Taking on the NY Times and second-guessing the President

This month there are two topics I'd like to focus on. One is President Obama's decision to release 30 million barrels of oil from the Strategic Petroleum Reserve (SPR) in an effort to reduce oil prices, and the other is the New York Times' reporting on natural gas, particularly shale gas. Some have called the newspaper's reporting on this "deeply flawed," "inaccurate," and "misleading."

Let's start with the last topic first. As many of you know, the NY Times recently has published several articles about shale gas, one of them quoting unnamed sources that were highly critical of the prospects for shale gas development and suggesting that investors are being "oversold" on gas potential from shale rock. Times reporters and editors quote a number of anonymous sources who suggest that what some call the "Shale Revolution" is akin to a Ponzi scheme. Other unnamed sources compare companies engaged in shale gas development to Enron Corp., whose top executives were convicted of fraud and other criminal behavior.

No one expects a news organization to serve as a PR conduit for any industry, much less the oil and gas business, which some loathe. However, people in the petroleum industry have a right to expect impartiality from those who cover the industry. In my view, the NY Times' coverage of the natural gas industry has been one-sided, which disturbs me because I grew up admiring that great newspaper and have long considered it the gold standard for journalism excellence.

When it comes to shale, people have a right to disagree about its potential and whether or not it is being overhyped. There are believers and there are skeptics as to the role shale gas will play in America's future. More important than what we "believe," there are geologists and engineers who study shale properties and extraction technology using scientific methodology, and these people draw conclusions as to the economic viability of various formations. They pass on these conclusions to company management, which makes strategic decisions based on their expertise.

Industry analyst Dan Pickering of Tudor Pickering Holt & Co. questioned the accusation that production from shale gas wells is declining at an unexpectedly high rate. He cited the Barnett Shale, which is the oldest shale play that has been drilled using modern horizontal drilling and multi-stage hydraulic fracturing techniques. The Barnett has been producing more gas than ever (5.6 bcf per day) with fewer rigs working than two years ago when production was 5.3 bcf per day. "If wells are declining faster than expected, the Barnett would not be at record production with reduced rig count," said Pickering.

Moving on to the other topic, President Obama has been criticized by pundits and even IPAA President and CEO Barry Russell for releasing oil from the SPR last month in an effort to bring down oil prices, which Obama said were artificially high due to rampant speculation by energy traders. The administration also convinced the International Energy Agency to release an equivalent amount of oil into international markets. In all, about 60 million barrels were released.

Russell commented, "[This] action is not a solution, but yet another decision that will only prolong the nation's vulnerability to swings in oil prices. Drilling for more oil at home will not only increase American oil supplies, but will also create jobs and increase government revenues through taxes and royalties. Releasing oil from our strategic reserves cannot accomplish these other important goals."

Hard to argue with that, but some industry figures went further than the IPAA.

Breitling Oil & Gas CEO Chris Faulkner said, "Tapping those reserves to combat a pricing issue is a dangerous game. The SPR is usually used by countries for emergency situations. Clearly there is no emergency situation in the market, and this is the first time they are using this kind of instrument for bringing the prices down."

Taking issue with this line of thinking, Amy Myers Jaffe of the Baker Institute at Rice University, said in her blog, "The SPR was not created to be a tool only used in the event of war…or in response to a major natural disaster. It was created to redress the bargaining imbalance to allow the United States greater [room to] maneuver in its foreign policy…and to prevent global economic damage from undue manipulation of oil markets."

She added, "The release of oil from the system last week was aimed to remove the fear factor out of the oil market and thereby both protect the stability of the global economy and additionally ensure that oil producers are discouraged from taking undue advantage of market instability and uncertainty…We believe this aim is in line with the original spirit of the creation of the reserve and is a sound policy."

I have to agree with Ms. Jaffe on this one.

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