Asjylyn Loder at Bloomberg Businessweek has posted an article, “Junk Bonds Fuel the Shale Boom”, pointing out that the financial model underlying the boom is unsustainable.

The article notes, “S&P says that of the 97 energy exploration and production companies it grades 75 are rated below investment grade.” That’s because these companies are spending far more than they make year after year. That means they have to borrow to finance their continuing operations, using junk bonds.

Since shale gas production from any well drops sharply after the first year and keeps on dropping, the only way to keep production up is to keep on drilling ever more wells–requiring heavy ongoing investment–just to stay even.

“This is a melting ice cube business,” says Mike Kelly, an energy analyst at Global Hunter Securities in Houston. “If you’re not growing production, you’re dying.”

and Tim Gramatovich, chief investment officer of Peritus Asset Management, is quoted as concluding that the way the shale gas boom is being financed is

“a perfect setup for investors to lose a lot of money…. The model is unsustainable.”