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How Fracking Became America's Money Pit - YouTube
Channel: Bloomberg Quicktake: Originals
[6]
If you wanna get around,
[7]
if you wanna drive a car,
you wanna get on a plane,
[9]
you need oil.
[12]
It has been the foundation
of the 20th century economy.
[21]
Once considered impossible,
[23]
American energy independence
has become a reality.
[27]
And for better or for worse,
[28]
it's all thanks to fracking.
[31]
The spoils of which have spurred
[32]
what's commonly called
[34]
the Shale Revolution.
[35]
It is almost impossible to overstate
[38]
the transformational
effect that fracking had
[40]
on US oil and natural gas production.
[43]
It became this rallying cry
[45]
that the shale boom was
really gonna transform
[47]
the US into a dominant energy player.
[51]
It changed everything really.
[53]
The US went from producing
about five million barrels
[56]
of oil a day in 2008,
[57]
up to 13 million barrels of
oil just this last March.
[62]
It was this, what we thought at the time,
[63]
was gonna be this great
American success story.
[66]
Except for one problem.
[69]
The numbers never added up.
[74]
For every dollar they brought in,
[76]
they'd be spending $1.10,
or $1.20, or $1.50.
[80]
This has always been the
Achilles heel of the business.
[84]
The oil sector always
needs to be very careful
[87]
about the level of investment it makes
[89]
and the cash returns to investors.
[93]
The investment community did not finance
[96]
the shale revolution out of
the goodness of their hearts,
[99]
I think they liked the idea
of US energy independence,
[103]
but they wanted returns,
and for the most part,
[105]
they hadn't come.
[107]
There has never been a better decade
[109]
for growing US oil and gas production
[112]
and yet what was the worst
performing sector in the S&P500?
[116]
Energy.
[117]
That tells you a lot about this sector.
[119]
26 US oil and gas producers
[122]
have filed for bankruptcy this year.
[124]
This is the story of how shale
[126]
went from revolution to
a bottomless money pit.
[138]
In order to understand how much shale
[140]
changed the energy game,
[142]
you have to go back a half century or so.
[144]
For about 50 years,
[145]
America has been way short of oil and gas,
[147]
having to import these vital fossil fuels
[150]
that are essential to the
running of the economy.
[153]
And everyone believed
that we would be importing
[156]
almost all our oil requirements
for the foreseeable future.
[160]
And really that shaped American economics
[162]
for a decade.
[163]
You had the Arab oil embargo in the 70's,
[166]
you've had wars, you've had recessions,
[169]
all driven by shortages of oil and gas.
[174]
From 1970 until 2000,
[176]
the US imported most of its oil
[178]
from Saudi Arabia and Russia.
[185]
Companies like Exxon and Chevron
[186]
were exploring drilling all over the world
[189]
in places like the Arctic, and Africa.
[197]
But fracking changed everything.
[199]
When we talk about fracking,
[201]
we basically talk about the combination
[203]
of two technologies,
[204]
horizontal drilling, and
hydraulic fracturing,
[207]
and when they come together,
[209]
it allows oil producers to get oil and gas
[212]
out of very, very dense shale rock,
[216]
very deep beneath the earth.
[217]
And they really unlocked
huge, huge resources
[221]
of oil and gas.
[225]
It was briefly profitable
[227]
as a gas game, but very quickly,
[229]
the problem with any kind
of commodity industry
[231]
is supply and demand,
[232]
so natural gas fracking
unleashed such a plethora
[235]
of supply, price plummeted
[238]
and it's never recovered.
[240]
After shooting itself in the foot
[242]
by flooding the gas market,
the fracking business
[244]
managed to pivot to oil.
[246]
And what we find is that all
the lessons that were learned
[249]
in natural gas could be
applied just as easily
[253]
to deposits of oil,
because it's essentially
[256]
the same process.
[257]
A lot of people thought
this was hocus pocus,
[260]
it was never gonna work, but
there were a few companies
[263]
who decided to try it, just in case.
[266]
Lo and behold, it worked.
[271]
So, enormous amounts of
money flooded into the sector
[274]
and you had lots of
companies took the money,
[278]
and went out drilling.
[282]
It was a perfect storm.
[283]
Near zero interest rates
prompted by the financial crisis,
[287]
mixed with the seemingly
endless demand for oil and gas
[290]
at sky-high prices gave way
to a veritable feeding frenzy
[294]
of hungry investors on Wall Street.
[296]
This made it very easy
[297]
for small, independent shale
companies to get started.
[301]
You could really just lease up land
[303]
and if you had partners, and you know,
[304]
even just a small amount of investment,
[307]
you could just try to figure
out where the good rock was.
[310]
And that meant that sometimes you lost
[312]
and sometimes you won,
[313]
but when you won, you won big.
[315]
For years, the big majors
didn't want anything
[318]
to do with it, they stayed out of it.
[320]
So it really was almost
like modern day wildcatting,
[323]
and people made fortunes.
[329]
Throughout American history,
[330]
oil has always attracted
the rebellious type.
[333]
And fracking was no different.
[337]
Back then, and today, these
guys were called wildcatters.
[343]
In the movies, you see those pictures of
[345]
the rugged Texas oil
wildcatter standing in front of
[350]
some spewing well.
[354]
Wildcatter was basically someone who took
[358]
what was considered like
a small amount of money
[360]
at the time,
[361]
and went out and leased
up a bunch of acreage
[365]
and poked holes in the ground
[366]
to try to figure out where the oil was.
[369]
And no one personified the modern day
[371]
shale wildcatter better
than Aubrey McClendon.
[375]
We might have brought a way
for America and the world
[379]
to be able to increasingly say no to OPEC.
[384]
Aubrey McClendon was the founder and CEO
[386]
of a company called Chesapeake Energy.
[389]
He's a fascinating character,
just larger than life.
[392]
He was one of the first
[394]
to appreciate the scale of
American shale gas reserves.
[398]
If there's an old maxim
in the oil business,
[401]
drill baby, drill!
[402]
Drill baby, drill!
[403]
Drill baby, drill!
Drill baby, drill!
[405]
That was Aubrey to a tee.
[407]
If you gave him money,
[408]
if he had access to money, any money,
[409]
no matter how hard he had
to scrounge to find it,
[412]
he was gonna go drill a well.
[416]
With McClendon as shale's mascot,
[418]
companies like Chesapeake
and a slew of other startups
[421]
rode a wave of glory, and shale was hailed
[424]
as the next great American success story.
[426]
So 2010 to 2014 were really
the glory days of shale.
[430]
This is when you had
everything going right.
[432]
You had oil prices at $100 a barrel,
[435]
you had Wall Street throwing
money at these companies,
[438]
you had exploration being very successful,
[440]
finding all these new areas,
[442]
all these new basins.
[443]
The idea that you could take something
[446]
that was in your own backyard
[448]
and make your country
this big global player
[451]
is really a romantic one,
and I think a lot of people
[454]
believed in that.
[458]
And so the oil flowed.
[460]
Lots of it.
[461]
So much that America's
standing actually reversed
[464]
from a net importer to
a net exporter of oil.
[467]
And for the wildcatters
and consumers alike,
[470]
it was a remarkable transformation.
[472]
But what no one seemed to want to admit
[475]
is that shale extraction
is incredibly expensive.
[478]
And a shale well is very different
[481]
from a traditional oil well.
[483]
With a conventional well,
[484]
once you've drilled it,
if you're lucky enough
[486]
to hit natural gas, or oil,
[488]
the well generally continues to produce
[490]
for a long, long time.
[492]
Shale wells by nature,
explode in this like spew
[497]
of production, and it's like
if you take a champagne bottle
[501]
and you shake it, you're gonna
get bubbles flowing over.
[507]
But the decline that happens
[509]
after that initial burst of production,
[511]
you can see a shale well
lose 70 percent of production
[515]
after its first year.
[516]
I mean, it's pretty staggering.
[518]
As a shale producer,
you're constantly fighting
[519]
this enormous decline rate.
[521]
You need to constantly be
drilling new wells, new wells,
[524]
new wells, new wells, which
is more money, more money,
[527]
more money.
[528]
If you think about the
mindset of dot com companies
[531]
back in the day, it was get market share,
[534]
just grow, grow, grow, claim the market,
[536]
then it's all yours,
then you're gonna be able
[537]
to produce profits.
[538]
And Aubrey McClendon's mindset
and the mindset of many
[541]
in the shale industry
was much the same way.
[545]
And while investors kept
pouring in new money,
[548]
shale executives were
raking in huge salaries,
[551]
even as their companies were sinking.
[553]
Executives were paid based
on production growth,
[556]
not on profits, and if
you reward an executive
[560]
to grow, then grow is
what they're going to do.
[564]
Tell an oil guy that not
only does he have money
[566]
to go drill, but you're gonna pay him
[568]
if he can go and produce more oil,
[570]
he's gonna go produce all
the oil he possibly can.
[573]
You can't slow down, or
your company shrinks,
[577]
but if you keep growing,
[579]
you're just constantly
putting cash in the ground
[581]
to drill new wells
[582]
and eventually investors are gonna say,
[585]
"Wait a second, I need
you to stop drilling wells
[587]
"if you're not gonna be able
to give me my money back."
[590]
Over the last decade,
[591]
an estimated $340 billion dollars
[594]
has been spent on US fracking.
[596]
It's what everyone refers
to as the treadmill.
[599]
The problem, of course, is
when the treadmill stops,
[602]
or when you are forced
to get off the treadmill.
[608]
How low could oil go?
[611]
It's been referred to
[612]
as the Thanksgiving Day massacre.
[615]
There is going concern
amongst some members of OPEC
[618]
that shale was eating their lunch.
[621]
Because you had this enormous
growth in the sector.
[625]
Saudi Arabia, that is
taking the bigger picture,
[627]
to protect the oil price,
we have to not cut,
[630]
because otherwise shale
oil will get the advantage.
[633]
The entire shale business model
[635]
was predicated on high oil prices.
[638]
Any serious drop and it
all comes crashing down.
[641]
Who's winning?
[642]
Consumers.
[643]
Who's losing?
[643]
Well obviously producers,
but maybe people who've lent
[646]
to producers need to be
a little bit more worried
[648]
than perhaps they have been.
[650]
US frackers who had been promising
[652]
they could make money,
suddenly it was clear
[654]
they couldn't make money.
[656]
And the capital going into the
industry started to dry up.
[660]
While over 100 companies
ended up declaring bankruptcy.
[663]
And people said the
shale revolution is over.
[666]
But since when has a slew of bankruptcies
[668]
and a highly volatile market
stopped any self-respecting
[671]
entrepreneur?
[672]
There was still a lot of people willing
[673]
to invest billions of dollars in shale.
[677]
A big reason why investors
remained interested
[679]
in shale was the rediscovery
of a huge reserve in Texas
[682]
called the Permian Basin.
[684]
The hype around this region
became known as Permania.
[687]
And so even though
there was this downturn,
[690]
the music really didn't stop playing.
[694]
Guys like Aubrey McClendon
[696]
used permania to continually
sell the shale story,
[699]
even as the price per
barrel made the model
[702]
totally unsustainable.
[703]
And fighting back the cloud over shale
[705]
was gonna prove as futile
as trying to change
[707]
the direction of the wind.
[709]
The reckoning came in 2016,
with McClendon's death.
[716]
The Oklahoma City Police
Department responded
[718]
to a fatality accident
involving Mr. Aubrey McClendon.
[721]
The government had been investigating him
[723]
on price fixing charges,
[725]
and they indicted him
in the spring of 2016,
[728]
and the day after he was indicted,
[730]
he went out in his SUV and
hit a bridge at top speed,
[734]
and was killed.
[736]
His death was almost
like the punctuation mark
[738]
underscoring what was supposedly the end
[741]
of the shale revolution, but it came back!
[745]
And the main reason it came back
[747]
is because we were still in
this super low interest rate
[750]
environment.
[750]
Investors didn't have anywhere
else to put their money,
[754]
and so it came roaring back.
[756]
Oil prices continued to rise steadily,
[758]
and shale execs drilled harder than ever,
[760]
praying for increasing oil prices
[762]
and promising returns
to anxious investors.
[765]
2020 was supposed to be the year
[767]
where the top 20, 25 players
in the independent US
[772]
oil industry were
supposed to, in aggregate,
[775]
turn cash flow positive
for the first time.
[779]
But, of course, that didn't happen.
[783]
In March of 2020, Russia
triggered an oil war
[785]
with Saudi Arabia, effectively killing
[788]
an important OPEC deal,
cratering global oil prices.
[791]
And as if that wasn't enough.
[793]
The coronavirus pandemic
is triggering fears
[795]
of a global recession.
[797]
Crude oil drops below $30 a barrel.
[800]
The impact on the oil is disproportionate.
[804]
Oil prices crashed,
and everything changed.
[809]
Within weeks, you started
seeing the impacts
[811]
of the coronavirus and
the subsequent lockdowns
[815]
having effect on oil demand.
[817]
And unlike the last downturn,
[819]
this one was really triggered
by a complete collapse
[824]
in demand.
[825]
Global demand for oil was already low,
[827]
since governments imposed
widespread lockdowns,
[830]
and airlines grounded flights
because of the disease.
[833]
There were lots of passive investors,
[835]
people who own oil futures,
but have zero interest
[838]
in taking delivery of a
physical barrel of crude oil
[842]
suddenly realizing that they
were gonna be on the hook
[845]
for taking delivery of crude oil.
[848]
I think what everyone will
remember for many years to come
[851]
is the day oil prices fell
to negative $37 a barrel.
[857]
Since then, oil prices have bounced back,
[861]
but the shale wildcatters have not.
[864]
Some of the quickest to
rise have already fallen,
[867]
including McClendon's white
knight, Chesapeake Energy,
[870]
which filed for bankruptcy
in June of 2020.
[874]
Are we almost through
this bankruptcy cycle
[876]
in the distressed oil and gas patch?
[878]
We are not.
[879]
For a lot of these guys, it
was going to happen anyway,
[883]
and this really just accelerated it.
[886]
The tally is still coming in,
[888]
but the number of jobs lost
[889]
due to the collapse in the shale business
[891]
is going to be crushing.
[893]
Fracking actually provided
some four million jobs
[896]
in the decade since the financial crisis.
[898]
It's a sudden demise,
[900]
perhaps a hint of things to
come, for the beleaguered
[902]
shale oil industry.
[904]
Yet amidst this collapse,
[906]
shale execs have been
taking home huge bonuses.
[909]
Oil and gas executives have
typically made well over
[913]
100 percent of their target bonuses,
[915]
even as their returns or stock performance
[918]
has been in the negatives.
[921]
Ban fracking now!
[922]
And now that the bubble has burst,
[924]
many environmentalists have
seized on these failures
[927]
to make their case against shale.
[929]
You actually have a
coming together, almost,
[931]
of environmentalist and investors to say
[934]
just keep the oil in the ground,
[936]
because there is too much of it.
[939]
Environmentalists were delighted
[940]
by any reports that fracking
wasn't financially viable
[944]
because it appeared to be
support for their claim
[947]
that this industry needed to go away.
[950]
The lack of profits in
the fracking industry
[953]
means that it's all of us, it's taxpayers
[955]
who are gonna be stuck
with the cleanup cost
[957]
with what it's done to our water supply,
[959]
with what it's done to our environment.
[966]
The lure of American dominance
[968]
in the energy sector remains strong
[970]
and despite the shale revolution's
faulty business model,
[973]
and unresolved environmental concerns,
[976]
the powerful desire to
extract oceans of oil
[978]
that lay beneath our feet
will likely never relent.
[982]
Fracking has come back from
the dead several times.
[985]
I wouldn't count the industry out,
[989]
I don't know that we'll
ever see the heyday
[991]
that we did in the last few years again,
[994]
but I think it's too soon to say
[995]
that fracking is going away.
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