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

Between 2006 and 2015, the vigor world was turned upside-down by an epic development in the oil industry few had foreseen. From the low place, 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 make of natural gas.

This remarkable transformation was come about by American entrepreneurs who figured out how to literally force open stones often more than a mile below the surface of the earth, to produce gas, and then oil. Those rock-and-rolls- announced shale, beginning boulder or close-fisted rock-and-roll, and once thought 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 spouted into the earth at a high enough pressure to crack open hydrocarbon-bearing stones, while a so-called proppant, typically sand, props the rock-and-rolls open a shred 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 fervor 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 oil boom. This time, it is expected to reach almost 11 m barrels a day, according to the US Energy Information Administration. The Marcellus Shale, which stretches 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 brand-new epoch of American intensity abundance has already had a profound impact around the world. Economies that were dependent on the high price of oil, from Russia to Saudi Arabia, have begun to struggle. The place “wouldve been” 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 chairwomen from Gerald Ford to both Bushes emphasised the importance of” energy 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 grounds, including national park, to drilling in order to ensure” energy dominance “.

” We’ve got underneath us more oil than anybody, and none known to 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 abundance that the United District has under its paw, but that China doesn’t have and that other countries don’t have, we can’t give .”

But the shale success storey roughly 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 oil, in particular, rests on a financial foundation that is far less secure than most people realise.

Because so few fracking fellowships actually make money, the most vital ingredient in fracking isn’t compounds, but capital, with business relying on Wall Street’s willingness to fund them. If it weren’t for historically low-toned 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 boom ,” one private-equity titan told me. That look is repetition 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 age of unprecedentedly low-spirited interest rates it heralded in ,” he wrote in a recent report. Another investor set it this lane:” If fellowships were forced to live within the cash flow they induce, US oil would not be a factor in the rest of the world, and would have grown at a quarter to half the rate that it has .”

Worries about the financial fragility of the fracking revolution have simmered 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 running.” The oil and gas are real ,” his partner would say. “Yes,” Hempton would respond,” but the economics don’t work .”

Thus far, the fracking industry 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 disbelieves now extend to the boardrooms of some big-hearted investors, as well as to the executive suites of at least a few of the fracking companies themselves. The fracking thunder has been fuelled principally 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 history, he most represented US fracking to the world. No one was more right and more wrong , no one bolder in his prophecies or more spectacular in his failings , no one more willing to risk other people’s fund and his own, than McClendon; or, as one banker who knew McClendon well introduced it:” The macrocosm moves when people who like gamble taking any decision .”

” He was the good face of service industries- the passion, the ingenuity, the audaciou ,” another former investment banker told me.” But he was also the bad face .” And that duality prepares him a perfect epitome of the US fracking revolution.

Fracking
Fracking industrialist Aubrey McClendon, who was killed in a gondola gate-crash in 2016. Photograph: Layne Murdoch/ NBAE/ Getty Images

McClendon’s death, like his bequest, was heatedly rivalry. On 2 March 2016, just after 9am, McClendon threw his Chevrolet Tahoe SUV into a concrete viaduct under a connection on Midwest Boulevard in Oklahoma City, and died instantly. He was hastening, wasn’t wearing a seatbelt, and didn’t appear to make any effort to avoid the collision. Just one day earlier, a federal magnificent jury had accused him for flouting antitrust constitutions during his time as the CEO of Chesapeake Energy. Investigators ultimately governed his death an accident, but rumors of suicide persevere to this day. As Capt Paco Balderrama of the Oklahoma City police told the press:” We may never know 100% what happened here .”

In the sink 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 acquired so much money and secured business loans with personal guarantees, lawyers will continue to be squabbling over the remains of his estate 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 debt- had tumbled, buying the debt for less than 50 cents on the dollar, virtually making a judgment that the claims wouldn’t be paid in full. If McClendon did die separate, it wouldn’t have been out of character. During his years as an oil and gas tycoon, he fed on probability, and was as fearless as he was reckless. He improved an territory that at one point rendered more gas than any American companionship except ExxonMobil. Once, when an investor requested on a conference call,” When is enough ?”, McClendon answered 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 plaza today. Narrations abounded about how, at manufacture gatherings, managers from lubricant majors like Exxon would find themselves speaking to chiefly empty tushes, while beings literally fought for space in the chamber 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 a consultant, from 1993 until the springtime of 2013.” There was a period of time that will never be repetition, with a company that will never be replication .”

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


In the darkest eras of the collapse of oil prices in the mid-1 980 s, McClendon, as ever undeterred, realise an opportunity in gather bundles of drilling rights- for gas , not oil- 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 other citizens, rather than authorities, own the mineral rights under their owneds. In ordering 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” ground boy”- the person who negotiates the leases that allow for drilling. That, it turned out, would obligate him the perfect person for the new world of fracking, which is not so much about locating the single gusher as it is about assembling the rights to drill multiple reservoirs.” Landmen were always the stepchild of the industry ,” he later told Rolling Stone.” Geologists and technologists were its most important people- but it dawned on me fairly early that all their fancy hypothesis aren’t worth much needed if we don’t have a lease. If you’ve got the lease and I don’t, you acquire .”

In 1983, when McClendon was just 24 years old, he went into partnership with another Oklahoman called Tom Ward,” do spates for scraps of land in Oklahoma, faxing each other in the middle of the night ,” Ward said to Rolling Stone. Six years later, the two structured Chesapeake Energy, which was identified after the beloved inlet where McClendon’s kinfolk vacationed. They seeded it with a $50,000 investment.

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

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

” To is the possibility of borrow money for 10 years and ride out boom-and-bust repetitions was almost as important an revelation as horizontal drilling ,” McClendon, with typical immodesty, said to Rolling Stone.

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

On 12 February 1993- a day McClendon would later describe as the best of his vocation- he and Ward took Chesapeake public. They did so despite the fact that their accounting firm, Arthur Andersen, had problem a “going concern” forewarn, entailing its bean-counters worried that Chesapeake might go out of business. So McClendon and Ward simply switched accounting houses.” 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 expended around$ 6bn acquiring belongings, companies and leases. McClendon, who would later call these years the “the great North American land grab”, developed a honour 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 country was leasing for $200 – $300 an acre. All of a sudden, Chesapeake was compensating $2,000 – $3,000. They went in some good plazas since they are shut everybody else out. Their attitude was:’ We are Chesapeake, get out of our behavior .'”

“[ McClendon’s] vigorous style ruffled some plumages in service industries ,” Andrew Wilmot said.” He became guns firing, and drove up the prices. That made some people millionaires, but it inflicted carnage on others .”

McClendon went on a corporate spending 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 son what to do with the beer ,” McClendon told Natural Gas Intelligence in 2005. Nor was he frugal when it came to his personal life. He acquired multimillion-dollar dwellings and useds in Oklahoma, Bermuda, Maui, Vail, on Lake Michigan, and even in Minnesota. He had one of the best wine accumulations 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 producing , 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 make ask ,'” Chesapeake’s Henry Hood said.


Back in 2003, when McClendon was just getting started, the consensus panorama 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 counselled Congress during a rare appearance that the dearth and rising cost of gas could hurt the Us economy. Greenspan recommended that the US build terminals to accept deliveries of liquefied natural gas from other countries.” We assure a gust brewing on the horizon ,” said Billy Tauzin, a Republican representative from Louisiana and the then-chairman of the Energy and Commerce Committee. Such suspicions eventually helped push through the Energy Policy Act of 2005, which relieved natural gas drillers from having to disclose the compounds be useful in hydraulic fracturing, thus precluding 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 years. He calmly financed awareness-raising campaigns called ” Coal is Filthy”, and he are of the view that converting 10% of US vehicles to run on natural gas in the next 10 years would be the fastest, cheapest space to free “the two countries ” from dependence on foreign oil. He was adamant that employees should drive gondolas fuelled by tightened natural gas. For a humanity engulf in the industry’s history of boom and failure, McClendon had by now persuaded himself that natural gas prices would never fall. In August 2008, he is forecast that costs would stay in the$ 8-$ 9 compas for the foreseeable future.” He had a exceedingly, very strong point of view about gas ,” said one banker who knew him since the early 1990 s.” By the room, he was basically wrong for the last 30 times .”

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

At the same time, Vladimir Putin was doing same wagers. 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.” Expenses of investigate, gas make and transport are going up ,” Putin said.” It makes the industry’s development expenditures will skyrocket. The hour of cheap energy resources, inexpensive gas, is surely drawing to a close .”

When the starting go rough, McClendon had always subsisted by borrowing yet more money to acquire more owneds.” Simply threw, low prices cure low prices as consumers are motivated to consume more and creators are compelled to produce less ,” he wrote in Chesapeake’s 1998 annual report. But he had forgotten the flipside of that industry commonplace. Time and again, in stock marketplaces, high prices encourage more makes to produce, creating a surplus, that then subdues costs- and creators.” He was right that shale reformed the nations of the world ,” said one longtime gas follower.” 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 rates speedily uncovered the weak underbelly of US shale- its high costs and devouring need for capital. Once-booming US production reached the skids. The so-called rig count- the number of rigs drilling for oil and gas at a given point in time- fell off 1,920 rigs in late 2014 to a low-toned of 480 in early 2016.” We think it likely that to find a lower level of activity would require going back to the 1860 s, the early part of the Pennsylvania oil boom ,” Paul Hornsell, is chairman of commodities 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 corporations began to declare bankruptcy, with some 200 of them eventually croaking 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 proportions ,” said David Keisman, a Moody’s elderly vice-president.

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

As one investor applied it:” All of their purchases of shale resources done by the majors and by international fellowships ought to have tragedies. The wildcatters made a lot of money, but the companies haven’t .”

As shale fellowships trounced their own budgets, fracking material was idled- experiment conglomerate IHS Markit reported in 2016 that close to 60% of the fracking paraphernalium 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 towns suddenly resembled their California counterparts after the gold rush. In the Cline shale east of Midland in Texas, Devon Energy lessened its rigging work and make its rentals expire, citing” a lot of variability” in the formation. In the town of Sweetwater,” passions are fading fast as the plummeting price of oil reasons investors to back away, cutting off the projects that were supposed to pay for a luminous brand-new future ,” wrote the Associated Press in early 2015.” Now the town of 11,000 awaits layoffs and budget slashes and defers its dreams .”

By nearly all accounts, the shale thunder used to go failure. In early 2016 , non-investment grade energy bails- the shale industry’s rocket fuel- furnished 25%, five times what they had a year and a half earlier, indicating a wildly elevated height of danger.” This has the makings of a stupendous funding crisis” for vitality corporations, William Snyder, the head of Deloitte’s US restructuring unit, told the Wall Street Journal in early 2016. That springtime, the Kansas City Federal Reserve to be acknowledged that” current prices are too low for much long-term economic viability of shale oil production “.

Surveying the carnage in the spring of 2016, then ExxonMobil CEO Rex Tillerson told a collect of psychoanalysts that due to the huge amount of indebtednes most companies in the industry had accumulated, he couldn’t even find anything merit 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 period. As the Australian hedge fund manager John Hempton asked:” Is Chesapeake the pattern for this business? It alters 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, go to guardianbookshop.com or label 0330 333 6846

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