June 2016, Vol. 243, No. 6


Taking the Cover off the Shale Revolution

By Jeff Share, Editor

Buy it, sit down and read The Green and the Black, The Complete Story of the Shale Revolution, the Fight over Fracking, and the Future of Energy by Gary Sernovitz,(St. Martin’s Press, 2016,. $27.99).

The shale revolution prompted by the development of hydrofracking has changed the face of energy in America and to a lesser extent, the rest of the world. However, the changes have occurred so quickly that they remain shrouded in controversy and mystery. Today, this perception is heightened by the role of fossil fuels in climate change, along with a gross lack of knowledge, to become a threat to future infrastructure.

Gary Sernovitz, a managing director of Lime Rock, an oil and gas private equity firm, has crafted a punchy book that debunks the myths surrounding the shale revolution and also explains how natural gas in particular can be the greatest contributor in battling climate change.

P&GJ: What prompted you to write your book, and how did you come up with the title?

Sernovitz: The book had two motivations. First, there had been a few books written at the start of the shale revolution but no complete summary after the revolution matured and took off, on both the gas and oil side, with all the environmental, political, price, and industrial implications. Second – and this relates to the title – I thought the world could use a fair-minded, balanced view of both the industry’s view of the shales (the “black,” for oil) and environmentalists’ “green” reservations and objections. The Green and the Black is also a slight play on the title of a novel, The Red and the Black, I was forced to read in college.

P&GJ: In your view, do you think the shale revolution will be seen as an historic milestone in the energy industry or will it prove to be short-lived?

Sernovtiz: I think it will be seen as a historic event. We have not even begun to fully exploit all the potential of the shales, and the volume growth to come is likely huge. In the Midland Basin, for instance, there have been only about 3,000 horizontal wells drilled out of probably over 80,000 potential wells. On the gas side, of course, we are basically drilling in just a half dozen counties nationwide now and are waiting for domestic demand and exports to pick up to unleash the volume possibilities.

And from a broader view, the shales also brought in a period of global oil and gas abundance, instead of ever more perilous scarcity, and shifted the center of the oil and gas business back to the United States. These shifts were completely unimaginable a decade ago. How quickly this all will happen depends, of course, on price.

P&GJ: You identify four individuals as the Mount Rushmore of the shale revolution: Mitchell, Papa, McClendon and Hamm. How was each of their contributions vital to the shale revolution?

Sernovitz: Well, though any Mount Rushmore analogy forces you to leave some important people off the mountain, I think the analogy works pretty well: George Mitchell was George Washington, the father of the revolution and the man at the start of it all (and also named George); Mark Papa is Jefferson, as his company EOG is considered the most “intellectual” technology-leading pioneer of the shales; Harold Hamm is Lincoln, as he started from the humblest of beginnings and has had the most personal financial success; and Aubrey McClendon was Teddy Roosevelt, the youngest, wildest roughrider who helped bring a boldness and love of risk to the revolution.

P&GJ: How valid do you feel the concerns of those opposed to fossil fuel development are, and how well is the industry doing at refuting their arguments?

Sernovitz: I think fossil fuels are wonderful sources of energy, which have enabled much of the advances and some portion of the greater human happiness of the modern world. But they do have a tragic flaw, in that they emit greenhouse gases. What I think the industry tries so hard to do but generally fails, is to broaden the conversation of whose “fault” is that tragic flaw: the fossil fuel companies that extract oil and gas, or the consumers who burn it in their cars or for electricity. Too often, I’ve found, the sides just shout at each other: “hypocrites,” from the industry to fossil fuel consumers; “planet killers,” from the other side.

P&GJ: Are there really that many people opposed to infrastructure development, or is it a situation where the industry is pushing into areas not used to energy development, such as E&P and pipelines?

Sernovitz: I think this is a regional issue and largely a function of the shale revolution occurring in some areas not used to oil and gas development, particularly up here in the Northeast where I live. And clearly there are people sincerely opposed to infrastructure development, no matter how misinformed they may be and no matter how much their opposition is a combination of old-fashioned NIMBY concerns and general opposition to fossil fuels. Those people can win, as seen in the recent ruling against the Constitution Pipeline in New York.

P&GJ: Did the shale revolution evolve too quickly for the industry to explain what this could mean for the nation’s energy picture?

Sernovitz: I think the shale revolution expanded very quickly, but sort of naturally in the ways that unexpected, amazing economic forces often attract capital and economic actors in the periods of initial exuberance. That being said, just as the collapse of the dot-com bubble in 2001-02 didn’t derail the Internet, I don’t think this temporary period of oversupply and low prices will fundamentally alter the shifts caused by the shales when we look back at their greater importance and volume growth a decade from now.

P&GJ: What do you think are the biggest challenges the oil and gas industry faces moving forward? Climate change, OPEC, local environmental concerns, low prices, skilled workforce?

Sernovitz: I think climate change concerns are the biggest challenge, in terms of regulation, ability to attract capital, and private and government efforts going on to spur competing sources of energy. Oil and gas is already a slow-growing commodity, and it’s hard for a commodity with long-term declining demand to have stable pricing.

P&GJ: Can the Saudis put our domestic industry out of business, similar to what they did during the Reagan administration?

Sernovitz: I don’t think so, and the current OPEC-Russia discussions, as unsuccessful as they have been to date, highlight the challenges Saudi is facing trying to keep its foot on the neck of all non-Saudi suppliers, U.S. shale and others alike. Saudi has a young and growing population, domestic fractures, tremendous calls on oil profits for bread and circuses, and a “fiscal break-even” price of around $100 per barrel. Perhaps the more interesting long-term question is whether the U.S. business will ratchet down the global oil price, driving the Saudi rulers out of power.

P&GJ: What were the main factors that caused the oil and gas glut, and isn’t this something that industry leaders should have expected?

Sernovitz: It’s all about the shales, and as painful as the glut has been, it should also be celebrated. That is, few in the industry could imagine that these tired basins with their impermeable rock could, out of nowhere, in a blink, completely turn over all the assumptions on oil and gas production and prices. So I tend to take a more philosophical attitude toward this glut, as something natural in important revolutions affecting industries.

P&GJ: Are we seeing a historic transformation of the oil and gas industry in which perhaps $50-60 oil and $3-4 natural gas will be the norm? What do you think it will look like in 10 years?

Sernovitz: Man, if I tried to predict oil and gas prices 10 years ago, I’d have to find all the old copies of your magazine and burn them to spare me the embarrassment of those predictions. So I don’t really know, but I would caution folks that there are as many inflationary forces that could affect oil and gas prices as deflationary ones. That is, the shales are benefiting from efficiency gains driven by technology and greater industry data and experience.

But there will also be forces driving prices higher, such as higher oilfield service pricing (which is at murderous levels now), worse quality shale locations being developed after the cores are drilled up, and dis-efficiencies as second-rate operators and second-rate crews get back to work. In addition, at some point, whether in 10 years or 30, the shales won’t be the global price setters and conventional production will have to be incented to grow again at likely higher prices than the shales.

P&GJ: What’s your view of the current administration’s seemingly ambivalent attitude toward the oil and gas industry? Did rejection of the Keystone pipeline galvanize the anti-fossil fuel movement at a time when it seemed to be lagging?

Sernovitz: It’s puzzling, for sure. There are many times in which the administration has been supportive of domestic oil and gas, such as in the 2012 “all of the above” energy strategy and the landmark 2015 EPA study that largely proved that fracking didn’t cause systemic damage to the water table. And for all the industry bellyaching, the shale revolution largely took off during Obama’s seven years so far. That is likely coincidence, but you can’t accuse him of killing it – because it didn’t die. But then there are things like the rejection of Keystone. My view on the matter is that Keystone was rejected only after it was rendered unnecessary by the growth in U.S. oil production driven by the shales. So it was an “easy” give to environmentalists – even if it had obvious negative impacts on the pipeline industry.

P&GJ: Although there has always been a divide between the energy industry and the Democratic/liberal side, today it seems worse than ever. Is this a correct assessment, and is there any way to resolve this?

Sernovitz: I think that’s correct, primarily because a longstanding distrust of the oil business (for polluting incidents, for meddling in foreign countries) has been ramped up, in an era of climate change worries, to extreme levels, such as calling oil companies like ExxonMobil enemies of the planet.

I think the best way for the industry to address this is to make it clear that it is not the enemy of the planet – or America – by highlighting a few things: the great potential of natural gas to displace coal; the importance of cheaper and more available energy to people in developing countries; the admission by all the major oil companies and others in the industry that climate change needs solutions, and those should come from producers and consumers; and a focus on how the energy industry today is particularly benefiting America, at the expense of places like Russia and Iran, which engender bipartisan distrust.

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