Was Gordon Gekko Right?

Back in the 1980s when we were all about "me," we loved movies teeming with style and money. One that generated some interesting one-liners was "Wall Street," starring Michael Douglas, before Catherine Zeta-Jones settled him down, and a young Charlie Sheen, before he knew he needed to be settled down.
The most famous scene in the movie is one in which Douglas is giving a speech to a group of shareholders and makes the infamous statement "Greed, for lack of a better worrd, is good. Greed works." A sensational claim that makes anyone watching cringe.
I often think of that line when I'm speaking with people who are heavily against natural gas drilling. Those folks usually have two basic arguments. One, of course is environmental -- drilling is bad for the planet. The other is that drilling is the work of greedy oil and gas companies out to rule the world. I think of "Wall Street," beacuse sometimes, putting those two ideas together actually proves Douglas character, Gordon Gekko, may have a point.
To get to that point, think of each Marcellus well -- or any well drilled for that matter -- as its own business or cost center. When all is said and done, each developed well needs to produce enough in profit to make the cost of creating it worthwhile. So basic economics -- if the amount of money the production company gets back from the well over its lifetime is not higher than the amount of money that was needed to develop and maintain it over its lifecycle, the well was a bad business decision, so to speak. Thats the "economic viability" issue you hear Marcellus drillers talk about a lot. We've known about the gas in shales for years. But sinking a traditional well to that depth in most cases just didn't produce enough gas to make it profitable until the combination of hydraulic fracturing and horizontal drilling.
But its still expensive. Rule of thumb -- and this is a little dated -- about $1million for a traditional well vs. $3 million for a shale well. That ratio has likely increased a little on the shale side. But the point is, it costs at the very least about three times more capital to develop a shale well than a traditional well.
The most expensive part of shale well drilling is called the completions process. This step is post drilling, and includes methods to stimulate the well for good production. It includes the fracturing process.
There has been much made of the "thousands of chemicals" that go into frac fluid, which is forced into a well to encourage gas flow. Gas companies have routinely said that while the formulas are not always the same (they change somewhat based on the conditions of the shale where the specific well is and based on the service company doing the frac), frac fluid usually contains about 99 percent water and sand, and about 1 to .5 percent additives. Each frac usually uses about 4 to 5 chemical additives. Not hundreds or thousands. Let me clarify that: there may be numerous chemicals that CAN be used to stimulate the shale, but usually very few are used on each job. Yet the idea of the frac crew as mad scientists dumping chemical after chemical into some evil brew persists.
Back to Gekko. And some simple logic. Completions processes are expensive. Every cost here works against the wells overall profitability. Chemicals cost money. So does transporting them and disposing of the leftovers. The more chemicals used, the higher the development cost of the well. So, it actually behooves production companies to use as few additives, and the smallest volume of those chosen, as absolutely necessary to stimulate the well. So, if production companies are indeed greedy, how can the myth of frac fluid containing "hundreds of toxic chemicals" actually be true? I'm not exactly sure.
You can apply "the greed is good theory" to a number of other criticisms of the industry as well when you think about each well as a cost center.
For instance, there's the idea that well sites in themselves are an environmental mess and that while developing the well workers are careless and irresponsible. Again, keep in mind that every issue associated with a well that costs the company money goes against profitability. Hence, no one -- most specifically the producer -- wants a spill or accident of any kind. Spills require emergency remediation. Expensive. The actual solution applied can be costly. Providing drinking water to any impacted water well owner, really expensive. Then there are litigation costs, public outreach/meeting attendance costs, loss of production and work stoppage costs, fines, and various other financial losses that come with onsite accidents. Once again, the idea of the greedy company doesn't quite match up with that of the environmentally irresponsible drilling company. Thats not to say accidents and problems don't occur. But the insinuation that companies developing wells don't do their best to keep them from occurring is just conjecture. Running any business that irresponsibly is a recipe for ruin. And considering the need for capital to continue drilling, being sloppy in business doesn't work well for drilling companies.
So, maybe in some ways, taken just a little out of context, maybe Doulas's Gordon Gekko had a point. Greed, and the desire to make money, might actually be good, if it keeps companies from making dumb mistakes that actually cost them money.