“Saudi America: The Truth About Fracking and How It’s Changing the World”
By Bethany McLean
Columbia Global Reports, $15.99
Reviewed by Jennifer Weeks
In “Saudi America: The Truth About Fracking and How It’s Changing the World,” award-winning business journalist Bethany McLean looks at fracking for oil and gas from an angle that may be unfamiliar for environmental reporters — the financial end.
In her view, the environmental impacts of fracking have been well covered by other reporters, while the science around them is still evolving.
But McLean sees other reasons to question the popular view that fracking for oil and gas will “assure our future, extricate us from the Middle East, and allow us to crush Russia, OPEC, and everyone else.”
Although Trump administration officials assert that fracking has ushered in a new era of U.S. “energy dominance,” McLean shows that this technology — especially when it’s used to extract oil — rests on a rickety financial base.
Money more central than technology
McLean, who co-authored the 2003 best-seller, “The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron,” provides useful insights into the economics of fracking. Making money through fracking, she notes, “is not so much about finding the single gusher as it is about assembling the right to drill multiple wells.”
That’s because of another key attribute of fracking: Production from fracked wells, especially oil, declines much faster after the initial hit than production from conventional oil and gas deposits.
“For a fracking operation to show growth requires huge investment each year to offset the decline from the previous year’s wells,” McLean writes.
As she sees it, money has been much more central to this industry’s growth than technology.
If Wall Street hadn’t been willing to finance the industry’s expansion with cheap capital while interest rates were low, McLean argues, there might never have been a fracking boom.
To attract that money, many fracking companies promise spectacular returns but fail to deliver. One investment manager tells McLean: “The industry has a very bad history of money going into it and never coming out.”
Growth of an industry
“Saudi America” provides a dense but succinct account of how the U.S. fracking industry grew. It spotlights one of the industry’s early stars: Chesapeake Energy, headed by oil and gas wheeler-dealer Aubrey McClendon.
McClendon — who died in a mysterious car accident in Oklahoma City in 2016 — kept his business going by constantly raising and spending money to acquire properties, companies and leases.
He ultimately was dumped from Chesapeake Energy, which paid $25 million in 2015 to settle charges of bid-rigging, racketeering and fraud filed by the state of Michigan in connection with sales of state-owned land to oil and gas drillers.
McLean doesn’t dispute that drillers are constantly improving fracking technology to get more oil and gas out of the ground. She reports that in the Permian basin in Texas, the cost to get a barrel of oil out of the ground from a fracked well has fallen from around $70 in the early 2000s to less than $50.
Nonetheless, she contends, the industry is still financially unsustainable.
It’s even less clear whether or how fracking
will affect U.S. relations with Middle East oil exporters,
or political and economic stability in those countries.
Investment banks will lend money to energy companies while interest rates are low — but if those rates rise, it could wipe out much of the improvement in break-even costs to extract a barrel of oil.
Some companies take a more cautious approach.
EOG, an Enron spinoff, sees fracking more as a long-term commitment than a get-rich-quick opportunity. The company prides itself on keeping overhead costs low and will only drill where it makes economic sense based on the price of oil.
“EOG isn’t exactly blowing the doors off, but it is making money, which is better than most of its peers,” McLean writes.
Spotlighting global repercussions
“Saudi America” also casts a skeptical look at the notion that weakening other oil- and gas-producing countries is good for the United States.
U.S. shale oil production has cut exports to the United States from Nigeria, Algeria and Angola, which could create instability in those countries. And it’s even less clear whether or how fracking will affect U.S. relations with Middle East oil exporters, or political and economic stability in those countries.
McLean focuses on a key question: How soon will renewable energy become cheaper than fossil fuel without subsidies?
When that happens, it will trigger “demand destruction”: The price of oil and gas will start to decline, and it will be much harder for oil and gas companies to raise money.
No one knows when that will happen, she writes, but that doesn’t make it smart to pretend it won’t — which seems to be the Trump administration’s strategy.
Jennifer Weeks is environment and energy editor at The Conversation U.S., based in Boston, and is a former SEJ board member.
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* From the weekly news magazine SEJournal Online, Vol. 4, No. 2. Content from each new issue of SEJournal Online is available to the public via the SEJournal Online main page. Subscribe to the e-newsletter here. And see past issues of the SEJournal archived here.