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The Frackers by Gregory Zuckerman

22/02/2015

If, over the holiday period you drove to one of New Zealand’s pleasant locations (or indeed anywhere else), you probably received a pleasant surprise at a cheaper price to fill up your tank (in New Zealand prices have recently moved back up slightly caused in part by a fall in the NZ dollar making the importing of oil more expensive). The price of West Texas Crude Oil has plummeted from over US $100 per barrel to a mere $50.81 as at 22 February 2015.

Falling oil and gas prices seem to have occurred in no small part as a result of massively increased production of oil and gas in North America. The increased production in North America has confounded doomsday figures predicting through the mid 2000s that the world had approached “peak oil”.

New techniques of horizontal hydraulic fracturing, colloquially known as fracking, has opened up vast swathes of shale oil and gas reserves previously uneconomic to exploit. The increased production has also meant reduced reliance for the USA and other Western nations on more volatile regimes in the Middle East and elsewhere. “Fracking” is a controversial technique which involves pumping chemical and water fluid mixes at high pressure into shale rock in order to release gas and oil reserves contained therein. The technique has courted controversy for the potential negative environmental impacts inherent with the process.

The Frackers by Gregory Zuckerman, a Wall Street Journal business reporter gives a bracing account of the “wildcatters” spurred on by the opportunity to create fabulous wealth driving the rush to exploit the newly available resources.

Interestingly fracking itself is actually not new as Zuckerman notes it dates back to the American civil war when gun charges were used to break up underground rock to expose oil and gas. What is more recent is pumping chemical fluids and high volume and horizontal fracking at an angle which combined with changed circumstances around rising demand and stagnant supply leading initially to rising prices has made exploiting “tight” shale deposits economically viable.

American Exceptionalism

The story of The Frackers is a quintessentially American one given the makeup of that country, with a property rights regime which means land owners actually own rights to resources buried beneath their land combined with a highly advanced capital markets. The property rights regime contrasts with the United Kingdom, parts of Europe and New Zealand and Australia where central governments own the royalties to resources buried underneath private land. In New Zealand government ownership is codified in the Crown Minerals Act of 1991 which also includes gold, silver and uranium.

The American property rights regime creates incentives for private land owners to encourage development given their ability to benefit from any resource exploited. Economic development is considered so paramount amongst the American governance that in some states such as Oklahoma, forced leasing of the reserve is legal. This is a paradox I think typical of the USA in that liberty is held as a supreme ideal yet a landowner who may object to exploitation is compelled by the state of Oklahoma to allow drillers to drill. Such a law is actually not uncommon in the United States where the issue of “eminent domain”, which is the taking of private property for purposes of economic development have generated controversy and the benefit is seen to accrue to a private entity instead of being in the “public good”*.

The Wildcatters

The term wildcatters refers to drillers in America who take on drilling wells in unlikely areas. Wildcat more generally refers to those undertaking business ventures perceived to be highly risky. One of the more noteworthy features of the story of the Frackers in America is that the players who made the most significant impact in exploiting the country’s hitherto unexploited shale gas reserves is their relative small size. Whilst big players Chevron, Shell, ExxonMobil and British Petroleum (BP) had bought the narrative of “peak oil” and given up on American reserves to search in far flung parts of the globe, maverick drillers kept the faith and risked everything in the hopes of striking oil and gas (economically exploitable oil and gas) and getting rich.

I think this indicates something about large corporations, risk taking and flexibility; the big players weren’t willing to experiment with new techniques to tap USA reserves but smaller players thought they had nothing to lose and were willing to risk all. Zuckerman tells the stories of his different players well; such as Lebanese migrant Charif Souki who had raised billions in investment capital to establishing an import processing facility for liquefied natural gas only for American prices to tumble with the shale revolution. Souki adapted by convincing investors to fund the conversion of his import facility to an export facility.

The Economic Puzzle

The complexity of economic and business exchange is a subject I find very interesting.The story of fracking reflects that complexity between speculators who bought up large swathes of land to be drilled, the geologists and engineers who provided technical advice and information, wall street investors who financed the exploration and the entrepreneurs themselves who risked it all in the hopes of getting rich. It can be frustrating at times since Zuckerman moves quickly between the different players in the piece but he describes well how these moving pieces fit together.

Environmental impacts and health risks

A large reason behind the controversy surrounding fracking has been the real and perceived environmental impacts arising from the process. This includes the leaking of methane which is damaging to climate change. Fear of fracking has been fomented in the public consciousness by Hollywood opposition and uncertainty given frackers’ reluctance to release details of the chemicals used in their fracking fluid mixture. There has also been concern around the risk of fracking fluid chemicals entering water aquifers. Zuckerman notes this is unlikely given the aquifers in prominent shale wells of the Barnett, Marcellus and Haynesville regions are between 400 (121 metres) and 1200 (365) feet below the surface whereas the shale itself is between 4,000 (1.2 kilometres) and 13,500 (4 kilometres) feet below the surface.

Frack off vs. Drill baby drill

It is a frequent lament these days that the American political climate is characterised by such intense partisanship that the parties speak past one another resorting to simplistic slogans rather than collaborating to reach a compromised solution in the public interest. Zuckerman sees this is at work in the debate around fracking:

When it comes to energy production from shale formations, one camp argues that fracking poisons and should be abolished, while the other snickers at legitimate health concerns while clinging to the mantra of drill baby drill. As with other raging political, social and economic debates, the nation would be best suited edging back toward the forsaken middle ground, finding ways to work together for the greater good.

The summary and what happens next?

For me Zuckerman’s excellent book has piqued my interest in what happens next in this story. With a growing estimate of shale oil and gas reserves available in the USA, likely substantial shale reserves elsewhere, OPEC increasing production to drive out over leveraged frackers, it is very hard to say what happens next. OPEC may be successful in the short term in undercutting some of the frackers (particularly given a possible break even point of $50-$69 US per barrel for exploiting tight shale oil reserves) but a rise in price and the availability of substantial reserves will simply drive more wildcatters to have a go at drilling reserves.

In sum, The Frackers provides a detailed account of the brazen wildcatters who led the USA’s shale revolution. The book is meticulously well reported as one may expect from a hard working journalist. The hours of interviews and number of secondary sources such as scientific articles, newspaper accounts and stock market records scoured by Zuckerman is impressive and really adds to the reader’s understanding of what is a complicated subject. Zuckerman definitely comes out in favour of fracking’s overall benefits exceeded costs including environmental impacts and potential health risks. Nonetheless he still addresses those concerns and notes the concern with fracking is much of its dangerous potential impacts remain unknown. The USA’s Environmental Protection Agency is currently undertaking a study to assess fully the risks associated with fracking which shows us how regulation often plays catch up following technological change. When discussing fracking with friends and colleagues, the first concern raised is often environmental risks so perhaps Zuckerman could have spent more time on such risks but my view is he struck a good balance between the economic benefits and the potential costs. It is an excellent backgrounder for anyone wanting to learn more about how the shale revolution has begun in the USA.

*Such a term is fairly porous and hard to define but the point is simply to question the state compelling economic behaviour on the part of the land owner which will accrue a significant private benefit to the entity allowed to use the space/exploit the resource. Such a policy also presumes the end justifies the means of abrogating the rights of a private property owner. Eminent domain is an American paradox in the way it allows the limitation of said property right if the right owner elects not to advance the exploitation of resources aiding economic growth.

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