Exxon's Russian Roulette

[ashling]

http://www.nybooks.com/blogs/nyrblog/2011/sep/09/exxons-russian-roulette/
Peter Maass



How can you turn $3.2 billion into $500 billion in a day?

If you are Vladimir Putin, the prime minister of Russia, and Rex Tillerson, the chief executive of Exxon, you announce a deal that allows Exxon to explore for oil in Russia’s Arctic waters. According to Putin, who last week said, “It’s scary to utter such huge figures,” the deal could reach $500 billion. According to Exxon’s news release, all that’s been agreed so far is an investment of $3.2 billion. The only certainty is that the energy industry’s numbers game sometimes resembles the magical calculations the financial industry relied on before the 2008 crash.

Take natural gas. There has been a flood of recent investment in the effort to extract gas from the Marcellus shale, a geological formation that runs underground from Virginia to New York. Drilling rights have been snapped up as everyone tries to get a piece of the hazardous action. Few seem concerned that it involves an extraction technique, known as hydraulic fracturing—it uses chemicals and explosives to release deposits of oil or gas that are trapped in rock formations—that can poison water tables. The technique, which has been around for decades, is now being applied far more frequently than before and has come under intense criticism by environmental and health groups.

The investments have been encouraged by bullish numbers from, among others, the US Energy Department’s Energy Information Administration, which earlier this year estimated that the Marcellus contains an astounding 410 trillion cubic feet of natural gas. The fossil fuel industry loves suggestions of bountiful supplies because that means more investment, more drilling, and more profits, and it was not thrilled when the New York Times reported in June that some Energy Department officials were doubting the estimates:

“Am I just totally crazy, or does it seem like everyone and their mothers are endorsing shale gas without getting a really good understanding of the economics at the business level?” an energy analyst at the Energy Information Administration wrote in an April 27 e-mail to a colleague. Another e-mail expresses similar doubts. “I agree with your concerns regarding the euphoria for shale gas and oil,” wrote a senior official in the forecasting division of the Energy Information Administration in an April 13 e-mail to a colleague at the administration.


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The Exxon deal, meanwhile, is attention-getting not just for its roulette of numbers but because it involves drilling in Arctic waters. The risk of an accident is higher there, due to only-in-Arctic perils that include icebergs crashing into drilling rigs. And even more worrying, the consequences of a spill are far greater than in less remote regions, since cleanup would be extremely difficult in the harsh weather and winter darkness of the Arctic. More and more, industry declarations about high safety standards–Exxon said it “will use global best practices to develop state-of-the-art safety and environmental protection systems”—seem akin to AIG giving paternal assurances to investors that its derivatives business was being managed in a way that would prevent a meltdown if the housing market declined.

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