AN HOUR AFTER dawn Scott Sheffield is at the window of her 2,300-acre (930-hectare) Forked Lightning ranch in New Mexico, contemplating a day of fishing. The estate, formerly owned by Jane Fonda, is crossed by a four mile river. It’s muddy right now, he says, but on a good day, a fly fisherman can easily remove a score of rainbow trout. It’s a dream-like place, with pine-covered cliffs and wandering elk. It’s a different world from the oil fields of West Texas, where Mr. Sheffield was once nicknamed the “Mother of Fracking” for his role in transforming 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 co-founder and boss of Pioneer Natural Resources was the Permian’s foremost free market evangelist. It was the height of the shale revolution. Pioneer was in the midst of a drilling windfall that increased its oil production by an average of 15-20% per year for a decade. All the money he made, he reinvested in fracking even more shale wells. Mr. Sheffield liked to compare the Permian to Ghawar, Saudi Arabia’s largest oil field.
This drilling craze has made revolutionaries Mr. Sheffield and his fracking companions. This helped them to usurp the role of OPEC, the Saudi-led cartel, as a price-maker of last resort in the global oil market. This reduced America’s dependence on imported crude, creating what then-President Donald Trump called America’s “energy dominance”. Yet it came at a cost. To make the platforms work, the shale producers spent Wall Street money. They flirted with ruin last year when oil prices collapsed amid the covid-19 pandemic. Led by Mr Sheffield, some even borrowed a sheet from OPEC, urging the Railroad Commission of Texas, a state regulator, to order production restrictions to save the oil market.
It was not necessary. Oil prices have since rebounded, with U.S. crude briefly hitting a six-year high on July 6 after OPEC and Russia failed to agree on the level of production increase. But now it’s the shale industry, no OPEC, which presents itself as the guardian of high prices. Amid self-imposed production restrictions, he’d rather flood investors with money than flood the world with cheap crude. This can worry oil users and inflation hawks. But it is economically rational. It is also deeply ironic. Just as climate change makes investing in oil out of fashion, the shale industry is finally becoming investable. If the holdback continues, forget the revolutionary idea that the US shale industry will be a quick source of supply in a tight global oil market. His mantra might as well be “Keep it in the ground.”
Mr. Sheffield, 69, embodies the transformation. In 2016, he hung up his oil tanker boots and retired to his ranch. It was a short-lived movement. In 2019, he returns to the head of Pioneer, convinced that two things threaten the future of the shale industry. One was its tendency to pump too much oil, even when it was not profitable. The other was the growing sense that demand for oil would peak as electric vehicles gain traction and efforts to prevent climate change intensify. He realized that to attract investors, the industry had to reinvent itself. It does this in several ways.
Start with the manufacturing. These days, frackers prefer to brag about how little oil and gas they produce, rather than how much. Pioneer, the Permian’s largest producer, does not promise more than 5% annual volume growth for several years. On June 30, ConocoPhillips, another big producer, went further, pledging to increase annual production by 3% over the next decade. With less investment and higher barrel prices, the rewards are in cash, not crude. Rystad, an energy consultancy, predicts that the U.S. shale industry will generate nearly $ 350 billion in free cash flow this year, a record. Much of this will go to shareholders. Over the next five years, Mr. Sheffield predicts that energy companies will be the biggest dividend payers in the S&P 500. Not surprisingly, investors are thrilled. The Pioneer share price, which has been lagging for half a decade, has risen more than 40% this year. That of ConocoPhillips increased by 50%.
Then comes consolidation. It’s another way to appeal to investors, especially when transactions are done with equity, not debt, and a more concentrated market means even less oversupply. ConocoPhillips acquired Concho, a large Permian producer, and Pioneer purchased two shale producers, Parsley and DoublePoint Energy, both located on adjacent lands. Mr Sheffield says the agreements will further improve production discipline. Pioneer has reduced the number of drilling rigs used by both.
Finally, the sector is renewing itself to appeal to environmental, social and governance issues (ESG) squad. This seems ridiculous, given that the use of oil and gas is one of the main causes of climate change. But by reducing gas flaring and methane leaks, the frackers believe they can attract even more investors. Unlike oil giants like ExxonMobil and Chevron, Pioneer is not under pressure from ESG investors to curb oil production for environmental reasons, said Mr Sheffield. Rather, it is for economic reasons: higher dividends. Furthermore, he doubts even drillers without public shareholders, such as those backed by private capital, are eager to embark on a production frenzy. They have too much to lose. He believes oil is heading for $ 80 a barrel, which would be good for producers, but, based on past experience, wouldn’t hurt demand, he adds.
The vagaries of capital
This is the optimistic view. Investors are fickle, however. As Bobby Tudor of Tudor, Pickering, Holt & Co, an investment bank, says if oil prices continue to rise, there could be a premium on companies 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 says. Eventually, he intends to retire again – at that point, he says, he plans to take advantage of those dividends. The more so, probably, that he throws a fly over a pool of trout. ■
This article appeared in the Business section of the print edition under the headline “Keeping It In The Ground”