NYT: Energy Self Regulation Fails Again Reporting Gas Reserves
After the first and second oil crises of the 1970s caught the American economy flatfooted and governments both in the dark and not prepared for supply disruptions, US and state governments rushed to create new agencies to provide independent assessments of energy demand, supplies, technologies and costs. I once worked for one of these in California.
President Carter and Congress passed five energy acts, some ill-advised and now repealed, but the creation of the Energy Information Agency to provide independent assessments and forecasts about energy has proved to be worthwhile, helping government officials, the industry and investors make better informed decisions.
Of course, the whole point is to have credible studies performed by independent experts. They can’t be compromised by self interested views of those who make or lose money from decisions based on those assessments. Or to frame this in the mindset of the anti-regulatory crowd that has captured many regulators and who want to rip off the public, the government, and investors, the trick is to capture the assessment process and use it to defraud everyone and steal their money.
As part of its excellent and sobering series, here and here, on the predictable overselling of the extraction of natural gas from shale (fracking), the New York Times provides a companion piece on how the Securities and Exchange Commission under Bush appointed Chairman Cox got through a Trojan Horse change in the reporting rules for natural gas reserves.
Why the SEC? The SEC’s mandate is to protect investors from misleading statements by companies selling securities. If a natural gas drilling company can report large reserves of economically recoverable natural gas in the fields it is drilling or owns, investors will be more likely to invest their dollars there. So the SEC has rules intended to induce companies to provide reasonably accurate reserve estimates and to disclose the uncertainties.
But how much gas is economically recoverable from shale and fracking techniques? No one was quite sure. Traditional ways of estimating reserves were too conservative, the industry told SEC. So they convinced Cox’s SEC to relax the estimation rules, but allowed them to keep secret the models they used to make the estimates, making independent estimates impossible.
That allowed the drillers to claim far more recoverable reserves than before. And since known drilling costs were spread over a much larger assumed volume, the reported cost of recovery plummeted, making it seem as though the drilling companies were sitting on much larger reserves that could be economically extracted at lower costs and higher expected profits The result? Billions in investor dollars flowed in and we’ve had an explosion of fracking.
It’s probably too early to have a credible estimate of reserves or the costs of extraction over time, never mind the environmental concerns. A previous Times report in this series suggests the early claims are proving way too optimistic — the reserves are smaller and the extraction rates and costs are not nearly as favorable — and that undermines the industry’s strategic argument that increased gas supplies are the answer to the search for the “bridge” fuel to displace coal. The industry strenuously disagrees.
But the Times SEC story is just another reminder that when government functions under the delusion that compromising its independence is okay, bad things happen. Bending the rules in ways favorable to industry when the changes defy common sense and the obvious need for independent judgment usually means investors get defrauded, the public gets ripped off, and government becomes complicit in looting.
How many times . . .