DRILLING FOR oil and gas is a contest of man and machine against nature. In America’s shale formations, nature takes the form of rocks, rich in hydrocarbons, buried about a mile (1.6 kilometres) below ground. It is a geologist’s job to find those rocks. It is an engineer’s job to develop the right mix of water, chemicals and drilling technology to “hydraulically fracture” them. One of the core beliefs of America’s shale-fracking revolution, which took off in the late 2000s, is that if you blast enough pressure at the rocks for long enough, they will eventually yield a big bounty.
The two “Okies” who founded Chesapeake Energy, a pioneer of this hydrocarbon upheaval, were neither geologists nor engineers. Tom Ward and the late Aubrey McClendon were “landmen”. Their skill was in leasing mineral rights and persuading investors they would produce a bonanza, particularly of natural gas, if enough wells were drilled. Their success was extraordinary. At times in the 2000s Chesapeake was considered the Google of energy. It had leases with 1m Americans. It became America’s biggest producer of unconventional natural gas.
That was then. On June 28th this once-mighty firm filed for bankruptcy protection, unable to support nearly $9bn of debt. Robert Clarke of Wood Mackenzie, a consultancy, says that ultimately the poor quality of its assets, despite their size, made it unfit for a world of low energy prices. Chesapeake’s tale is a common one of hubris in America Inc, evident in the dotcom bubble, the decline of General Electric and Detroit’s carmakers, or, most recently, the humbling of the tech unicorns. But is hubris really so bad?
In its early years Chesapeake’s self-belief was (literally) ground-breaking. It was a young company, armed with a new technology, offering a compelling growth story at a time when a big market opportunity was opening. That was natural gas, a fuel in such short supply in America in the early 2000s that the country was building liquefied natural-gas (LNG) terminals to import it. Chesapeake was quick to notice rising demand from utilities switching from coal to natural gas. Its land grab put it in a good position to take advantage as the fuel’s price increased. Sure enough, it quintupled to more than $12 per million British thermal units (BTUs) between 2000 and mid-2008, pushing Chesapeake’s market value to $37.5bn.
Its descent into bankruptcy 12 years later, too, displays familiar features. It became hooked on cheap credit. Its net debt grew thirteen-fold to $12.5bn in the decade to 2010. To finance this it needed natural-gas prices of at least $6 per million BTUs—a level seldom reached since the end of 2008. Then there was the evangelistic boss. With his rock-solid faith in shale, McClendon, who was ousted as chief executive in 2013 and indicted on bid-rigging charges the day before his death in 2016, doubled down on new basins even as America’s production tripled between 2008 and…
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