A fracking great Ponzi scheme

2019 was supposed to be the year that American shale oil and gas producers finally reined in spending, with the goal of funding all new development from free cash flow. And just like every other year, it didn’t take long for those plans to unravel.

An analysis of 40 US shale fracking companies by Rystad Energy, an independent research organisation in Norway, has revealed how badly things had gone in the first quarter of 2019: “The gap between capex [capital expenditures] and CFO [cash flow from operating activities] has reached a staggering $4.7 billion. This implies tremendous overspend, the likes of which have not been seen since the third quarter of 2017.”

In other words, the capital expenditures, or money spent drilling, outpaced the cash flow from operating activities, or the money made by selling fuel, by nearly $5 billion, in the first quarter of 2019 alone. And the announcement of second quarter results is bringing no better news, with many shale companies suffering major drops in value. 

The messages coming from energy analysts, the financial industry, and the fracking industry all lead to the same conclusion: The US shale industry has been a financial disaster for investors, with producers piling up huge amounts of debt despite extracting copious volumes of fuel from disappearing sweet spots. Now, shale companies are under mounting pressure to pay back that debt. 

Investors seem to be finally catching up to the bad deal that fracking represents. But the question remains: What took them so long to spot this Ponzi scheme? And why is the new UK Business Secretary Andrea Leadsom so convinced we should follow the American example?