raise cash.

Beginning August 2012, many large shale gas producers in the US were forced to announce major write-downs of the value of their shale gas assets. BP announced write-downs of $4.8 billion, including a $1 billion-plus reduction in the value of its American shale gas assets. England’s BG Group made a $1.3 billion write-down of its US shale gas interests, and Encana, a large Canadian shale gas operator made a $1.7 billion write-down on shale assets in the US and Canada, accompanied by a warning that more were likely if gas prices did not recover. xxix

The Australian mining giant BHP Billiton is one of the worst hit in the US shale gas bubble as it came in late and big-time. In May, 2012 it announced it was considering taking impairments on the value its US shale-gas assets which it had bought at the peak of the shale gas boom in 2011, when the company paid $4.75 billion to buy shale projects from Chesapeake Energy and acquiring Petrohawk Energy for $15.1 billion.xxx

But by far the worst hit is the once-superstar of shale gas, Oklahoma-based Chesapeake Energy.


Part VI: Chesapeake Energy: The Next Enron?

The company by most accounts that typifies this shale gas boom-bust bubble is the much-hailed leading player in shale, Chesapeake Energy. In August 2012 there were widespread rumors that the company would declare bankruptcy. That would have been embarrassing for the company that was the nation’s second largest gas producer. It would also have signaled to the world the hype that was behind promotion of a “shale energy revolution” from the likes of Yergin and the Wall Street energy promoters looking to earn billions on M&A and other deals in the sector to replace their dismal real estate experiences.

In May 2012, Bill Powers of the Powers Energy Investor, wrote of Chesapeake (CHK by its stock symbl): “Over the past year, however, CHK’s business model has broken down. The company’s shares continue to break to 52-week lows and the company has a funding issue—financial speak for the company is running out of money. While it was able to farm-out a portion of its Utica Shale assets in Ohio to France’s Total last year—this is remarkable given the accounting errors that resulted in Total receiving significantly less revenue from their Barnett Shale joint-venture—CHK has largely run out of prospective acreage to farm-out.” Powers estimated a $3 billion cash shortfall in 2012 for the company. That comes atop already huge corporate debt of $11.1 billion of which $1.7 billion was a revolving line of credit. xxxi

Powers adds, “When the off-balance sheet debt and preferred issues are added to the company’s existing $11.1 billion of on-balance sheet debt, CHK’s has a whopping $20.5 billion of financial obligations. Given such a high level of indebtedness, CHK debt is rated junk and will be for the foreseeable future. “ He concludes, “Having America’s second largest natural gas producer as well as its most reckless destroyer of shareholder capital almost completely walk away from the shale gas business is a great indication that today’s natural gas price bubble is on the verge of popping. CHK has not made any money by drilling shale wells—and neither have virtually any of its peers—and now the dumb money has run out.” xxxii

Angry shareholders forced a major shakeup of the Chesapeake board last September after a Reuters report that CEO Aubrey McClendon had been taking out large loans not fully disclosed to the company’s board or investors. McClendon was forced to resign as Chairman of the company he founded after details leaked out that McClendon has borrowed as much as $1.1 billion in the last three years by pledging his stake in the company’s oil and natural gas wells as collateral.xxxiii In March 2013 the US Government Securities and Exchange Commission (SEC) announced that it was investigating the company and Chief Executive Aubrey McClendon and had issued subpoenas for information and testimony, among other items looking into a controversial program that grants McClendon a share in every well that Chesapeake drills.xxxiv

The company is in the midst of a major asset sale of an estimated $6.9 billion to lower debt, including oil and gasfields covering roughly 2.4 million acres. It must invest heavily in drilling new wells to deliver the increased production of more lucrative oil and natural gas liquids, if it is to avoid bankruptcy.xxxv As one critical analyst of Chesapeake put it, “the company’s complex accounting methods make it almost impossible for analysts and stockholders to determine what the risks really are. The fact that the CEO is taking out billion-dollar loans and not openly disclosing them only furthers the perception that everything is not as it appears at Chesapeake – that the company is Enron with drilling rigs.” xxxvi

The much-touted shale gas revolution in the USA is collapsing along with the stock shares of Chesapeake and other key players.

  • F. William Engdahl is author of Myths, Lies and Oil Wars. He can be contacted via his website at  www.williamengdahl.com

SafelyGraze's picture

another approach is to use a "hyper link"


and an "excerpt"

the US shale boom is revealing itself to have been a gigantic hyped confidence bubble that is already beginning to deflate

Irelevant's picture

Very well put, I grew tired scrolling. But this is the beauty of ZH everyone can say what the fuck they want.

Badabing's picture


"By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct."


On this day in history thirty pieces of silver paid for a contract on an important political person.

The same thirty pieces of silver bought a large parcel of land in a world center city.

The pieces of silver probably used, where the shekel because it came from the temple.


This coins weight is around 22 grams. 22 x 30 = 660 divided by 32 = 20.625 oz or around $582 in today’s money. Does this sound like the correct price to you? Cursed is the man that uses faulty weights and measures!

Happy Easter ZH

Fuck you Bernanke


knukles's picture

Look no further for a rant by Stockman in no other than today's New York Times
An oped
Krugman must be having a well deserved stroke

kaiserhoff's picture

Here's a wealth tax for you, Stockman.

Let's tax the pensions of the Kleptocrats at 95%.

See how far you get with that tar baby.

steve from virginia's picture



All kinds: rig count decline from Baker Hughes:




Oil exports are declining:




BTW: the exporters also subsidize fuel product consumption in their own countries and the high price allows exporters to expand their own consumption.


Obviously, the high price effects consumption as more and more credit is required to gain fuels to waste. At some point the wasters cannot borrow any more and are ruined: insolvent because they cannot borrow ... unable to borrow because they are insolvent.


Har de har har!



Diogenes's picture

Estimating the weight of a shekel of 33 AD in Jerusalem at 14.5 grams, silver purity of 90% (typical for coins) 30 pieces of silver would be $1105.49 with silver at 28.30 an ounce.


Radical Marijuana's picture

Yeah, Irelevant, I have found ZH to be one of the very, very few sites where it appears to be true to say that "everyone can say what the fuck they want." 

One reason for that appears to be that the people who run Zero Hedge are very well aware of the extreme degree to which, as Stockman stated, "the system is dramatically unstable." In my opinion, it is barely possible to say anything which is too much of an exaggeration of that FACT.

Judging from the voting results on comments on Zero Hedge, the majority of people who post here are thinking that way too!

Escrava Isaura's picture

Irelevant, your comment made you 'Relevant'

Debeachesand Jerseyshores's picture

I see by your post you didn't attend Sunrise Service this Easter Morning.

SafelyGraze's picture

by "circling the financial wagons" you mean *lending* billions to banks and then sending goon squads to collect? 

or you mean *borrowing* billions from banks and then hiring goon squads to nullify their goon squads when the loans vaporize?

or you simply mean you are running for (or holding) political/judicial office?

good luck with all three!

IridiumRebel's picture

I mean shoring up debt, educating myself further via academia and the worthy knowledge of my fellow ZHers, saving saving saving, having my home as my bank, investing in PMs, selling my house, moving towards family, prepping and inspiring all within my family to do the same. It is not exactly an easy task when you have the Ministry of Truth working 24/7 to air out sweet lies of a bullshit recovery. 

neutrinoman's picture

It does explain why I feel sore in a certain place.

SafelyGraze's picture

mister stockman,

here's what you can do to make a difference:

1. name names

2. litigate

stop horsing around with the book and the interviews. get the process moving. make your life count.


"naming names" is different from "calling people names" .. it associates people with crimes they committed. hence item 2.


bank guy in Brussels's picture

Like everyone else in America who has some good knowledge of the system, David Stockman knows the red lines he must not cross, the things he cannot say, or else become - literally - a dead man

The book he just published was vetted by lawyers who no doubt edited and deleted many items, for which both Stockman and the publisher could be ruined

Naming 'too many' or 'the wrong' names will at the very least get Stockman charged, sued for libel and defamation before corrupt judges, and financially destroyed ... if not 'sudden cancer'

So, « litigate », in America ? ... Ha ! 

Why is it that Americans can accept that Congress and banks and the President are all corrupt, but they still have some ridiculous faith in US judges ? ... So American ... 'Take 'em to court' ... Like if it's some friggin' Hollywood movie ...

Stockman's case 'against the bigwigs' would go before the same bribe-taking US federal judges who approve things like the MF Global fraud and theft of customer billions ... the Peregrine Financial fraud ... the Sentinel fraud ...

As for the US federal judges, they face what happened to US Federal Judge John Roll right after he ruled against Obama ... getting shot dead on the street ... barely covered by US media, but every US judge got the message loud and clear ... like the nervous Chief Justice Roberts approving the non-Constitutional Obamacare, looking like a beaten slave

Too Big 2's picture

Roll died after being shot along with 18 others while attending a constituent outreach event held by U.S. Representative Gabrielle Giffords in Casas Adobes, near Tucson, Arizona.[2][3]

 From Wikipedia 

LasVegasDave's picture

Loughner was a hero for shooting a congressperson

Loughner is a madman who should get the death penalty

Disenchanted's picture

I seriously doubt that Loughner was the shooter...

Radical Marijuana's picture

Indeed, bank guy in Brussels, while a few incidents may not be convincing, the overall pattern leaves no reasonable doubt that the government of the USA is already effectively controlled by the methods of organized crime, and that anyone who does not agree to be a puppet, who agrees to be bribed, and is intimidated, runs a very real risk of being assassinated. In general, I call that the Suicidal Socratic Predicament, especially with respect to attempting to tell more truth to young people.

The title to this article is "We've Been Lied To, Robbed, And Misled."


Of course, I am way too insignificant to be specifically targeted. However, from a theoretical point of view, it greatly diminishes one's motivation to "try to make a difference" when the most probable real result of that kind of political success would make one become a target to be discredited and destroyed. Moreover, since the established systems are already so lopsided, it would take a series of political miracles for any genuine alternatives to have any fighting chance to emerge in the context where 90% of the information delivered to the public comes from a handful of huge corporations, which, of course, are in debt to the banksters. The way that "freedom of speech" works in the USA is that the truth is drowned out by overwhelming lies, which have made those liars fantastically wealthy, and therefore, powerful, because they can fund puppet politicians orders of magnitude more than anyone else.

How is anyone else supposed to compete with the banksters, when they ARE making billions of dollars in bonuses, and therefore, can easily afford to continue to outspend anyone else, with respect to lobbying puppet politicians? Between those two book ends, the ability to pay for political puppets to win elections, and the ability to pay to assassinate any politicians who do not agree to be puppets, there appears to be no real solutions to these runaway situations ...

The long-term triumph of the methods of organized crime taking over the government is the underlying reason WHY the vast majority have become Zombie Sheeple. Those who might have become their champions to lead any other genuine alternatives were eliminated. HOW is is possible to have any better political movements, when it is practically guaranteed that, IF those became successful enough, then its leaders would become the victims of dirty tricks to discredit or destroy them? Mostly, things are never able to get that far, since every emerging movement tends to be infiltrated by people who are covertly paid to subvert it.

To fully face the social facts is to perceive that money is backed by murder, and the assassination of politicians in the past provided the greatest leverage in moving the current social systems to be what they are now. What Stockman is talking about has been on an exponential growth curve in the USA for more than a Century. Nothing is new, except that each additional doubling of the total debts generates numbers which are even more obviously nuts!

Since the REAL problem has been caused by the triumph of the methods of organized crime being able to take control over the government of the USA, and that is now almost totally accomplished, and so, its exponential growth has become plainly insane, there could be no genuine solutions which do not admit and address that central social fact. That is why I always repeat the mantra that "money is backed by murder," and therefore, there are no good solutions which could work other than those which depended upon some new murder system ... MEANWHILE ... The monetary system being dominated by organized crime, so that sovereign powers have been more than 99% privatized, is on a runaway exponential growth curve, with the next doubling of that situation being almost impossible to imagine ... while the next doubling after that is totally impossible to imagine being possible ...

Inbetween is pain's picture

Judge Roll shot to death for a ruling against Obama?  Give me a break.  We've come to the point where every high profile death is a conspiracy.  There is absolutely no evidence that the judge was the primary target of the nutbag who shot him.  End of story.

Orly's picture

I didn't say that. Why are you using my name?

earleflorida's picture

sell them'ems` books 'davey [i don't know?... davey]', and cry meow a river! all mouth this stockton and nothing moar!

'words that are spoken freely have naught a friend, other than ones conscience'-- ... be weary of this obsequious worm and of his shredded tireless printed words, that only weighs heavy upon an arbitrary pittance long past its usefulness?

ZeroHedge is all that one needs to read, period!

... and it's free

SubjectivObject's picture

What you advocate is cutting off your nose to spite your face.

The freemongers are always embarrased by prodigious efforts, and hide their impotence behind a bleat of not free.  Banksters love yaz.

Since you must use other's words: "... be weary of this obsequious worm and of his shredded tireless printed words ..."  You could at least asign them to the correct context;   The trillions of media hours given over to the corrupt voice of the banksters.  Highlighting on ZH is like green shoots after the bull dozer.  Find some way to not step on them.

earleflorida's picture

is there something 'trickling down' your posthumous tongue... a palindrome of sorts?-- a usury's simony where golden`embroiled words' have placated the human soul, hense, many a mortal sin is now rewarded with a slap on the back and a page from this self ordained visionary seer, whilst a village blog burns in despair as he plagarizes the whole?!?

is that, what you're sayin... `there is a divinity that shapes our ends`-- and, in tyler's [asceticism] case, vis-a-vis stockton's [gilding-the soil'd-lily]... it is davey boy that needs financial solipism redemption for a past he himself fabricated and now shakes intangibles? with a hoeing for moral support-- if only it were truth!


orez65's picture

Yes, there is something significant that you can do about it.

Except for the dollars that you need to cover monthly expenses, exchange them for gold and/or silver.

Kirk2NCC1701's picture

Long-John-Silver: "and there is nothing we can do about it."

Sorry, LJS, I have to disagree:  There is almost always something constructive one can do in almost any situation.  In this case, we can prepare to mitigate the risks of the Crash of Tertiary Assets:  Get out of the fiat game! 

Hold some cash & foreign currencies for liquidity, but hold mostly REAL, PRIMARY & SECONDARY assets.  E.g., PM's, productive land, and fine art.  This is an old tried-and-proven trick that the very rich have used for centuries, and still works today.

When things have unwound & settled down (very polite words for what will actually happen), you can step in and pick up things for pennies on the dollar.  Again this is what the rich have always been doing while they kept their powder dry during the storm.

"...Cheer up... look at the bright side of life..." -- 'Life of Brian', Monty Python

DaddyO's picture

"We" as in the USA Financial system? Yes!! We as in individuals, not so much if we have taken our financial and personal health and well being back into our own hands.

Even a casual reader of ZH is light years ahead of the sheeple in terms of seeing the system for what it is, both financial and governmental.

I personally resolved shortly after 9/08 to make some drastic changes in how I interacted with banks and the .gov in terms of minimizing my exposure to these leviathans of greed.

I would encouorage anyone who is willing to explore alternative forms of investment. Private hard money lending is a great way to maximize returns while minimizing exposure. Local opportunities abound!

Moving into PM's with excess FRN's is another way to attempt to insulate reserves from thievery.

Other investments in tangibles may prove to be acceptable and profitable for some, look into it...

I took some FRN's and invested in a distributorship with an ammo importer early in 2012 and that has done very well as the headlines will attest, there are other avenues along this line that has paid off as well.


little buddy buys the dips's picture

speak for yourself. you're only fucked if you let yourself be fucked. in that case, then, you're not 'fucked', you're just a bitch.

IridiumRebel's picture

("We" as in the USA Financial system? Yes!! We as in individuals, not so much if we have taken our financial and personal health and well being back into our own hands.)


This sums up my meaning. I am hardly a bitch. I do bitch via text sometimes and ZH provides me an area to do so without rustling the sheep. 

rbg81's picture

What Stockman [conveniently?] ignores is the OTHER reason the Fed did it--which has nothing to do with TBTF banks.  The Fed is keeping interest rates low so the Government can go on a spending spree.  And much of that spending is geared toward keeping people on the Dole so they will vote Democratic for the rest of their lives.  

If interest rates ticked up to 4% for 10 Year USTs, the Government would go bankrupt, period.  That is why the Fed will never let interest rates rise ever again.  In fact, if anything, they are headed ever lower.

JustObserving's picture

"We've Been Lied To, Robbed, And Misled"

This has been going on for decades now - JFK, Gulf of Tonkin, Gulf war, 9/11, Iraq war, 2008 bank bailout, ZIRP, QE, Patriot Act, NDAA, Homeland Security, Regulatory Capture, HFT - the list is endless. But it is never too late to see the light.

caimen garou's picture

I agree that it's never too late to see the light, only problem is it will take a mac wrecker truck to pull peoples head out of the sand and twice the size to pull peoples headout of lefts ass! 

Bloodstock's picture

WE HAVE BEEN BETRAYED! AND IT CONTINUES!!! We need to be viligant in protecting ourselves, our families, our homes,,,and pray that our brothers and sisters figure that out. However that being said, we are not as stupid as we are told that we are. The lame stream media deal only in mind fucking. Even the most illiterate are wise in many ways. Truth WILL prevail. It's just a matter of time. Me thinks that the faster the elite push their traitorous agenda, the faster more sheeple wake up. Hold on.

Seasmoke's picture

It wasactually a bigger lie than that. Paulson said TARP was for underwater homeowners and than switch where the money was going before the ink was even dry. And we all sat here and did NOTHING. The back door to Goldman from AIG bugs me more than anything else.

Bad Attitude's picture

The revolving door between Goldman and the regime really bothers me.

short screwed's picture

If we had only known.  No one could forsee this happening.


overhere2000's picture

God I miss the Glass–Steagall Act.

fijisailor's picture

It kept risk at a much lower level for 66 years.  But n.  That wasn't good enough. 

earleflorida's picture

clinton single handedly destroyed america!!!

...and hillary, god forbid, she will bury it!

DoneThis2Long's picture

Sadly few are able and/or willing to accept that. Green arrow x10

Kirk2NCC1701's picture

Actually, in perfect hindsight and 10+ years later, it turns out that Clinton was just plain LUCKY.  Lucky in the sense that he held office when all the Deregulation effects kicked in that Reagan & Bush had implemented.  Now before the GOP Good Ol' Boys get a big woody, let's be intellectually honest and clear:  Their buzzword "Deregulation" was nothing more than an sanitized weasel-word for "Removing the Checks & Balances".  This invited the rewards & behaviors of execs to change completely:  From nominal salaries plus bonuses that were some percentage of salary, to salary plus bonuses that now became multiples of salary -- because they were tied to stock performance.  As soon as that happened, the die was cast:  The game became rigged, such that the execs went to maxing and juicing the stocks each and every quarter.  Thus also making Wall St very rich.

An empty Oval Office or 'Curious George' (the chimp) could have had no better or worse effect in Clinton's place, given what was going on in the economy and Wall St.

DoneThis2Long's picture

All restrains and controls have been destroyed. Be it competitive, accountability, political, economic..... Virtually all systems have been destroyed.

1C3-N1N3's picture

The banksters have declared war on more than just the poor people. This is a war on ethics.

Downtoolong's picture

We have devolved from a free market economy into a managed one that operates for the benefit of a privileged few.

Like the deal between Buffett and Goldman for which Buffett was once again being heralded as a genius by the MSM last week. That deal stunk like a dead fish from day one. Due to its structure, Buffett essentially got a better deal than Goldman shareholders had. So why did Goldman do it? It clearly wasn’t just about raising the amount of money they needed. They could have gotten a lot more than that from TARP and half a dozen other government sponsored subsidies. That’s what ultimately paid for all this folly in the banking system anyway. Indirectly, it’s what paid for Buffett’s profits too.

I think Goldman wanted to raise some money in a high profile way so they could demonstrate to the world that a guy like Buffett still had faith in their survival. That, of course, is a deal neither you nor I could ever get from Goldman. Even if we did they would then have raked us over the coals in ways that would have reduced our returns dramatically. It’s just another example of how the really sweet deals are only available to the good old boys within their network, and how we’re all still paying for it through government subsidies to the banking industry. If you’re not sure whether you’re in or out of the club, that’s a guarantee right there you’re not in, and it’s time to leave the table with whatever you have left. Because these days, if you want to invest like Buffett you must be Buffett.  There’s only room for a few winners now in the land of opportunity.