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 vitality world was turned upside-down by an epic developed as the oil industry few had foreseen. From the low-toned time, in 2006, when it imported 60% of its oil, the US became an oil powerhouse- eclipsing both Saudi Arabia and Russia- and following the adjournment of 2015, was the world’s largest producer of natural gas.

This remarkable transformation was come about by American entrepreneurs who figured out how to literally thrust open stones often more than a mile below “the earths surface”, to produce gas, and then oil. Those boulders- announced shale, generator rock or close-fisted rock, and once believe 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, generally sand, props the rocks 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 volley 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 lubricant 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 pulls 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 period 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 would have been impossible in the pre-2 014 world of $100 -a-barrel oil, and is playing out in strange and erratic ways.

Since the 1970 s, US chairmen from Gerald Ford to both Bushes emphasised the importance of” intensity independence”, although the country had in fact become more and more dependent, particularly 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 grounds, including national park, to drilling in order to ensure” energy dominance “.

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

But the shale success narrative 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 lubricant, including with regard to, remains on a financial foundation that is far less secure than most people realise.

Because so few fracking fellowships actually make money, the most vital ingredient in fracking isn’t compounds, but capital, with corporations 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 boom ,” one private-equity titan “ve been told”. That look is resembled 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 age of unprecedentedly low-pitched interest rates it heralded in ,” he wrote in a recent report. Another investor put it this method:” If companies were forced to live within the cash flow they produce, 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 boom was just getting travelling.” The oil and gas are real ,” his partner would say. “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 thunder are no longer limited to a small set of skeptics. Those mistrusts now extend to the boardrooms of some big investors, as well as to the executive suites of at least a few of the fracking firms themselves. The fracking boom has been fuelled largely 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 turn into a colossus. For a brief moment in biography, 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 outages , no one more willing to risk other people’s coin and his own, than McClendon; or, as one banker who knew McClendon well applied it:” The world-wide moves when people who like danger take action .”

” He was the good face of the industry- the passion, the imagination, the boldnes ,” another former investment banker told me.” But he was also the bad face .” And that duality constructs him a perfect epitome of the US fracking revolution.

Fracking financier Aubrey McClendon, who was killed in a car accident in 2016. Photograph: Layne Murdoch/ NBAE/ Getty Images

McClendon’s death, like his gift, was hotly raced. 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 rapidity, wasn’t wearing a seatbelt, and didn’t appear to make any effort to avoid the collision. Just one day earlier, a federal grandiose jury had indicted him for contravening antitrust constitutions during his time as the CEO of Chesapeake Energy. Investigators eventually ruled 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% whatever happens .”

In the drop 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 guarantees, lawyers were still disputing over the remaining his property two years after his death, trying to figure out which obligations 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 fund that invest in distressed indebtednes- had tumbled, buying the debt for less than 50 cents on the dollar, virtually making a judgment that the claims wouldn’t be paid in full. If McClendon did die burst, it wouldn’t have been out of character. During his years as an oil and gas tycoon, he fed on gamble, and was as fearless as he was reckless. He improved an empire that at one point made more gas than any American company except ExxonMobil. Once, when an investor requested 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. Narrations abounded about how, at industry consultations, managers from petroleum majors like Exxon would find themselves is talking about largely empty tushes, while people literally fought for space in the chamber where McClendon was regarding 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 repeated, with a company that will never be repeated .”

” America’s Most Reckless Billionaire ,” Forbes once announced McClendon, and for many in the industry, that headline defined the three men. But if it was a con, he was conning himself, too. Because he accepted. He was, in many ways, the embodiment 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, saw job opportunities in gather parcels 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” territory boy”- those individuals who negotiates the leases that allow for drilling. That, it turned out, would clear him the perfect party for the new world of fracking, which is not so much about locating the single gusher as it is about assembling the rights to drill multiple reservoirs.” Landmen were always the stepchild of service industries ,” he later told Rolling Stone.” Geologists and operators were the important guys- but it dawned on me fairly early that all their fancy feelings aren’t worth much needed 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 identified Tom Ward,” make slews for scraps of ground in Oklahoma, faxing each other in the middle of the night ,” Ward said to Rolling Stone. Six years later, the two structured Chesapeake Energy, which was reputation after the beloved inlet where McClendon’s kinfolk vacationed. They seeded it with a $50,000 investment.

Neither Ward nor McClendon were technological colonists. That separation, most people concur, goes to a humankind referred George Mitchell, who outlined on investigate done by the government to experiment on the Barnett Shale, an area of tight stone in the Fort Worth basin of North Texas. Using a combination of horizontal drilling and hydraulic fracturing, Mitchell’s team cracked the code 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 parent of invoke capital for shale in the US is Aubrey McClendon .”

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

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

On 12 February 1993- a day McClendon would later describe as the best of his occupation- he and Ward took Chesapeake public. They did so despite the facts of the case that their accounting conglomerate, Arthur Andersen, had questioned a “going concern” alarm, entailing its bean-counters worried that Chesapeake might go out of business. So McClendon and Ward simply switched accounting conglomerates.” 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 belongings, companies and rentals. McClendon, who are capable of later call these years 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 gentlemen.” Everyone in Midland detested Chesapeake ,” one said.” They came out here when territory was leasing for $200 – $300 an acre. All of a sudden, Chesapeake was $2,000 – $3,000. They get in some good places because they shut everyone else out. Their attitude was:’ We are Chesapeake, get out of our practice .'”

“[ McClendon’s] vigorous style ruffled some feathers in service industries ,” Andrew Wilmot said.” He led handguns blazing, and drove up the prices. That made some people millionaires, but it wreaked desolation on others .”

McClendon went on a corporate spending rampage that would have put today’s Silicon Valley chieftains to dishonor.” 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 mansions and useds 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 wanted most: consistency and growth. His pitch was that fracking had changed 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 once called him.

” Aubrey was the first one to say,’ Let’s establish require ,'” Chesapeake’s Henry Hood said.

Back in 2003, when McClendon was just getting started, the consensus belief 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 cautioned 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 check 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 frights eventually helped push through the Energy Policy Act of 2005, which relieved natural gas drillers from having to disclose the chemicals used in hydraulic fracturing, thus averting 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 a campaign announced ” Coal is Filthy”, and he are of the view that proselytizing 10% of US vehicles to run on natural gas in the next 10 years would be the fastest, cheapest road to free “the two countries ” from dependency on foreign petroleum. He was adamant that employees should drive cars fuelled by tightened natural gas. For a being engulf in the industry’s history of thunder and failure, McClendon had by now persuaded himself that natural gas rates would never descend. In August 2008, he predicted that prices would stay in the$ 8-$ 9 series 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 space, he was basically wrong for the last 30 times .”

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

At the same time, Vladimir Putin was shaping same 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.” Costs of exploration, gas yield and transport are going up ,” Putin said.” It signifies the industry’s development overheads will skyrocket. The age of cheap energy resources, inexpensive gas, is surely drawing to a close .”

When the starting go rough, McClendon had always survived by borrowing yet more money to acquire more properties.” Simply employed, 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 commonplace. Time and again, in commodity sells, high prices foster more creators to produce, generate a surplus, that then humiliates costs- and farmers.” He was right that shale modified the nations of 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 prices soon exposed the feeble underbelly of US shale- its high costs and ravenous need for capital. Once-booming US production made the skids. The so-called rig count- the number of rigs drilling for oil and gas at a given point in time- fell off 1,920 riggings in late 2014 to a low-pitched of 480 in early 2016.” We think it likely that to find a lower level of work would require going back to the 1860 s, the early part of the Pennsylvania oil boom ,” Paul Hornsell, is chairman of commodities 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 companionships began to declare bankruptcy, with some 200 of them eventually proceeding 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 bankruptcies, it may very well turn out that this oil and gas industry crisis has created a segment-wide bust of historic balances ,” said David Keisman, a Moody’s senior vice-president.

Some of the number of those 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 added advantage of its shale and Canadian petroleum sand resources by$ 4bn; Royal Dutch Shell reported a write-down of more than$ 8bn. Most prominent was Australia’s BHP Billiton, which had expended$ 5bn endowing with Chesapeake in the Fayetteville shale and ploughed another $15 bn into the purchase of Houston-based Petrohawk. BHP made all the assets on the block in the fall of 2014, but ascertained no purchasers, and eventually wrote off more than$ 7bn- which begat the phrase” pulling a BHP “.

As one investor set 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 fund, but the companies haven’t .”

As shale corporations lashed their budgets, fracking gear was idled- study house IHS Markit reported in 2016 that closely connected to 60% of the fracking gear in the US was inactive. Shale companies and oilfield service companies laid off workers. All told, the global 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 rig pleasure and let its rentals expire, quoting” a lot of variability” in the formation. In the town of Sweetwater,” ambitions are fading fast as the plummeting price of oil campaigns investors to back out, cutting off the projects that were supposed to pay for a shining new future ,” wrote the Associated Press in early 2015.” Now the town of 11,000 awaits layoffs and budget gashes and defers its dreams .”

By nearly all chronicles, the shale boom used to go bust. In early 2016 , non-investment grade energy bails- the shale industry’s rocket fuel- relented 25%, five times what they had a year and a half earlier, expressing a wildly heightened height of threat.” This has the makings of a massive funding crisis” for vigor companies, William Snyder, the head of Deloitte’s US restructuring unit, told the Wall Street Journal in early 2016. That spring, 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 assembly of analysts that due to the huge amount of obligation most fellowships in the industry had accumulated, he couldn’t even find anything importance buying.

When Aubrey McClendon been killed in his vehicle, 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 director John Hempton expected:” Is Chesapeake the modeling for this business? It alters 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 see 0330 333 6846

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