The Frackers tells of high risk and high reward in the US
A new book tells the definitive inside story of the US shale boom. Review by Derek Brower
A decade ago US oil and gas production was falling, demand was rising and energy prices were about to set off on their great bull run. Shale drilling turned the outlook on its head. Now producing more gas than any other country, the US will also soon be the world's biggest oil producer.
Unless you've slept through the past five years, you'll know the gist of the story. But a new book by the Wall Street Journal's Gregory Zuckerman puts flesh on it all. The Frackers: The Outrageous Inside Story of the New Wildcatters* is a tale of high-stakes gambling, wayward corporate governance and, above all, the gutsiness of men who refused to accept that their country's oil and gas heyday was over. Those are fine ingredients for a good story. Zuckerman tells it brilliantly.
In an earlier book he followed the rise of hedge-fund manager John Paulsen, who made a fortune spotting the sub-prime mess earlier than rivals. Some of the new frackers grew almost as wealthy, but they did much more for their country. Fracking has given US consumers industry cheap and abundant energy, underpinning an economic revival while also freeing the country from its dependence on foreign supplies.
The Frackers, though, is a tale rife with personalities, not geopolitics. George Mitchell showed heroic persistence refining and honing hydraulic fracturing (fracking) techniques for years before finally cracking Texas's Barnett Shale. But it was one of Mitchell Energy and Development's engineers, Nicholas Steinberger, who tweaked the technique. Slick-water fracking was the true breakthrough.
Meanwhile, Robert Hauptfuhrer, of Oryx Energy, was honing horizontal drilling, an equally disruptive technology. When they were applied in tandem - and later, when multi-stage fracking improved the economies of scale - the techniques unlocked a realm of energy long ignored by the oil patch's big firms. "The majors - were all about out-of-the-park-home-run wells in places like Angola," writes Zuckerman, quoting Steinberger.
Zuckerman's book reminds us how quickly it all changed. Barnett gas production was negligible in 2000. By 2012, it had leapt to nearly 5 billion cubic feet a day (cf/d). The Marcellus and Haynesville shales were a twinkle in the eye of geologists a decade ago. Now they are bigger than the Barnett. Land in the Bakken could be bought for $3 an acre in 2004. Now North Dakota enjoys an economic boom. The region's oil output was just 48,000 barrels a day (b/d) in 2006. Now it is almost 1 million b/d. US oil output could overtake Saudi Arabia's by 2015.
The real thrust of The Frackers, though, is about the gambles and gamblers that lay behind the revolution. While the majors were scorning the US onshore, Tom Ward and Aubrey McClendon, the founders of Chesapeake Energy, were scouring it for land. Convinced that rising demand for gas would send prices soaring, they set off on a colossal credit-fuelled spending spree to sew up choice acreage.
It worked until it didn't. US gas prices spiked above $12 per million British thermal units in 2005 and again in 2008. The men grew extremely rich and Chesapeake's stock - and production - soared. McClendon, who owned a stake in each well his company drilled, splurged on opulent property around the country and amassed a $12m collection of antique maps. He pledged money for projects to transform Oklahoma. Local media called him a "one-man economic boom".
The problems came after 2008. With the economy crumbling, lenders got scared. Energy prices plummeted, just as shale's potential was being realised and a bubble of excess gas loomed over the market. Chesapeake had drilled thousands of wells, but McClendon couldn't shut them, because use-it-or-lose it leasing terms demanded more drilling. Moreover, writes Zuckerman, his pitch to lenders had been about rising demand and the need to meet it. Slower output would crash his company's share price. "It was a game of musical chairs. If McClendon turned off the music, he'd suffer a painful fall."
By 2008, McClendon had personally borrowed more than $500m from banks, using Chesapeake stock as collateral. But when the share price sank, his creditors called in the debt. The firesale of his shares put even more pressure on the stock price. Eventually, only a bail-out from his own company in the shape of a $75m bonus enabled him to keep paying his portion of the company's well costs. Shareholders weren't impressed.
Corporate governance issues also stalked Ward, who left Chesapeake and founded SandRidge Energy. Despite its small size and minimal output, it managed to pay its boss $47m in 2010-11, making Ward one of the wealthiest execs in the business. Both men were eventually forced out of their companies. Chesapeake's value rose 9% when the "Aubrey discount" ended.
While Chesapeake gambled on gas, others went after oil. EOG Resources spent heavily on little-known prospects in Texas's Eagle Ford, just as oil prices were collapsing in 2008. It was another long shot that paid handsomely, helping EOG to shed its past as the upstream division of another corporate gambler, Enron.
Continental Resources piled into the Bakken, although early drilling confirmed widespread doubts about the play. Running out of cash in 2004, Harold Hamm, Continental's boss, almost sold its position. Since that near-miss, Continental's output has risen more than tenfold. Hamm thinks the Bakken will eventually yield 2m b/d. He is now one of the richest men in the US and his imminent divorce settlement may be one of the largest in history.
Zuckerman gets under the skin of these men and his book is rife with telling details. One of XTO Energy's founders, for example, liked to hire people "who grew up poor and were disciplined by their parents, including corporal punishment".
But what the men of Zuckerman's book share was a gritty determination to defy the doubters. Charif Souki, a Lebanese-American restaurateur and founder of Cheniere Energy, had the chutzpah to raise billions of dollars to build liquefied natural gas (LNG) terminals to meet the US' growing need for imported gas - and then, after the fundamentals shifted and his company floundered, turn the idea on its head. In a few years, Cheniere's Sabine Pass LNG plant will start shipping US gas to the world.
It all makes for an astonishing story of American economic revival. As Zuckerman points out, vast federal subsidies for renewables were supposed to have brought a green, renewable energy revolution. Instead, free-thinking independent oilmen with a high tolerance for risk, a little luck and a lot of self-belief opened up the shale. Zuckerman quotes a comment about Steinberger that would also work for the other men of his book: "If the oil business had a gonads-on-the-anvil award, he'd win."