AN HOUR AFTER dawn Scott Sheffield is at the window of his 2,300-acre (930-hectare) Forked Lightning ranch in New Mexico, 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 easily pull out 20 or so rainbow trout. It is a dreamy-sounding place, with pine-covered cliffs and roving elk. It is another world from the tumbleweed-strewn oilfields of West Texas where Mr Sheffield was once dubbed the “mother-fracker” 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 co-founder and boss of Pioneer Natural Resources was the Permian’s greatest free-market 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 15-20% 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 Saudi-led cartel, as price-setter of last resort in the global oil market. It reduced American dependence on imported crude, creating what then-President Donald Trump called America’s “energy dominance”. Yet it came at a cost. To keep the rigs running the shale producers burned through Wall Street cash. They flirted with ruin last year when oil prices crashed in the midst of the covid-19 pandemic. 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 American crude briefly hitting a six-year high on July 6th after OPEC and Russia failed to agree among themselves on how much to increase output. But it is now the shale industry, not OPEC, that casts itself as the guardian of high prices. Amid self-imposed 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 rational. It is also deeply ironic. Just when climate change is making investing in oil unfashionable, the shale industry is finally becoming investable. If the self-restraint lasts, forget the revolutionary notion that America’s shale industry will be a fleet-footed 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 short-lived 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 climate 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. Pioneer, the Permian’s biggest producer, promises no more than 5% annual volume growth for several years. On June 30th ConocoPhillips, another big producer, went further, pledging 3% annual output growth over the next decade. With less investment, as well as higher prices per barrel, the rewards come in cash, not crude. Rystad, 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&P 500. 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 investors, 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 environmental, 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 gas-flaring 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 ESG investors to curb oil production for environmental reasons, says Mr Sheffield. Rather it is for economic reasons: higher dividends. 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. ■

This article appeared in the Business section of the print edition under the headline “Keeping it in the ground”