As Fracking Enters A Bear Market, A Question Emerges: Is The Shale Boom Built On A Sea Of Lies?

Tyler Durden's picture

One of, if not the biggest contributors to the improving US trade deficit and thus GDP (not to mention labor market in select states) over the past several years, has been the shale revolution taking place on US soil, which has led to unthinkable: the US is now the biggest producer of oil in the world, surpassing Saudi Arabia and Russia. Which is great today, but what about tomorrow?

It is here that problems emerge according to Bloomberg's snapshot of the shale industry. In "We're Sitting on 10 Billion Barrels of Oil! OK, Two", the authors look at the two-tiers of reporting when it comes to deposits that America's fracking corporations allegedly sit on, and find something unpleasant:

Lee Tillman, chief executive officer of Marathon Oil Corp., told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage. That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators.


Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice Energy Inc., it was almost 27-fold.

Fracking 101: "Predicting how much oil can be pumped out of shale has been controversial since the boom began about a decade ago. Companies combined horizontal drilling with fracking, or hydraulic fracturing. Fracking involves blasting water, sand and chemicals into deep underground layers of shale rock to free hydrocarbons. Innovators such as Oklahoma City-based Chesapeake Energy Corp. (CHK) said that drilling vast expanses of oil-soaked rock formations is more predictable than the traditional, straight-down method of exploration. Regulators agreed and requirements were loosened starting in 2010."

Furthermore, as tech companies have non-GAAP to hide all the nasty "expense" stuff, energy companies rely on probable and possible.

Energy companies also lobbied the SEC to let them file more speculative estimates, known as probable reserves and possible reserves. Only three companies take that option, according to data compiled by Bloomberg. The rest report only proved reserves to the SEC and save their other estimates for public presentations, which the SEC doesn’t supervise.

Now the discrepancy between the two estimation methodologies is hardly new: every serious investors in the E&P space has known about the two-tier bookkeeping system for years. The problem, however, is well laid out by John Lee, one of University of Houston petroleum engineering professors for hire: "They’re running a great risk of litigation when they don’t end up producing anything like that. If I were an ambulance-chasing lawyer, I’d get into this."

The reason why no ambulances were chased for the past 6 years, ever since the shale boom truly took off, is that this roughly corresponds to the time when the Fed unleashed its QE on the world, and boosted stock prices to record levels across the board, including those of shale plays. As a result, since fracking investors saw their stocks also rise to record highs, they had no reason for complain, even if the surge in market cap may have had little to do with the actual underlying fundamentals, among which level of reserves, and everything to do with a very different type of liquidity, that emerging from the Fed's printer.

But now things are rapidly changing, the commodity space is getting, pun intended, fracked, E&P companies across the board are sliding, and as of today, the shale space just entered a bear market.


And since investors take to losses with far less enthusiasm and stoic patience than paper profits, artificial as they may have been, they will soon start looking for scapegoats. They will find these were right in front of their eyes. To wit:


Additionally, here is what the abovementioned ambulance chasers will be closely looking at in the coming weeks and months unless the shale stock plunge doesn't reverse quickly.

Marathon’s Tillman, who was speaking at the Barclays Plc CEO Energy-Power Conference in New York on Sept. 3, said there are “risk and uncertainties that could cause actual results to differ materially from those expressed or implied by” his comments. Many company presentations remind investors that publicly announced estimates are more speculative than the numbers the drillers file with the SEC.


Figures the company executives cite during presentations “are used in the capital allocation process, and are a standard tool the investment community understands and relies on in assessing a company’s performance and value,” said Lisa Singhania, a Marathon spokeswoman. The Houston-based company’s shares have risen 1.6 percent in the last year.


The SEC requires drillers to provide an annual accounting of how much oil and gas their properties will produce, a measurement called proved reserves, and company executives must certify that the reports are accurate.


No such rules apply to appraisals that drillers pitch to the public, sometimes called resource potential. In public presentations, unregulated estimates included wells that would lose money, prospects that have never been drilled, acreage that won’t be tapped for decades and projects whose likelihood of success is less than 10 percent, according to data compiled by Bloomberg. The result is a case for U.S. energy self-sufficiency that’s based more on hope than fact.

The SEC is keeping mum, realizing very well that it is suddenly sitting on the next powder keg:

Judy Burns, a spokeswoman for the SEC, declined to comment on what drillers say during investor presentations.

And this is where companies have gotten into hot water:

Many of the companies use their own variation of resource potential, often with little explanation of what the number includes, how long it will take to drill or how much it will cost. The average estimate of resource potential was 6.6 times higher than the proved reserves reported to the SEC, the data compiled by Bloomberg News show.

This is the E&P equivalent of annualized, pro-forma, adjusted EBITDA, a metric that is fully made up on the spot to exclude anything and everything and make the subject look more attractive. In other words, lipstick on a pig.

It is also known as the "Bill Gross effect": everything was great as long as he was making money. And then things all hell broke loose.


Several companies, including Sanchez Energy Corp. (SN), don’t provide a total estimate. Instead, they publish variables such as the number of well locations and the estimated output from each one. Analysts often use these figures to independently compute the total. Even though Sanchez Energy provides the variables for analysts to calculate its resource potential, the Houston-based company doesn’t publish a total estimate. Executives debated whether to include one and decided against it, said Gleeson Van Riet, senior vice president for capital markets and investor relations.

In practical terms, the discrepancies are quite glaring:

The investor presentation by Canonsburg, Pennsylvania-based Rice Energy shows 2.7 billion barrels. Rice, which went public in January, reported 100 million barrels to the SEC in March, records show.


At Pioneer Natural Resources, the number they cite to potential investors has increased by 2 billion barrels a year in each of the last five years -- even as the proved reserves it files with the SEC have declined.


The rising number is “a game changer for this company,” said Sheffield, the CEO. “It’s a game changer for this country.”

Curiously, just like in the great Herbalife soa opera, the politicians are involved for one simple reason: they can collect lots of money to give their stamp of approval even if they really have no understanding or idea what they are vouching for.

Pioneer’s numbers aren’t misleading; they’re conservative, Sheffield said. He said he’s shared them with Senators Mary Landrieu of Louisiana and Lisa Murkowski of Alaska, the Democratic chair and Republican ranking member, respectively, of the Senate energy committee.

“Obviously it’s helped us in regard to making headway on convincing people to lift the export ban,” Sheffield said. “We want to convince them that we have this great resource. We don’t want it trapped here in the U.S. That’s for the public, the administration and Congress. So if we’ve got this great resource, why don’t you allow us to export it?”

The message is getting through. While Landrieu said she favors more study, Murkowski said she supports ending the ban.

The one message that is not getting through, however, is that no matter if Obama endorses one reserve estimation metric or another, if and when the P&L crash comes, nobody will be able to stop the onslaught of lawsuits that will immediately hone in on the weakest link, which in this case is clearly the ambiguous and two-tiered public data.

Some are already getting a sense of which way the wind is blowing:

In August, Lee led a workshop in Houston on the best practices of reserves estimation. The audience in the ballroom of the Hotel Derek included engineers for shale drillers such as Marathon, Continental and Rice. Pamela Allen, a senior reserves coordinator for Marathon, raised her hand and told Lee that she was worried that using outsized forecasts in public presentations would run afoul of the SEC and “come back to haunt us.”


Singhania, the Marathon spokeswoman, said she was unable to comment on Allen’s remarks without seeing a transcript.


“If a lot of people get burned -- and I think a lot of people can and will be burned -- by these numbers in the investor presentations, there may be a push by investors to get the SEC to do something about it,” Lee said during the workshop.

Actually, considering the gross incompetence of the SEC, the corrupt, co-opted regulator (for hire) may do something... in just about a decade. In the meantime, the most vibrant US industry may go from boom to bust in a heartbeat, as soon as its is mired in litigation once shareholders realize that the stock gains of the past half-decade will not continue in perpetuity. One look at the shale index chart above and the alarm bells should be going off.

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10mm's picture

Too much for to little. 

Croesus's picture

Fracking Company Lies: 

1. We will create local jobs. 

2. We won't pollute the water. 

3. We'll reduce dependence on foreign oil. 


I live in PA. Friend of mine, in Zelienople, is dealing with: 

1. A local neighbor/town councilman, who sold them out, because his landscaping business got a sweetheart contract to mow lawns for the corporate offices.

2. Polllution that happens now, for supposed financial rewards that occur later - the wells were capped, meaning that: Nobody who signed up for this "deal" gets paid, until the wells produce. They cap the wells, the shale-oil companies get paid now. The people who signed-over their mineral rights don't. 

3. Groundwater pollution. 

Ain't business great? These motherfuckers ought to be hung upside-down by their balls, for causing long-term damage, in the name of short-term rewards....

"It's okay, because I got mine...who cares about what happens later"... <-- the mindset of the 'people' who run the show. 

espirit's picture

Fracking companies should have been made to put up performance bonds out to 30 years protecting against groundwater pollution.


Prolly superfund sites in the making.

Croesus's picture



They're fucking criminals, and they know it. 

max2205's picture

The High PE bleed has just started ...sell the rips

deeply indebted's picture

The shale "miracle" is more "hope" than "lies," but I guess one could argue, "what's the difference between 'hope' and 'lies?'."

BurningFuld's picture

OK explain to me why I should not invest in the South Sea Drilling and Fracking Company.

10mm's picture

Thank current PA Gov. Next Gov wants to tax them. Might be too late.

Hongcha's picture

They don't need to be taxed.  The taxers are profiteering as well.

worbsid's picture

Who cares. Kim kardashian might go to a movie next week.  /sarc

Ab80's picture

The estimates provided by companies to investors in public presentations are based on what is called downspacing, i.e. drilling additional wells in a section where a well has produced oil or gas and is considered economic.

The whole point of the shale oil & gas revolution is that these new methods have freed up otherwise "trapped" oil and gas. Traditional, conventional, drilling was mostly binary, hit or miss. Unconventional drilling is based on the concept that there are blanket shale (or tight rock, for the most part not previously targeted by the indsutry) formations across the country. These formations have been identified and delineated by drilling wells across a play, effectively triangulating productive areas. No acre is created the same, results vary, but the company takes into account these results and creates what are called type curves. These type curves estimate what an average well in any given area will produce. They are designed to be within a 10% margin of error by the petroleum engineers. History tells us that we have met or beat expectations set by petroleum engineers, primarily due to improvements in drilling and extraction technology.

Look up slickwater fracs, perf & plug vs. cemented liners, ceramic vs. sand proppant, various meshes, increased rates, etc. Look at EOG Resources, theres a reason they are the best in the game, they have good people and the best technology. This is a REAL technology game.

The only real variable is commodity pricing.  

Companies have spent tons of time and money evaluating which are the most effective methods for extracting oil and gas. These numbers will likely only get better.


Not Too Important's picture

"These motherfuckers ought to be hung upside-down by their balls, for causing long-term damage, in the name of short-term rewards...."

GMO Ebola will solve that.

tempo's picture

50% 1st yr decline rates, ever increasing capital/wells on zirp debt to cover decline of existing wells, $100 oil/$5 gas must to continue. Massive damage to environment. millions of abandonment wells/problems. Real money is made when you discover large reseriors that will produce for many years, not a money funded, media hype. BTW all the economic areas were drilled years ago. $150/bbl oil and $10/mcf gas will trigger another run on uneconomic reservoirs. The smart money is off and out.

assistedliving's picture

which part of "the US is now the biggest producer of oil in the world, surpassing Saudi Arabia and Russia" are you people missing?

take that away and knock 0.5% off gdp and we're in a deeper depression than we already are. 

So Hollywood/WS accounting is in the oil patch...what else is new

just add some Scotch to that tap water and stop b&*#in

this is Amerika d#$@mit

LawsofPhysics's picture

More lies?  I am shocked, just shocked I tell you...

yes, the sound you here in the background are several underground tanks being filled with diesel fuel...

g&#039;kar's picture

Obola gets 2 birds with one stone. Kill off domestic oil production and piss off the Russians. Saudi's are quite happy. We need moar solar subsidies.

Landrew's picture

Apparently you have not been reading the news on energy. The Saudi's are in full panic mode.They are as I write are requesting all of OPEC to reduce production NOW. Maybe you have NOT been keeping up with production and costs in the OPEC world. Now that almost all of OPEC has to use salt water injection, and separation which drives energy use and well as costs, they no longer have the margin for falling prices as they did even 10 yrs. ago. It could be that you are a paid TROLL, and I understand making a dollar when you can. But, we also reserve the right to call out your BS when we see it.

g&#039;kar's picture

troll? if you say so, ignorant, probably. That doesn't justify a personal attack.

Not Too Important's picture

Don't harsh his buzz 'cuz he missed an article or two. Geez.

Great catch on the Saudis, btw. Any links to follow up? (Don't doubt you at all, just looking for more info)

James_Cole's picture

 The Saudi's are in full panic mode.They are as I write are requesting all of OPEC to reduce production NOW. Maybe you have NOT been keeping up with production and costs in the OPEC world.

It's pretty amusing, 'mericas bff uber ally Saudi arabia fighting it out with iran on oil! Cue iran being greatest threat in the known universe (again) in 3...2......

Australia & Canada (also run by idiots) betting the farm on high energy costs to pay for shit projects are also entertaining to watch. And it must be added, are also gallantly fighting des evil terrirsts with the saudis (anything to get those prices up)! If it wasn't so tragic it would make a great comedy. Ah fuck it, still makes a great comedy.

g&#039;kar's picture

Can't get kicked off this sight no matter what I try...Oh well.....

lasvegaspersona's picture

The Saudis are happy with $90 Brent?..I doubt that...

g&#039;kar's picture

The Saudi's can oulast it. The frackers can't.

Not Too Important's picture

The Saudis - as long as 'Yellen keeps printen'.

djsmps's picture

It may be a sea of lies, but we had our longest lasting fracking quake this morning.

Ms No's picture

Technically it's the disposal wells that cause quakes.  There were a couple south of Williston ND along the river also, which tells you everything you need to know.

Not Too Important's picture

Congratulations. Can you monetize that into a vacation destination?

Hongcha's picture

I expected long ago every possible avenue to BTUs would be exploited no matter the cost to the environment.  Starting right around the time Cheney said the sad clown show known as  Amerikan Kar Kulture was not negotiable.  Not in my backyard.

disgruntled housewife's picture

YES it is built on a sea of lies! More energy is used in the extraction than energy produced. Negative externalities are abundant. Companies are started, dupe their investors, take big paychecks, leave fouled water tables. Rinse, repeat, again.

Philo Beddoe's picture

North Dakota can now return to being a shithole that nobody wants to visit. 

Canadian Dirtlump's picture

This article seems to talk about shale gas more than oil. How much if North Dakota is gas driven if I may ask? My company which operates a division in Southern saskatchewan minutes from the border I can tell you how much gas drilling is being done? Virtually none. At least for all the clients we either work for or try to work for. The only newsworthy item on gas there is that what was once flared intot he air is now set to be captured which is already fueling an increased construction boom.

Either way the important part of the equation is price. If the US as a coherent matter of policy ( same for canada for that matter ) gave a shit about natural gas development, they would be pushing it as a surface vehicle fuel more, and would already have export terminals all over the place ergo attaining a higher international price instead of our current price - AIDS on toast.

In summary - is this whole thing a lie propagated by financial talking heads. Just like everything - of course it is in some form.

Landrew's picture

You will admit, Fracking oil is NOT even close to West Texas Crude quality? If not, I am not sure I except your thoughts as fact. Clue, gallons of gasoline per barrel refined from Frack oil and WTC. The entire refinery complex through the mid-West had to be overhauled just to refine the best of the Frack oil. Why do you think they HAVE to export this Frack to countries that do NOT have air quality standards ha!

Ms No's picture

That may be the case for tar sands but ND crude is about as light and sweet as it comes, can actually run a motor off of it, I have seen it.  Motor may not last forever but it works.  Tar sands is sludge, I have a hard time imagining that they can even refine it into fuel and yet they do.  How that stuff can move down pipelines without added bakken crude or some other fluid is beyond me.

Ab80's picture

Your comment about "frac oil" is completely unfounded and outright dumb. Oil quality varies from formation to formation, oil out of the Bakken happens to be extremely light and sweet, the easiest to refine...


Ms No's picture

I see the point you are trying to make, yes a lot of "Fracking oil" has less desireable qualities than traditional Texas light sweet and may be more difficult to refine.  However, all oil reservoirs have different chemical properties and Bakken is consistant with light sweet crude.  I imagine there are numerous reasons for them to export this oil abroad. 

Landrew's picture

I was speaking in general, when I was a kid crude would crack 21.5 gallons of gasoline, now 17.5 is normal.

Not Too Important's picture

"The only newsworthy item on gas there is that what was once flared into the air is now set to be captured which is already fueling an increased construction boom."

A construction boom for collecting gas, that will diminish at the same or increased rates as the fracking well depletion rates.

What financial genius decided that investment was worth hundreds of millions of dollars?

Sell it to the pensions!

kowalli's picture

So shale technology is a FAKE

FieldingMellish's picture

Only the promised returns. It works at $100/bbl and ZIRP. There is a vast amount of oil that is economical at $200/bbl. Even more oil can be recovered at $400/bbl.. etc...

Bunga Bunga's picture

... and oil supply will last forever at $5,000/bbl ... wow we have solved the energy problem!


Jstanley011's picture

Haha, oil is at $85.80, today, right now.

TheReplacement's picture

Isn't it really the case that you must get more energy out than the energy you put in?  Price really doesn't matter in the end, efficiency is the key.

HardlyZero's picture


WAS: $105 and going up.

IS: $85 and going down.

Frack'n Finance must be FRACKED by now !

It is like the .com crash, or the upcoming 10x NASDAQ leveraged crash.

The Fiat must flow...and if not, the flow based system collapses, since there is no capital...only virtual capital and future capitial (which both don't exist in reality).

When the Frack'd Oil is too expensive it will just stop being Frack'd and will stay in the ground.

The Byzantine finance and business of Frackn' must be very similar to Gold mining....keep the land and drilling rights and preserve the laws to get to it later.

Landrew's picture

The author is NOT saying Fracking tech. is a fake. He is saying the profitability is fake. Two very different arguments. NO one not even the most ardent Anti-facking groups deny fracking can drive previously UN-recoverable oil to the surface. The arguments are about BTUs/total energy recovered and known reserve quality. Just as with fermenting corn at a cost of 1.25 gallons of Ethanol to make 1.0 gallons of Ethanol. Without the price supports and government subsides, Ijust ask Tesla how they make their money) the whole idea is a failure if that is what this tech is about. To me this isn't really about how profitable the process is now, it's about when Gahwar stops producing. Without BTUs the whole Fracking mess goes up in flames, pun intended.

Jstanley011's picture

Only in Zero Hedgeland. In the real world, it's quite real.

Colonel Klink's picture

The current entire system is built on a sea of lies.

JustObserving's picture
Is The Shale Boom Built On A Sea Of Lies?

And an underground sea of polluted water. But at least you can dispense with matches as flames come for free from your tap.

But then, the entire US economy is based on lies.