The Boom (30 page)

In August 2011 Aubrey McClendon appeared on
Mad Money,
a cable financial news show on CNBC. He was there to boast about a newly discovered shale—the Utica—in Ohio. It was a typical performance. The Utica is “one of our biggest discoveries in US history.” Maybe twenty-five billion barrels of oil and petroleum liquids. Really big. Chesapeake had drilled in total only fifteen wells in the Utica—and only six modern horizontal wells. From this small sample, it extrapolated that the discovery could be worth between $15 billion and $20 billion. It was a bold statement, considering the entire company was worth about $22.6 billion at the time.

Not long after, Chesapeake began to turn the acreage it had leased into money. Before the end of the year, two deals came together. One was a joint venture with French oil major Total to sell a quarter of its Utica acreage in ten counties in eastern Ohio. Chesapeake had also created a new subsidiary, placed most of its Utica acreage into it, and then sold $500 million in shares of this subsidiary to EIG Global Energy Partners. EIG, which ultimately spent another $750 million on CHK Utica shares, received a nice 7 percent annual dividend on its investment, plus the first 3 percent of revenue from the first 1,500 wells drilled in the Utica. Eads represented Chesapeake, as financial adviser on the joint venture and as adviser helping to connect Chesapeake with EIG. It was the twentieth and twenty-first transactions that Eads had undertaken for Chesapeake, cumulatively generating $28 billion for the company, since the beginning of 2007.

When Chesapeake released details of the EIG deal, it spelled out a mind-numbingly complex financial transaction. What it didn’t disclose was that a couple weeks after McClendon sold off a chunk of Chesapeake’s hottest new acquisition to EIG, he was arranging a personal $500 million loan from EIG. (The Reuters news agency disclosed this in an April 2012 story that walloped Chesapeake’s stock price.) The loan helped McClendon continue buying his 2.5 percent share in Chesapeake wells. And he was using his ownership in these wells as collateral. Henry Hood, Chesapeake’s general counsel and another Duke classmate of McClendon’s, told investors that everything was aboveboard. “The board of directors is fully aware of the existence of Mr. McClendon’s financing transactions,” he said.

This assurance did nothing to squelch investor discontent. The loans turned out to have been substantial: up to $1.4 billion to cover several years of participation in the perk. In 2011 McClendon had to come up with about $450 million to participate in the all-or-nothing program. The federal government opened two separate inquiries into whether the company had disclosed enough information—and whether McClendon had reported his income appropriately. Chesapeake took the unusual step of recanting Hood’s statement that the board was in the loop, eight days after it was issued. As it turned out, the board didn’t know about the loans. It “did not review, approve or have knowledge of the specific transactions,” according to a press release. By the end of the year, Chesapeake demoted Hood. The board, pushed into exerting its influence, negotiated an early end to the Founders Well Participation Program. Amid calls for better oversight, Chesapeake announced on May 1, 2012 that McClendon would step down as chairman but kept his chief executive role.

Large shareholders, however, were not placated, and McClendon appeared to dislike his diminished role. In late January 2013 Chesapeake’s new board of directors issued a two-page statement. McClendon was stepping down as CEO and leaving the company he had cofounded and steered for more than two decades. A couple days later, it clarified that he had been terminated. Former Conoco chief executive Archie Dunham, who had taken over as chairman the previous June, assured employees in an email that Chesapeake and the unique culture that McClendon created wouldn’t go away. The fitness center would remain. And the gourmet company cafeterias would not be sold to a food-services company. Within a few months, however, Dunham was steering Chesapeake in a new direction that was significantly less aggressive than it had been in the past. It was nothing less than a repudiation of the strategy McClendon had pursued.

McClendon left Chesapeake on April 1, 2013. Less than a month later, he sent an email to industry contacts. He was starting a new company called American Energy Partners. “I am interested in being contacted regarding onshore US assets,” he wrote. “In particular, I will be looking for deals with a lot of drilling left on them and will also consider undeveloped acreage deals—plus, I am not scared of natural gas.”

In 2003 McClendon had said there was “no way” to build an economy that consumed thirty trillion cubic feet of natural gas by 2010. But a couple years later, the United States was producing thirty trillion cubic feet a year. Companies vented some of it into the atmosphere and used some of it to power the machinery of fracking. It was still too much. America was consuming only twenty-five trillion cubic feet.

McClendon remains an unrepentant gas enthusiast and optimist. Asked if he had any regrets about his tenure at Chesapeake and whether he would do anything differently, he replied: “Nothing, I loved every minute of it.” After 2008, prices remained low enough, he contended, to stimulate more people and companies to commit to using natural gas. Now that demand is catching up with supply, it is again a good time to drill wells and produce natural gas. With a typical mix of boldness and far-reaching rhetoric, he said: “The future will once again belong to producers over the next twenty to fifty years.”

10

CELESTIA

Fracking is changing the world, but some places are shouldering more of this change than others. To understand better what Aubrey McClendon and Chesapeake have created, I returned to the Farm for a week to spend time traveling around Sullivan County. Chesapeake had leased thousands of acres and drilled nearly one hundred wells, including one on my parents’ property.

The debate over fracking here isn’t abstract. US energy security and climate change don’t come up that often in conversation. When residents of Sullivan County talk about fracking, they talk about their water and land as well as the trucks on the roads. What I learned—and would have realized long ago if I had thought about it—was that my parents’ approach to the land was out of step with their neighbors’. They planned to keep the land untouched and wild. Many of their neighbors worked the land for their livelihood. Over the years, my parents had inched toward the local way of thinking. They allowed a local timber company to harvest some of the trees. They posted No Hunting signs on the property, but within a few years relented and let neighbors come in during white-tailed deer season.

There are people opposed to fracking in Sullivan, but they seem to be recent arrivals. As I spent time talking to a variety of residents, I came to believe that the longer a family has lived in the county, the more it was willing to allow gas drilling. As I talked to locals, I began to realize that the county was gripped in a form of seller’s remorse. They had agreed to lease, but now had second thoughts about their decision. The sheer magnitude of the change was what worried most people. Nearly everyone had signed leases and turned over the future of the county to outsiders.

Not long after I arrived, I sat on the porch of a house near the Farm, drinking lemonade with a couple who had lived there for decades. I had bumped into the husband, Wylie Norton, at the courthouse that day. When he found out my parents’ cabin was a mile down the road, he invited me over. Wylie is a county commissioner, and his wife, Melanie, worked at the county’s small historical museum. As a cat tried to leap into my lap, Melanie relayed a piece of the county’s history that I had never heard, but it had odd parallels to my parents’ story and the gas boom unfolding around us. “Have you ever heard of Celestia?” she asked, between drags on a cigarette. When I replied I had not, she told me to stop by the two-room museum.

Many parts of the United States boast they are God’s country, but only Sullivan County has the legal paperwork to back up the claim. The roots of a most unusual real estate transaction began in 1850, when a husband and wife from Philadelphia named Peter and Hannah Armstrong bought land in the middle of the county. Like my parents a century later, the Armstrongs were lured by Sullivan County’s cheap real estate and the promise of escape from the hustle and bustle of the city. The similarities end there.

Peter Armstrong was a divine communist and a messianist who believed that Jesus Christ would soon return to earth. Following the book of Isaiah, which says the “Lord’s house shall be established in the top of the mountains,” the Armstrongs bought several hundred acres atop one of the county’s mountains and began to build the city of Celestia, a community that would be pure of sins and follow divine, not human, law. They planned a city of thousands centered around a vast four-story temple with a pyramid atop it that reached toward heaven. This grand vision was never realized, but a handful of Philadelphians followed them and built homes.

Celestia might have disappeared—a footnote in the history of nineteenth-century religious revivalism—if not for a curious incident that unfolded in 1864. During the Civil War, one of Armstrong’s followers sought a religious exemption from conscription into the Union army. Armstrong wrote President Abraham Lincoln a letter and received a speedy reply, approving the request. Building on this success, he decided to seek exemption from property taxes also. The matter was referred to a local board, which devised a clever response. If Armstrong claimed that his faith led him to seek separation from earthly affairs in the wilderness, then surely holding a deed to the property was inconsistent with his faith. The board gave Armstrong a choice. He could either give up his faith and keep his property or relinquish his property and keep his faith.

Armstrong, however, was more than up to the challenge. His response is recorded in the Sullivan County Courthouse, in a deed dated June 14, 1864. He transferred Celestia, about six hundred acres of land and, incidentally, the attached mineral rights as well, to God. “We do, by these presents, deed, grant and convey to Almighty God, who inhabiteth Eternity, and to His heirs in Jesus Messiah, to the intent that it shall be subject to bargain and sale by man’s cupidity no more forever, all our rights and title (by human law) and claim of any nature soever in or to, of that certain tract of land,” the one-page document notes. He likely drew inspiration from another portion of the Old Testament that states, “The land shall not be sold for ever: for the land is mine.”

It was an elegant solution. The six hundred acres were no longer owned by people of this earth. Celestia remained put. But there was one problem; God was a tax delinquent. Armstrong and his followers may have been trying to build in the wilderness a new city that glorified God, but local officials held a different view of real estate. They believed that Sullivan County was there to be worked. Small subsistence farmers were settling all over the county, clearing out the hemlock forest to harvest the bark, which was used in nearby tanneries. Soon railroads would enter the county, to transport its coal north and blocks of ice south. The United States was in the midst of an energy transition; coal would soon displace wood as America’s primary fuel and fire the nation’s industrialization. Pennsylvania embraced its role as a resource provider and became a leading producer of coal, iron, steel, timber, and petroleum. Sullivan County required tax revenue to build roads and supply services to its population, which increased by nearly half between 1860 and 1880.

By 1876, the Sullivan County treasurer had begun to demand Celestia’s back taxes, but Armstrong refused to pay. There are two stories of how the showdown ended. One is fanciful and the other probably true. The first is that the sheriff went to Celestia to take its sheep as payment for taxes owed. Armstrong gathered his followers to witness a miracle. The sheep, he said, wouldn’t follow the sheriff. But they did follow him, and soon most of Armstrong’s human flock departed as well. The other version of events is that the treasurer sold 350 acres at a sheriff’s land sale. The buyer was Armstrong’s son, who paid $33.72, an amount that covered the tax bill.

Whichever version is correct, within a few years, Celestia was in terminal decline. The Armstrongs’ bid to sever the land’s earthly ties from commerce and government had failed. Their son sold the land to a lumber company, and the forest was cut down for its bark. The Armstrongs couldn’t break free from nineteenth-century trade and taxation. My parents also found they couldn’t escape from twenty-first-century energy exploration, and neither could their neighbors. Even the holdouts are now surrounded by pads, rigs, and pipelines. The rumble of trucks is too ubiquitous to escape, the lure of jobs servicing this new industry too great to ignore.

The energy industry juggernaut has rolled through Sullivan County. The only real question left is what the county will look like after the gas industry has come and gone. Sullivan County was nearly denuded in the nineteenth century as its old-growth hemlocks were felled, but the forest returned. Today a lush canopy of second-growth pine, ash, and oak trees covers the mountains. The coal mine is, for the most part, gone too. A strip mine was filled in and reclaimed. Both the tanneries and the coal mine dumped toxins into streams, but most of the rivers run with clear, drinkable water. Still, the arrival of the gas industry has left some locals wondering whether the land and water will recover this time. “Our forests were not harvested correctly and our coal was not harvested correctly; left us with acid runoff. We can’t do that three times in a row,” said Erick Coolidge, a dairy farmer and supporter of gas drilling. “Where is our plan? If we don’t do this right, what the hell have we done?”