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

Between 2006 and 2015, the vitality world was turned upside-down by an epic development in the oil industry few had foreseen. From the low-pitched level, in 2006, when it imported 60% of world oil, the US became an oil powerhouse- eclipsing both Saudi Arabia and Russia- and following the adjournment 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 oblige open rock-and-rolls often more than a mile below the surface of the earth, to produce gas, and then oil. Those rock-and-rolls- announced shale, root stone 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 pumped into the earth at a high enough pressure to crack open hydrocarbon-bearing rock-and-rolls, while a so-called proppant, usually sand, supports 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 famous 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 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 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 struggle. The statu would therefore be impossible 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 chairmen from Gerald Ford to both Bushes emphasised the importance of” vitality 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 properties, including national park, to drilling in order to ensure” energy dominance “.

” We’ve got underneath us more petroleum 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 resource that the United State has under its feet, but that China doesn’t have and that other countries don’t have, we can’t call .”

But the shale success narration nearly 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 petroleum, including with regard to, remains on a fiscal 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 chemicals, 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 told me. That opinion is resembled 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-toned interest rates it ushered in ,” he wrote in a recent report. Another investor introduced it this style:” If fellowships were forced to live within the cash flow they grow, 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, withdraws having debates with his partner as the boom was just getting becoming.” The oil and gas are real ,” his partner said here today. “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 indecisions now extend to the boardrooms of some large-scale investors, as well as to the executive suites of at least a few of the fracking corporations themselves. The fracking thunder has been fuelled mostly 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 predictions or more spectacular in his omissions , no one more willing to risk other people’s money and his own, than McClendon; or, as one banker who knew McClendon well placed it:” The world-wide moves when people who like hazard take action .”

” He was the good face of the industry- the passion, the creativity, the adventurou ,” another former investment banker told me.” But he was also the bad face .” And that duality constitutes him a perfect incarnation of the US fracking revolution.

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

McClendon’s death, like his bequest, was hotly contested. On 2 March 2016, just after 9am, McClendon slammed his Chevrolet Tahoe SUV into a concrete viaduct under a bridge on Midwest Boulevard in Oklahoma City, and died instantly. He was accelerating, wasn’t wearing a seatbelt, and didn’t appear to make any effort to avoid the collision. Just one day earlier, a federal grand jury had indicted him for flouting antitrust constitutions during his time as the CEO of Chesapeake Energy. Investigators ultimately governed 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 descent 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 borrowed so much money and secured business lends with personal guarantees, advocates will continue to be bickering over the remaining his estate two years after his death, trying to figure out which indebtedness would be paid- from the $500,000 he owed the Boy Scouts 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 indebtednes- had condescended, buying the debt for less than 50 pennies on the dollar, essentially rendering a judgment that the claims wouldn’t be paid in full. If McClendon did die stone-broke, it wouldn’t have been out of character. During his years as an oil and gas tycoon, he fed on threat, and was as fearless as he was reckless. He improved an territory that at one point produced more gas than any American companionship except ExxonMobil. Once, when overseas investors 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. Stories abound about how, at industry powwows, managers from petroleum majors like Exxon would find themselves are talking about mainly empty benches, while parties literally fought for space in the room where McClendon was bracing forth.” In retrospect, it was kind of like Camelot ,” said Henry Hood, Chesapeake’s former general counsel, “whos working” at the company, initially as the expert consultants, from 1993 until the springtime of 2013.” There was a period of time that will never be repeated, with a company that will never be replication .”

” America’s Most Reckless Billionaire ,” Forbes once announced McClendon, and for many in service industries, that headline characterized the man. But if it was a con, he was conning himself, more. Because he believed. 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 periods of the collapse of oil prices in the mid-1 980 s, McClendon, as ever undeterred, received an opportunity in assemble packets of drilling rights- for gas , not petroleum- 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 properties. In tell 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” estate man”- those individuals who negotiates the leases that allow for drilling. That, it turned out, would construct him the perfect party for the new world of fracking, which is not so much about noting 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 engineers were its most important people- but it dawned on me somewhat early that all their fancy meanings aren’t worth very much if we don’t have a lease. If you’ve got the lease and I don’t, you triumph .”

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

Neither Ward nor McClendon were technological innovators. That discrimination, most people agree, goes to a male mentioned George Mitchell, who sucked on investigate done by the government to experiment on the Barnett Shale, an area 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 system for going 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 unitings 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 papa of invoke uppercase for shale in the US is Aubrey McClendon .”

” To be able to borrow money for 10 years and ride out boom-and-bust hertzs was almost as important an penetration as horizontal drilling ,” McClendon, with usual immodesty, said to Rolling Stone.

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 or label 0330 333 6846

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