Kinder Plays Rockefeller While Chesapeake Burns
Booms and busts are natural features of the oil patch. Price attracts supply, over-supply rolls back the price, then order is imposed from downstream by the industry's limited infrastructure.
This has been true since the 19th century. John D. Rockefeller came to control the market by organizing ownership of what was downstream, the transport and refining of the oil. Everybody thinks finding oil or gas makes them rich. But delivering the oil, refining it and getting it to market creates wealth.
Aubrey McClendon did more than anyone to create the present boom.Fracking -- fracturing rock in the path of a horizontal shaft, using water and sand under high pressure -- let McClendon's Chesapeake Energy (CHK) find huge quantities of gas in places where it didn't seem to exist, like eastern Pennsylvania. It created North Dakota's Bakken shale oil boom, and found new supply in fields that seemed played out in the traditional oil patch. McClendon leveraged Chesapeake to the boom, using a variety of complex partnerships to gain controlling interests in new plays.
But what one oil man could do, all oil men could do.
Competition raised prices, the margin for error went down, errors happened as they do, and eventually the price of natural gas rolled over, trapping McClendon's company under enormous capital requirements. Christopher Helman of Forbes thinks it may be impossible to unravel Chesapeake because it was all leveraged to high prices, not today's low prices.
After accepting "adult supervision" last year, McClendon succumbed to the inevitable this week, Forbes reports. You can call it early retirement if you like. The bottom line is he's out.
Enter Rich Kinder. Kinder's Kinder Morgan Energy Partners (KMP) has been quietly buying pipeline capacity across the U.S., at an accelerating rate as the boom developed, and already had 75,000 miles of pipe and 180 storage terminals, Forbes wrote last year, thanks to its purchase of El Paso Corp. for $38 billion.This week, my old friends at the Houston Business Journal report KMP bought Copano Energy (CPNO) for $5 billion, including debt.
Pipelines can move product at half the cost of rail, and at a tiny fraction of what trucks cost. This, too, has been true since the 19th century. Developing pipeline technology was, for John D. Rockefeller, the trump card in gaining control of the market. Kinder now has the Rockefeller position, and for as long as the boom lasts he will be in control of it.
What all this tells me is that there are no new rules in the oil patch. The old rules always apply. Boom leads to bust, bust leads to consolidation around downstream assets, and the biggest winner is someone who doesn't get their hands dirty.