At KD’s Bar-B-Q in Midland, Texas, one can see first hand that the energy boom is still alive and well. Oil service workers, property developers, and financiers stand in a line that snakes out onto the street to order its fabled tri-tip steaks and ribs.
In less than a decade, a boom in the country’s shale patch has added a record eight million barrels per day, and made the United States the number one oil producer in the world, at 12m barrels per day.
A large chunk of credit must go to the producers in the Permian Basin — a vast expanse of 222,000 square kilometres that borders west Texas and south-eastern New Mexico — which is responsible for about a third of America’s crude output.
During my visit to downtown Midland, often referred to as the capital of shale country, an electronic sign updated the active drilling rig count to 864, with nearly half of them at working in the Permian.
One firm working in the Permian is Pioneer Natural Resources. Scott Sheffield, the company’s chief executive, embraced the shale revolution early on. Over nearly two decades of his stewardship, it has accumulated 680,000 acres of oil and gas territory.
Sheffield firmly believes that there is a very long runway of shale growth to come, allowing it to last another hundred years. For perspective, that is five times the projected life span of North Sea assets at current production rates.
The proven reserves in the Permian are, in a word, massive — with Sheffield suggesting that his estimates show a total of 160bn barrels of recoverable reserves. That is in the league of Iraq and Iran.
And according to Opec’s World Oil Outlook, released earlier this month, the shale boom will continue — taking US daily production to a whopping 20m barrels per day in five years.
This boom has far-reaching implications. For instance, President Donald Trump is blunt about his unwillingness to deploy American troops to protect the free flow of crude.
This was proven just a few months ago. Trump recently declared that the US military was “locked and loaded” to strike Iran, but when a brazen attack in mid-September — often blamed on Tehran — against Saudi Aramco’s oil facilities did not trigger American military action in the region, many marked that event as a profound shift in US policy.
Not only has the shale expansion allowed for growing US energy independence, it has created jobs in America’s oil and gas belt, and allowed Trump to tout how lower prices at the gas pump have helped extend the country’s economic expansion.
While many have focused their attention on America’s rise to the world’s number one oil producer, unseating traditional heavyweights like Saudi Arabia, the prolific expansion of shale gas has also allowed the United States to stand toe-to-toe with energy giants such as Qatar and Russia.
At the Sabine pass on the border of Texas and Louisiana sits Cheniere Energy’s shiny new liquefied natural gas terminal. The group spent $12bn to build the facility after legislation signed into law by President Barack Obama lifted a ban on energy exports in 2015. Thanks to fracking, Cheniere now exports liquid gas to more than 30 countries in Asia, Europe and South America.
But cracks are beginning to emerge in America’s fracking model, as Wall Street enforces financial discipline on the shale patch.
There have been nearly 200 bankruptcies of shale producers in the last four years, with small and medium-sized producers collapsing under more than $100bn of debt.
To avoid this fate, Pioneer’s Sheffield had to postpone his retirement plans to return as chief executive in February 2019 to cut $100m in overhead and lay off 530 workers — a quarter of his workforce. And he is pushing an internal target of 15 per cent return on capital deployed after receiving feedback from Wall Street.
“Now they are saying, ‘slow down. You’re producing way too much. You’ve got too much supply in the US and it’s affecting world oil prices. Instead, start returning capital back to us’,” says Sheffield.
Fracking and the future
The market capitalisation of energy companies in the S&P 500 has been cut in half over the last four years, as institutional investors move out of the oil and gas sector due to squeezed margins and the threat to the industry posed by climate change.
While some believe that this is a healthy shakeout to extend America’s oil and gas boom, three basic options have quickly emerged in shale country: remain independent by slashing costs and enforcing production discipline, put up the “for sale” sign, or go bankrupt.
Main image credit: Getty
John Defterios is emerging markets editor at CNN Business and host of The Global Energy Challenge on CNN International.