1. The Magical Thinking of Richard Kinder-Stiltskin: Resources versus Reserves
If ever an extraction corporation epitomized the spirit of 16th century philosopher Francis Bacon, it is surely Kinder Morgan Energy Partners (KMEP).
But this isn’t merely because their record of fossil fuel transport and export rivals the company from which KMEP derives its major players—ENRON—for sheer economic ruthlessness.
It’s because—if Deborah Lawrence Rogers of the Energy Policy Forum (EnergyPolicyForum | America has come to crossroads with regard to energy) is right—Richard Kinder (COO–Chief Operating Officer) of Enron for over 16 years to 1996) is gambling KMEP’s assets—not to mention the environmental integrity upon which millions of human beings, nonhuman animals and wildlife depend—on what can only be called magical thinking.
Why? Because we’ve very little good reason to believe that the gas KMEP needs to get into its pipelines is going to be gas we can actually get out of the ground—even via the massive environmental destruction to which we’re already witness. Kinder, in fact, must be channeling Bacon if he thinks that his most recent pricey gambit—the Tennessee Pipeline—is going to cash out the over the long haul; indeed, only magic could make this true—or perhaps the “magic” of deception, or even better, the “magic” of creating deceptive cover while you cash out the last whiff of fossil fuel from the shale plays.
Historian Carolyn Merchant points out that “[i]t was Bacon’s singular achievement to demonstrate through rhetoric, metaphor, and vivid example how the ‘‘secrets of nature’’ could be extracted and put into use in the service of humankind. Bacon’s thought evolved during a period in which natural magic emerged as a new practical technique for understanding the workings of the natural world through the manipulation of matter.”
“Rhetoric, metaphor, and vivid example” have become for the natural gas industry the magical currency—literally—for transforming what has in fact a very limited life-span into the promise of virtually endless wealth—at least for a few. The trouble, as Bacon himself realized, was that when you deploy “natural magic,” namely, empirical analyses of real evidence, as a “new practical technique” the illusion that, for example, you can turn stones into nuggets of gold is quickly vanquished. So too long-term profits spun from shale gas.
What Rogers shows is that because there is a world of difference between what might be in the shale and what might be recoverable from the shale, the promise of long-term profits for Fracking-Stiltskin and the industry’s sycophantic associates evaporate as quickly as do Rumpelstiltskin’s promise of gold threads from straw—or Kinder-Stiltskin’s promise of huge
pipeline profits from shale gas and/or LNG transport.
What the industry needs is a “new” kind of magic, ergo the “rhetoric, of “cheap, natural, abundant,” the metaphor of the “good American,” or, as Roger’s shows, the vivid example of a one hundred year resource. The trouble, as Rogers spells out (and fracking industry executives no doubt know) is that the “vivid example” is nothing but a ploy intended either to bamboozle investors, or provide them cover (“defraying risk”) on the hope that the ploy will magically translate into profit quickly and robustly enough that they’ll never have to raise the flag of the flatly false claim that they were bamboozled.
If Rogers has her way, however, there will be no flag to raise—false claims or no. Why? Because a resource is not the same thing as a reserve:
This notion that we have 100 years of gas available is misleading at best. Industry uses this figure but it simply isn’t true in a way that is meaningful. It is a deliberate confusion of what geologists refer to as resources vs. reserves.
Resources are the total amount of gas that is potentially available in the ground. And this is indeed about 100 years worth but this gas is not necessarily available nor is it necessarily economically viable to pull it out of the ground. The Society of Petroleum Engineers (SPE) defines resources as “potentially recoverable but not yet mature enough for commercial development due to technological or business hurdles.” In other words, it exists but cannot necessarily be pulled out of the ground because of lack of existing technology or it simply is not economically viable.
Reserves on the other hand are defined by petroleum engineers as gas that can be realistically pulled out of the ground at today’s prices and using today’s technologies. This is now estimated to be only about 11 years worth. Unfortunately, claiming resources rather than reserves makes it sound as though natural gas is very abundant when in fact it may not be. Obviously it becomes even more problematic when policy begins to be implemented based on resource numbers rather than actual reserve numbers and that is precisely what is occurring at present. That is foolish to the extreme.
In other words, it takes quite a lot of magical thinking—deliberate confusion—to believe that resources are (or can become) reserves, and yet, as was reported by Ian Urbina of the New York Times way back in January 2011, that’s exactly what drives investments in the exploding extraction industries—and hence the Kinder-Stiltskins of the shale play:
Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States. But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells. In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles. “Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”
No wonder, like his analogues over at EXCO, Kinder has been in a hurry ever since the birth of KMEP emerged from the carnage of ENRON, to structure his corporate empire—as a master limited partnership—in such a fashion that KMEP could be protected from some forms of liability, pay no corporate taxes, and hire virtually no employees:
In the years before the shale boom, Kinder and Morgan (since retired) unlocked magic by taking a sleepy corporate structure known as the master limited partnership and reinventing it as a growth vehicle. MLPs, as they’re known, simply hold long-lived, income-producing assets. They usually have no employees or offices (all of that is handled by the general partner), and crucially, they don’t pay corporate taxes. All profits and tax liabilities are passed on to unitholders. (Kinder’s own pretax distributions top $100 million a year.) “Our idea, Bill Morgan’s and my idea, was that we could take that and we could operate them very efficiently with laser focus so our whole game would be assets,” Kinder says. “We wouldn’t be in the trading business.” Because of their tax treatment MLPs enjoy a lower cost of capital than regular corporate structures. Kinder could buy pipelines from non-MLP owners, drop them into the Kinder Morgan Energy Partners MLP, squeeze out costs and immediately increase free cash flows.
That’s just the kind of sweet deal a Kinder-Stiltskin needs to make good on a gambit as clearly dicey on the evidence as the shale play—a gambit that doesn’t even begin to take heed of the serious environmental and human health impacts already accruing to the extraction industries to which KMEP is beholden.
Here’s the simple upshot: the only way to make shale gas extraction via horizontal slickwater hydraulic fracturing profitable is to swindle investors into thinking (or provide them cover so that they can pretend that that’s what they believed) that resources can be translated into reserves and/or to make this piece of magical thinking appear true by (a) structuring the enterprise for maximally efficient execution of acquisitions and expansions (MLPs), and (b) getting as much production into the pipeline and ready for export to the global markets as fast as possible before the ratio of production cost to profit margin becomes too narrow, too risky, or too transparently a shell game to continue. Making sure that laws are written, governments bought, propaganda crafted, opponents neutralized, and the harmed silenced is essential to the Fracking-Stiltskin enterprise as a whole because there is no hundred years to make good on the gambit. Maybe there’s ten years; maybe there’s only five. But in another two years, no one’s going to buy, for example, the bridge fuel metaphor because the bridge turns out to be nothing more than a Rumpelstiltskin straw stretched across the rising oceans of climate change.
“[R]eminds you of dot.coms.” Yup.
Boy, Mr. Kinder-Stiltskin, do you need those pipelines.
2. The High Cost of Trying to Convert Straw into Gold: From Enron to Kinder- Stiltskin
As reported by The Wall Street Journal, October 2011, Richard Kinder, who owns 30% of KMEP, is one “lucky ex-Enron employee”
Kinder managed not only to “escape the carnage” of meltdown that put his colleague, Jeff Skilling, into a Colorado prison for twenty-four years, but to “engineer one of the biggest energy deals in history,” namely the acquisition of El Paso Corporation, the second largest acquisition in the U.S. rivaled only by Exxon-Mobil’s take-over of XTO. As reported by the New York Times:
Kinder Morgan agreed on Sunday to buy the El Paso Corporation for about $21.1 billion in cash and stock, striking one of the biggest energy deals in history, to tap into a boom in natural gas drilling and production. Through the deal, Kinder Morgan will become the biggest of North America’s midstream energy companies, which are entities that process oil and gas products before transporting them to production facilities. Kinder Morgan will own or operate about 67,000 miles of pipelines stretching across the continent. “If you believe in the future of natural gas, you believe in putting together the biggest possible network,” Richard D. Kinder, Kinder Morgan’s chief executive, said in an interview. He added that the deal was “a once-in-a-lifetime opportunity.”
A once in a lifetime opportunity, that is, if as a “midstream company” you can leverage your production assets into pipeline infrastructure and gas flow before frack-gas goes “dot.com.” Kinder also paid a heavy premium for El Paso: “For each share of El Paso, Kinder will pay $14.65 in cash, 0.4187 of a Kinder share and 0.640 of a warrant. At Friday’s closing price, that values the offer at about $26.87. That is a 37 percent premium to El Paso’s Friday closing price and a 47 percent premium to El Paso’s 20-day average closing price.” But Kinder “believes in the future of natural gas.” So much so, in fact, that he’s promised “that the transaction will provide big rewards for shareholders. The company said that it expected to begin raising its dividend next year at an average annual rate of about 12.5 percent through 2015.”
That’s one mother-load of a promise, especially since Kinder’s willing to stake a claim in the construction of pipeline in shale plays that Rogers has shown to have either already peaked, or will in short order, the Bakken of North Dakota, the Eagle Ford in South Texas, and the Marcellus in Pennsylvania. In what Rogers dubs the “drilling treadmill,” or running as fast as you can just to stay in the same place, she sites a study of the Bakken shale fields (re-posted with permission by Energy Policy Forum from The Oil Drum):
Findings from this in-depth study of time series for production from some individual wells: Presently the estimated breakeven price for the “average” well in the Bakken formation in North Dakota is $80 – $90/Bbl In plain language this means that presently the commercial profitability for new wells is barely positive. The “average” well now yields around 85 000 Bbls during the first 12 months of production and then experiences a year over year decline of 40% (+/-) 2%. The recent trend for newer “average” wells is one of a perceptible decline in well productivity (lower yields). As of 2007 and also as of recent months, the total production of shale oil from Bakken, has shown exceptional growth and the (relatively high) specific average productivity (expressed as Bbls/day/well) has been sustained by starting up flow from an accelerating number of new wells. Now and based upon present observed trends for principally well productivity and crude oil futures (WTI), it is challenging to find support for the idea that total production of shale oil from the Bakken formation will move much above present levels of 0.6 – 0.7 Mb/d on an annual basis.
The upshot here is that the Bakken shale fields will experience a decline in production (reserve will not match resource), hence the only way to continue to profit from the shale play here is to find ways to raise the price of natural gas. But here is precisely the gambit of a Kinder-Stiltskin whose argument is that production has so exceeded pipeline capacity that the glut—burning off the excess instead of pipelining it—is what explains the drop in the price of natural gas. More pipeline. More demand. More profit—at least for as long as the boom lasts.
Indeed, so committed to turning this straw into gold, Kinder-Stiltskin is apparently willing to ignore growing suspicion within his own industry that resource is being deliberately conflated with reserve:
Forecasting these reserves is a tricky science. Early predictions are sometimes lowered because of drops in gas prices, as happened in 2008. Intentionally overbooking reserves, however, is illegal because it misleads investors. Industry e-mails, mostly from 2009 and later, include language from oil and gas executives questioning whether other energy companies are doing just that…The e-mails do not explicitly accuse any companies of breaking the law. But the number of e-mails, the seniority of the people writing them, the variety of positions they hold and the language they use — including comparisons to Ponzi schemes and attempts to “con” Wall Street — suggest that questions about the shale gas industry exist in many corners. “Do you think that there may be something suspicious going with the public companies in regard to booking shale reserves?” a senior official from Ivy Energy, an investment firm specializing in the energy sector, wrote in a 2009 e-mail. A former Enron executive wrote in 2009 while working at an energy company: “I wonder when they will start telling people these wells are just not what they thought they were going to be?” He added that the behavior of shale gas companies reminded him of what he saw when he worked at Enron.
“Behavior he saw while working at Enron.” Go figure. When KMEP bought El Paso, it also bought the Tennessee Gas Pipeline, and despite investor predictions in late 2012 that the company might have “reached its peak,” Kinder-Stiltskin is determined to continue the corporation’s phenomenal rate of growth via “increases in volumes and prices” as well as “expansions and acquisitions” having spent 30 billion since 1998 (Revealing the Structure of the Kinder Morgan-El Paso Deal – Insider Monkey).
The Tennessee Gas Pipeline—the Northeast Upgrade Project—is essential to Kinder-Stiltskin’s vision: “The 13,900-mile Tennessee Gas Pipeline serves the Northeast with access to the Marcellus and Utica shale plays” transporting natural gas from “Louisiana, the Gulf of Mexico and south Texas.” (Kinder Morgan – Tennessee Gas Pipeline)
KMEP promises a myriad array of benefits including the hire of local union-shop workers, revenue for local businesses, and an energy source that is “versatile, clean, and abundant” (Benefits of Natural Gas | Northeast Upgrade Project).
The KMEP strategy is clear: amass as much pipeline infrastructure as possible across a wide array of extraction ventures (including, but not limited to, shale plays), distributing both risks and gains across that array, thereby defraying against production declines, and limiting competition. Then, via the advantageous corporate structure provided by the MLP, utilize incoming revenues to acquire additional pipeline. For example, KMEP “operates the only pipeline that carries tar sands crude out of Alberta over the Rocky Mountains to its tanker terminal in Vancouver. Kinder acquired the Trans Mountain Pipeline in 2005 and now seeks to expand it from 300,000 barrels per day to 750,000 bpd by building a new $4 billion pipe alongside the first. He’s already signed up nine oil companies eager to fill the proposed line with their crude.” Kinder is also gearing up for the Northern Gateway Project as well as part of the action in the Keystone XL Pipeline “to bring more oil sands crude into the U.S. and ultimately down to Gulf Coast refineries,” much to the discontent of environmentalists, (Rich Kinder’s Energy Kingdom – Forbes).
When you’re Kinder-Stiltskin, however, and you need to hedge your bets against the inevitable decline in reserves by getting the price of extraction-booty as high as possible, national borders apparently become a nuisance (and why shouldn’t they when patriotism has long been appropriated to corporate propaganda?) KMEP’s latest venture—like so many of his corporate fellows—is export:
A new business for Kinder is liquefied natural gas. With the El Paso deal came two liquefied natural gas terminals in Elba Island, Ga. and Pascagoula, Miss. They were built for LNG imports, but Kinder is reconfiguring them and has already received permits to export LNG. Producers will jump at the chance to ship gas to the likes of Japan and Korea, where it can fetch upwards of $12 per thousand cubic feet. You can buy the same amount of gas in Louisiana today for $3.70, a tasty spread.But will what’s good for Kinder Morgan be good for America? If all the proposed LNG projects get done it would give the U.S. the ability to export 20 billion cubic feet of gas per day, or about a third of current supplies. This could cause U.S. prices to skyrocket. Some politicians, like Representative Ed Markey (D-Mass.), want to block LNG exports altogether, insisting U.S. gas would better serve America if it remains at home to keep prices low.
This frustrates Kinder. Despite supporting presidential hopeful Mitt Romney, he thinks many politicians–including Romney, Obama and Markey–are out to lunch when they talk about the U.S. being somehow “energy independent.” “If people think we can draw a circle around North America and that we can be an independent island of energy, that’s not realistic,” says Kinder. “This is a world market for oil, for refined products and increasingly for natural gas.”
Having the option of exporting gas will put a floor under gas prices, he says, and that will protect drillers, producers–and the country–from painful boom-and-bust cycles.
That last line about “getting a floor under gas prices, and protecting the country from painful boom and bust cycles” is especially revealing in that it acknowledges both what Rogers insists players like KMEP must already know, namely, that they’re banking on the perception that the boom will last even in the face of clear evidence that it won’t, and that they’re more than willing to appeal, however indirectly to patriotism, national security—and thus the fear this solicits—to advance a profit-venture. Such ventures may well afford protection to “drillers and producers,” but, as those pesky environmentalists continue to point out, at an enormous cost to the environment and human health—the sin qua non of national security.
3. What Kinder-Stiltskin Leaves Behind: What No Promise of Magic Can Repair
In the original version of Rumpelstiltskin, an imp spins straw into gold for a girl whose king has shut her up in a tower because her father—a lowly miller—has lied to the king telling him the girl has magical powers. Seeing the gold spun by the imp—and thinking it magic belonging to the girl, the king demands more and more.
In my version, the imp—Kinder-Stiltskin—turns straw not into gold, but rather “gold,” by convincing the king that the environment—the shale—can spin resources into reserves for an endless supply, and quieting lowly investors with dividends sufficient that they’ll not notice, for example, the deterioration of their water and air, or the despoiling of their lands. After all, the king can always point out, the lowly investors wanted “gold,” depend on “gold,” and now have “gold.” It would therefore be unseemly for them to raise a ruckus over the “girl” environment put to service to extract it. Indeed, the king may even know of the imp who has exploited the “girl,” taken everything she has in collusion with the king, and left her in the end bereft, but can only determine that the desire for the “gold” is so great that the cost is worth it.
As Eric de Place reports, however, in April 2012, that cost may be far greater than the environment can endure. “Gold” for Kinder-Stiltskin represents not merely shale but every extractible fossil fuel exportable. KMEP, for example, “is planning to export millions of tons of coal to Asia from an Oregon port on the Columbia River,” and claims great expertise in such ventures having coal export facilities in Virginia, South Carolina, and Louisiana. And that, argues de Place, is just the problem:
- The truth is that Kinder Morgan’s existing coal export operations are well known for blighting neighborhoods and fouling rivers. In fact, the company’s track record in the Northwest and beyond is one of pollution, law-breaking, and cover-ups.
- In Louisiana, Kinder Morgan’s coal export facilities are so dirty that satellite photos clearly show coal dust pollution spewing into the Mississippi River.
- In South Carolina, coal dust from Kinder Morgan’s terminal contaminates oysters, pilings, and boats. Locals have even caught the company on video washing coal directly into sensitive waterways.
- In Virginia, Kinder Morgan’s coal export terminal is an open sore on the neighborhood, coating nearby homes in dust so frequently that even the mayor is speaking out about the problem.
- In Portland, Kinder Morgan officials bribed a ship captain to illegally dump contaminated material at sea, and their operations have repeatedly polluted the Willamette River.
- Kinder Morgan has been fined by the US government for stealing coal from customer’s stockpiles, lying to air pollution regulators, illegally mixing hazardous waste into gasoline, and many other crimes.
- Kinder Morgan’s pipelines are plagued by leaks and explosions, including two large dangerous spills in residential neighborhoods in British Columbia.
Just to provide a sample of the cases de Place surveys:
Kinder Morgan’s operations in Portland, Oregon, have been home to pollution, law- breaking, and even bribery. In one incident, Kinder Morgan illegally dumped contaminated potassium chloride into the Pacific Ocean rather than pay landfill charges to dispose of it properly. In 2003, according to dockworkers, company officials bribed a ship captain $1,100 to haul 159 tons of the fertilizer component out to sea and dump it. Nearly five years later, Kinder Morgan finally pled guilty to violating the Ocean Dumping Act and settled with the US Attorney’s Office, agreeing to pay $240,000. Previously, in response to a lawsuit against the company for its poor handling of soda ash in Portland, Kinder Morgan agreed in 2004 to pay $75,000 for spills and to prevent its soda ash from continuing to pollute the Willamette River.36 But problems continue. In July 2011, state officials levied a $10,400 fine for a spill at Kinder Morgan’s port site, in which a fueling vessel spilled 125 gallons of marine fuel into the Willamette River. Then in October 2011, the US Coast Guard investigated a mysterious oil spill and fish die-off at Kinder Morgan’s soda ash facility; state officials say it was the deadliest fish kill on the lower Willamette in nearly a decade.
In 2010, the federal government fined Kinder Morgan $1 million for repeatedly violating the Clean Air Act at its Port Manatee Terminal in Florida. The US Department of Justice found that, among other crimes, Kinder Morgan managers lied in permit applications, stating that the company would control its pollution when they knew the control equipment was not being operated nor even maintained properly.
The most tragic Kinder Morgan mishap occurred in November 2004 when an excavator ruptured a high-pressure oil pipeline in the town of Walnut Creek, California. A welding torch then ignited the fuel, and five workers were killed as the pipeline erupted in a fiery explosion. A Kinder Morgan subsidiary was subsequently convicted of six felony counts related to the Walnut Creek explosion and ordered to pay $15 million in fines.
More recently, in May 2011, the US Pipeline and Hazardous Materials Safety Administration announced a proposed $425,000 fine against Kinder Morgan for safety violations, following a federal investigation into Kinder Morgan spilling 8,600 of “hazardous liquid” in New Jersey. Then in December 2011, a two-year-old Kinder Morgan natural gas pipeline leaked in Ohio, spewing 127,000 cubic feet of natural gas and forcing nearby residents to evacuate their homes.
These are not arguments; they are facts. It doesn’t matter, moreover, where they occur. What they illustrate is a pattern that solicits far more than a Kinder-Stiltskin who qualifies as an “imp.” An imp is simply a selfish child with a penchant for cruelty. Kinder-Stiltskin is a genocidal profiteer whose vision of power is not merely environmentally exploitive but takes us all the way back to Francis’ Bacon’s images of a nature depicted as a female whose “secrets” must be forcibly appropriated and commodified.
Kinder-Stiltskin, in other words, is not an imp, but an assailant willing to commit rape to insure his MLP continues to grow. Like the imp, Kinder-Stiltskin is willing to lie to get what he wants. For example, although KMEP insists that it does not make political contributions, Kinder-Stiltskin and his wife clearly do:
Richard Kinder seems to focus his political contributions on unregulated “soft money” giving nearly half a million dollars to the Republican National State Elections Committee since 2001. He also contributed over $250,000 to Political Actions Committees (PACs) and an additional $90,000 in “joint fundraising contributions” for Republican candidates. His wife, Nancy Kinder, donated over $90,000 to the National Republican Senatorial Committee, and since 2001 she has contributed over $340,000 to Republican candidates and PACs, plus more than $80,000 in joint fundraising contributions.64 Richard and Nancy Kinder were also major financial supporters of George W. Bush, raising well over $1 million for his two presidential candidacies.
It is no wonder that the prospect of the Tennessee Gas Pipeline meets with deeply committed resistance from the people who are already feeling the effects of its clear-cutting of old growth forest, and the threat KMEP poses to essential public resources in the Delaware River Basin. Organizers like Maya K. van Rossem from the Delaware River Keeper (Delaware Riverkeeper),and so many others see is that there is no magic that can turn the extraction of fossil fuels into gold without turning our environment to rubble, our bodies into the casualties of global competition for dwindling resources, and our futures into a mausoleum of what was once not merely a planet, but a home.
We take up peaceful nonviolent resistance all the while Kinder-Stiltskin cozies up to Royal Dutch Shell to export LNG to the global marketplace (http://seekingalpha.com/article/1138871-shell-joins-kinder-morgan-to-export-lng-from-the-u-s.).
There is unyielding violence in this.
But it is not among those of us willing to tree-sit to prevent the chainsaws from destroying a hundred years of Hemlocks.
No, the sanction for violence lay in Francis Bacon’s (and John Locke before him) blithe insistence that we can treat nonhuman nature just as some men have treated women—as resources whose value is calculable as exchange, as something that can be owned, traded, discarded, and killed without remorse and without conscience.
That we have institutionalized this violence such that the Kinder-Stiltskins of the world can commit the sorts of callous and mercenary crimes de Place chronicles without meaningful penalty—such that KMEP can simply write off the loss of human and nonhuman life to the cost of doing business—indicates not that our fundamental social and economic institutions stand in need of correction, but rather that they stand in need of a revolution—one whose magic doesn’t traffic in the fakery of profiteering charlatans, but allows us to see that the beauty in the Hemlock is immeasurably greater than its obstacle to the pipeline.
The irony, of course, is that at the end of at least one version of Rumpelstiltskin, the imp becomes so angered by his failure to secure for himself the only thing the girl–now queen–loved, her child, that he splits himself in two and self-destructs. We could only be so lucky with KMEP. But unfortunately, “splitting themselves in two” or three or a hundred smaller entities is all just part of the “magic” spun by Fracking-Stiltskin that keeps us from ever knowing who it was that polluted our air and poisoned our water.
For the committed activists of Stop the Tennessee Pipeline what becomes split in two is all too palpable, all to real.
It is the trees.