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

Between 2006 and 2015, the power macrocosm was turned upside-down by an epic development in the oil industry few had foreseen. From the low-toned point, in 2006, where reference is 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 brought about by American entrepreneurs who figured out how to literally oblige open rock-and-rolls often more than a mile below “the earths surface”, to produce gas, and then oil. Those stones- announced shale, informant rock or tight rock, and once thought to be impermeable- were opened by combining two technologies: 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 boulders, while a so-called proppant, often sand, harbours the boulders 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 burn 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 oil thunder. This time, it is expected to reach almost 11 m barrels a day, according to the US Energy Information Administration. The Marcellus Shale, which unfolds through northern Appalachia, could be the second-largest natural gas field in the nations of 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 vitality 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 situation “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 given to” vigor sovereignty”, although the country had in fact become more and more dependent, including information 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 territories, including national parks, to drilling in order to ensure” energy dominance “.

” We’ve got underneath us more lubricant than anybody, and nothing 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 wealth that the United Government has under its hoof, but that China doesn’t have and that other countries don’t have, we can’t exploit .”

But the shale success narration virtually 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 predictions about America’s future as an oil and gas giant. The fracking of petroleum, in particular, remains on a financial foundation that is far less secure than most people realise.

Because so few fracking companionships actually make money, the most vital ingredient in fracking isn’t compounds, but uppercase, with corporations 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 told me. That opinion is repetition by Amir Azar, a fellow at Columbia University’s Center on Global Energy Policy.” The real catalyst of the shale revolution was the 2008 financial crisis and the period of unprecedentedly low interest rates it led in ,” he made in a recent report. Another investor put it this path:” If companies were forced to live within the cash flow they make, 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 the financial fragility of the fracking revolution have stewed for some time. John Hempton, who runs the Australia-based hedge fund Bronte Capital, recollects having debates with his partner as the thunder was just getting leading.” 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 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 fellowships themselves. The fracking boom has been fuelled principally by overheated investment capital , not by cash flow.

If the story of the fracking thunder has a central character, it’s Aubrey McClendon, the founder of Chesapeake Energy, a startup that raise into a colossus. For a brief moment in history, he most represented US fracking to the world. No one was more right and more incorrect , no one bolder in his prophecies or most spectacular in his lacks , no one more willing to risk other people’s money and his own, than McClendon; or, as one banker who knew McClendon well applied it:” The world-wide moves when people who like threat taken any steps .”

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

Fracking
Fracking tycoon Aubrey McClendon, who was killed in a auto disintegrate in 2016. Photograph: Layne Murdoch/ NBAE/ Getty Images

McClendon’s death, like his legacy, was heatedly struggled. 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 rapidity, wasn’t wearing a seatbelt, and didn’t seem to make any effort to avoid the collision. Just one day earlier, a federal grand jury had indicted him for infringing antitrust principles during his time as the CEO of Chesapeake Energy. Investigators eventually regulated his death an accident, but rumours 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 tumble of 2008, Forbes had graded 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 lends with personal assures, lawyers were still disputing over the remaining his manor two years after his death, trying to figure out which obligations 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 fund that invest in distressed debt- had tumbled, buying the debt for less than 50 cents on the dollar, virtually 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 peril, and was as fearless as he was reckless. He constructed an empire that at one point grew more gas than any American corporation except ExxonMobil. Once, when overseas investors asked on a conference call,” When is enough ?”, McClendon reacted 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 residence today. Tales bristled about how, at manufacture meetings, executives from petroleum majors like Exxon would find themselves speaking to chiefly empty sits, while parties literally fought for space in the room where McClendon was deeming 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 spring of 2013.” There was a period of time that will never be duplicated, with a company that will never be replicated .”

” America’s Most Reckless Billionaire ,” Forbes once called McClendon, and for numerous in the industry, that headline defined the man. But if it was a con, he was conning himself, very. Because he guessed. He was, in many ways, the personification of a transformation that has changed the face of not just the oil and gas industries, but of geopolitics as well.


In the darkest periods of the collapse of oil prices in the mid-1 980 s, McClendon, as ever undeterred, met good opportunities in gather packets of drilling rights- for gas , not lubricant- 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 governments, own the mineral rights under their dimensions. 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 male”- the person who negotiates the leases that allow for drilling. That, it turned out, would prepare him the perfect person for the new world of fracking, which is not so much about discovering the single gusher as it is about making the rights to drill multiple holes.” Landmen were always the stepchild of the industry ,” he later told Rolling Stone.” Geologists and technologists were its most important guys- but it dawned on me fairly early that all their fancy ideas 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 partnership with another Oklahoman identified Tom Ward,” make slews for scraps of region in Oklahoma, faxing each other in the middle of the night ,” Ward said to Rolling Stone. Six years later, the two worded Chesapeake Energy, which was appointed after the beloved inlet where McClendon’s clas vacationed. They seeded it with a $50,000 investment.

Neither Ward nor McClendon were technological innovators. That separation, most people agree, is applicable to a mortal referred George Mitchell, who drew on research done by the government to experiment on the Barnett Shale, an area 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, capital is to the oil and gas business ,” said Andrew Wilmot, a Dallas-based consolidations and buys adviser to the oil and gas industry at Purposed Ventures.” This industry needs capital to fire on all cylinders, and the founder and papa of parent 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 insight as horizontal drilling ,” McClendon, with typical immodesty, said to Rolling Stone.

A
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 facts of the case that their accounting conglomerate, Arthur Andersen, had problem a “going concern” advise, symbolizing its bean-counters worried that Chesapeake might go out of business. So McClendon and Ward simply switched 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 wasted around$ 6bn acquiring belongings, corporations and rentals. McClendon, who are able later call these times 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 men.” Everyone in Midland hated Chesapeake ,” one said.” They came out here when ground was leasing for $200 – $300 an acre. All of a sudden, Chesapeake was paying $2,000 – $3,000. They got in some good homes since they were slammed everyone else out. Their attitude was:’ We are Chesapeake, get out of our acces .'”

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

McClendon went on a corporate expend 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 manors and resorts in Oklahoma, Bermuda, Maui, Vail, on Lake Michigan, and even in Minnesota. He had one of the best wine collectings in the world.

To Wall Street investors, McClendon was delivering on what they missed 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 create 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 alerted 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 realise a commotion 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 exempted natural gas drillers from having to disclose the chemicals used 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-place more than 100 times. He calmly financed awareness-raising campaigns called ” Coal is Filthy”, and he argued that altering 10% of US vehicles to run on natural gas in the next 10 times would be the fastest, cheapest route to free the country from dependence on foreign petroleum. He was adamant that employees should drive automobiles fuelled by constricted natural gas. For a being immersed in the industry’s history of boom and failure, McClendon had by now persuasion himself that natural gas tolls would never fall. In August 2008, he predicted that rates would stay in the$ 8-$ 9 scope for the foreseeable future.” He had a very, 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 years .”

McClendon’s optimistic vistum on tolls became the conventional wisdom in intensity sells. In 2007, the supposedly smartest investors in the nations of the world- among them Goldman Sachs and the takeover 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 stimulating similar gamblings. In an attempt to set up a cartel for gas, the Russian premier hosted a group of gas-producing districts, including Algeria, Iran, and Venezuela, in Moscow. The US was not among them.” Expenses of expedition, gas production and transport are going up ,” Putin said.” It represents the industry’s development expenditures will skyrocket. The day of cheap energy resources, inexpensive gas, is surely coming to an extremity .”

When the becoming get rough, McClendon had always lived by borrowing yet more money to acquire more dimensions.” Simply gave, 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 marketplaces, high prices inspire more producers to produce, generate a surplus, that then mashes prices- and farmers.” He was right that shale modified the nations of the world ,” said one longtime gas human.” 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 speedily disclosed the strong underbelly of US shale- its high costs and ravenous need for capital. Once-booming US production stumbled the skids. The so-called rig count- the number of members of riggings drilling for oil and gas at a given point in time- fell from 1,920 riggings in late 2014 to a low-grade of 480 in early 2016.” We think it likely that to find a lower level of pleasure would require going back to the 1860 s, the early part of the Pennsylvania oil boom ,” Paul Hornsell, head 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 companionships began to declare bankruptcy, with some 200 of them eventually becoming 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 insolvencies, 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 also began to write down the value of what they had obtained. Statoil, the Norwegian energy giant, wrote down the best interest of the its shale and Canadian petroleum sands assets by$ 4bn; Royal Dutch Shell reported a write-down of more than$ 8bn. More prominent was Australia’s BHP Billiton, which had wasted$ 5bn endowing with Chesapeake in the Fayetteville shale and ploughed another $15 bn into the purchase of Houston-based Petrohawk. BHP set all the resources on the block in the fall of 2014, but learnt no buyers, and eventually made off more than$ 7bn- which begat the motto” pulling a BHP “.

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

As shale fellowships slashed its own budget, fracking equipment was idled- study firm IHS Markit reported in 2016 that close to 60% of the fracking material in the US was inactive. Shale companies and oilfield service companies laid off craftsmen. All told, the world oil and gas industry molted almost half a million jobs during the bust, according to consulting firm 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 abridged its rigging work and give its rentals expire, citing “a lot of variability” in the formation. In the town of Sweetwater,” aspirations are fading rapidly as the plummeting price of oil justifications investors to pull away, cutting off the projects that were supposed to pay for a bright new future ,” copied the Associated Press in early 2015.” Now the town of 11,000 awaits layoffs and budget gashes and shelves its dreamings .”

By nearly all reports, the shale thunder used to go failure. In early 2016 , non-investment grade energy attachments- the shale industry’s rocket fuel- furnished 25%, five times what they had a year and a half earlier, expressing a wildly heightened rank of danger.” This has the makings of a gigantic fund crisis” for energy firms, William Snyder, the head of Deloitte’s US restructuring unit, told the Wall Street Journal in early 2016. That outpouring, 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 convene of commentators 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 auto, 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 director John Hempton asked:” Is Chesapeake the pattern for this business? It reforms 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 bawl 0330 333 6846

* Follow the Long Read on Twitter at @gdnlongread, or sign up to the long read weekly email here.

LEAVE A REPLY

Please enter your comment!
Please enter your name here