Hydraulic Fracking: Illusion or Financial Bubble?

For years, extracting gas and oil from shale has been presented as a U.S. energy sector success. Gas and petroleum agencies such as the Department of Energy have disseminated estimates on the size of existing reserves — estimates that make us think that the U.S. will be energy independent within the coming decades. Much of this information is based more on conjecture than on hard data.

The hubbub is reaching Mexico. As part of the misnamed energy reform, the door has been opened for this type of extraction and its trail of negative implications. At this point, the betrayal by the energy sector is clear. The introduction of hydraulic fracking will be accompanied by grave environmental and economic damages. Clearly, the future of shale oil products in the U.S. and the damaging extractive technology will be determinative for this type of energy exploitation in Mexico.

The rhetoric about the supposed energy independence in the United States is accompanied by publicity about its positive impact on economic development. However, long-term regional and local development and the creation of durable jobs are unrelated to the use of hydraulic fracturing for gas and oil extraction. It now seems that fracking is not even a viable financial option in the short and medium term.

The reason is that gas wells generally mature very quickly. The window between the start of activity and the height of production only lasts for a few years, and then productivity declines very quickly. Given the short life of each well, the benefits are short-lived. In order to sustain stable levels of production, the number of working gas wells must constantly be multiplied, creating a vicious circle.

This process has given rise to a new business model in the United States. Eight years ago, the lobby representing the gas and oil companies launched an enormous public relations campaign to promote fracking as an excellent business venture. The objective of the campaign was to consolidate the support of regulators and Wall Street investors. The exuberance with which financial markets reacted to the possibilities of exploiting these unconventional hydrocarbons is not much different from the exuberance behind the 2008 global financial crisis.

Many of the financial practices that drove the 2008 crisis are being applied to the development of fracking markets. In some cases, investments are surrounded by operations that are not even reflected in the financial statements of the firms. Some structured instruments and schemes to attract more investors (for example, through high returns) are similar to the ingenious structured investment schemes through which investment banks and their secondary market operators pushed the approval and sale of subprime mortgages before the crisis. It goes without saying that the opaqueness of such operations is fertile ground for creating a frenzy among innocent investors, which creates a situation of overinvestment.

The gas industry has already had its first wake-up call. The excess in established capacity caused gas prices to plummet in 2012. The selling prices fell below the operating costs for many of the companies that produce gas. Some of the firms diversified their production, moving into oil fields that were rich in liquefied natural gas. But that maneuver only led to a collapse in the prices of those products. Other companies desperately tried to cushion the blow from the fall in prices through consolidations, mergers and new acquisitions. Banks and intermediaries on Wall Street received copious earnings by charging commission on the transactions.

The fall in the price of natural gas and associated products in the petrochemical industry forced asset depreciation among many large operators, including Chesapeake Energy. The process began in 2011, when the USGS [U.S. Geological Survey] published its downward estimates on the level of reserves in shale oil fields, including the two largest — Marcellus and Eagle Ford. Fundamentally important is the fact that financial agents promoted an excessive growth in drilling and then benefited handsomely from the energy revolution — making it seem like a new Ponzi scheme.

The result of all this is not the energy independence of the United States. In addition to slowing the transition toward an energy profile that boasts less dependence on fossil fuels, the explosion of shale oil hydrocarbons will provoke a repetition of the crisis experienced by technology firms in the 1990s — but with even greater environmental and economic repercussions.

The fracking bubble will reach Mexico through the perverse delivery of natural resources to the transnational corporations.