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

Between 2006 and 2015, the vigor macrocosm was turned upside-down by an epic development in the oil industry few had foreseen. From the low-grade place, in 2006, when it imported 60% of its 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 come about by American entrepreneurs who figured out how to literally oblige open boulders often more than a mile below the surface of the earth, to produce gas, and then oil. Those boulders- announced shale, source boulder or close-fisted boulder, and formerly 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, usually sand, supports the stones open a sliver 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 famous 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 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 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 therefore be impossible in the pre-2 014 nature 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 of” intensity independence”, although “the two countries ” 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 estates, including national parks, to drilling in order to ensure” energy dominance “.

” We’ve got underneath us more oil than anybody, and nobody 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 property that the United Nation has under its paw, but that China doesn’t have and that other countries don’t have, we can’t employ .”

But the shale success fib 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 predictions about America’s future as an oil and gas giant. The fracking of petroleum, in particular, 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 compounds, but uppercase, with business 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 “ve been told”. That vistum 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 epoch of unprecedentedly low interest rates it ushered in ,” he wrote in a recent report. Another investor made it this road:” If fellowships were forced to live within the cash flow they induce, 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 simmered for some time. John Hempton, who runs the Australia-based hedge fund Bronte Capital, echoes having debates with his partner as the thunder was just getting disappearing.” The oil and gas are real ,” his partner “re just saying”. “Yes,” Hempton would respond,” but the economics don’t work .”

Thus far, the fracking industry 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 disbeliefs now extend to the boardrooms of some large-hearted investors, as well as to the executive suites of at least a few of the fracking companies themselves. The fracking thunder has been fuelled predominantly 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 grow 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 predictions or most spectacular in his collapses , no one more willing to risk other people’s fund and his own, than McClendon; or, as one banker who knew McClendon well gave it:” The macrocosm moves when people who like jeopardy taken any steps .”

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

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

McClendon’s death, like his bequest, was passionately 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 rushing, wasn’t wearing a seatbelt, and didn’t appear to make any effort to avoid the collision. Only one day earlier, a federal splendid jury had accused him for infringing antitrust principles during his time as the CEO of Chesapeake Energy. Investigators ultimately governed his death an accident, but rumors of suicide persevere to this day. As Capt Paco Balderrama of the Oklahoma City police told the press:” We may never know 100% whatever happens .”

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, lawyers were still disputing over the remains of his estate two years after his death, trying 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 a group of Wall Street creditors, including Goldman Sachs. Wall Street’s vultures- the hedge fund that invest in distressed debt- had descended, buying the debt for less than 50 cents on the dollar, essentially making a judgment that the claims wouldn’t be paid in full. If McClendon did die infringe, 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 constructed an empire that at one point developed more gas than any American company except ExxonMobil. Once, when an investor expected 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 situate today. Floors bristled about how, at industry powwows, managers from petroleum majors like Exxon would find themselves speaking to mostly empty tushes, while beings 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, who worked at the company, initially as a consultant, from 1993 until the springtime of 2013.” There was a period of time that will never be replicated, with a company that will never be replication .”

” America’s Most Reckless Billionaire ,” Forbes once called McClendon, and for many in service industries, that headline characterized the man. But if it was a con, he was conning himself, too. Because he conceived. He was, in many ways, the embodiment of a transformation that has changed the face of not only 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, insured job opportunities in gather packs 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 authorities, own the mineral rights under their properties. 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 human”- those individuals who negotiates the leases that allow for drilling. That, it turned out, would see 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 shafts.” Landmen were always the stepchild of service industries ,” he later told Rolling Stone.” Geologists and designers were the important people- but it dawned on me quite early that all their fancy opinions 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 referred Tom Ward,” make transactions for scraps of ground 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 inlet where McClendon’s kinfolk vacationed. They seeded it with a $50,000 investment.

Neither Ward nor McClendon were technological pioneers. That mark, most people agree, goes to a follower named George Mitchell, who attracted on experiment done by the government to experiment on the Barnett Shale, a zone of tight stone in the Fort Worth basin of North Texas. Using a combination of horizontal drilling and hydraulic fracturing, Mitchell’s unit cracked the code for getting gas out of stone 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 unitings and buys consultant to the oil and gas industry at Purposed Ventures.” This industry needs uppercase to fire on all cylinders, and the founder and parent of conjure uppercase for shale in the US is Aubrey McClendon .”

” To is the possibility of borrow money for 10 times and ride out boom-and-bust cycles was almost as important an penetration as horizontal drilling ,” McClendon, with usual immodesty, said to Rolling Stone.

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

On 12 February 1993- a period McClendon would later describe as the best of his profession- he and Ward took Chesapeake public. They did so despite the facts of the case that their accounting house, Arthur Andersen, had questioned a “going concern” advice, symbolizing its bean-counters worried that Chesapeake might go out of business. So McClendon and Ward simply swopped 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 invested around$ 6bn acquiring belongings, companies and rentals. McClendon, who are capable of 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 males.” Everyone in Midland hated Chesapeake ,” one said.” They came out here when region was leasing for $200 – $300 an acre. All of a sudden, Chesapeake was $2,000 – $3,000. They get in some good neighbourhoods since they were slammed everyone else out. Their attitude was:’ We are Chesapeake, get out of our style .'”

“[ McClendon’s] aggressive style ruffled some featherings in the industry ,” Andrew Wilmot said.” He extended guns blazing, and drove up the prices. That made some people millionaires, but it wreaked carnage on others .”

McClendon went on a corporate spending spree that would have put today’s Silicon Valley chieftains to dishonor.” Asking me what to do with extra cash is like asking a sorority 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 mansions and useds in Oklahoma, Bermuda, Maui, Vail, on Lake Michigan, and even in Minnesota. He had one of the best wine accumulations in the world.

To Wall Street investors, McClendon was delivering on what they wanted 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 fabricating , 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 make challenge ,'” Chesapeake’s Henry Hood said.

Back in 2003, when McClendon was just getting started, the consensus thought 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 shortfall and rising cost of gas could hurt the Us economy. Greenspan recommended that the US build terminals to accept gives of liquefied natural gas from other countries.” We understand a hurricane 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 relieved natural gas drillers from having to disclose the substances be useful in hydraulic fracturing, thus preventing 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 years would be the fastest, cheapest lane to free “the two countries ” from dependence on foreign oil. He was adamant that employees should drive cars fuelled by tightened natural gas. For a mortal immersed in the industry’s history of boom and bust, McClendon had by now persuaded himself that natural gas rates would never fall. In August 2008, he predicted that rates would stay in the$ 8-$ 9 array for the foreseeable future.” He had a exceedingly, very strong point of view about gas ,” said one banker who knew him since the early 1990 s.” By the acces, he was basically incorrect for the last 30 years .”

McClendon’s optimistic position on tolls became the conventional wisdom in energy sells. In 2007, the supposedly smartest investors in the nations of the world- among other issues Goldman Sachs and the takeover titan KKR- organized their massive $45 bn buyout of a utility announced TXU in a way that was essentially a bet that natural gas rates, then around$ 7, were set to rise significantly.

At the same time, Vladimir Putin was obliging similar wagers. 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 exploration, gas yield and transport are going up ,” Putin said.” It intends the industry’s development overheads will soar. The era of cheap energy resources, inexpensive gas, is surely coming to an end .”

When the leading got rough, McClendon had always lived by borrowing yet more money to acquire more owneds.” Simply made, 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 manufacture platitude. Time and again, in commodity groceries, high prices encourage more producers to produce, creating a surplus, that then subdues costs- and farmers.” He was right that shale varied the world ,” said one longtime gas gentleman.” 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 prices soon exposed the feeble underbelly of US shale- its high costs and ravenous need for capital. Once-booming US production reached the skids. The so-called rig count- the number of rigs drilling for oil and gas at a given time- fell off 1,920 rigs in late 2014 to a low 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, 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 corporations began to declare bankruptcy, with some 200 of them eventually get bust. In each of these reports released in the fall of 2016, credit rating agency Moody’s called the corporate casualties “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 ratios ,” said David Keisman, a Moody’s elderly vice-president.

Some of the number of those bought assets from McClendon and others in the heyday also 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 wasted$ 5bn investing with Chesapeake in the Fayetteville shale and ploughed another $15 bn into the purchase of Houston-based Petrohawk. BHP put all the assets on the block in the fall of 2014, but determined no purchasers, and eventually wrote off more than$ 7bn- which begat the term” gathering a BHP “.

As one investor put it:” All of the acquisitions of shale resources done by the majors and by international business have been calamities. The wildcatters made a lot of fund, but the companies haven’t .”

As shale companionships flogged their budgets, fracking paraphernalium was idled- experiment conglomerate IHS Markit reported in 2016 that closely connected to 60% of the fracking material 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 towns suddenly resembled their California equivalents after the gold rush. In the Cline shale east of Midland in Texas, Devon Energy lessened its rig work and give its leases expire, quoting” a lot of variability” in the formation. In the city of Sweetwater,” desires are fading fast as the plummeting oil prices campaigns investors to pull 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 pieces and shelves its dreams .”

By nearly all chronicles, the shale boom had gone bust. In early 2016 , non-investment grade energy bonds- the shale industry’s rocket fuel- produced 25%, five times what they had a year and a half earlier, expressing a wildly promoted height of hazard.” This has the makings of a massive funding crisis” for intensity 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 financial viability of shale oil production “.

Surveying the carnage in the spring of 2016, then ExxonMobil CEO Rex Tillerson told a throng of specialists that due to the huge amount of indebtednes most companies in the industry had accumulated, he couldn’t even find anything merit buying.

When Aubrey McClendon died in his gondola, 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 converts 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 bawl 0330 333 6846

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