Making people like you is one way to get famous; making people hate you is another. If geologist Arthur Berman is getting well known, it's via the latter route. For several years, Berman, a Houston-based petroleum geologist who worked for two decades for Amoco Corp. before starting his own consulting business and blog (Petroleum Truth Report), has been espousing a point of view that runs in stark contrast to conventional wisdom and challenges the very bedrock of America’s energy future: that energy companies are overblowing the profitability of natural gas.
Berman's voice has been a relatively small one in the wilderness, known mostly to industry insiders — until just over a month ago, when The New York Times published an article titled "Insiders Sound An Alarm Amid A Natural Gas Rush." The article cited the emails of various gas- and energy-industry insiders who, sometimes using eye-catching words such as "Enron" and "Ponzi scheme," questioned whether the profits from gas being drilled in "shale" formations in Texas and in Pennsylvania's Marcellus Shale even cover the costs of drilling for it. Most of the emails were anonymous. Berman was one of only two named sources.
The article caused quite the stir. Natural gas has gone from making up just 2 percent of U.S. energy in 2000 to 23 percent last year, gaining some powerful allies along the way. It's relatively inexpensive — at the moment, at least — and it burns cleaner than coal (though there’s debate over how much the processes used to produce it reduce that environmental edge). Plus, it's domestic: We don't need any Middle East countries to sell it to us. Right now, federal and state lawmakers are considering various plans to increase subsidies for gas; in March, President Obama endorsed the plan of gas magnate T. Boone Pickens to convert heavy U.S. vehicles to run on natural gas, not diesel. And so confident is Pennsylvania Gov. Tom Corbett in the industry's long-term viability in the state that he, rather famously, has refused to tax it.
No surprise, then, that the Times article was rebutted with vengence. Gas industry officials derided it, and the Times' own public editor called the article undersourced and unbalanced. (Times editor Richard Berke has defended the reporting.) John Hanger, former secretary of the Pennsylvania Department of Environmental Protection (now an environmental consultant), called the article "baloney" on CNBC. These critiques largely hinged around a single, powerful point: If shale gas isn't worth money, multinational corporations wouldn't be pouring billions of dollars into drilling it.
"Obviously, Mr. Berman is a fringe figure within the gas industry," Hanger told City Paper this week. "He's either a genius or a fool … . I'm betting a fool."
CP spoke with Berman this week in an attempt to get the bottom of what, exactly, he's saying.
At the heart of his critique of shale gas drilling's profitability are two main points. The first is that drilling companies have understated their expenses and overstated their profits to the public. At the beginning of the natural gas boom, first in shales in Texas, most recently in the Marcellus Shale, natural gas was valued at about $7 or $8 per thousand cubic feet. But amid the economic chaos of 2008, that price dropped by half.
That hasn't stopped energy companies, big and small, from investing in shale gas — notably in the Marcellus Shale, where more than 2,400 wells have been drilled since 2010 alone. And as Hanger and an M.I.T. study group have pointed out, the volume of gas being produced across the country from shale drilling has increased enormously.
"I get that, and that's great," says Berman, "but my question is, is anybody making money on the stuff?"
Companies like Range Resources and Chesapeake Energy have touted the big money to be made in shale drilling. But according to Berman's calculations, such companies are barely breaking even — indeed, sometimes losing money — at current prices (just last week, the Securities & Exchange Commission subpoenaed financial files from several gas-related energy companies). Should prices increase, that might change the profit margins. But this would disrupt the other narrative of natural gas: that it will remain cheap enough to become a major part of the U.S. energy future and might therefore deserve government subsidy or support.
Why would drillers even bother to drill if they weren't making money now? One reason, says Berman, is land: Many of the land leases signed by gas companies contain clauses that revert the land back to the owner if gas production stops or doesn't begin: “But once you have production … you can hold that lease forever,” says Berman. Indeed, Chesapeake Energy CEO Aubrey McClendon told the Inquirer in May 2010, "Half of our drilling is kind of nonvoluntary in the sense that we're drilling to hold leases, not drilling because we think $4 is a great gas price."
That might not thrill landowners or the environmentally minded, many of whom already believe that Corbett and his predecessor Ed Rendell have allowed too much drilling for environmental watchdogs to keep an eye on.
Which brings us to Berman's second argument: that gas wells are drying up faster than gas companies admit. Using data from thousands of wells in Texas, Berman argues that, contrary to industry models, wells do not, after a number of years, "flatten out" and produce a steady output but instead continue to decline until they aren’t profitable anymore.
Less gas, he says, will mean more wells, which in turn means "the drilling never stops," says Berman. "Our findings say … that the wells decline so fast that you never stop drilling. You have to continue at the rate you’re drilling now."
Berman's assertions have not, to be sure, gone unchallenged. Some of the critiques have been technical: a rebuttal by investment advisor Tudor, Pickering, and Holt rejects the model for declining gas production. The online industry magazine, The Oil Drum, has offered a summary on its website of various technical critiques, positive and negative, of Berman's work.
Other attacks have verged on the personal: Berman has been accused of serving those who’ve bet against gas in marketsa, including the Middlefield Group, a Canada-based financial firm that pays Berman a quarterly stipend. A letter posted online by George Mason University fellow Jon Entine goes so far as to question whether (but stops just short of suggesting that) Berman and/or Middlefield conspired to "short" stocks ahead of the Times article. (Berman hotly denies this, saying "I don't give investment advice," that his work for Middlefield is "entirely appropriate and aboveboard," and "I don’t own any stock.")
But the larger criticism is that Berman and the Times are missing the big picture: that shale gas is abundant and its role shaping America's energy future is inevitable.
Ironically, Berman doesn’t really disagree. While those opposed to fracking and drilling in the Marcellus Shale have pointed to the Times article and Berman's findings as more evidence of its risks, they won't find an anti-gas crusader in this geologist. "I'm very much a part of the natural gas industry, and very much a supporter," Berman asserts. "Everyone knows that coal has issues. … Even if [gas] isn't profitable, we need the energy."