Fracked to Death

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One of the least understood and least reported stories of the Covid era has been the death of fracking — the much-touted “new technology” that was supposed to usher in a revolution of the American oil industry that would lead to energy independence and world oil-market domination. It did no such thing. It did not even come close. And now it is shutting down.

At a time when world oil demand and prices are rising, and the production of oil has become theoretically profitable again after a long, pandemic-induced coma, legacy oil fields are ramping up production and singing, “Happy Days Are Here Again.” Fracking, on the other hand, is sinking deeper into its final coma.

Remarkably, despite all the hype and the cheerleading, nobody has ever made any money from fracking. Don’t believe it? Here’s a report from a large accounting firm that works for the industry that concluded in 2020 that “the US shale industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies since 2010.” 

[I have been writing in this space since the beginning of the fracking “revolution” that it was a con aimed at lenders and investors. Search The Daily Impact for the word “fracking” and you can see for yourself.]

The confusion here arises from the fact that the operators brag about the profits from individual wells but never mention that the wells, which are fiendishly expensive to build and operate, play out in about three years instead of the normal 20+ years for a traditional well. Not only do the profits not pay for the well, but they don’t fund the construction of the next well which must be up and running in 36 months to maintain the company’s revenue stream. So when you factor in the capital spending necessary to stay in business, nobody’s making any money.

But for 15 years, lenders and investors have been throwing money at the frackers like they used to do for dot-coms and substandard mortgages. Like the continued hysterical buoyancy of the stock market, the whole thing’s a mystery until we realize that the financial world of today is driven by the one percent of people who are awash in cash, so much that they cannot possibly spend it, but who nevertheless demand of “wealth managers” and “hedge funds” that they go out and find double-digit returns for investing their obscene surpluses. With typical investments returning a couple of percent per year, the money guys are desperate, and like all the people conned through all of history, desperately want to believe the con.

Not any more. The Federal Reserve Bank of Dallas surveyed 400 institutional investors who have been involved with frackers and found one willing to continue to invest. Much of the cash frackers are able to raise from banks and investors is being used to roll over debt — they began the year $150 billion in debt. And while other sectors of the oil industry are ramping up to take advantage of the highest oil prices in years, production in, for example, the Bakken shale oil fields of North Dakota has fallen off 26 per cent since 2019.

The Financial Times recently reported that of the 500 privately owned oil and gas companies in the United States, 400 are losing money and unlikely to ever pay back their enormous debts. All their efforts now are directed at hyping the wonderful prospects for the Ponzi scheme they are running, and seeking, as they put it, “to secure a profitable exit.”  

As Adam Waterous, head of the private equity group Waterous Energy Fund, told the Financial Times: “This business is broken.” 

Right now this is a disaster only for the frackers and the hedge funds. But as was the case with the dot-coms and the go-go mortgages, the conflagration is spreading.