64 Business The Economist July 10th 2021
Keepingitintheground
A
n hour afterdawn Scott Sheffield is at the window of his
2,300acre (930hectare) Forked Lightning ranch in New Mex
ico, contemplating a day’s fishing. The estate, formerly owned by
Jane Fonda, has four miles of river running through it. It’s muddy
at the moment, he says, but on a good day a fly fisherman can easi
ly pull out 20 or so rainbow trout. It is a dreamysounding place,
with pinecovered cliffs and roving elk. It is another world from
the tumbleweedstrewn oilfields of West Texas where Mr Sheffield
was once dubbed the “motherfracker” for his role in turning the
Permian Basin into the mother lode of America’s shale boom.
The last time your columnist spoke to Mr Sheffield, five years
ago, the cofounder and boss of Pioneer Natural Resources was the
Permian’s greatest freemarket evangelist. It was the heyday of the
shale revolution. Pioneer was in the middle of a drilling bonanza
that pushed its oil output up by an average of 1520% a year for a
decade. All the money it earned, it reinvested into fracking even
more shale wells. Mr Sheffield was fond of comparing the Permian
with Ghawar, Saudi Arabia’s biggest oilfield.
That drilling mania made revolutionaries of Mr Sheffield and
his fellow frackers. It helped them usurp the role of opec, the Sau
diled cartel, as pricesetter of last resort in the global oil market. It
reduced American dependence on imported crude, creating what
thenPresident Donald Trump called America’s “energy domi
nance”. Yet it came at a cost. To keep the rigs running the shale pro
ducers burned through Wall Street cash. They flirted with ruin last
year when oil prices crashed in the midst of the covid19 pandem
ic. Led by Mr Sheffield, some even borrowed a leaf from opec’s
book, urging the Railroad Commission of Texas, a state regulator,
to order production curbs to rescue the oil market.
It didn’t need to. Oil prices have since rebounded, with Ameri
can crude briefly hitting a sixyear high on July 6th after opecand
Russia failed to agree among themselves on how much to increase
output (see Finance section). But it is now the shale industry, not
opec, that casts itself as the guardian of high prices. Amid selfim
posed production restraints, it prefers showering investors with
cash rather than flooding the world with cheap crude. This may
worry users of oil—and inflation hawks. But it is economically ra
tional. It is also deeply ironic. Just when climate change is makinginvesting in oil unfashionable, the shale industry is finally be
coming investable. If the selfrestraint lasts, forget the revolution
ary notion that America’s shale industry will be a fleetfooted
source of supply in a tightly squeezed global oil market. Its mantra
might just as well be “Keep it in the ground.”
Mr Sheffield, 69, embodies the transformation. In 2016 he hung
up his oilman’s boots and retired to his ranch. It was a shortlived
move. In 2019 he came back to the helm of Pioneer, convinced that
two things threatened the future of the shale industry. One was its
tendency to pump too much oil, even when it was unprofitable to
do so. The other was the growing sense that oil demand would
peak as electric vehicles gained traction and efforts to prevent cli
mate change ramped up. He realised that to attract investors, the
industry needed to reinvent itself. It is doing so in several ways.
Start with production. These days frackers prefer to brag about
how little oil and gas they produce, rather than how much. Pio
neer, the Permian’s biggest producer, promises no more than 5%
annual volume growth for several years. On June 30th ConocoPhil
lips, another big producer, went further, pledging 3% annual out
put growth over the next decade. With less investment, as well as
higher prices per barrel, the rewards come in cash, not crude. Rys
tad, an energy consultancy, predicts that America’s shale industry
will generate almost $350bn in free cashflow this year, a record.
Much of that will go to shareholders. Over the next five years, Mr
Sheffield predicts that energy firms will be the biggest dividend
payers in the s&p500. Unsurprisingly, investors are delighted.
Pioneer’s share price, a laggard for half a decade, is up by more
than 40% this year. That of ConocoPhillips has risen by 50%.
Next comes consolidation. This is another way to please inves
tors, especially when transactions are done with equity, not debt,
and a more concentrated market means even less oversupply.
ConocoPhillips has acquired Concho, a big Permian producer, and
Pioneer has bought two shale producers, Parsley and DoublePoint
Energy, both of which sit on land adjacent to it. Mr Sheffield says
the deals will further improve production discipline. Pioneer has
reduced the number of drilling rigs used by both.
Last, the industry is sprucing itself up to appeal to the environ
mental, social and governance (esg) brigade. That sounds barmy,
considering that the use of oil and gas is a leading cause of climate
change. But by reducing gasflaring and methane leaks, frackers
believe they can attract yet more investors. Unlike oil giants such
as ExxonMobil and Chevron, Pioneer is not under pressure from
esginvestors to curb oil production for environmental reasons,
says Mr Sheffield. Rather it is for economic reasons: higher divi
dends. Furthermore, he doubts that even drillers without public
shareholders, such as those backed by private equity, are raring to
go on a production spree. They have too much to lose. He thinks
that oil is headed to around $80 a barrel, which would be good for
producers, yet, based on past experience, would not hurt demand,
he adds. The capriciousness of capital
That is the optimistic view. Investors are fickle, though. As Bobby
Tudor of Tudor, Pickering, Holt & Co, an investment bank, says, if
oil prices keep rising there may be a premium on firms with high
production growth. Mr Sheffield insists the industry will not be
swayed, having finally found a business model that works. “I’m
sorry it took us so long,” he quips. Eventually he intends to retire
again—at which point, he says, he plans to enjoy those dividends.
All the more so, presumably, as he casts a fly over a pool of trout.nSchumpeter
How the “mother-frackers” of shale came to resemble opec