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.