Monday, November 14, 2011
What can you learn about fracking from seeing the recent film Margin Call? Quite a bit actually. In the film, analysts at a New York investment house discover that they are holding large quantities of increasingly worthless mortgage backed securities. The drama involves their attempts to figure out what to do about it.
Serious questions have also been raised about the value of thousands of leases that have been generated over the last few years by the natural gas industry. Keep in mind that fracking is very capital intensive, much more so than conventional gas drilling. All the trucks that tear up local roads. All the chemicals. All the pipes. All the drilling rigs. It costs a lot of money to carry out that level economic and environmental destruction.
While the industry estimates that fracking is profitable when gas sells at 5 dollars per thousand cubic feet, independent analysts put the figure at 7. Natural gas wellhead prices peaked in 2008 at 7.97 dollars per thousand cubic feet. As result of the recession and mild winters, the price fell to 3.67 dollars per thousand cubic feet in 2009, recovering modestly to 4.16 dollars in 2010.
In general, we expect business activity to decrease when prices fall, but that hasn't been the case with natural gas fracking. This fact is largely attributable a change in SEC rules that allows producers to put undeveloped reserves on their balance sheets. As a result, companies can maintain share value while not actually pumping and selling the gas.
You might argue that it’s just a matter of time before gas prices increase and the drilled wells become profitable, but this is highly doubtful. The gas companies, it turns out, have vastly overestimated the amount of natural gas that can be tapped from shale gas generally, and the Marcellus shale in particular.
A U.S. Geological Survey Report released last summer cut by 80% the estimate of available gas in Marcellus deposits. And there is considerable other evidence that drilled wells are not producing at near the promised capacity. A New York Times report on this drew a massive defensive response from the industry.
This explains why the companies are so determined to expand their reach into New York and Ohio. Quite simply: they have to. They need to expand operations to keep inflating share price values and to secure loans to continue expansion. If they stop, and have to maintain profitability by pumping and selling gas, at the same time revealing what their assets are actually worth, they risk collapse.
Morning Star, with regard to Chesapeak Energy Corp, notes that there are “ongoing questions about the sustainability of the firm's business model, given its propensity to outspend available cash flow.” Still, it gives the company a “bullish” rating, due its “knack for creatively financing its operations and the relevance (that is, the attractiveness to third-party investors) of its current leasehold positions.”
Translation: "Chesapeak is good at cooking its books, and may be able to unload this crap before investors figure out that it’s a scam.”
If you’ve seen Margin Call, that should sound eerily familiar.
Leases tied to natural gas fracking are essentially like mortgage backed securities. At some point, they will be proven to have much less value than originally promised. And when that happens, shareholders, and--more importantly--those of us who live in the Marcellus Shale region, will be left holding the proverbial bag.
Thursday, February 24, 2011
What’s happening in Wisconsin could be seen as the final blow of deindustrialization. Deindustrialization was after all closely connected to undermining union power and undercutting labor costs. The global flight of capital began its movement from the North into the American South, because unions there were either weaker or non-existent.
As deindustrialization took hold in the 70s, union membership dropped markedly. Former union members lost their jobs, and others were cowed due to the lack of worker protections and took lower paid jobs. The retail sector grew as cheap goods flooded the U.S., but it was difficult to organize, partly due to extreme and effective resistance on that part of management.
As a result, the gap between the non-unionized and unionized workforces expanded, not just in terms of wages and benefits, but in terms of a cultural understanding of the necessity of unions. Support for unions has declined, as they have been seen by many non-union workers as ineffective, irrelevant, or privileged. Private sector union membership is now below 7%.
The exception to union membership decline was the public sector. In the 80s and 90s, in spite of Republican hostility, as manifested by Ronald Reagan’s successful attempt to break the air traffic controllers’ union (PATCO), public sector union membership remained relatively strong, especially at the state level. The public sector was an island of stability in an unstable economic world. Public employees held job security, health benefits, and pensions, as those things became increasingly scarce within the private sector workforce.
Of course everything has its costs. Local and state governments had to pay the salaries and benefits for unionized state workers. But, in return, the public received essential services, from health care to education to bridge repair. Public sector jobs kept people from poverty, gave them the resources to send their kids to college, and, as a form of public spending, had a counter-cyclical influence during periods of economic recession.
One question raised by the Wisconsin case is whether an existential threat to this last bastion of labor stability will bring people together, in recognition of a common enemy, or whether it will create resentment and fragmentation, as in, “I don’t have mine anymore, so why should you have yours?”
According to a recent New York Times article, the politics of resentment is ascendant. The Times quotes several private sector employees, some members of labor unions, who are supporting Governor Walker in his attempts to dismantle the public employee unions. In the words of one woman, "I don't get to bargain in my job either."
But it’s not clear that the article is an accurate representation of what’s happening. There are other indications that solidarity between workers is expanding rather than contracting, not just within the leadership, but among the rank and file. Public support in Wisconsin, in general, seems to be moving to the side of the state employees.
It’s hard to reverse a downward spiral. When people start to lose, there is a tendency to lash out. And it’s hard to be optimistic, given the past forty years of labor history. But Governor Scott Walker may have actually crossed a line.