Oil is one ubiquitous commodity whose nips and tugs influence not only the global economy but also sways the geo political environment across continents. The price of oil can either quell the rising tide of uncertainty or produce tidal waves of frightening ramifications. This double edged paradox surrounding what is commonly and in a clichéd manner referred to as “black gold” gets further complicated by the arrival of a new “kid on the technological block” – Fracking. A term that makes environmentalists squirm with displeasure and entrepreneurs squeal in delight, fracking (the original term being ‘fracturing’), refers to the process of drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside. Water, sand and chemicals are injected into the rock at high pressure which allows the gas to flow out to the head of the well. In this compelling read, Bethany McLean traces the origin, players, and the geology underlying the fracking phenomena.
In particular Ms. McLean charts out the controversial and flamboyant lifestyle of the buccaneering Aubrey McClendon, who prior to ploughing his Chevrolet Tahoe SUV into an embankment at high speed on the 2nd of March, 2016, saw his personal net worth decline from a staggering US$ 3 billion to penury, virtually overnight! The former Chairman and CEO of Chesapeake Energy, McClendon transformed a bumbling start-up into a representative monarch of the fracking world, albeit for a temporary period. As Ms. McLean highlights in her book, in the fall of 2008, Forbes placed McClendon at number 134 on its list of 400 richest Americans. However, it was a net worth teetering perilously on an unstable foundation of reckless borrowing, indiscriminate spending, injudicious investments, and a personal trust in the fortunes of a fluctuating market. In highlighting the rampantly luxuriant and lavish spending habits if McClendon, Ms. McLean paraphrases one of the man’s famous quotes, “asking me what to do with extra cash is like asking a fraternity boy what to do with the beer.” But the things which McClendon did with ‘extra’, (read borrowed) cash was to say the least, eye popping! With a campus touting a 63,000 square foot day care centre, a luxurious gym and multiple cafes, McClendon extended his affluence to his personal life as well accumulating a mansion in Oklahoma, Bermuda. The person known to the industry player as “Mr. Gas” was overstretching his own capabilities to transgress dangerous boundaries.
If Chesapeake was an example in rashness, Enron Oil and Gas Resources (“EOG), a spin-off of the notorious ENRON was an epitome of rectitude and prudence. Signifying all that was NOT Chesapeake, EOG as Ms. McLean enlightens us went on to be known as “the Apple of Oil”, “the Harvard of Shale” and “the Brain Trust.” On account of its cautious ventures and alacrity, EOG is now valued at a whopping US$70 billion! Operating from ordinary instead of lofty premises, EOG in a low profile manner began accumulating land in an area called Eagle Ford Shale – a substrata of Austin Chalk – at less than US$500 an acre at a time when Chesapeake was throwing US$2000 to $3000 an acre! By 2013 EOG was in the words of Ms. McLean, “completing so called ‘monster’ wells that produced over 2,500 barrels a day.”
While profligacy and patience compete with each other in a race of attrition, their object of attention lends itself to some revealing dilemmas as Ms. McLean illustrates. The reporting of reserves to the SEC and disclosure to the investors speak diametrically different tales. For example, in the year 2014, while the industry in total reported 33 billion barrels of oil equivalent to the SEC, the corresponding number as disclosed to the investors was a whopping 163.5 billion barrels! This kind of dichotomy prevalent in the industry led legendary investors such as David Einhorn to take a pessimistic view on the future of fracking.
Ms. McLean also brings to the fore in an engaging manner the Saudi angle to the entire developments surrounding the fracking debate. The wily tactics of Ali Al-Naimi, a Bedouin shepherd turned Oil Minister in the Middle Eastern oil producing giant to counteract the burgeoning rise of the United States of America as a net exporter of oil instead of a net importer (on account of the flabbergasting discoveries of shale oil and gas) and Saudi Arabia’s dangerous dalliance with Russia to keep Iran’s production/supply under check make for some engaging read. The perils of placing optimism on shale as the next big thing is illustrated in stark detail by Ms. McLean by swelling upon the unfortunate experiences of big industry players burning their feet. Australia’s BHP Billiton which sunk US$15 billion in its purchase of the Houston based Petrohawk. As Ms. McLean illustrates, “BHP put all the assets on the block in the fall of 2014, but found no buyers, and eventually wrote off over US$ 7 billion – which begat the phrase, “pulling a BHP’ “
The future of shale oil and shale gas is both cloaked in a veneer of hope and enveloped in a cloud of susceptibility. With the ascension of Donald Trump to power, and Saudi Arabia’s avowed pledge to be a ‘non-oil dependent’ nation by 2020, the race for alternatives to oil us fast heating up. Substitutes and renewables such as solar power and hydroelectricity are doing mega rounds and are being touted as pathways to the future. But as Ms. McLean has illustrated with clarity and impartiality, the day is still far when oil makes the transition from an indispensable primary resource to being a reliable alternative.
Meanwhile the fracking rush intensifies….