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

Between 2006 and 2015, the power world was turned upside-down by an epic development in the oil industry few had foreseen. From the low-toned item, in 2006, where reference is imported 60% of world oil, the US became an oil powerhouse- overshadowing both Saudi Arabia and Russia- and following the adjournment of 2015, was the world’s largest creator of natural gas.

This remarkable transformation was brought about by American entrepreneurs who figured out how to literally push open rock-and-rolls often more than a mile below the surface of the earth, to produce gas, and then oil. Those boulders- announced shale, generator rock-and-roll or close-fisted boulder, 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 gushed into the earth at a high enough pressure to crack open hydrocarbon-bearing rocks, while a so-called proppant, generally sand, includes 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 ardour 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 per day, according to the US Energy Information Administration. The Marcellus Shale, which elongates 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 era 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 would have been inconceivable in the pre-2 014 macrocosm 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, including information 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 countries, including national park, to drilling in order to ensure” energy dominance “.

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

But the shale success fib practically 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 prophecies about America’s future as an oil and gas giant. The fracking of lubricant, including with regard to, remains on a fiscal foundation that is far less secure than most people realise.

Because so few fracking companies actually make money, the most vital ingredient in fracking isn’t compounds, but capital, with firms 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 argument that the Federal Reserve is entirely responsible for the fracking thunder ,” one private-equity titan “ve been told”. 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 era of unprecedentedly low interest rates it heralded in ,” he wrote in a recent report. Another investor employed it this course:” If companionships were forced to live within the cash flow they raise, 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 change 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 manufacture has been more resilient than anyone would have dreamed. But questions about the sustainability of the thunder are no longer limited to a small set of skeptics. Those disbeliefs 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 boom has been fuelled predominantly 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 produce into a colossus. For a brief moment in biography, he most represented US fracking to the world. No one was more right and more wrong , no one bolder in his prophecies or most spectacular in his loss , no one more willing to risk other people’s fund and his own, than McClendon; or, as one banker who knew McClendon well made it:” The macrocosm moves when people who like risk take action .”

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

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

McClendon’s death, like his gift, was fiercely raced. 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 quickening, wasn’t wearing a seatbelt, and didn’t appear to make any effort to avoid the collision. Only one day earlier, a federal magnificent jury had indicted him for transgressing antitrust principles during his time as the CEO of Chesapeake Energy. Investigators ultimately 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 tumble 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, solicitors will continue to be bickering over the remains of his estate 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 funds that invest in distressed obligation- had sunken, buying the debt for less than 50 cents on the dollar, essentially yielding a judgment that the claims wouldn’t be paid in full. If McClendon did die smash, it wouldn’t have been out of character. During his times as an oil and gas tycoon, he fed on gamble, and was as fearless as he was reckless. He improved an territory that at one point induced more gas than any American corporation 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 region today. Floors abounded about how, at manufacture conferences, executives from oil majors like Exxon would find themselves speaking to principally empty fannies, while people literally fought for space in the area where McClendon was viewing 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 reproduction, with a company that will never be replicated .”

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


In the darkest days of the collapse of oil prices in the mid-1 980 s, McClendon, as ever undeterred, appreciated an opportunity in assemble 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 opening, America is almost unique, because it is one of the few countries where private 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 follower”- those individuals who negotiates the leases that allow for drilling. That, it turned out, would attain him the perfect party for the new world of fracking, which is not so much about observing 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 engineers were the important people- but it dawned on me pretty early that all their fancy intuitions aren’t worth very much if we don’t have a lease. If you’ve got the lease and I don’t, you win .”

In 1983, when McClendon was just 24 years old, he went into partnership with another Oklahoman called Tom Ward,” make deals for scraps of property 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 named 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 discrimination, most people concur, goes to a gentleman identified George Mitchell, who described on study done by the government to experiment on the Barnett Shale, an area of tight rock-and-roll in the Fort Worth basin of North Texas. Using a combination of horizontal drilling and hydraulic fracturing, Mitchell’s team cracked the system for get gas out of stone 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 uppercase to fire on all cylinders, and the founder and parent of promote capital for shale in the US is Aubrey McClendon .”

” To be able to borrow money for 10 times and ride out boom-and-bust hertzs was almost as important an insight 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 daytime 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” message, entailing 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 properties, companies and rentals. 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 humanities.” Everyone in Midland detested 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 plazas because they shut everybody else out. Their attitude was:’ We are Chesapeake, get out of our way .'”

“[ McClendon’s] aggressive style ruffled some feathers in service industries ,” Andrew Wilmot said.” He went guns 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 dishonor.” Asking me what to do with extra cash is like asking a fraternity 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 collects in the world.

To Wall Street investors, McClendon was delivering on what they required 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 inventing , 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 develop require ,'” Chesapeake’s Henry Hood said.


Back in 2003, when McClendon was just getting started, the consensus deem 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 scarcity and rising cost of gas could hurt the American economy. Greenspan recommended that the US build terminals to accept bringings of liquefied natural gas from other countries.” We meet a gale brewing on the horizon ,” said Billy Tauzin, a Republican representative from Louisiana and the then-chairman of the Energy and Commerce Committee. Such anxieties eventually facilitated 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 deflecting 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 years. He quietly financed awareness-raising campaigns called ” Coal is Filthy”, and he are of the view that altering 10% of US vehicles to run on natural gas in the next 10 times would be the fastest, cheapest way to free “the two countries ” from dependency on foreign lubricant. He was adamant that employees should drive automobiles fuelled by constricted natural gas. For a man engulf in the industry’s history of thunder and failure, McClendon had by now persuasion himself that natural gas prices would never descend. In August 2008, he is forecast that rates would stay in the$ 8-$ 9 compas 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 course, he was basically incorrect for the last 30 times .”

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

At the same time, Vladimir Putin was clearing similar gamblings. 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.” Rates of investigate, gas make and transportation are going up ,” Putin said.” It makes the industry’s development overheads will skyrocket. The era of cheap energy resources, inexpensive gas, is surely coming to an result .”

When the get got rough, McClendon had always existed by borrowing yet more money to acquire more belongings.” Simply put, low prices cure low prices as consumers are motivated to consume more and producers are compelled to produce less ,” he wrote in Chesapeake’s 1998 annual report. But he had forgotten the flipside of that manufacture banality. Time and again, in merchandise sells, high prices inspire more producers to produce, generate a surplus, that then humiliates tolls- and producers.” He was right that shale altered the nations of the world ,” said one longtime gas being.” 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 quickly exposed the feeble underbelly of US shale- its high costs and ravenous need for capital. Once-booming US production hit the skids. The so-called rig count- the number of riggings drilling for oil and gas at a given point in time- fell off 1,920 riggings in late 2014 to a low 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 merchandises research for Standard Chartered bank, wrote in a research note. By mid-2 016, US oil production had decreased during 1m barrels a day.

One after another, debt-laden firms began to declare bankruptcy, with some 200 of them eventually going bust. In each of these reports 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 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 energy giant, wrote down the value of its shale and Canadian petroleum 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 investing with Chesapeake in the Fayetteville shale and ploughed another $15 bn into the purchase of Houston-based Petrohawk. BHP made all the assets on the block in the fall of 2014, but acquired no buyers, and eventually wrote off more than$ 7bn- which begat the term” attracting a BHP “.

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

As shale companionships reduced their budgets, fracking material was idled- research firm 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 workers. 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 towns suddenly resembled their California counterparts after the gold rush. In the Cline shale east of Midland in Texas, Devon Energy lessened its rigging act and let its leases expire, quoting “a lot of variability” in the formation. In the town of Sweetwater,” aspirations are fading fast as the plummeting price of oil makes investors to back away, 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 sections and shelves its dreams .”

By nearly all histories, the shale thunder used to go bust. In early 2016 , non-investment grade energy bails- the shale industry’s rocket fuel- produced 25%, five times what they had a year and a half earlier, marking a wildly promoted stage of risk.” This has the makings of a stupendous fund crisis” for vitality fellowships, 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 assemble of analysts that due to the huge amount of obligation most business in the industry had accumulated, he couldn’t even find anything importance buying.

When Aubrey McClendon died in his auto, colliding with a concrete wall supporting an overpass at 90 mph, “its difficult to” 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 simulation for this business? It alters the nations of the world, but it ends in tears ?”

This is an revised 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 see 0330 333 6846

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