Peak Oil: The Limits Of Swashbuckling

I and others have written a number of articles detailing some of the drawbacks, consequences, and less-publicized aspects of the recent oil production surge resulting from hydraulic fracturing (fracking) taking place in several regions of the country—most notably throughout the Bakken Formation in North Dakota and several regions of Texas.

Others have focused their attentions on the present financial benefits accruing to localities and workers from the fracking boom.

But one of the issues which rarely gets much attention—at least not nearly enough—is how some of the leading companies involved in fracking production have established some rather curious business and financial practices in their dealings with local residents whose properties have become prime sites for the thousands of wells involved in (and necessary for) production from the various shale formations.

ProPublica’s Abrahm Lustgarten in particular has done exceptional work investigating the activities of now-former Chesapeake Energy CEO Aubrey McClendon, one of the leading entrepreneurs responsible for the fracking surge. Others have chosen to write glowing profiles of the controversial executive [this, for example] as a tribute to the efforts of true-blue American born and bred daring businessmen who’ve bucked the odds to find fame and fortune. By golly, that sounds like a Hollywood movie!

Lustgarten had a different perspective on that narrative, and earlier this year wrote an outstanding feature about the not-so-swashbuckling efforts garnering almost no press from fawning cheerleaders of the fracking industry. But since the consequences fall mostly on the little people promised much but delivered little, that’s certainly understandable. Unpleasant truths rarely mesh well with Happy Talk about vast abundances and energy supplies forever at the hands of said swashbucklings.

In lawsuits in state after state, private landowners have won cases accusing the companies like Chesapeake of stiffing them on royalties they were due. Federal investigators have repeatedly identified underpayments of royalties for drilling on federal lands, including a case in which Chesapeake was fined $765,000 for ‘knowing or willful submission of inaccurate information’ last year.
Last month, Pennsylvania governor Tom Corbett, who is seeking reelection, sent a letter to Chesapeake’s CEO saying the company’s expense billing ‘defies logic’ and called for the state Attorney General to open an investigation (links in original).

The so-far not-so-happy-Hollywood ending of the various shenanigans employed were made clear in Mr. Lustgarten’s most recent article:

[T]he impact of the Financial Maneuvers that he made to save [Chesapeake Energy] will reverberate for years. The winners, aside from Chesapeake, were a competing oil company and a New York private equity firm that fronted much of the money in exchange for promises of double-digit returns for the next two decades.
The losers were landowners in Pennsylvania and elsewhere who leased their land to Chesapeake and saw their hopes of cashing in on the gas-drilling boom vanish without explanation (links in original).

In another outstanding reporting effort by Mr. Lustgarten last summer, he discovered that

Chesapeake’s conduct is part of a larger national pattern in which many giant energy companies have maneuvered to pay as little as possible to the owners of the land they drill.

How nice for them! What are the odds the owners were advised of those possibilities in advance?

As the recent article explains:

[L]andowners learned the expense of sending their gas through Access’s* pipelines would eat up nearly all of the money they had been previously earning from their wells. Some saw their monthly checks fall by as much as 94 percent.
An executive at a rival company who reviewed the deal at ProPublica’s request said it looked like Chesapeake had found a way to make the landowners pay the principal and interest on what amounts to a multi-billion loan to the company.

The marvels of the free market, and the misfortunate of those poor souls who just didn’t have the financial acumen or business wherewithal to negotiate on equal footing with billionaire executives. Tough luck! The ProPublica investigations also revealed that a number of other companies have engaged in patterns of conduct with winners (the companies) and losers (residents who have contracted with those companies for lease payments which turned out to be very different from expectations and promises). Imagine that!

What’s shocking—shocking!—is that almost none of those companies found time to discuss or explain their actions. But they are keeping lawyers and accountants busy!

Chesapeake appears to hold a special place in the halls of curious financial dealings with contractual partners. As Lustgarten noted:

Chesapeake has paid hundreds of millions of dollars in settlements and judgments in such cases, including a $7.5 million settlement with Pennsylvania landowners last fall.

Information is a good thing, and when others are diligently working to suppress as much as they can get away with, it’s a reasonable safe bet that it’s not about corporate “Aw shucks, gee whiz” modesty. They have something to hide because it’s not good.

So before we ride any farther down the trails of Happy Talk offered by the fossil fuel industry’s media cheerleaders, it might be worth asking a few other questions about the motivations and rationales offered for their stories of good cheer and energy abundance.

Who is benefiting and who is not? might be a good place to start.

* “Access Midstream, a newly formed company that had evolved out of Chesapeake itself.”

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