How the U.S. frack­ing boom is shak­ing up geopol­i­tics

The Morning Call (Sunday) - - BOOKS - By Steven Muf­son

In 2012, Leonardo Maugeri, the for­mer chief strate­gist of Ital­ian oil and gas gi­ant ENI, coined the phrase “Saudi Amer­ica” and pre­dicted that the frack­ing boom would make the United States as big an oil pro­ducer as Saudi Ara­bia.

That level of pro­duc­tion is now within reach, some­what ear­lier than the late Maugeri ex­pected. U.S. crude-oil pro­duc­tion hit a record mile­stone in Au­gust, when it ex­ceeded 11 mil­lion bar­rels per day for the first time, ac­cord­ing to the fed­eral En­ergy In­for­ma­tion Ad­min­is­tra­tion.

Bethany McLean, a con­tribut­ing edi­tor at Van­ity Fair, has bor­rowed that phrase as the ti­tle of her timely book, “Saudi Amer­ica: The Truth About Frack­ing and How It’s Chang­ing the World.”

McLean, who was a co-au­thor of the best-seller “The Smartest Guys in the Room: The Amaz­ing Rise and Scan­dalous Fall of En­ron,” has tapped into the re­cent his­tory of the U.S. oil and gas boom. She de­scribes ge­ol­ogy in plain English, re­counts the rise and fall of one of the coun­try’s most flam­boy­ant shale gas ty­coons, and stud­ies the po­lit­i­cal con­se­quences of a United States that is far less de­pen­dent on oil im­ports than it was just a decade ago.

In each case, in­formed by her ex­pe­ri­ence in fi­nan­cial af­fairs, McLean has cau­tion­ary words about the lim­its of U.S. out­put, the fi­nan­cial perils of bet­ting on shale ex­plo­ration stocks and the dan­gers of be­liev­ing that the United States is some­how free from the geopol­i­tics of petroleum.

First, the ge­ol­ogy. Frack­ing com­bines re­cent ad­vances in hor­i­zon­tal drilling with age-old hy­draulic frac­tur­ing — which in­volves shoot­ing wa­ter, sand and chem­i­cals into a well to ex­tract bits of oil and gas.

Sec­ond, the abil­ity of oil and gas ex­plo­ration com­pa­nies to tap into the un­der­ground for­ma­tions is a re­sult not only of tech­nol­ogy but, just as im­por­tant, of cheap cap­i­tal, McLean ar­gues. And in the past decade, as the Fed­eral Re­serve kept in­ter­est rates low to re­vive the econ­omy, that cap­i­tal has been ex­tremely cheap.

“The frack­ing boom has been fu­eled mostly by over­heated in­vest­ment cap­i­tal, not by cash flow,” she writes. She quotes a merg­ers and ac­qui­si­tions ad­viser as say­ing, “As oxy­gen is to life, cap­i­tal is to the oil and gas busi­ness.”

No ex­plo­ration ty­coon re­flected that phe­nom­e­non more than the late Aubrey McClen­don. In the cat­a­strophic fi­nan­cial year of 2008, McClen­don’s board gave him a $75 mil­lion bonus, lift­ing his to­tal pay for the year to $122 mil­lion, the largest amount for any ex­ec­u­tive in the coun­try.

McClen­don, whom McLean weaves into one-third of her book, built Ch­e­sa­peake En­ergy into a dom­i­nant player in shale gas dur­ing years he dubbed “The Great North Amer­i­can Land Grab.” But his bet on nat­u­ral-gas prices turned sour, and he went broke. Hounded by cred­i­tors and se­cu­ri­ties reg­u­la­tors, he died in a fiery car crash. Many thought then and still think now that it was sui­cide.

For all the hoopla about the surge in U.S. oil and gas pro­duc­tion from frack­ing, most peo­ple over­look an im­por­tant fea­ture of the boom: The av­er­age shale well pro­duces most of its oil or gas in the first two years. That means oil com­pa­nies must keep drilling new wells to keep pro­duc­tion steady. They have to keep run­ning to stay in place.

The third and last sec­tion of McLean’s book is for­tu­itously timely. With the mur­der of Ja­mal Khashoggi, the United States has threat­ened pu­ni­tive ac­tion against Saudi Ara­bia, and the king­dom is try­ing to ease ten­sions. Both sides want to keep busi­ness be­tween the two na­tions go­ing.

But some law­mak­ers and pol­icy experts be­lieve that re­duced im­ports of crude oil can make Amer­ica free of petroleum pol­i­tics. Not so, McLean says.

“Even if Amer­ica doesn’t need Mid­dle East­ern oil, its al­lies in Europe do, and China cer­tainly does,” she writes.

“Even to­day, it is un­clear if we will look back and see frack­ing as the be­gin­ning of a huge and last­ing shift — or if we will , re­al­ize what we thought was trans­for­ma­tive was merely a mo­ment in time.”

By Bethany McLean, Columbia Global Re­ports. 138 pages, $15.99

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