How Fracking Became America's Money Pit

Video Statistics and Information

Video
Captions Word Cloud
Reddit Comments

Welcome to r/LateStageCapitalismⒶ☭


⚠ Announcements: ⚠


NEW POSTING GUIDELINES! Help us by reporting bad posts

Help us keep this subreddit alive and improve its content by reporting posts that violate our rules and guidelines.

Subscribe to our new partner subreddits!

Check out r/antiwork & r/WhereAreTheChildren


Please remember that LSC is a SAFE SPACE for socialist discussion.

LSC is run by communists. We welcome socialist/anti-capitalist news, memes, links, and discussion. This subreddit is not the place to debate socialism. We allow good-faith questions and education but are not a 101 sub; please take 101-style questions elsewhere.

This subreddit is a safe space; we have a zero-tolerance policy for bigotry. We also automatically filter out posts containing certain words and phrases that some users may find offensive. Please respect the safe space, and don't try to slip banned words or phrases past the filter.


I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.

👍︎︎ 1 👤︎︎ u/AutoModerator 📅︎︎ Jul 08 2020 🗫︎ replies

"markets spur innovation and are good forms to allocate resources". This disproves that false statement. If markets cared about efficiency we wouldn't have a lot of the industries we do today.

👍︎︎ 2 👤︎︎ u/xxgodsmistakexx 📅︎︎ Jul 08 2020 🗫︎ replies
Captions
If you wanna get around, if you wanna drive a car, you wanna get on a plane, you need oil. It has been the foundation of the 20th century economy. Once considered impossible, American energy independence has become a reality. And for better or for worse, it's all thanks to fracking. The spoils of which have spurred what's commonly called the Shale Revolution. It is almost impossible to overstate the transformational effect that fracking had on US oil and natural gas production. It became this rallying cry that the shale boom was really gonna transform the US into a dominant energy player. It changed everything really. The US went from producing about five million barrels of oil a day in 2008, up to 13 million barrels of oil just this last March. It was this, what we thought at the time, was gonna be this great American success story. Except for one problem. The numbers never added up. For every dollar they brought in, they'd be spending $1.10, or $1.20, or $1.50. This has always been the Achilles heel of the business. The oil sector always needs to be very careful about the level of investment it makes and the cash returns to investors. The investment community did not finance the shale revolution out of the goodness of their hearts, I think they liked the idea of US energy independence, but they wanted returns, and for the most part, they hadn't come. There has never been a better decade for growing US oil and gas production and yet what was the worst performing sector in the S&P500? Energy. That tells you a lot about this sector. 26 US oil and gas producers have filed for bankruptcy this year. This is the story of how shale went from revolution to a bottomless money pit. In order to understand how much shale changed the energy game, you have to go back a half century or so. For about 50 years, America has been way short of oil and gas, having to import these vital fossil fuels that are essential to the running of the economy. And everyone believed that we would be importing almost all our oil requirements for the foreseeable future. And really that shaped American economics for a decade. You had the Arab oil embargo in the 70's, you've had wars, you've had recessions, all driven by shortages of oil and gas. From 1970 until 2000, the US imported most of its oil from Saudi Arabia and Russia. Companies like Exxon and Chevron were exploring drilling all over the world in places like the Arctic, and Africa. But fracking changed everything. When we talk about fracking, we basically talk about the combination of two technologies, horizontal drilling, and hydraulic fracturing, and when they come together, it allows oil producers to get oil and gas out of very, very dense shale rock, very deep beneath the earth. And they really unlocked huge, huge resources of oil and gas. It was briefly profitable as a gas game, but very quickly, the problem with any kind of commodity industry is supply and demand, so natural gas fracking unleashed such a plethora of supply, price plummeted and it's never recovered. After shooting itself in the foot by flooding the gas market, the fracking business managed to pivot to oil. And what we find is that all the lessons that were learned in natural gas could be applied just as easily to deposits of oil, because it's essentially the same process. A lot of people thought this was hocus pocus, it was never gonna work, but there were a few companies who decided to try it, just in case. Lo and behold, it worked. So, enormous amounts of money flooded into the sector and you had lots of companies took the money, and went out drilling. It was a perfect storm. Near zero interest rates prompted by the financial crisis, mixed with the seemingly endless demand for oil and gas at sky-high prices gave way to a veritable feeding frenzy of hungry investors on Wall Street. This made it very easy for small, independent shale companies to get started. You could really just lease up land and if you had partners, and you know, even just a small amount of investment, you could just try to figure out where the good rock was. And that meant that sometimes you lost and sometimes you won, but when you won, you won big. For years, the big majors didn't want anything to do with it, they stayed out of it. So it really was almost like modern day wildcatting, and people made fortunes. Throughout American history, oil has always attracted the rebellious type. And fracking was no different. Back then, and today, these guys were called wildcatters. In the movies, you see those pictures of the rugged Texas oil wildcatter standing in front of some spewing well. Wildcatter was basically someone who took what was considered like a small amount of money at the time, and went out and leased up a bunch of acreage and poked holes in the ground to try to figure out where the oil was. And no one personified the modern day shale wildcatter better than Aubrey McClendon. We might have brought a way for America and the world to be able to increasingly say no to OPEC. Aubrey McClendon was the founder and CEO of a company called Chesapeake Energy. He's a fascinating character, just larger than life. He was one of the first to appreciate the scale of American shale gas reserves. If there's an old maxim in the oil business, drill baby, drill! Drill baby, drill! Drill baby, drill! Drill baby, drill! That was Aubrey to a tee. If you gave him money, if he had access to money, any money, no matter how hard he had to scrounge to find it, he was gonna go drill a well. With McClendon as shale's mascot, companies like Chesapeake and a slew of other startups rode a wave of glory, and shale was hailed as the next great American success story. So 2010 to 2014 were really the glory days of shale. This is when you had everything going right. You had oil prices at $100 a barrel, you had Wall Street throwing money at these companies, you had exploration being very successful, finding all these new areas, all these new basins. The idea that you could take something that was in your own backyard and make your country this big global player is really a romantic one, and I think a lot of people believed in that. And so the oil flowed. Lots of it. So much that America's standing actually reversed from a net importer to a net exporter of oil. And for the wildcatters and consumers alike, it was a remarkable transformation. But what no one seemed to want to admit is that shale extraction is incredibly expensive. And a shale well is very different from a traditional oil well. With a conventional well, once you've drilled it, if you're lucky enough to hit natural gas, or oil, the well generally continues to produce for a long, long time. Shale wells by nature, explode in this like spew of production, and it's like if you take a champagne bottle and you shake it, you're gonna get bubbles flowing over. But the decline that happens after that initial burst of production, you can see a shale well lose 70 percent of production after its first year. I mean, it's pretty staggering. As a shale producer, you're constantly fighting this enormous decline rate. You need to constantly be drilling new wells, new wells, new wells, new wells, which is more money, more money, more money. If you think about the mindset of dot com companies back in the day, it was get market share, just grow, grow, grow, claim the market, then it's all yours, then you're gonna be able to produce profits. And Aubrey McClendon's mindset and the mindset of many in the shale industry was much the same way. And while investors kept pouring in new money, shale executives were raking in huge salaries, even as their companies were sinking. Executives were paid based on production growth, not on profits, and if you reward an executive to grow, then grow is what they're going to do. Tell an oil guy that not only does he have money to go drill, but you're gonna pay him if he can go and produce more oil, he's gonna go produce all the oil he possibly can. You can't slow down, or your company shrinks, but if you keep growing, you're just constantly putting cash in the ground to drill new wells and eventually investors are gonna say, "Wait a second, I need you to stop drilling wells "if you're not gonna be able to give me my money back." Over the last decade, an estimated $340 billion dollars has been spent on US fracking. It's what everyone refers to as the treadmill. The problem, of course, is when the treadmill stops, or when you are forced to get off the treadmill. How low could oil go? It's been referred to as the Thanksgiving Day massacre. There is going concern amongst some members of OPEC that shale was eating their lunch. Because you had this enormous growth in the sector. Saudi Arabia, that is taking the bigger picture, to protect the oil price, we have to not cut, because otherwise shale oil will get the advantage. The entire shale business model was predicated on high oil prices. Any serious drop and it all comes crashing down. Who's winning? Consumers. Who's losing? Well obviously producers, but maybe people who've lent to producers need to be a little bit more worried than perhaps they have been. US frackers who had been promising they could make money, suddenly it was clear they couldn't make money. And the capital going into the industry started to dry up. While over 100 companies ended up declaring bankruptcy. And people said the shale revolution is over. But since when has a slew of bankruptcies and a highly volatile market stopped any self-respecting entrepreneur? There was still a lot of people willing to invest billions of dollars in shale. A big reason why investors remained interested in shale was the rediscovery of a huge reserve in Texas called the Permian Basin. The hype around this region became known as Permania. And so even though there was this downturn, the music really didn't stop playing. Guys like Aubrey McClendon used permania to continually sell the shale story, even as the price per barrel made the model totally unsustainable. And fighting back the cloud over shale was gonna prove as futile as trying to change the direction of the wind. The reckoning came in 2016, with McClendon's death. The Oklahoma City Police Department responded to a fatality accident involving Mr. Aubrey McClendon. The government had been investigating him on price fixing charges, and they indicted him in the spring of 2016, and the day after he was indicted, he went out in his SUV and hit a bridge at top speed, and was killed. His death was almost like the punctuation mark underscoring what was supposedly the end of the shale revolution, but it came back! And the main reason it came back is because we were still in this super low interest rate environment. Investors didn't have anywhere else to put their money, and so it came roaring back. Oil prices continued to rise steadily, and shale execs drilled harder than ever, praying for increasing oil prices and promising returns to anxious investors. 2020 was supposed to be the year where the top 20, 25 players in the independent US oil industry were supposed to, in aggregate, turn cash flow positive for the first time. But, of course, that didn't happen. In March of 2020, Russia triggered an oil war with Saudi Arabia, effectively killing an important OPEC deal, cratering global oil prices. And as if that wasn't enough. The coronavirus pandemic is triggering fears of a global recession. Crude oil drops below $30 a barrel. The impact on the oil is disproportionate. Oil prices crashed, and everything changed. Within weeks, you started seeing the impacts of the coronavirus and the subsequent lockdowns having effect on oil demand. And unlike the last downturn, this one was really triggered by a complete collapse in demand. Global demand for oil was already low, since governments imposed widespread lockdowns, and airlines grounded flights because of the disease. There were lots of passive investors, people who own oil futures, but have zero interest in taking delivery of a physical barrel of crude oil suddenly realizing that they were gonna be on the hook for taking delivery of crude oil. I think what everyone will remember for many years to come is the day oil prices fell to negative $37 a barrel. Since then, oil prices have bounced back, but the shale wildcatters have not. Some of the quickest to rise have already fallen, including McClendon's white knight, Chesapeake Energy, which filed for bankruptcy in June of 2020. Are we almost through this bankruptcy cycle in the distressed oil and gas patch? We are not. For a lot of these guys, it was going to happen anyway, and this really just accelerated it. The tally is still coming in, but the number of jobs lost due to the collapse in the shale business is going to be crushing. Fracking actually provided some four million jobs in the decade since the financial crisis. It's a sudden demise, perhaps a hint of things to come, for the beleaguered shale oil industry. Yet amidst this collapse, shale execs have been taking home huge bonuses. Oil and gas executives have typically made well over 100 percent of their target bonuses, even as their returns or stock performance has been in the negatives. Ban fracking now! And now that the bubble has burst, many environmentalists have seized on these failures to make their case against shale. You actually have a coming together, almost, of environmentalist and investors to say just keep the oil in the ground, because there is too much of it. Environmentalists were delighted by any reports that fracking wasn't financially viable because it appeared to be support for their claim that this industry needed to go away. The lack of profits in the fracking industry means that it's all of us, it's taxpayers who are gonna be stuck with the cleanup cost with what it's done to our water supply, with what it's done to our environment. The lure of American dominance in the energy sector remains strong and despite the shale revolution's faulty business model, and unresolved environmental concerns, the powerful desire to extract oceans of oil that lay beneath our feet will likely never relent. Fracking has come back from the dead several times. I wouldn't count the industry out, I don't know that we'll ever see the heyday that we did in the last few years again, but I think it's too soon to say that fracking is going away.
Info
Channel: Bloomberg Quicktake
Views: 657,395
Rating: 4.7939687 out of 5
Keywords: News, bloomberg, oil, shale, drilling, gas, natural gas, energy, us oil drilling, opec, energy industry, climate change, economy, business, fracking, Trump, Wall Street
Id: jFWHxZpF9rc
Channel Id: undefined
Length: 16min 49sec (1009 seconds)
Published: Thu Jul 02 2020
Related Videos
Note
Please note that this website is currently a work in progress! Lots of interesting data and statistics to come.