Saturday, October 27, 2012

positive presidential policies too damn hard to find or to explain



energypolicyforum | On October 21, 2012, the New York Times published an article delving in depth into the relationships between large Wall Street investment banks and shale gas operators. The article is outstanding but so much more needs to be said.

For nearly a year I have been giving presentations on this phenomenon which I refer to as financial co-dependency. A dysfunctional relationship, yes, but one which has been very lucrative for certain elite players, most particularly the investment banks and a few top oil and gas executives.

There is no doubt that the investment banking community has been the driving force behind shale production since the economic downturn. Shale should have unravelled long before now. But Wall Street saw an opportunity to generate massive fees and so shale was taken to new heights. Or perhaps some would say new depths. In August of 2011, Neal Anderson of Wood Mackenzie had this to say about the investment community and shale exploration:

“It seems the equity analyst community has played a key role in helping to fuel the shale gas M&A market, acting as chief cheerleaders for shale gas plays”.

It is important to understand how perceptions are manipulated by such “cheerleaders” in an attempt to effect changes in market direction that could be favorable to certain players.

After the economic downturn, shale operators continued to drill in spite of falling prices. Traditionally, when prices declined, oil and gas operators would shut wells in to stabilize the market. That, however, did not happen in 2008-2009. One look at the balance sheets of various shale gas companies explained why. They were exceptionally laden with debt and had no cash to speak of.

Oil and gas companies have traditionally been cash cows but not shale operators. They were highly leveraged and it seemed apparent that the only way they could continue to meet debt service was to engage in a frenzy of drilling due to shale wells steep depletions. It is extremely difficult to maintain a production plateau in shales without resort to continuous and prolific drilling. In fact, it has proven impossible.
Early in the game, Wall Street had been only too happy to provide funding to the shale operators. Many of these operators quickly became addicted to the cash. Shale production turned into more of a land grab than a legitimate oil and gas venture. In fact, I have referred to shale activities as “drilling for dollars in the capital markets”. And large Wall Street investment banks were only too willing to help…for a fee.

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