Is Fracking a Ponzi Scheme?

Is the bubble created by hydraulic fracturing (fracking) drilling for natural gas about to burst?

According to a report from Rolling Stone magazine, the head of the largest fracking company has built his empire similar to the way Enron grew in the electricity industry. Author Jeff Goodell writes fracking resembles more of a Ponzi scheme these days than a budding energy industry.

In profiling Chesapeake Energy CEO Aubrey McClendon, Goodell writes, “McClendon has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil.”

The key to Chesapeake’s future growth is not in the fuel it attempts to extract through the fracking process across the country, but from buying and flipping land lease deals based mostly on the hype of the value of the gas trapped in the shale below the surface. Chesapeake, as we’ve detailed on this site for the last two or more years, has exhausted considerable resources in becoming the largest land lease owner in the U.S. Through these means, Chesapeake has effectively cornered the market on the fracking industry’s growth. Many of the land leases they agreed to were inked several years ago, before the boom of the industry. In that time, McClendon has worked to stealthy influence the political narrative on fracking for natural gas, turning it from a relatively unknown gas and oil extraction method into the promise of the future which gets the nation off foreign oil dependence. Chesapeake and McClendon’s future rests in the promise and hype around natural gas and, specifically, fracking, not in the actual fuel.

McClendon indicated as much in a conference call with financial analysts a few years ago, according to the Rolling Stone report. In that call, he said: “buying leases for ‘x’ and selling them for ‘5x’ or ‘10x’ is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.”

This business methodology has created a bubble that’s ready to burst. McClendon created an energy giant in a few years mostly on hype. The recent boom in the Marcellus shale formation in the Mid Atlantic has pushed the U.S. ahead of Russia as the world’s top natural gas producer, but that has come at a great cost, not only to the fracking bubble but more importantly to the safety of those living near these wells. As more wells open, the more speculation over the future of the industry grows.

At the beginning of the year, the Energy Dept. drastically reduced its estimate on how much natural gas could be fracked from shale formations in the U.S., and just how long that gas could fuel the country’s energy needs. The most influential people in the industry, like McClendon or noted billionaire T. Boone Pickens, say there is enough gas to last 100 years but the government now believes the reserves may only last a quarter-century, at best. Officials reduced their estimates in January by 70 percent on how much natural gas could be fracked in the U.S.

Creating more trouble for the fracking industry is the safety of the method itself, something which has captured the public’s attention and, for the most part, its skepticism. A boom on the industry in Pennsylvania, Ohio, and West Virginia has created an environmental nightmare. Fracking has created a demand for fresh water at unsustainable rates and has only proven to contaminate that water beyond future use. Shoddy well manufacturing and an inability to capture escaping gas and other chemicals used in the process has put fracking on par with coal mining, which it was supposed to supplant as a “cleaner, safer” alternative.

People living nearest to active wells have suffered from methane gas and other carcinogenic poisoning of their private water wells. They’ve also reported suffering breathing problems and skin irritations. Recent federal studies have finally linked fracking drilling with this contamination.

Lax regulations on fracking allowed more than a million wells to be opened across the country, but as more have opened, these problems have come to the surface and just like the toxic gas escaping an active well, the industry is having a hard time containing it. More regulations, like localized bans that have been upheld in court, in a state like New York has put a large question over the future of fracking in the state and for the industry itself.