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 career- he and Ward took Chesapeake public. They did so despite the fact that their accounting firm, Arthur Andersen, had questioned a “going concern” warn, necessitating 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 spent around$ 6bn acquiring owneds, companies and leases. McClendon, who are capable of later call these times 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 husbands.” Everyone in Midland detested Chesapeake ,” one said.” They came out here when estate was leasing for $200 – $300 an acre. All of a sudden, Chesapeake was $2,000 – $3,000. They went in some good lieu since they were shut everyone else out. Their attitude was:’ We are Chesapeake, get out of our lane .'”
“[ McClendon’s] aggressive mode ruffled some featherings in service industries ,” Andrew Wilmot said.” He extended grease-guns blazing, and drove up the prices. That made some people millionaires, but it inflicted havoc on others .”
McClendon went on a corporate spending rampage that would have put today’s Silicon Valley chieftains to reproach.” Asking me what to do with extra cash is like asking a fraternity 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 manors 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 craved most: consistency and growth. His pitch was that fracking had transformed the production of gas from a hit-or-miss proposition to one that operated with an on and off switch. It was constructing , not wildcatting. He became a flag-waver for natural gas- “Mr Gas”, as Fortune magazine formerly announced him.
” Aubrey was the first one to say,’ Let’s form demand ,'” Chesapeake’s Henry Hood said.
Back in 2003, when McClendon was just getting started, the consensus vistum 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 reminded Congress during a rare appearance that the deficit and rising cost of gas could hurt the American economy. Greenspan recommended that the US build terminals to accept deliveries of liquefied natural gas from other countries.” We ascertain a cyclone brewing on the horizon ,” said Billy Tauzin, a Republican representative from Louisiana and the then-chairman of the Energy and Commerce Committee. Such frights eventually helped promoted through the Energy Policy Act of 2005, which exempted natural gas drillers from having to disclose the substances used in hydraulic fracturing, thus deflecting 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 quietly 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 acces to free the country from dependence on foreign petroleum. He was adamant that employees should drive autoes fuelled by constricted natural gas. For a humanity steeped in the industry’s history of boom and bust, McClendon had by now persuaded himself that natural gas prices would never descend. In August 2008, he predicted that rates 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 course, he was basically incorrect for the last 30 years .”
McClendon’s optimistic idea on tolls became the conventional wisdom in force markets. In 2007, the supposedly smartest investors in the world- among them Goldman Sachs and the takeover titan KKR- structured their massive $45 bn buyout of a utility called TXU in a way that was essentially a bet that natural gas costs, then around$ 7, were set to rise significantly.
At the same time, Vladimir Putin was realise same gambles. 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.” Expenditures of expedition, gas yield and transportation are going up ,” Putin said.” It makes the industry’s development payments will skyrocket. The occasion of inexpensive energy resources, inexpensive gas, is surely coming to an cease .”
When the leading get rough, McClendon had always subsisted by borrowing yet more money to acquire more owneds.” Simply introduced, low prices cure low prices as consumers are motivated to consume more and makes are compelled to produce less ,” he wrote in Chesapeake’s 1998 annual report. But he had forgotten the flipside of that industry platitude. Time and again, in stock markets, high prices foster more creators to produce, creating a surplus, that then suppresses prices- and farmers.” He was right that shale reformed the world ,” said one longtime gas person.” 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 tolls promptly exposed the weak 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 number of members of riggings drilling for oil and gas at a given 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 months of the Pennsylvania oil boom ,” Paul Hornsell, is chairman of merchandises 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 firms began to declare bankruptcy, with some 200 of them eventually starting bust. In a report released in the fall of 2016, credit rating agency 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 bust of historic amounts ,” said David Keisman, a Moody’s elderly vice-president.
Some of those who had bought assets from McClendon and others in the heyday likewise began to write down the value of what they had bought. Statoil, the Norwegian energy giant, wrote down the value of its shale and Canadian oil sand assets by$ 4bn; Royal Dutch Shell reported a write-down of more than$ 8bn. Most prominent was Australia’s BHP Billiton, which had spent$ 5bn vesting with Chesapeake in the Fayetteville shale and ploughed another $15 bn into the purchase of Houston-based Petrohawk. BHP gave all the resources on the block in the fall of 2014, but ascertained no buyers, and eventually wrote off more than$ 7bn- which begat the motto” gathering a BHP “.
As one investor introduced it:” All of the acquisitions of shale resources done by the majors and by international fellowships ought to have cataclysms. The wildcatters made a lot of money, but the companies haven’t .”
As shale fellowships slashed their own budgets, fracking gear was idled- study house 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 craftsmen. All told, the global oil and gas industry shed almost half a million jobs during the bust, according to consulting firm Graves& Co.
The shale boom town suddenly resembled their California equivalents after the gold rush. In the Cline shale east of Midland in Texas, Devon Energy decreased its rig task and give its leases expire, quoting “a lot of variability” in the formation. In the town of Sweetwater,” passions are fading fast as the plummeting oil prices generates investors to back out, cutting off the projects that were supposed to pay for a bright brand-new future ,” wrote the Associated Press in early 2015.” Now the town of 11,000 awaits layoffs and budget slashes and shelves its dreams .”
By nearly all accounts, the shale boom used to go failure. In early 2016 , non-investment grade energy bonds- the shale industry’s rocket fuel- furnished 25%, five times what they had a year and a half earlier, marking a wildly heightened rank of gamble.” This has the makings of a gargantuan funding crisis” for vigor business, 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 concluded 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 congregate of analysts that due to the huge amount of debt most corporations in the industry had accumulated, he couldn’t even find anything worth 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 age. As the Australian hedge fund administrator John Hempton asked:” Is Chesapeake the prototype for this business? It reforms 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 guardianbookshop.com or label 0330 333 6846
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