frack frack boom

The oil boom is a-coming in.

frack frack boom
Photo by Chris Liverani on Unsplash

Today's topic: some thoughts on the coming oil boom (7-minute read)


a spring in their step


I saw two red kites mating on Monday. A pretty grubby affair next to a road. I'm not sure why the birds insisted on being seen, as there was a forest behind them. But this desire to perform is probably a good sign; the kite population is feeling bullish about its prospects.

Spring has also handed the local chickens some confidence. The week before last, they took it upon themselves to double their daily egg production. And they've kept it up since then. Don't forget that it's been a tricky winter for chickens across the country. Avian flu has meant that they've been locked down and stuck inside since last November.

Further afield, oil men across the world are enjoying a bit of springtime optimism. Aside from some worries about Chinese lockdowns, things are mostly going their way. Russian oil is being drained from the global market, pushing up prices. Much of the world has recovered from Covid by binging on goods (when we demand goods we demand oil). And so $100 per barrel has become the new normal.

In the Bakken fields of North Dakota, in the Permian Basin in Texas, in the Vaca Muerta in Argentina, in Dhahran in Saudi Arabia, and across all of the ancillary industries, oil men - and they are mostly men - are readying themselves for the last great oil boom of the Anthropocene.

I interviewed a salesman in the oil and gas industry. He worked for a company that manufactured the massive pipes and valves that the industry uses, and he can help us answer two questions: what will this boom look like? and what will it mean for those caught up in it?

ben-seymour-pW2nEHR4Q0U-unsplash-1

Photo by Ben Seymour on Unsplash. Red Kite flying on a grey Oxfordshire afternoon.


fracking leads the way


Oceana, a nightclub in Watford, used to run a back-to-school night at the end of the school holidays. At least that's what I remember. I didn't understand how a nightclub could so shamelessly advertise to under 18s, and I also didn't get how anyone could enjoy themselves when there was so much start-of-school dread around.

I wouldn't be surprised if this coming oil boom was marked by a similar dread. Like teenagers at the end of summer, oil producers may be having a good time now but they are worried about what's coming next, about the political and economic risks that are heading towards them:

  • the war in Ukraine, and the linked global experience of high oil prices, may accelerate the transition from fossil fuels to renewable energy sources.
  • the pool of capital available to oil producers is shrinking as ESG investors walk away.
  • there's no scenario in which the regulatory environment gets easier for producers over the next decade.
  • post-covid global demand might be more transitory than it seems.

The thought of tomorrow sours the enjoyment of today; and so teenagers on a night out won't drink as much as they otherwise would, and oil majors won't produce as much as they otherwise would. However rosy prices are today, why invest in a new offshore/onshore field now if that project has a five-year lead time and you think that the good times might be over by 2030?

Producers' reluctance to ramp up production by investing in a whole load of traditional offshore/onshore projects is good for the planet, good for renewables, good for producer cash flow, but bad for inflation.

It also means that increases in oil production capacity in this boom will be led by the frackers and not the traditional deep well lot, because fracking sits on a different timeline from ordinary offshore and onshore drilling.

Vanilla offshore and onshore wells take years to bring online, but once they get going they can produce steadily for decades. Shale wells are the opposite; they can be set up in short order, but once the oil and gas is flowing it gushes out quickly. 60% of a typical shale well's resources are gone by the end of the first year. 90% by the end of the third year.[1] It's fast and dirty - so dirty, in fact, that babies born within 3km of a fracking site are 25% more likely to be unwell (and that's after adjusting for socio-economic factors).[2]

If you want to make some money on this, but don't want to support shale producers in their destruction of the planet, then here's the smart play: find a way to bet on American high school football, and bet on Texan / North Dakotan schools in shale regions. Student numbers and school budgets rise during oil booms. Look at this $94m school sports complex in the Bakken shale of North Dakota!


a silent boom


A good boom is not just about making money. It's about being seen to make money. It's the performance of wealth not the accumulation that leaves the lasting cultural impact. Investments banks, for instance, have had a bonanza couple of years, with bonuses at near pre-crash levels. Yet we've barely noticed. Wary of poking the great bear of public opinion, bankers don't talk about how much money they're making.

The oil and gas executives and salesmen are likely to approach their new riches with similar caution. There are a couple of reasons for this. First, the oil industry's past scandals weigh upon the present:

when I first started, the big contracting houses in London that built oil rigs... would go out for two-hour lunches, and you'd go with 'em, and sometimes you wouldn't even go back to work.

Some of the monies that were spent...I've gone to restaurants in London, maybe five of us, and you'll spend two or three thousand pounds on food and wine.

There were some scandals, particularly in America, about bribes. All of a sudden, a calendar and a bottle of wine at Christmas was potentially a bribe to keep their interest in your product. It got silly.

And companies started getting very wary of the drinking culture.

They suddenly said, "Right, okay, no more Christmas parties on boats in the Thames with a lot of strippers and gambling".

By the late 90s, that kind of culture disappeared.

Second, as mentioned above, those in oil and gas are afraid of the future.

It's hard to think of a less popular industry. Defence contractors perhaps? But even they have become kosher since Putin's invasion of Ukraine. With few friends and net zero targets on the horizon, the industry is awfully exposed to suffocation by the state. e.g. if oil prices and inflation remain high, and wages low, then voters will want nothing more than to smother producers with a fat windfall tax.

Given the scandals of the past and the fears of the future, those with their heads in the oil trough will be drinking quietly. The spirit of excess, of drinking and drug-taking, will be limited to the oil cities. We won't notice that hundreds of thousands of millionaires are being made each year (c.f. Silicon Valley, where we do notice).


shale and false promises of levelling up


In the UK, the fracking debate has got going again. One of the arguments raised by the frackers is that domestic fracking will create tens of thousands of highly paid jobs in regions that have suffered from de-industrialisation - it promises a great revival in fortune for the North.

In one sense this is right. Oil and gas is the only industry that can rival the salaries of the knowledge economy. Wherever it settles, it pumps huge amounts of money into the local area.

But in another sense the vision of a manufacturing revival driven by shale is illusory. It fails to account for the transient nature of the industry.

You can see these forces at play in the Argentinian town of Añelo, an oil town in the Vaca Muerta shale formation.

The frackers promised Añelo's residents good jobs in the oil industry and money.

What happened (according to the geographer Ivin Degado[3]):

  • the population tripled between 2010 and 2015 (from 2.6k to c.8k).
  • the good oil jobs went to the itinerant oil workers that arrived, as they had much more experience than the locals.
  • the town's infrastructure failed to keep up with the population expansion. It took longer for the local government to build sewers than it did for the corporations to start fracking.
  • there was no direct redistributive mechanism that sent oil money into the residents' pockets.
  • prices shot up like a gusher. A residential lot in town used to cost 25k pesos in 2012. By 2013 that same lot would cost 2-3m pesos.

The short timeline of shale makes it difficult to imagine any other outcome. Why would the frackers, in Argentina or Lincolnshire or wherever, take the time to employ and train locals when (i) they need the wells running as soon as possible, (ii) the area may not be viable in a couple of years, and (iii) skilled non-locals have turned up at their doorstep? And so, instead of a revival of local manufacturing, a locust-like elite of oil workers earning good money arrives. They push up prices and push out locals.

The solution is probably some form of direct redistribution of oil tax revenues to affected locals, but that seems politically far fetched in the UK.

There won't be a great industrial revival if the frackers get their way. Not in any meaningful sense, where the community feels a sense of ownership and pride in the local industry. For that to happen, the frackers must need the local community, and they don't. In fact, they'd rather they weren't there.


a boom for service stations on the M1


In the UK, working in oil and gas seems to involve spending your life driving between London and the oil city of Aberdeen:

[ how did you spend those car journeys?]

Usually listening to music and eating too much. I got a bit of a weight problem. And it was just too many business lunches, and snacking on crisps and a bag of revels and a Red Bull.

Back when I was a younger man, I would drive from wherever to Aberdeen. You know, 500 miles. Sometimes I'd do it in a day. When I got older and wiser and had a few near misses through falling asleep at the wheel, you'd start to think:

"stop doing this. It's a job. You're not killing yourself for it."

But on long trips like that, you'd stock up - mine was bags of revels, packets of walkers crisps, and Red Bull. "Bzzz"! it gets you going!

But the trouble is the crash afterwards... you're not yourself.[4]

We need to decarbonise now: save the oil workers from an early heart attack.


That's all from me. I hope you all have a good week.

Charlie

Contact me: charlie@re-working.co.uk

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  1. https://web.archive.org/web/20201222105612/https://www.wsj.com/articles/fracking-from-breaking-shale-to-breaking-even-11608546780 and https://www.sciencedirect.com/science/article/abs/pii/S0920410521010536 and https://www.sciencedirect.com/science/article/pii/S2666278720300106 ↩︎

  2. https://www.forbes.com/sites/ucenergy/2018/02/20/fracking-has-its-costs-and-benefits-the-trick-is-balancing-them/?sh=46e82e5519b4 ↩︎

  3. Ivin Delgado, Journal of Latin American Geography , OCT 2018, Vol. 17, No. 3, SPECIAL ISSUE: 'Petro-Geographies and Hydrocarbon Realities in Latin America' (OCT 2018), pp. 102-131 ↩︎

  4. NB this is eerily similar to Alan Partridge's breakdown in 'I'm Alan Partridge': "I gorged on Toblerone and drove to Dundee in my bare feet." ↩︎