The long speak: The wildernes narration of Americas energy revolution, and the cowboy who made and lost billions on shale

Between 2006 and 2015, the energy world was turned upside-down by an epic development in the oil industry few had foreseen. From the low object, in 2006, when it imported 60% of world oil, the US became an oil powerhouse- overshadowing both Saudi Arabia and Russia- and by the end of 2015, was the world’s largest creator of natural gas.

This remarkable transformation was come about by American entrepreneurs who figured out how to literally coerce open boulders often more than a mile below the face of the earth, to produce gas, and then oil. Those rocks- announced shale, root rock-and-roll or tight stone, and formerly believe to be impermeable- were opened by combining two engineerings: horizontal drilling, in which the drill bit can travel more than two miles horizontally, and hydraulic fracturing, in which fluid is run into the earth at a high enough pressure to crack open hydrocarbon-bearing boulders, while a so-called proppant, frequently sand, includes the boulders open a fragment of an inch so the hydrocarbons can flow. A fracking entrepreneur likens the process to creating hallways in an office building that has none- and then calling a ardor drill.

In November 2017, US production topped the 10 m barrel-a-day record set in 1970, back in the last gasp of the famed petroleum thunder. This year, it is expected to reach almost 11 m barrels a day, according to the US Energy Information Administration. The Marcellus Shale, which pulls through northern Appalachia, could be the second-largest natural gas field in the world, according to geologists at Penn State. Shale gas now accounts for more than half of total US production, according to the EIA, up from almost nothing a decade ago.

The apparent new epoch of American intensity abundance has already had a profound impact around the world. Economy that were dependent on the high price of oil, from Russia to Saudi Arabia, have begun to struggle. The statu would therefore be unbelievable in the pre-2 014 world of $100 -a-barrel oil, and is playing out in strange and unpredictable ways.

Since the 1970 s, US chairmen from Gerald Ford to both Bushes emphasised the importance of” vigour independence”, although the country had in fact become more and more dependent, particularly on the Countries of the middle east. Under the Trump administration, the longstanding dream of America’s energy independence has taken a grander, more muscular turn. Secretary of the interior Ryan Zinke talks about opening more federal properties, including national parks, to drilling in order to ensure” energy dominance “.

” We’ve got underneath us more petroleum than anybody, and none knew it until five years ago ,” Trump told the press aboard Air Force One in the summer of 2017.” And I want to use it. And I don’t want that taken away by the Paris accord. I don’t want them to say all of that opulence that the United State has under its paw, but that China doesn’t have and that other countries don’t have, we can’t use .”

But the shale success narrative nearly became a disaster. While to date, most of the complaints about fracking have focused on environmental concerns, there’s a bigger and far less well known reason to doubt the most breathless prognosis about America’s future as an oil and gas giant. The fracking of petroleum, in particular, rests on a financial foundation that is far less secure than most people realise.

Because so few fracking corporations actually make money, the most vital ingredient in fracking isn’t compounds, but uppercase, with fellowships relying on Wall Street’s willingness to fund them. If it weren’t for historically low interest rates, it’s not clear there would even have been a fracking boom at all.

‘You can make an argument that the Federal Reserve is entirely responsible for the fracking thunder ,” one private-equity titan “ve been told”. That judgment is resembled by Amir Azar, a fellow at Columbia University’s Center on Global Energy Policy.” The real catalyst of the shale change was the 2008 financial crisis and the epoch of unprecedentedly low interest rates it led in ,” he wrote in a recent report. Another investor gave it this road:” If corporations were forced to live within the cash flow they create, US oil would not be a factor in the rest of the world, and would have grown at a one-quarter to half the rate that it has .”

Worries about the financial fragility of the fracking change have stewed for some time. John Hempton, who runs the Australia-based hedge fund Bronte Capital, recollects having debates with his partner as the boom was just getting croaking.” The oil and gas are real ,” his partner would say. “Yes,” Hempton would respond,” but the economics don’t work .”

Thus far, the fracking manufacture has been more resilient than anyone would have dreamed. But questions about the sustainability of the boom are no longer limited to a small set of skeptics. Those indecisions now extend to the boardrooms of some big investors, as well as to the executive suites of at least a few of the fracking companies themselves. The fracking thunder has been fuelled mostly by overheated investment capital , not by cash flow.

If the story of the fracking boom has a central character, it’s Aubrey McClendon, the founder of Chesapeake Energy, a startup that arise into a colossus. For a brief moment in record, he most represented US fracking to the world. No one was more right and more wrong , no one bolder in his predictions or more spectacular in his downfalls , no one more willing to risk other people’s coin and his own, than McClendon; or, as one banker who knew McClendon well placed it:” The nature moves when people who like threat taken any steps .”

” He was the good face of the industry- the passion, the originality, the adventurou ,” another former investment banker told me.” But he was also the bad face .” And that duality shapes him a perfect incarnation of the US fracking revolution.

Fracking financier Aubrey McClendon, who was killed in a vehicle crash in 2016. Photograph: Layne Murdoch/ NBAE/ Getty Images

McClendon’s death, like his legacy, was fiercely raced. On 2 March 2016, just after 9am, McClendon slammed his Chevrolet Tahoe SUV into a concrete viaduct under a connection on Midwest Boulevard in Oklahoma City, and died instantly. He was rushing, wasn’t wearing a seatbelt, and didn’t appear to make any effort to avoid the collision. Just one day earlier, a federal splendid jury had accused him for violating antitrust statutes during his time as the CEO of Chesapeake Energy. Investigators ultimately ruled his death an accident, but rumors of suicide persist to this day. As Capt Paco Balderrama of the Oklahoma City police told the press:” We may never know 100% whatever happens .”

In the descend of 2008, Forbes had ranked McClendon No 134 on its list of the 400 richest Americans, with an estimated net worth of more than$ 3bn. But because he borrowed so much money and secured business loans with personal guarantees, lawyers should continue to be disputing over the remaining his owned two years after his death, trying to figure out which indebtedness would be paid- from the $500,000 he owed the Boy scout of America to the $ 465 m he owed a group of Wall Street creditors, including Goldman Sachs. Wall Street’s vultures- the hedge funds that invest in distressed obligation- had descended, buying the debt for less than 50 pennies on the dollar, basically rendering a judgment that the claims wouldn’t be paid in full. If McClendon did die interruption, it wouldn’t have been out of character. During his years as an oil and gas tycoon, he fed on danger, and was as fearless as he was reckless. He built an territory that at one point produced more gas than any American company except ExxonMobil. Once, when an investor questioned on a conference call,” When is enough ?”, McClendon refuted bluntly:” I can’t get enough .”

Many think that without McClendon’s salesmanship and his astonishing ability to woo investors, the world would be a far different neighbourhood today. Fibs abound about how, at manufacture meetings, administrations from oil majors like Exxon would find themselves are talking about primarily empty sets, while beings literally fought for space in the room where McClendon was comprising forth.” In retrospect, it was kind of like Camelot ,” said Henry Hood, Chesapeake’s former general counsel, “whos working” at the company, initially as the expert consultants, from 1993 until the outpouring of 2013.” There was a period of time that will never be replicated, with a company that will never be replica .”

” America’s Most Reckless Billionaire ,” Forbes once called McClendon, and for numerous in service industries, that headline characterized the three men. But if it was a con, he was conning himself, too. Because he belief. He was, in many ways, the personification of a transformation that has changed the face of not only the oil and gas industries, but of geopolitics as well.

In the darkest epoches of the collapse of oil prices in the mid-1 980 s, McClendon, as ever undeterred, assured an opportunity in meet containers of drilling rights- for gas , not petroleum- either to be sold to bigger companies or to be drilled. In the mere existence of that possibility, America is almost unique, because it is one of the few countries where private citizens, rather than authorities, own the mineral rights under their owneds. In guild to drill, you just have to persuade someone to give you a lease. McClendon became what’s known in the oil and gas business as a” property husband”- those individuals who negotiates the leases that allow for drilling. That, it turned out, would establish him the perfect being for the new world of fracking, which is not so much about determining the single gusher as it is about making the rights to drill multiple shafts.” Landmen were always the stepchild of the industry ,” he later told Rolling Stone.” Geologists and designers were the important guys- but it dawned on me jolly early that all their fancy thoughts aren’t worth very much if we don’t have a lease. If you’ve got the lease and I don’t, you triumph .”

In 1983, when McClendon was just 24 years old, he went into partnership with another Oklahoman appointed Tom Ward,” doing slews for scraps of territory in Oklahoma, faxing each other in the middle of the darknes ,” Ward said to Rolling Stone. Six years later, the two worded Chesapeake Energy, which was mentioned after the beloved bay where McClendon’s clas vacationed. They seeded it with a $50,000 investment.

Neither Ward nor McClendon were technological colonists. That discrimination, most people agree, goes to a guy identified George Mitchell, who gleaned on experiment done by the government to experiment on the Barnett Shale, a zone of tight rock in the Fort Worth basin of North Texas. Using a combination of horizontal drilling and hydraulic fracturing, Mitchell’s team cracked the system for going gas out of rock-and-roll that was thought to be impermeable.

” As oxygen is to life, uppercase is to the oil and gas business ,” said Andrew Wilmot, a Dallas-based unitings and buys consultant to the oil and gas industry at Purposed Ventures.” This industry needs uppercase to fire on all cylinders, and the founder and father of grow capital for shale in the US is Aubrey McClendon .”

” To be able to borrow money for 10 years and ride out boom-and-bust rounds was almost as important an penetration as horizontal drilling ,” McClendon, with usual immodesty, said to Rolling Stone.

A fracking locate in Texas in 2017. Photograph: Bloomberg via Getty

On 12 February 1993- a day McClendon would later describe as the best of his busines- he and Ward took Chesapeake public. They did so despite the fact that their accounting conglomerate, Arthur Andersen, had questioned a “going concern” tell, symbolizing its bean-counters worried that Chesapeake might go out of business. So McClendon and Ward simply swopped accounting firms.” Tom and I were 33 -year-old landmen at the time, and most people didn’t think we had a clue what we were doing, and probably in hindsight they were at least partially right ,” McClendon told an interviewer in 2006.

In the decade before 2004, Chesapeake spent around$ 6bn acquiring owneds, companies and leases. McClendon, who are capable of later call these years the “the great North American land grab”, developed a reputation among his peers for overpaying. His aggressiveness didn’t endear him to the old-time oil boys.” Everyone in Midland hated Chesapeake ,” one said.” They came out here when land was leasing for $200 – $300 an acre. All of a sudden, Chesapeake was $2,000 – $3,000. They went in some good plazas since they were slammed everybody else out. Their attitude was:’ We are Chesapeake, get out of our course .'”

“[ McClendon’s] aggressive mode ruffled some feathers in the industry ,” Andrew Wilmot said.” He became guns glowing, and drove up the prices. That made some people millionaires, but it inflicted desolation on others .”

McClendon went on a corporate spend spree that would have put today’s Silicon Valley chieftains to shame.” Asking me what to do with extra cash is like asking a frat boy what to do with the brew ,” McClendon told Natural Gas Intelligence in 2005. Nor was he frugal when it came to his personal life. He acquired multimillion-dollar dwellings and resorts in Oklahoma, Bermuda, Maui, Vail, on Lake Michigan, and even in Minnesota. He had one of the best wine collections in the world.

To Wall Street investors, McClendon was delivering on what they required most: consistency and growth. His pitch was that fracking had changed the production of gas from a hit-or-miss proposition to one that operated with an on and off switch. It was manufacturing , not wildcatting. He became a flag-waver for natural gas- “Mr Gas”, as Fortune magazine once announced him.

” Aubrey was the first one to say,’ Let’s compose demand ,'” Chesapeake’s Henry Hood said.

Back in 2003, when McClendon was just getting started, the consensus thought had been that the US was running out of natural gas. It became a fixation for Alan Greenspan, the once-revered chair of the Federal Reserve, who informed Congress during a rare appearance that the famine and rising cost of gas could hurt the Us economy. Greenspan recommended that the US build terminals to accept bringings of liquefied natural gas from other countries.” We learn a tornado brewing on the horizon ,” said Billy Tauzin, a Republican representative from Louisiana and the then-chairman of the Energy and Commerce Committee. Such horrors eventually helped push through the Energy Policy Act of 2005, which exempted natural gas drillers from having to disclose the chemicals used in hydraulic fracturing, thus averting costly regulatory oversight.

As fracking took off, McClendon began telling anyone who would listen that the US had enough natural gas to last more than 100 times. He softly financed awareness-raising campaigns called ” Coal is Filthy”, and he are of the view that proselytizing 10% of US vehicles to run on natural gas in the next 10 times would be the fastest, cheapest route to free “the two countries ” from dependency on foreign oil. He was adamant that employees should drive gondolas fuelled by compressed natural gas. For a soul steeped in the industry’s history of boom and failure, McClendon had by now convinced himself that natural gas costs would never fall. In August 2008, he is forecast that costs would stay in the$ 8-$ 9 assortment for the foreseeable future.” He had a extremely, very strong point of view about gas ,” said one banker who knew him since the early 1990 s.” By the style, he was basically wrong for the last 30 years .”

McClendon’s bullish scene on rates became the conventional wisdom in vigor marketplaces. In 2007, the presumably smartest investors in the world- among them Goldman Sachs and the merger titan KKR- organized their massive $45 bn buyout of a utility announced TXU in a way that was essentially a bet that natural gas costs, then around$ 7, were set to rise significantly.

At the same time, Vladimir Putin was seeing similar bets. In an attempt to set up a cartel for gas, the Russian premier hosted a group of gas-producing countries, including Algeria, Iran, and Venezuela, in Moscow. The US was not among them.” Payments of investigate, gas product and transportation are going up ,” Putin said.” It signifies the industry’s development expenditures will soar. The occasion of cheap energy resources, cheap gas, is surely drawing to a close .”

When the departing get rough, McClendon had always survived by borrowing yet more money to acquire more dimensions.” Simply put, low prices cure low prices as consumers are motivated to consume more and farmers are compelled to produce less ,” he wrote in Chesapeake’s 1998 annual report. But he had forgotten the flipside of that industry banality. Time and again, in stock sells, high prices foster more farmers to produce, generate a surplus, that then crushes prices- and creators.” He was right that shale changed the nations of the world ,” said one longtime gas gentleman.” He should have listened to himself .”

The price of natural gas began to plunge in 2012, and in 2014, the price of oil followed suit. Falling costs quickly disclosed the strong underbelly of US shale- its high costs and devouring need for capital. Once-booming US production hit the skids. The so-called rig count- the increasing numbers of riggings drilling for oil and gas at a given point in time- fell off 1,920 riggings in late 2014 to a low-spirited of 480 in early 2016.” We think it likely that to find a lower level of act would require going back to the 1860 s, the early part of the Pennsylvania oil boom ,” Paul Hornsell, is chairman of stocks research for Standard Chartered bank, wrote in a research note. By mid-2 016, US oil production had declined by 1m barrels a day.

One after another, debt-laden business began to declare bankruptcy, with some 200 of them eventually moving bust. In a report released in the fall of 2016, credit rating agency Moody’s called the corporate casualties “catastrophic”. ” When all the data is in, including 2016 insolvencies, it may very well turn out that this oil and gas industry crisis has created a segment-wide bust of historic ratios ,” said David Keisman, a Moody’s elderly vice-president.

Some of the number of those bought assets from McClendon and others in the heyday likewise began to write down the value of what they had acquired. Statoil, the Norwegian energy giant, wrote down the added advantage of its shale and Canadian petroleum sand resources by$ 4bn; Royal Dutch Shell reported a write-down of more than$ 8bn. Most prominent was Australia’s BHP Billiton, which had expended$ 5bn endowing with Chesapeake in the Fayetteville shale and ploughed another $15 bn into the purchase of Houston-based Petrohawk. BHP placed all the resources on the block in the fall of 2014, but met no buyers, and eventually wrote off more than$ 7bn- which begat the motto” attracting a BHP “.

As one investor applied it:” All of their purchases of shale assets done by the majors and by international firms have been cataclysms. The wildcatters made a lot of coin, but the companies haven’t .”

As shale corporations slashed their budgets, fracking paraphernalium was idled- investigate conglomerate IHS Markit reported in 2016 that closely connected to 60% of the fracking material in the US was inactive. Shale companies and oilfield service companies laid off employees. All told, the world oil and gas industry shed almost half a million jobs during the bust, according to consulting firm Graves& Co.

The shale boom town abruptly resembled their California equivalents after the gold rush. In the Cline shale east of Midland in Texas, Devon Energy lessened its rig act and let its rentals expire, citing” a lot of variability” in the formation. In the city of Sweetwater,” ambitions are fading fast as the plummeting price of oil justifications investors to back away, cutting off the projects that were supposed to pay for a shining new future ,” wrote the Associated Press in early 2015.” Now the town of 11,000 awaits layoffs and budget slice and defers its dreams .”

By nearly all chronicles, the shale boom used to go bust. In early 2016 , non-investment grade energy alliances- the shale industry’s rocket fuel- produced 25%, five times what they had a year and a half earlier, indicating a wildly elevated tier of threat.” This has the makings of a gigantic fund crisis” for vitality business, William Snyder, the head of Deloitte’s US restructuring unit, told the Wall Street Journal in early 2016. That spring, the Kansas City Federal Reserve concluded that” current prices are too low for much long-term financial viability of shale oil production “.

Surveying the carnage in the spring of 2016, then ExxonMobil CEO Rex Tillerson told a rendezvou of psychoanalysts that due to the huge amount of obligation most firms in the industry had accumulated, he couldn’t even find anything importance buying.

When Aubrey McClendon been killed in his automobile, colliding with a concrete wall supporting an overpass at 90 mph, it was hard not to see his death as the punctuation marking the end of an epoch. As the Australian hedge fund director John Hempton expected:” Is Chesapeake the modeling for this business? It changes the nations of the world, but it ends in tears ?”

This is an edited extract from Saudi America by Bethany McLean, which will be published by Columbia Global Reports on 12 September. To buy it for PS9. 99, going to see or announce 0330 333 6846

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