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