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Fracking guaranteed product, but not profit. Dry holes became obsolete. Every frack could yield gas, if not oil, too.
Supply again became functionally unlimited, of oil and especially of gas. Risk-seeking money fled from the markets, the price collapsed. Material shortages may be avoidable forever. Limiting factors will be political. Russia has equally vast reserves—actually much more than the US, though at that scale it hardly matters. If markets were driven by pure supply and demand, gas would be cheaper than water, much cheaper in many places. But that price point is too low to support profits, given the capital cost of fracking and associated infrastructure. Higher prices are required “for the good of the industry,” as John D. Rockefeller would have put it (and did, because market conditions are today identical to those of his day). The most reliable tools to raise energy prices in times of oversupply are monopoly and war.
The wave of frack gas crested when the technique was applied back where the American oil industry started. The Appalachian Basin, known geologically as the Marcellus Shale, underlies twenty thousand square miles of Pennsylvania, West Virginia, and Ohio and is made entirely out of shale rock—rock formed from the sediment of ancient ocean floors. Drill and frack anywhere in the area, and produce a guaranteed quantity of commodifiable methane.
This reversed the poles of global energy markets and unleashed enough methane to bottom out the market. The plumbing had to be reversed. A system designed to carry gas from the Southwest to the Northeast had to be turned to export millions of cubic feet of gas from the Northeast. Not that hard to flip a pipeline, and plenty of investment to build new lines. Physically this was hardly a problem. But the pipeline network could only bring gas as far as the seashore.
As gas has a higher volume per energy unit as oil, it can only be transported by pipeline. It doesn’t make sense to try to fill a tanker full of gas.
North American gas prices plummeted to levels where everyone became bagholders. Vast amounts of money were lost. Aubrey himself hit personal lows and was bailed out by his own company; an embezzlement in the form of the sale of McClendon’s collection of 19th century maps to his own board of directors, which he was subsequently court-ordered to buy back. The energy section of the Stock Market became a toxic swamp of cons and pump-and-dump schemes as dollars turned into costly objects that produced oil at a capital loss. Independent producers were utterly ruined. It was a perpetual money-hole during years when the rest of the Market was delivering big returns on the beloved FAANGS. And yet, money kept going down the hole. The big guys don’t pull their money out of an investment that goes down. Rather, they intervene in the material world to turn the bet around, at least to the point where they can exit the position without embarrassing losses. They needed a narrative about where all the extra gas was going to go.
Charif Souki was there to sell it to them. He raised $5.4 billion for initial construction costs to flip Sabine Pass from an import to an export terminal. This investment in Sabine Pass was backed by long-term purchasing contracts: Souki had to sell the product, LNG, to buyers, before he could sell the project to investors. Any buyer needed their own LNG import terminal capable of “safely” regasifying the product. He found interest in the Pacific region, particularly Japan but also China.
Linguistically, this ‘flip’ from an import to an expert terminal is seamless. Materially, the two types of facilities have little in common. As an LNG import facility, the first incarnation of Sabine Pass had been built to receive ultracold methane, gradually warm it up and let it expand(“regasify”), and feed it into the pipeline system. An export facility would need to receive gas from a pipeline, freeze it, and load it on specialized boats. The construction costs to convert it into an export facility started at $3.4 billion, only symbolically lower than starting from scratch. To all appearances, Souki had no trouble raising the capital. This is because of what his Sabine Pass plant offered to the whole industry: a narrative.
The most valuable thing about LNG that it is a narrative pressure-valve. It told a story about where all that American Gas was going to go. This story that justified further investment up and down the industry. Gas could escape its pipeline: we were going to ship gas. It didn’t precisely matter how much product was offloaded, what mattered was that American gas could be sold in Eurasia. This finally ended the last regional market in the energy sector, perhaps in the whole world. American gas had to be frozen to be able to play on the geopolitical stage.
But for it to become an investment thesis, this narrative did need a buyer, a source of demand. To some extent, investors were willing to look past their contemporary low gas prices, but savvy investors needed to understand how they were going to make the price of gas was going to go up, in the future. And how LNG could ever be competitive with pipeline gas. The vast capital investments required to build gas liquefaction would not have been made if they did not have an answer to these questions.
In 2014, energy was cheap everywhere, and gas will always be cheaper out of a pipeline than off a boat. The gas market in Europe faced towards the East; the Nord Stream 1 had been online since 2011. Although Charif needed to sell LNG, no one particularly needed to buy it. Few people even had the required infrastructure to receive it.
The 2010s were, as we said at the time, the last moment in which a radical change of the source of power could truly avert the catastrophe that is now bearing down upon us. Since an immediate change of political power was at the time untenable as the global Left was radically disenfranchised, it could only have been achieved by switching to another, non-emitting power source. This would only have happened if hydrocarbons were expensive. But at just this moment, we faced one of the greatest surpluses of natural gas in history.
The flood of gas pushed against the coasts of the North American continent like a balloon, seeking some escape. Logistically, the only way it could be exported was to freeze it. Liquefied Natural Gas became an inevitability, in response to any demand for imported natural gas, but to an overwhelming new supply. For natural gas to become liquid, it must be held at -172° degrees. Your freezer keeps things at around -8°. Therefore, LNG facilities and even LNG ships require a considerable amount of carbon energy to run. This is not a problem for the companies, as they are sitting on a large quantities of the stuff, unable to sell it for a profit. This immense inefficiency, though, does pose a problem for human bodies, which require a certain climate to survive.
Each cubic meter of gas that is liquefied for export must be regasified at their site of import. American investors seemed happy to invest the capital for the export terminals, but assumed that the public and utilities of the importing countries would put up the money for import terminals. Before the Ukraine war, the only European country willing to put up the money was France, whose Électricité de France funded the construction of an LNG import terminal at Dunkirk, and then sold it to a private company (funded with investments from Belgian municipalities) called Fluxys. (By the end of 2017, Europe’s total regasification capacity was 227 bcm.)
Although the regasification infrastructure in Europe is built mostly with public money, both before the war and than at a larger scale after the war, European financiers were willing to underwrite the investment on the American gulf coast, who had quite a bit of cash in Sabine Pass. The buyers use public money; the sellers use private.
At the time, all the investors in the sector were hemorrhaging money; gas was cheap, but storing excess in salt domes was expensive. Freezing gas and keeping it cold was expensive. There was a massive structural incentive to vent, “unintentionally” leak, and flare as much gas as possible; in times of great surplus, it is infinitely more profitable to sell some gas at a profit than all the gas at a loss. Infinite because the mathematical expression of this concept involves an instance of dividing by zero. When methane is released directly into the atmosphere, it is at least 50x more enthaplic than CO2, and so the future of humanity would prefer that this excess be flared (combusted into CO2); the problem is that flares are noticeable. It is almost impossible to detect and even more impossible to measure a massive flume of invisible gas dispersing into the atmosphere unless you are looking right at it with an infra-red camera. There are many such videos available online. Here’s one of Sabine Pass LNG. But it is impossible to quantify such leaks. It is the perfect crime, except for the fact that it couldn’t push up the price enough to recoup the massive folly of these terrible pre-Ukraine War investments.
Only investors who could hold on to massive paper losses for decades were able to cash out at a profit. But the people with that capacity are also the people with the capacity to influence history, and they would never have entertained the idea of simply not exploiting the newly available reserves of American frack-gas; the thought would have been heretical to their value-systems.
A reporter would now investigate the numerous human interlocks between gas companies and government in the lead-up to the Euromaidan coup. That will be my next post. Ankit Desai, for example, has at various times in his career acted as vice president of government relations for Cheniere Energy, a member of the Atlantic Council, a freelance lobbyist contracted with Cheniere among other companies, and Senator Joseph R. Biden’s Political Director. Or Heather Zichal, the former deputy assistant for energy and climate change and then a member of the board of directors of Cheniere Energy.
But I would do anything for my family, and I can only respect others who will do anything for theirs. Could Desai, if he had so chosen, have prevented the invasion of Ukraine? It is doubtful. Zichal is a villain for environmentalists, but if she had chosen a different career, would Obama’s climate policy have been noticeably different? These people are interchangeable, and they are products of systems much larger than themselves. Instead sentient oil gives us a conceptual framework to point the finger at the real interlock of interests: the material quantity of methane erupting from North American soils. This speculative-materialist perspective allows us to be compassionate to individual human beings while honestly identifying and reckoning with the actual culprit of our collective demise.
Note that you can email me at thespouter@substack.com. It forwards to my personal email.
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