Sunday, October 21, 2012

Gold Rush - Shale Gas Version

If not the only way, but for sure a prominent way of making money in American Capitalism is cashing out finance driven higher valuations. While all along Congress and Obama Administration were busy drafting Frank-Dodd to control copious ways of Wall Street Finance, that same American Capitalism Machine was in full force on a new playing ground - natural shell gas based boom (and inevitable burst). Ignoring all that and failing to avoid all the concomitant excesses; it is laughable to see Obama and Romney sparring about 'who helped to get higher natural gas and oil production' (Obama Administration or Bush Administration). It is as if these politicians have no clues what is happening on the ground. 

For sure, profits and losses in the business of natural shell gas production are all private and none of those deals pose systematic financial risks, at least as of now. Collapsing gas price might create few issues for steady supply over longer term and that can be a national challenge for America; but then American Capitalism is never about longer term sustainability. If this raises issues about American Regulatory setup to detect financial excesses and avoid consequences of those excesses; well, but we have not learnt anything worthwhile from 2008 recession. Rather than having our election about discussing these weighty issues (and authentic economic plans about how we can create sustainable jobs); we have our election about who is going to be more bully to China.

Some of the gems from this great article are: 

“We are all losing our shirts today, ...We’re making no money. It’s all in the red.”
-- Exxon CEO Tillerson, talking about gas production.

“We just killed more meat than we could drag back to the cave and eat,”
-- Maynard Holt Co-president of Tudor Pickering Holt and Company 

"In China, he [Mr. Eads] was in awe at just how much money was available to invest. One senior executive at a major Chinese oil company that Mr. Eads declined to identify, citing the confidential nature of the negotiations, explained that the country wanted to move as much as $750 billion from United States Treasury bonds into the North American energy business. 

Mr. Eads was only happy to oblige, helping to secure $3.4 billion from the Chinese for Chesapeake through two deals."

“Quit drilling,”
-- T. Boone Pickens, the Texas oilman, barked to his fellow board members at Exco Resources.

"There was only one problem: under the contracts that Exco signed, it couldn’t stop drilling."

"The industry was also driven to keep drilling because of the perverse way that Wall Street values oil and gas companies. Analysts rate drillers on their so-called proven reserves, an estimate of how much oil and gas they have in the ground. Simply by drilling a single well, they could then count as part of their reserves nearby future well sites. In this case, higher reserves generally led to a higher stock price, even though some of the companies were losing money each quarter and piling up billions of dollars in debt." [Wall Street failed to consider price of gas while valuing gas companies and how it would get impacted when more supply comes online. One of the difficulties with gas is, it is much less economical to transport it over sea unlike Oil which is still profitable after crossing oceans.]

"Just as in the earlier real estate bubble, the main players publicly predicted success even as, privately, their doubts were growing, court documents show."

“At least half and probably two-thirds or three-quarters of our gas drilling is what I would call involuntary,” -- Mr. McClendon then CEO of Chesapeake Energy 

"Mr. Eads then helped arrange what will go down as one of the great early paydays of the shale revolution: the 2010 sale of East Resources, which Mr. Pegula had started with$7,500 borrowed from family and friends, to Royal Dutch Shell for $4.7 billion."

"Houston businessman Floyd Wilson, who created a company in 2003 called Petrohawk Energy with the intention from the start of selling it. Petrohawk drilled its first Haynesville well in 2008. Last year, it sold itself to an Australian energy conglomerate, BHP Billiton, in a $15 billion deal that brought Mr. Wilson and other executives a payout worth at least $304 million."

And that is how gold rushes continue in American Capitalism. Don't get the impression that greasy American Capitalism is about Carbon energy sources only. You have Goldman Sachs buying / financing thousands of acres of land in prime Solar Spot of Southern California and Arizona. If Solar Industry would have boomed, we would have seen the same 'excesses' there too. That is just the way things work in this country.

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