Slamming Shale: Shoddy Reporting or Market Tinkering
Last Sunday, the New York Times published Insiders Sound an Alarm Amid a Natural Gas Rush, raising serious questions about the true scale and economics of the production of natural gas from shale, and making comparisons to a Ponzi scheme.
Jon Entine, a visiting scholar at American Enterprises Institute for Public Policy, examines the article in detail and reveals some interesting facts.
Natural Gas "Bubble" Report: Market Tinkering or Shoddy Reporting?
The New York Times rattled energy markets this week with a Sunday front page story asserting that many "insiders" in the natural gas industry harbor serious doubts about the long-term viability of the natural gas market. They are keeping mum, determined to cash in on the short-term exuberance over recent reports of sizable shale gas reserves, reporter Ian Urbina wrote.
"[W]e have a big problem," he quoted Deborah Rogers -- portrayed in the story as a "member of the advisory committee of the Federal Reserve Bank of Dallas" -- as saying.
It's one of 10 quotes deployed by the Times sharply criticizing the prospects for natural gas production from shale. Eight of them are from anonymous sources. The only other critic who is named, Houston geologist Art Berman, said the energy data suggests that gas fields contain far less reserves than claimed. It's "harder and harder to deny that the shale gas revolution is being oversold," he told Urbina.
The explosive article was re-posted literally thousands of times. It was echoed on TV and radio reports earlier this week and was the talk of the markets in the United States and Canada, where natural gas competes with oil, tar oil and coal investments. "Times' Nat Gas Slam Affects Markets," opined The Street.com. "Natural Gas Stocks Fall," headlined Bloomberg BusinessWeek. (Stories on RealClearMarkets and RealClearEnergy, however, subsequently questioned the Times' reporting in the article.)
Just as importantly, the sharply critical narrative has emboldened a faction of the environmental movement that is campaigning against fracking, the technique used to extract shale gas that some environmentalists claim makes this form of natural gas dirtier than coal.
Anti-natural gas members of Congress jumped on the bandwagon. "I urge the S.E.C. to quickly investigate whether investors have been intentionally misled," wrote Rep. Maurice Hinchey, D-N.Y., in one of three letters sent to the commission by four federal lawmakers, all Democrats. Indeed, Hinchey might be on to something. But in a twist, investigators might end up targeting the New York Times and the key sources for its report.
From the Fringe to the Mainstream
The Times has a venerable history of taking stories that other news outlets have ignored or under-appreciated and, with enterprising reporting, turning them into causes célèbre. Perhaps that was the case here; otherwise this topic choice is puzzling. After all, the "shale gas is a bubble" story has been knocking around the fringes of cyberspace for years.
Almost two years ago, the AP headlined its story on the phenomenon "Analyst: Gas shale may be the next bubble to burst," quoting Berman, who laid out the issues in a way that Urbina would later mimic almost point for point.
The two major promoters of the sky-is-falling thesis are Berman, who runs Labyrinth Consulting Services, and Henry Groppe, an octogenarian patriarch of Texas petroleum industry analysts Groppe, Long & Little. They have been pushing this view for years to wide skepticism and even ridicule from mainstream analysts. For reasons never explained, the Times determined that Berman and Groppe were less Chicken Little and more banking analyst Meredith Whitney, for their fingerprints are all over its story. But even a cursory background check of the cited sources raises serious ethical issues, some of which may have resulted in market manipulations that could yet raise the ire of regulators in Canada and the U.S.
Financial Conflicts of Interest
Times' editors present this story as an independent investigation, as blowing the top off a conspiracy of silence from natural gas "insiders." It brags in a special section headlined "Industry Privately Skeptical of Shale Gas" of reviewing, over six months, "thousands of pages of documents related to shale gas, including hundreds of industry e-mails, internal agency documents and reports by analysts."
The Times posted some of the emails, although they are heavily redacted "to protect the confidentiality of sources." Readers are left with hyperbolic but anonymous fragments of criticism, many years out of date, sprinkled with derisive comments from Berman and Rogers.
Berman is described as a "geologist who worked two decades at Amoco and has been one of the most vocal skeptics of shale gas economics." There is no reason to begrudge Berman (or Groppe) from holding strong beliefs and trying to profit from them by selling their investment advice to hedge funds or other investors. But the responsibility of the Times is different. Context is the difference between truth and manipulation. Disclosure is a central canon of journalism ethics.
What didn't the Times disclose? Berman has direct and indirect financial ties to a range of critics of shale gas. For example, In January, Berman testified as a paid expert witness before the Indiana Utility Regulatory Commission in support of Indiana Gasification, a unit of Leucadia National Corp., detailing the benefits of buying natural gas made from coal instead of hydraulic fracturing. The coal industry fears getting crushed by the cleaner, natural gas movement, and Berman backed coal.
Berman not only has an indirect financial interest playing the role of shale gas skeptic, he has a direct conflict of interest: He (and Groppe) are "strategic partners" and "consultants" to Middlefield Capital in Toronto, according to Dean Orico, its president. They are both on retainer and are prominently featured on the company's website. Middlefield offers more than 30 funds and limited partnerships, including the Groppe Tactical Energy fund, which follow the two advisers' anti-shale gas investment outlook. It has sizable investments in key competitors to shale gas drillers, most prominently Canadian tar oil producers, an industry with far more environmental questions than the natural gas industry.
Berman is reportedly also a consultant and paid speaker with the Canadian Imperial Bank of Commerce. Both Middlefield and CIBC World Markets have clients who would profit from Berman taking an aggressive public stance. Moreover, if any of their clients, or indeed the fund managers at Middlefield, knew that the Times story was coming out, they could face charges of market manipulation under Canadian and U.S. securities law. (Orico said that Middlefield was never contacted by the Times and only found out about the story after it appeared. CIBC said it was looking into its relationship with Berman but has not yet responded to requests for a comment.)
Did Berman tell his strategic partners and clients, and directly profit from the Times story? Did Middlefield's funds or clients or CIBC's clients with knowledge of the Times' piece hold short interest in shale stocks or long interest in competitors' stocks? Did the Canadian oil sands industry, which includes Middlefield Capital, seek to influence the U.S. fracking debate, which could be a potential violation of the Foreign Agents Registration Act? Did Middlefield's funds or clients or CIBC's clients have short interest in shale stocks ahead of the Times report? Is the Times' key source dealing in inside information? Recall that Martha Stewart went to jail after being accused by the government of conspiracy, obstruction of justice, securities fraud and insider trading for getting advance word on market-moving news.
One also wonders whether Berman disclosed his relationships to the New York Times. Only Urbina and his editors know for sure. I attempted to contact the reporter, the Times' executive editor, managing editor, business desk, news desk and public editor by phone and email for comment on the issues raised by the story. Eileen Murphy of paper's corporate communications office responded, writing that "the facts of the story are not in question and we fully stand by it," refusing to address the ethical issues raised by Urbina's reporting.
The Curious Case of the Federal Reserve "Adviser"
The Times' story rehashes criticism of the shale gas industry that has been rattling around the Internet for years. The only new identifiable voice is that of Deborah Rogers. She is described by Urbina as "a member of the advisory committee of the Federal Reserve Bank of Dallas" and later as a "commissioner" at the bank. She portrays herself as having begun her "financial career in Europe where she worked in Corporate Finance in London, specifically venture capital."
That sounds like someone with genuine credibility. And that's how she was treated on Monday, when she made the media rounds. CNBC, for example, featured her in an interview as a "retired financial consultant" now with the Federal Reserve.
In a telephone interview, Rogers said that she was once a model with the Ford agency, and left the job to join a one-person firm in London as an assistant. She returned to the U.S. and was briefly a stockbroker for Merrill Lynch. Now she's raises goats and is the founder of Farmstead, a dairy that makes artisanal cheeses.
Urbina also did not disclose that Rogers has been fighting the natural gas industry -- and Chesapeake Energy in particular -- tooth and nail for years. She is on the steering committee of the Oil and Gas Accountability Project at Earthworks, an anti-shale-gas advocacy group, and lectures around the country. In Urbina's story, in her public appearances, including on CNBC, and in her interview with me, she indicated she became an activist by accident. Urbina quoted her as "studying well data from shale companies in October 2009 after attending a speech by the chief executive of Chesapeake [Energy]," the central target of the Times' piece.
What's not reported is that this was hardly a serendipitous event. Throughout 2009, Rogers had tangled with Chesapeake, which has a well near her Texas farm. That spring, she commissioned a study by Wolf Eagle Environmental Engineers and Consultants that tried to prove that gas production was causing air pollution, endangering her farm.
In response to the complaint, the city of Fort Worth commissioned its own study, released that August. It dismissed her allegations, saying Wolf's study was "rudimentary in scope and design," adding, "Discussions of chemical hazards in the documents reviewed were generally exaggerated and speculative, not representative of the hazards posed by the actual concentrations of compounds detected." Ironically, a year later Rogers was cited for failing to conduct bacterial testing of well water at her farm, paid a fine and received 12 months' probation.
When I emailed the Federal Reserve Bank in Dallas about the Times' representation that she was on an "advisory committee" and was a "commissioner," spokesperson James Hoard corrected the record: She is an unpaid volunteer member of the "small business and agriculture advisory council (not 'committee'), which is composed of professionals primarily representing small business and agriculture . . . local citizens who provide input into regional business conditions. (Ms. Rogers is a cheese producer.)," he wrote. Hoard added that she has no "governance or policy responsibilities." The two former chairs instrumental in appointing her are executives in the oil industry: Jim Hackett at Anadarko Petroleum and Ray Hunt at Hunt Consolidated.
I asked Rogers whether she had discussed her ongoing battle with Chesapeake with the Times. She paused. "Call Urbina, call the New York Times." When pressed, she went silent. "Thanks," she said, and hung up.
Where were the Times' fact-checkers? Imagine how the reader of the Times' "investigation" would have assessed Rogers' credibility if Urbina had revealed key contextual details. Would she have been seen as credible, or even featured in the piece, if she had been introduced as "Deborah Rogers, a goat farmer, cheesemaker and activist who has tangled repeatedly with Chesapeake Energy and lectures for anti-fracking NGOs"? That would have been a one-sided caricature -- but no less deceptive than the résumé details cherry-picked by Urbina.
I spoke with representatives of two companies that are portrayed in the Times' piece as peddling to their customers the "bubble lie" that shale gas has a rosy future. PNC Wealth Management said it was not contacted by the reporter. IHS Drilling Data spokesperson David Pendery, quoted in the Times story, was irked at the paper. "I got a bizarre call from the New York Times reporter, who wanted me to respond to sections of an email that he read to me, but he wouldn't supply us with the actual email so we could read it in context," he said. "He wasn't very professional."
The Times' readers were never informed that the key named sources in a market-shaking investigative report are activists with personal stakes in the debate or with direct financial conflicts. By running this piece, the Times chose to endow with credibility what other responsible news outlets had determined was less than newsworthy. Issues large and small have been raised by the newspaper's reporting. Hopefully, the paper's editors or its public editor, Arthur Brisbane, will address the matter.
Source: American Enterprises Institute for Public Policy
Further Reading: UBS Research - NY Times Shale Gas Allegations Seem Exaggerated HERE