Disclosure and Investment: When Data Isn't What It Seems

by: Dennis U. Atuanya

One of the most crucial tools for making proper investment decisions is access to relevant analytical data. When such data are withheld or inappropriately manipulated, investment interests may be impaired. While such acts are not new, a sampling of three recent reports is informative:

Shale Gas

First is the case of natural gas exploitation from the shale formations (Barnett, Haynesville, Marcellus, etc) of the United States. A lot of investment capital has been ploughed into these projects but just as investors braced for a “shale gas explosion”, some analysts raised concerns about the viability of the plays.

For example, there have been concerns about the environmental impact of hydraulic fracturing or “fracing” (the extractive technolgy for shale gas) and more worrisome, the reported, steep rates of production decline (due perhaps to associated, high pressure gradients). The analysts claim that shale gas numbers may not add up and that producers have not been forthcoming with vital production data.

One of the shale gas sceptics, energy consultant Arthur Berman, is reportedly no longer published in the U.S. trade journal, World Oil, because of his strident and public dissent. The journal’s publisher reportedly said that Berman had been there for a year and it was time for him to move on. There have been (and expectedly so), investment concerns about the real cost, as well as the actual growth rate, of shale gas production.

Climate change technologies

Secondly, a substantial proportion of corporate, institutional and private investment capital has been (and is still being) channelled into the development of climate-change technologies as well as economies; and this for sustainable global development. It is estimated that about US$10.5 trillion worth of additional investment is needed between now and the year 2030 to set the world on a low-carbon development path, a target at which the current global meeting in Copenhagen aims.

The recent allegations of data manipulation (or “hoaxing”) by researchers to bolster the argument for anthropogenic climate-change must therefore be unnerving for just about any investor. Climate-change dissenters (or skeptics) are arguing that the series of leaked e-mail correspondences at the Climate Research Unit, CRU, of the University of East Anglia, United Kingdom, provide evidence of collusion among some scientists to foist climate change on the world and suppress data to the contrary. While research data from CRU reportedly corroborate those from the other acclaimed research centers (namely, National Aeronautics and Space Administration, NASA, and National Oceanic and Atmospheric Administration, NOAA, both in the United States), parts of the leaked e-mails are quite suggestive; even if technical explanations as well as the truth behind them have been adduced.

Oil reserves

Finally, just last month, it was revealed by a whistleblower that has since left the Paris-based International Energy Agency, that the United States exerted undue influence on the agency to underplay rates of production decline in extant oilfields while overplaying prospects of discovery of new reserves. While this has been denied, it does raise issues of credibility.

One rather curious observation about some victims of the Bernie Madoff scandal was that quite a number of them occupied very senior levels in major financial institutions around the world especially the United States. The implication then is that they were certainly capable of subjecting most of those fraudulent schemes to proper financial scrutiny. Many of them rather, relied on the advice of a “credible” colleague that relied on that of another, that relied on another that… According to Professor Sydney Finkelstein of Dartmouth’s Tuck Business School, such inappropriate attachment is often conducive to business failure.

During the oil price shock of 2008, oil prices were spiralling higher while the market was well-supplied with crude oil; in other words the strident price rally was against market fundamentals. There was a handful of analysts that warned of the unsustainability (and subsequent crash) of those prices; but their warnings were largely drowned out in mainstream media reportage that seemed to be hooked on a decidedly “credible” majority opinion. The subsequent global economic slump must rank as one of the most devastating in decades and from which many economies are still trying to crawl out.

Disclosure: None

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