oil and gas is a contest of man and machine against nature. In America’s shale formations, nature takes the form of rocks, rich in hydrocarbons, buried about a mile below ground. It is a geologist’s job to find those rocks. It is an engineer’s job to develop the right mix of water, chemicals and drilling technology to “hydraulically fracture” them.
That was then. On June 28th this once-mighty firm filed for bankruptcy protection, unable to support nearly $9bn of debt. Robert Clarke of Wood Mackenzie, a consultancy, says that ultimately the poor quality of its assets, despite their size, made it unfit for a world of low energy prices. Chesapeake’s tale is a common one of hubris in America Inc, evident in the dotcom bubble, the decline of General Electric and Detroit’s carmakers, or, most recently, the humbling of the tech unicorns.
Its descent into bankruptcy 12 years later, too, displays familiar features. It became hooked on cheap credit. Its net debt grew thirteen-fold to $12.5bn in the decade to 2010. To finance this it needed natural-gas prices of at least $6 per millions—a level seldom reached since the end of 2008. Then there was the evangelistic boss.
Like Chesapeake, the shale industry has become a shadow of its former self. The more investors poured money into shale oil after the financial crisis of 2007-09, the worse life got for gas producers. Oil drillers in basins like the Permian in Texas also extract “associated gas” as a by-product. Although some of it is flared , most is dumped on the natural-gas market, exacerbating the glut. The shale-oil euphoria turned against the oilmen, too.
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