Over the run up to the peak in crude prices in early H2/18 I became interested in the oil market and what drives the price, with the intention of trying to develop a strategy for trading leveraged oil stocks. I was attracted by the volatile nature of the market and the opportunities it provided, but aware that the price can be driven more by politics and sentiment than market fundamentals and I learned very quickly in the last two quarters just how true that is!
Inevitably my early assumptions were wrong and mistakes were made but I'm learning fast, and to help understand one of the key elements of the market bought this book. I haven't read Bethany McLean before but as she had written 'The Smartest Guys In The Room' I figured that she would be able to get a handle on the shale industry in a concise and direct manner.
That really is the first takeaway when you pick up the book - It is small. At 131 pages and smaller than A5, I was left feeling a bit deflated about how much information could be included and how deep it could really dive in such a brief book. I wanted Concise though and so I couldn't complain but on a cost/page basis it looked pricey (£10 from Amazon, more the cost of a hardcover).
The start and really the first half describes the birth of shale and particularly the role of Aubrey McClendon and Chesapeake Energy in the birth of the industry. The strategy and sheer force of McClendon is gone into in some detail, it is vividly conveyed just how inspired and reckless he really was.
McClendon's positioning in gas shale set the tone for the industry early on and when oil shale was subsequently developed the same strategies were employed to expand this new industry, principally the drive by participants to acquire acreage at any cost and shut out competitors using very large sums of institutional money. McLean then goes on to describe how the antithesis of McClendon grew out of the ashes of Enron in the shape of EOG - 'The Harvard of Shale'. Their smart approach to developing technology, finding new patches, acquiring acreage at low cost and being relentlessly focused on making a return on capital was the complete opposite of McClendon.
McLean does a great job of describing the stories of both and, although at times it feels like she is working very hard to contrast them, really sets the backdrop to the modern shale industry and how we got to where we are today as described in Part 2.
Early on I was very keen to identify any bias to McLean's writing and whether it reinforced my own bias or challenged it and going into Part 2 felt that there wasn't much that could be described as being political or anti-capitalist or even overly pro-capitalist. This did not seem to change in the second half. There are descriptions of policy from both the Obama administration and the Trump administration and she seems to do a good job of just stating the facts (or narrative as she understands it) and not making any judgement about it.
The modern shale oil era (Shale 2.0?) starts with the Obama administration lifting the ban on the export of US crude oil. This was the catalyst for the shale revolution that we see now and whether or not you think this was a good idea (I have my own view - DM me if you want to discuss) it removed the final hurdle in the easy borrowing era post-GFC to the astronomical growth of shale oil production. McLean goes into detail about who were the main movers and shakers in policy change being assured and it is interesting in that way that politics can sometimes be by make the mundane process of administration end with world-changing outcomes.
The book then goes on to discuss the improvements in technology, the game changer that was the Permian and the impacts on OPEC's strategy especially in relation to how they behaved when the 2014 glut didn't result in cuts and how their previous experience cutting output costing market share in the 80s/90s informed the strategy of the shale-driven glut. There is also a description of the global market and regional dynamics that impact supply, such as Venezuela and Nigeria.
There is some data on the capital inefficiency of the market and how the different players operate, with EOG held up as a shining example of the market leader, but still having quite slim margins even with their data-led strategy. There is also some description of the geological challenges and variation within small areas affecting how easy it is to extract oil but this is where the book is lacking really.
I was hoping that there would be much more depth into the nuts and bolts of shale with some strong quantitive analysis but this work has been done elsewhere and McLean does a good job of pointing the reader to sources for further investigation.
The book finishes with an epilogue summing up the place of crude in a socio-economic context with a view on how shale's just-drill philosophy will ultimately be detrimental to the US. Everyone will form their own opinion on that and it's an interesting discussion that I'm happy to have with anyone.
For me the book was a valuable background into shale history, putting all the developments into context and providing a great starting point for further research. The data sources are invaluable and the narrative is easy to read and flows nicely. I would have liked much more technical, economic and corporate discussion but it's job is to give a layman an introduction to the industry and in that it has done very well.
