The long read: The wild anecdote of Americas energy revolution, and the cowboy who made and lost billions on shale

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

This remarkable transformation was brought about by American entrepreneurs who figured out how to literally thrust open rock-and-rolls often more than a mile below the face of the earth, to induce gas, and then lubricant. Those boulders- announced shale, beginning rock or tight boulder, and once thought to be impermeable- were opened by compounding two technologies: horizontal drilling, in which the drill bit can walk more than two miles horizontally, and hydraulic fracturing, in which liquor is pumped into the earth at a high enough pressure to crack open hydrocarbon-bearing rock-and-rolls, while a so-called proppant, usually sand, impounds the rocks open a shred of an inch so the hydrocarbons can flow. A fracking entrepreneur likens the relevant procedures to forming hallways in an office building that has none- and then announcing a volley drill.

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

The seeming new epoch of American energy 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 fight. The statu would have been inconceivable in the pre-2 014 world of $100 -a-barrel oil, and is playing out in strange and erratic ways.

Since the 1970 s, US chairwomen from Gerald Ford to both Bushes emphasised the importance of” power liberty”, although the country had in fact become more and more dependent, particularly on 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 estates, including national parks, to drilling in order to ensure” energy predominance “.

” 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 asset that the United States has under its paws, but that China doesn’t have and that other countries don’t have, we can’t use .”

But the shale success storey practically became a disaster. While to date, the majority of members of the complaints about fracking concentrating on environmental concerns, there’s a bigger and far less well known reason to disbelieve “the worlds largest” breathless projections about America’s future as an oil and gas giant. The fracking of petroleum, including with regard to, rests on a fiscal foundation that is far less secure than most people realise.

Because so few fracking firms actually make money, the most vital part in fracking isn’t chemicals, but capital, with companies relying on Wall Street’s willingness to fund them. If it weren’t for historically low-spirited interest rates, it’s not clear there would even have been a fracking boom at all.


‘You can make an controversy that the Federal Reserve is alone responsible for the fracking boom ,” one private-equity titan told me. That attitude is echoed by Amir Azar, a friend at Columbia University’s Center on Global Energy Policy.” The real catalyst of the shale revolution was the 2008 financial crisis and the age of unprecedentedly low-grade interest rates it led in ,” he wrote in a recent report. Another investor set it this channel:” If firms were forced to live within the cash flow they render, US oil would not be a factor in the rest of the world, and would have grown at a part to half the rate that it has .”

Worries about financing of the fragility of the fracking change have simmered for some time. John Hempton, who runs the Australia-based hedge fund Bronte Capital, withdraws having debates with his partner as the thunder was simply getting proceeding.” The oil and gas are very ,” 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 ought to have been dreamed. But questions about the sustainability of the thunder “re no longer” is restricted to a small set of skeptics. Those mistrusts now extend to the boardrooms of some big investors, as well as to the executive suites of at least a few of the fracking fellowships themselves. The fracking boom 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 germinated 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 projections or most spectacular in his downfalls , no one more willing to peril other people’s fund and his own, than McClendon; or, as one banker who knew McClendon well applied it:” The world-wide moves when people who like risk take action .”

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

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

McClendon’s death, like his gift, was passionately struggled. 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 accelerating, wasn’t wearing a seatbelt, and didn’t are reported to make any effort to avoid the collision. Just one day earlier, a federal grandiose jury had accused him for flouting antitrust statutes during his time as the CEO of Chesapeake Energy. Investigates eventually governed 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% what happened .”

In the fall of 2008, Forbes had graded McClendon No 134 on its roll of the 400 richest Americans, with an estimated net worth of more than$ 3bn. But because he borrowed so much better coin and secured business loans with personal secures, advocates were still squabbling over the remains of his manor two years after his death, are seeking to figure out which debts would be paid- from the $500,000 he owed the Boy scout of America to the $ 465 m he owed groupings of Wall st. creditors, including Goldman Sachs. Wall Street’s vultures- the hedge fund that invest in disturbed debt- had descended, buying the debt for less than 50 pennies on the dollar, virtually rendering a judgment that the claims wouldn’t be paid in full. If McClendon did succumb violate, it wouldn’t have been out of reputation. During his times as an oil and gas industrialist, he fed on danger, and was as fearless as he was reckless. He built an territory that at one point rendered more gas than any American fellowship except ExxonMobil. Once, when an investor requested on a conference call,” When is enough ?”, McClendon answered bluntly:” I can’t get enough .”

Many be considered that without McClendon’s salesmanship and his astonishing they are able to woo investors, countries around the world would be a far different residence today. Tales abound about how, at manufacture powwows, managers from oil majors like Exxon would find themselves speaking to predominantly empty accommodates, while parties literally fought for opening in the chamber where McClendon was hampering forth.” In retrospect, the information was various kinds of like Camelot ,” said Henry Hood, Chesapeake’s former general counsel, who worked 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 repetition, with a company that will never be duplicated .”

” America’s Most Reckless Billionaire ,” Forbes once called McClendon, and for numerous in service industries, that headline characterized “the mens”. But if it was a con, “hes been” conning himself, very. Because he speculated. 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 high oil prices in the mid-1 980 s, McClendon, as ever undeterred, saw job opportunities in assembling bundles of drilling rights- for gas , not lubricant- either to be sold to bigger corporations or to be drilled. In the mere existence of that opening, America is almost unique, because it is one of the few countries where other citizens, rather than authorities, own the mineral rights under their dimensions. In ordering to drill, you just have to persuade someone to give you a rental. McClendon became what’s known in the oil and gas business as a” country soldier”- all individuals who negotiates the leases that allow for drilling. That, it turned out, would represent him the perfect party for the new world of fracking, which is not so much better about receiving the single gusher as it is about making the rights to drill multiple wells.” Landmen were always the stepchild of service industries ,” he subsequently told Rolling Stone.” Geologists and architects were its most important guys- but it dawned on me pretty early that all their thought opinions aren’t worth very much if we don’t have a lease. If you’ve got the lease and I don’t, you prevail .”

In 1983, when McClendon was just 24 years old, he went into collaboration with another Oklahoman mentioned Tom Ward,” doing batches for scraps of country in Oklahoma, faxing each other in the middle of the night ,” Ward said to Rolling Stone. Six years later, the two organized Chesapeake Energy, which was referred after the beloved inlet where McClendon’s family vacationed. They seeded it with a $50,000 investment.

Neither Ward nor McClendon were technological colonists. That distinction, most people concur, goes to a person appointed George Mitchell, who drew on study done by the government to experimentation on the Barnett Shale, an area of tight rock-and-roll in the Fort Worth basin of North Texas. Use a combination of horizontal drilling and hydraulic fracturing, Mitchell’s team cracked the code for going gas out of boulder 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 mergers and acquisitions consultant to the oil and gas industry at Purposed Ventures.” This industry requires capital to fire on all cylinders, and the founder and father-god of creating uppercase for shale in the US is Aubrey McClendon .”

” To be able to borrow money for 10 times and ride out boom-and-bust rounds was almost as important an revelation as horizontal drilling ,” McClendon, with typical immodesty, used to tell Rolling Stone.

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

On 12 February 1993- a era McClendon would eventually describe as the best of his job- he and Ward took Chesapeake public. They did so despite the fact that their accounting house, Arthur Andersen, had problem a “going concern” admonish, entailing its bean-counters worried that Chesapeake might go out of business. So McClendon and Ward plainly switched accounting conglomerates.” Tom and I were 33 -year-old landmen at the time, and most people didn’t think we had a evidence what we were doing, and perhaps in hindsight they were at least partially right ,” McClendon told an interviewer in 2006.

In the decade before 2004, Chesapeake expended around$ 6bn acquiring properties, companies and rentals. McClendon, who are able afterward call these years the” the great North American property grasp”, developed a honour among his peers for overpaying. His aggressiveness didn’t endeared him to the old-time petroleum humen.” Everyone in Midland hated Chesapeake ,” one said.” They came out here when estate was leasing for $200 – $300 an acre. All of a sudden, Chesapeake was compensating $2,000 – $3,000. They went in some good plazas because they shut everyone else out. Their attitude was:’ We are Chesapeake, get out of our practice .'”

“[ McClendon’s] vigorous mode ruffled some featherings in service industries ,” Andrew Wilmot said.” He led grease-guns gleaming, and drove up the prices. That made some people millionaires, but it wreaked desolation on others .”

McClendon went on a corporate spending rampage that would have put today’s Silicon Valley leaders to reproach.” Requesting me what to do with extra cash is like expecting a frat son 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 mansions and resorts in Oklahoma, Bermuda, Maui, Vail, on Lake Michigan, and even in Minnesota. He had one of the best wine-coloured collects in the world.

To Wall Street investors, McClendon was be conducted in conformity with what they craved most: consistency and proliferation. His pitching was that fracking had transformed the production of gas from a hit-or-miss proposition to one that operated with an on and off permutation. It was inventing , 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 develop expect ,'” Chesapeake’s Henry Hood said.


Back in 2003, when McClendon was simply getting started, the consensus viewpoint 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 cautioned Congress during a rare appearance that the famine and rising cost of gas could hurt the American economy. Greenspan recommended that the US build terminals to countenanced gives of liquefied natural gas from other countries.” We understand 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 fears eventually facilitated promoted through the Energy Policy Act of 2005, which exempted natural gas drillers from having to disclose the compounds used in hydraulic fracturing, thus preventing expensive regulatory oversight.

As fracking taken away from, McClendon began telling anyone who would listen that the US had enough natural gas to last more than 100 times. He quietly financed awareness-raising campaigns announced ” Coal is Filthy”, and he argued that proselytizing 10% of US vehicles to run on natural gas in the next 10 years would be the fastest, cheapest road to free the country from dependence on foreign petroleum. He was adamant that employees should drive autoes fuelled by compressed natural gas. For a mortal engulf in the industry’s history of thunder and failure, McClendon had by now reassured himself that natural gas tolls would never descend. In August 2008, he predicted that tolls would stay in the$ 8-$ 9 array 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 road, he was basically incorrect for the last 30 times .”

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

At the same time, Vladimir Putin was drawing same gambles. In an attempt to set up a cartel for gas, the Russian premier hosted groupings of gas-producing countries, including Algeria, Iran, and Venezuela, in Moscow. The US was not among them.” Expenses of journey, gas make and transport are going up ,” Putin said.” It makes the industry’s development rates will skyrocket. The epoch of cheap energy resources, inexpensive gas, is surely coming to an end .”

When the croaking went rough, McClendon had always existed by acquiring yet more fund to earn more owneds.” Simply make, low prices antidote low prices as consumers are being encouraged to ingest 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 truism. Time and again, in stock groceries, high prices foster more creators to produce, creating a surplus, that then suppresses rates- and makes.” He was right that shale changed the world ,” said one longtime gas follower.” He should have listened to himself .”


The price of natural gas initiated to dash in 2012, and in 2014, the price of oil followed suit. Descending prices quickly uncovered the strong underbelly of US shale- its high costs and ravenous would be required for capital. Once-booming US production made the skids. The so-called rigging counting- the increasing numbers of rigs drilling for oil and gas at a given time- fell from 1,920 riggings in late 2014 to a low-toned of 480 in early 2016.” We think it likely that to find a lower level of act would require “re going back to the” 1860 s, the early part of the Pennsylvania oil thunder ,” Paul Hornsell, is chairman of commodities research for Standard Chartered bank, wrote in a research document. By mid-2 016, US oil production had declined by 1m barrels a day.

One after another, debt-laden companies began to declare insolvency, with some 200 of them eventually moving bust. In each of these reports released in the fall of 2016, rating agencies Moody’s called the corporate fatalities “catastrophic”. ” When all the data is in, including 2016 bankruptcies, it may very well turn out that this oil and gas industry crisis has created a segment-wide failure of historic ratios ,” said David Keisman, a Moody’s senior vice-president.

Some of those who had bought resources from McClendon and others in the heyday too began to write down the value of what they had acquired. Statoil, the Norwegian power monster, wrote down the value of its shale and Canadian lubricant sands 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 vesting with Chesapeake in the Fayetteville shale and ploughed another $15 bn into the purchase of Houston-based Petrohawk. BHP introduced all the resources on the block in the fall of 2014, but find no customers, and eventually wrote off more than$ 7bn- which begat the term” drawing a BHP “.

As one investor threw it:” All of the acquisitions of shale assets done by the majors and by international fellowships have been tragedies. The wildcatters made a lot of coin, but the companies haven’t .”

As shale business lashed their own budgets, fracking paraphernalium was idled- experiment house IHS Markit reported in 2016 that closely connected to 60% of the fracking paraphernalium in the US was inactive. Shale companies and oilfield service companies laid off workers. All told, the world-wide oil and gas industry molted almost half a million jobs during the course of its failure, according to consulting conglomerate Graves& Co.

The shale boom town unexpectedly resembled their California counterparts after the gold rush. In the Cline shale east of Midland in Texas, Devon Energy weakened its rigging act and make its rentals expire, quoting” a lot of variability” in the formation. In the town of Sweetwater,” desires are fading fast as the plummeting price of oil stimulates investors to pull back, 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 fantasies .”

By almost all reports, the shale boom had gone bust. In early 2016 , non-investment grade vigor attachments- the shale industry’s rocket fuel- furnished 25%, five times what they had a year and a half earlier, expressing a wildly elevated rank of jeopardy.” This has the makings of a monstrous fund crisis” for power firms, William Snyder, the head of Deloitte’s US restructuring component, told the Wall Street Journal in early 2016. That springtime, 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 accumulate of psychoanalysts that due to the huge amount of indebtednes most business in service industries had accumulated, he couldn’t even find anything worth buying.

When Aubrey McClendon died in his auto, colliding with a concrete wall supporting an overpass at 90 mph, it was difficult to not to ensure his death as the punctuation marking the end of an epoch. As the Australian hedge fund administrator John Hempton requested:” Is Chesapeake the simulate for this business? It changes the world, but it ends in tears ?”

This is an edited removed 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 call 0330 333 6846

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