Review: Frackers needed long view to make history
By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The revolution in U.S. energy came from an unlikely source, as Gregory Zuckerman recounts in “The Frackers: the Outrageous Inside Story of the New Billionaire Wildcatters.” Tiny drillers like George Mitchell and Harold Hamm persisted with shale while deep-pocketed giants such as Chevron gave up. It was a triumph of leadership over short-term shareholder value.
Just six years ago the United States seemed destined for ever greater reliance on increasingly hostile Arab and Latin American nations to meet its energy needs. Worse, many respected energy experts, for example banker Matthew Simmons, credibly claimed that the globe faced a ruinous shortage of crude. A surge in the price of oil to a record $147 a barrel in June 2008 seemed just a taste of the economic pain to come.
“The Frackers” charts how a handful of small businessmen in America overturned these seemingly inexorable trends.
Hydraulic fracturing, the drilling technique commonly known as fracking, opened up vast reserves of oil and gas previously thought inaccessible. The resulting surge in U.S. natural gas production has lowered electricity bills, and the 40 percent surge in U.S. oil output since 2008 was enough to compensate for lower output from the likes of Iran and Libya. By the end of the decade the technology will have created 2 million jobs, offsetting all the jobs lost in the housing crash.
Why did America’s oil giants lag behind unknown peers in fracking, despite their far greater resources? Largely because they focused too much on quarterly results and a narrow definition of shareholder value. In the late 1990s, for example, Chevron pulled the plug on $50 million of annual spending to develop fracking in Texas. Many investors in the $50 billion company would have admired the frugality and attention to returns.
In contrast, by 1997 oil minnow George Mitchell, whose Mitchell Energy had a market value of under $1 billion, had spent $250 million over 16 years to develop fracking in the same region. The obsessive spending looked like the height of irrationality, until Mitchell finally made fracking work. In August 2001 Devon Energy paid $3.1 billion for his company. Mitchell became a billionaire and an energy legend – when he was 82. It took another five or six years for shale drilling to become widespread in the United States and start boosting output of gas and oil.
Anyone who took up the shale baton had to be willing to take many years of heavy losses. Harold Hamm, founder of tiny Continental Resources, spent so much trying to develop North Dakota’s Bakken shale that profits all but evaporated. Yet by 2012 oil production from Hamm’s wells accounted for 10 percent of America’s oil output, earning him a $12 billion fortune, which is still growing.
“The Frackers” details the colorful exploits of Aubrey McClendon, co-founder of Chesapeake Energy. His willingness to brush aside shareholder caution enabled him to build the second largest gas producer in the United States from a standing start in the 1990s. Sadly the same stubbornness impelled him to continue spending far beyond the means of his company and to use Chesapeake as a personal piggy bank. Disgruntled shareholders booted him out in 2013.
The picture that emerges, then,from Zuckerman’s compelling account is a revolution driven by stubborn entrepreneurs – often over the objections of shareholders and more rational directors. By the time Exxon Mobil, America’s largest oil company, awoke to the implications of fracking, it had to pay top dollar to catch up, buying shale driller XTO for $31 billion.