The Boom (24 page)

He attended Heritage Hall, a relatively new private high school that offered a less rigid social environment than Oklahoma City’s other elite prep schools. Aubrey excelled both socially and academically. He was elected senior class president and was covaledictorian. Graduating in 1977, he went off to Duke University. His years in Durham, North Carolina, revolved around schoolwork, the hard-partying Sigma Alpha Epsilon fraternity, and the school’s basketball team. One of his best friends was Ralph Eads, a fellow fraternity member. Eads hailed from Houston, and his father, like McClendon’s, worked in the oil industry. They lived across the hall from each other. Eads was known as Ringo. People close to McClendon called him Aubs. Ringo and Aubs.

During their senior year, McClendon was wrapping up a degree in history, but he had also taken a number of courses in economics and finance. Eads studied economics with an eye toward a job on Wall Street. For the final home basketball game of their four years in college, Eads and McClendon must have arrived early at Cameron Indoor Stadium on the morning of Saturday, February 28, 1981. When the doors opened, they grabbed seats practically on the court, almost immediately behind the players’ bench. It was as close to the action as possible.

The game was one last chance to see their beloved Blue Devils as students. The opponent was the school’s archrival, the University of North Carolina Tar Heels. The Blue Devils had sputtered that year under first-year coach Mike Krzyzewski, including two losses at the hands of the Tar Heels. Under legendary coach Dean Smith, UNC was ranked eleventh in the nation. It was the establishment behemoth. Duke was at risk of faded glory, a once-proud basketball program that had fallen into disrepair.

Duke kept the game close and trailed by only two points with two seconds left. After a time out, senior forward Gene “Tinkerbell” Banks caught the inbound pass at the top of the key, turned, and shot the ball over his defenders’ outstretched hands as time expired. The ball went straight through the rim, tying the game and sending it into overtime. Banks was electric in the extra period, notching several rebounds and baskets. In the final seconds, when a teammate missed a shot, Banks grabbed the rebound and laid it in for the victory. Thousands of Duke students rushed onto the court in euphoric celebration. These days Duke is a basketball dynasty. That day, a David had defeated a Goliath. Eads recalls being among the throng that celebrated on the hardwood. McClendon has a different memory. He says both of them were in a rush to drive an hour west to Greensboro, where they had tickets to a Bruce Springsteen concert.

By an odd coincidence, I was among the ten thousand people at Cameron for the game. My family had moved to nearby Chapel Hill for a year, and my father took me to the game that day. We sat about as far from courtside as possible, just a couple rows from the rafters. When the game was over, we got in our car and drove ten miles back home. On Monday I went back to fourth grade and told my friends about having been at the game. A few months later, at the end of the school year, my family moved back to Philadelphia.

McClendon moved home to Oklahoma City a few weeks later after the basketball game, finishing his time at Duke with a 3.7 grade-point average and a fiancée. Later that summer, he married Kathleen Upton Byrns, a granddaughter of the founder of Whirlpool Corporation. Eads, who was a member of the wedding party, went to New York and began training as an investment banker at Merrill Lynch, where he learned how money moved through the modern financial world. Years later, Eads and McClendon would work together again, the financier finding money for McClendon to keep up a torrid pace of leasing and drilling. I was again orbiting around the action as a
Wall Street Journal
reporter keeping tabs on Chesapeake. I first interviewed McClendon in August 2006 in Oklahoma City. On my flight home, I wrote in my notebook: “Is he a huckster, a dynamic salesman, a visionary, a fool? I can’t tell.”

A couple months before McClendon returned home from Duke, oil prices hit $39 a barrel. Revolutions and war between Iran and Iraq drove up crude oil to this never-before-seen level. Adjusting for inflation, this 1981 price was the equivalent of $100 oil. A generation would pass before crude regained this plateau. As McClendon settled in Oklahoma City, crude prices were falling due to a global recession and increased output from the Middle East. Drilling rigs idled. And aggressive loans to oil companies began to cause trouble at the Penn Square Bank, a major financial institution in Oklahoma City where McClendon, as a kid, had deposited money from mowing lawns and selling holiday cards door to door. The bank had been cofounded by McClendon’s great-uncle Robert S. Kerr. Bank auditors found Penn Square had too many loans that weren’t being repaid, there was not enough cash, and inexperienced loan officers had too much autonomy. The bank was awash in loans to oil companies. When oil prices dropped, these loans began to go unpaid. Penn Square had farmed out its loans to other banks across the country. When Penn Square went under, its loans sunk the Continental Illinois National Bank in Chicago, then the seventh largest in the country. The slow-motion collapse of Penn Square turned Oklahoma City from a boomtown into a ghost town. The regional economy of the US oil patch sunk into the doldrums.

In the midst of this crisis, young Aubrey McClendon needed a job. The small company where he landed, Jaytex Oil & Gas, was owned by his uncle, Aubrey Kerr Jr. His uncle offered him a position as a staff accountant. It was steady work but, like his father’s job servicing gas stations, it was not glamorous. After nine months at Jaytex, McClendon took on a new assignment in the land department, where he was responsible for figuring out who owned the mineral rights to any particular parcel and getting them to sign a lease. Mineral rights are often split, and landmen often must hunt down a long-forgotten family member who owns one thirty-second of the oil and gas. The work involves a lot of digging through county courthouse land records. This work appealed to McClendon. “In land, I found my true love in the oil/gas business,” he wrote in an email to me in 2006. “Learning to become an oil/gas landman combined my love of history with my appreciation for the precision of numbers learned through accounting.”

In 1982 McClendon realized that Jaytex wouldn’t survive the downturn. He left the company and struck out on his own. He bought a typewriter, some oil-and-gas maps, and rented a one-man office. He spent the next few months acquiring leases and trading them. He soon began to bump into another independent landman named Tom Ward. If McClendon had been born into a privileged life, Ward was the opposite. He came from Seiling, a tiny town in northwestern Oklahoma, into what he called “a fairly dysfunctional family.” Ward can be gruff, while McClendon is all polish and charm. Ward went to the University of Oklahoma, a far cry from elite Duke. After graduating, he struck out on his own as a landman. His early success in the business came not from geological acumen but from recognizing and exploiting Oklahoma’s oil and gas laws.

In southern Oklahoma, there is a large gas field called the Golden Trend. A company that wanted to drill a well might acquire the mineral rights to the vast majority of a 640-acre block of property but run into problems locking up all the rights. In this situation, the company could apply to the state for a forced pooling order. If granted, all of the mineral owners in the block who had not signed a lease would be forced to participate, or pooled. The farmers (or whoever owned the mineral rights) who hadn’t signed would be entitled to the highest amount paid to the farmers who had signed. Ward figured that if a big energy company wanted to go through the bother of obtaining a forced pooling order, it must be excited about the geology and prospects. He spent his days driving around and locating the holdouts, explaining that they were going to be pooled and then offering them a bit more than the state would pay. In this way, he would get a small slice of another company’s well—without the cost of hiring geologists and engineers to do any actual exploration work. He was, in essence, piggybacking off the work of other companies. This strategy proved successful, except that he kept finding himself in competition with McClendon, who had figured out the same trick. They bid against each other, driving up prices and eroding each other’s profits. In the summer of 1983, McClendon and Ward agreed to collaborate instead of compete. This partnership was the beginning of Chesapeake Energy.

From that point on, the two men often pursued separate deals but worked under a fifty-fifty agreement that intertwined their interests and split the risks. Any deal that Ward worked out, McClendon would take a 50 percent share—and vice versa. Despite joining forces, the partners maintained separate offices in different buildings. Indeed, in the twenty-three years they worked together, they never had offices in the same building.

Neither man any had training to read a well log or study subsurface geology, the typical background for oil company executives. What they knew was land and money. Recognizing their limits, they weren’t attracted to the high-risk world of drilling wildcat wells. “We clearly could not outthink a geologist or an engineer,” McClendon said a few years ago. So the partners pursued oil fields “where once the geology was recognized and the engineering solution had been crafted, that it was the land guys that then made the difference.” Success for the young Oklahomans didn’t require any particular technology or engineering skill. It required hustle and money, and an ability to lease land before anyone else.

By the end of the decade, the partnership had outgrown its model of buying small slices of other people’s wells. Ward and McClendon migrated to acquiring large tracts of land, drilling and operating their own wells. Ward gravitated toward operations. McClendon took over finance and land operations. In May 1989 the partners incorporated Chesapeake Operating. Even after the early-eighties oil bust, Oklahoma remained filled with hundreds of small-time operators, raising money and drilling a handful of wells. Even today, there is one oil operator for every 1,200 Oklahomans, nearly twice the rate of Texas. Getting into the business wasn’t hard. It took the gift of gab and the ability to raise money from friends, family, and business associates. “Oil is
the
Oklahoma business, and it’s a family business,” said Dewey Barlett Jr., part of a family involved in both energy and Tulsa politics. It was a point of pride for many Oklahomans to be invested in a well or two. These deals were free-wheeling, often sealed with a firm handshake, a confident smile, and the promise that everyone was putting his own money into the venture. This arrangement worked just fine, except when the foundation of trust crumbled. Then acrimony and lawsuits took over.

That’s what happened in an energy deal that turned into a lawsuit which has been largely forgotten, and misunderstood by those who remember it. The case involved allegations of fraudulent land deals, double-crossing petroleum engineers, and what turned out to be a dry hole in rural Beckham County. Tom Ward had put together what he called the East Virgil prospect: land in westernmost Oklahoma, near the Texas panhandle and less than a mile from a successful well. He hired a geologist to prepare a subsurface map of his acreage that suggested there might be oil and gas there.

Ward had leased the land and put together the package but was looking for someone else to take over and drill the prospect. (As usual, McClendon and Ward split the prospect evenly.) Ward offered the deal to Ralph E. Plotner Oil & Gas, a company owned solely by Ralph Plotner, an Oklahoma City salesman for a local radio station who had decided to get into the oil business a year earlier. On his first venture into his new trade, the neophyte had trudged through snow to a farmhouse, got the farmer to sign a lease, and drilled a successful well with the help of a friend. Plotner Oil agreed to buy a stake in the East Virgil prospect and took over as the operator. Then Ward rounded up another investor, Continental Trend Resources, run by Harold Hamm. (The company is now known as Continental Resources and is a major oil producer; Hamm is regularly listed as one of the country’s wealthiest billionaires.) Eventually Plotner Oil bought a 40 percent interest, Continental took 20 percent, and another small company held 25 percent. The remaining 15 percent was held equally by TLW Investments, a company wholly owned by Ward, and Chesapeake Investments, a company owned by McClendon and his wife.

After the well was drilled and didn’t turn up any oil or gas, the partnership soured. It all ended up in a lawsuit in which Plotner Oil claimed that Ward had lied to him while promoting the East Virgil prospect. He said he was impressed when told that Ward and McClendon had had personally invested more than $2 million in the prospect, paying $500 an acre to accumulate between 4,500 and 5,000 acres. But during the trial, it came to light that they hadn’t spent $500 an acre. They had spent only $300 an acre, according to testimony that the jury relied on.

Megan Hann, a petroleum geologist who worked for McClendon and Ward, was subpoenaed to appear at the trial. Her testimony damaged her employers. She said that Ward regularly overstated reserves, or recoverable oil and gas, to potential investors. At first, she said, the embellishments were small, but by 1990 “the exaggerations got pretty large.” Hann said she sat in on meetings where she heard Ward make these outlandish claims, but remained silent. She attended these meetings to present the geology, not the economics. “I didn’t believe it was my place” to contradict Ward when talking to potential investors, she said. But when her friends and family asked for tips, she testified that she advised them not to put in any money. She also said that she heard Ward tell Plotner he had spent $500 an acre, and repeat the same to Harold Hamm.