The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (13 page)

Mitchell’s company had survived a brutal period for the business, but he knew they’d have to come up with huge amounts of cash if they really wanted to take full advantage of its advances in the Barnett. It was cash they didn’t have.

Reluctantly, Mitchell toyed with the idea of selling his company to a rival and slowing his pace. Bowker’s data on the size of the Barnett seemed to make the company’s acreage look attractive, and Steinsberger’s improved fracking methods made it seem likely that a burst of gas could be extracted from the rock. If Mitchell could get a hefty price for his company, he decided he’d agree to a sale.

Mitchell hired Goldman Sachs, the preeminent investment banking firm, as well as Chase Manhattan Bank, to make a sale happen. Mitchell executives agreed to the difficult step of allowing competitors to come to their offices to spend a month reviewing their assets and proprietary information. George Mitchell told his bankers he’d only agree to sell his company if someone paid a price that was a premium above the Mitchell Energy’s weak share price. “We’d done too much work not to do it for a premium,” he says.

No one else seemed interested in his company, though. Rivals repeated the same thing: Mitchell’s team was doing interesting work in the Barnett and there was a lot of potential. But the Barnett was a new play and they couldn’t project how big it might get or if Mitchell’s production would last. After all, short-term production rises were common in the business, but they often died down. Companies such as ExxonMobil, Conoco, and others had spent years ignoring Mitchell’s work in Texas’s Barnett Shale area. They sure as heck weren’t going to start betting on Texas fields and this newfangled drilling now.

They still don’t get it?!
Mitchell thought.

Mitchell Energy had earned less than $100 million in the fiscal year that ended January 31, 2000, and the company had lost nearly $50 million just the year before. Mitchell executives spoke of how much gas was in other areas of the Barnett. But they hadn’t actually drilled in those newer areas yet, potential suitors noted. The latest survey by the U.S. Geological Survey from 1998 had judged the Barnett Shale to have just ten trillion cubic feet of gas reserves. It was a puny and stale estimate that didn’t reflect Mitchell’s growing production, but it was all the industry had to go on at the time.

“We turned our noses up because we didn’t think it would work,” says Larry Nichols, then the chairman and chief executive of Devon Energy.
²

It didn’t help that natural gas prices remained under pressure in 1999, averaging just about $2.30 per thousand cubic feet, a popular measure of gas prices. The low prices doused the spirits of even the most optimistic rival.

Kent Bowker had another reason why the company was being ignored. “We were a bunch of goofy mothers in a little office in The Woodlands who weren’t intellectual geniuses,” he recalls. “We were just guys from Oklahoma State and Texas Tech with a task—to keep Mitchell in business. . . . We weren’t PhDs in white lab coats or Harvard first-in-their-class yahoos.”

With each rejection, George Mitchell became more enraged. The Internet boom was near its peak; any kind of company with a dot-com in its name was going public at an eye-popping valuation, but Mitchell couldn’t find a single taker for his own company that was producing the energy for all of it.

“I can’t believe it!” he screamed one day.

Mitchell took each rejection personally. Soon he was throwing temper tantrums around the office, railing about how companies with no assets were getting all the attention. “But we have the Barnett!” he said. He couldn’t let it go, turning angrier with each rebuff by a potential suitor, and with each billion-dollar IPO by a new dot-com company. “This is ridiculous!” he screamed to his son Todd, who tried to calm his father.

In April 2000, Mitchell Energy announced it wasn’t going to sell itself after all, an embarrassing public retreat. George Mitchell was devastated. “I just couldn’t convince them,” he recalls.

Mitchell realized there might be a silver lining to the brush-off from would-be buyers. If the industry was still skeptical about the Barnett, it meant one thing: They would have less competition leasing more acreage in the area.

The Mitchell team leased even more land. To avoid tipping off competitors to their new buying, brokers weren’t told who was doing all the leasing. Before long, Mitchell had leased more than 180,000 acres in the Barnett, including areas Chevron had given up on a few years earlier, bringing Mitchell’s total holdings to nearly 600,000 acres.

Surely the added acreage, new production, and other moves would make Mitchell Energy a more attractive acquisition target, Mitchell and other senior executives figured. Plus, natural gas prices were finally showing signs of recovering.

Their plan seemed like it could work—if the company didn’t split apart at the seams while it waited for a suitor, a scenario that seemed increasingly likely. One day that year, management sent an e-mail to employees alerting them to an appearance on business cable television network CNBC by Mitchell’s president, Bill Stevens. As Mitchell employees tuned in to watch the interview, their jaws dropped as Stevens described the shale in the Barnett as “black tombstone.”

“That’s how he talks about our biggest asset?” a Mitchell employee said to a colleague.

Stevens may have meant it as a joke, and Mitchell’s men were being a bit sensitive. Shale actually does look like a tombstone, due to how compressed it is, and the comparison was common in the business. But to some, Stevens’s comment was one more insult after years of hard work on the Barnett.

Stevens did other things to get under their skin. In a meeting in 1999, a geologist proposed that the company, which had begun to drill a few wells using the new horizontal method, ramp up its horizontal drilling in the Barnett. Stevens became annoyed. “I will be dead before Mitchell drills another horizontal in the Barnett,” he told the geologist, ending the meeting.

After Stevens left the room, Kent Bowker turned to another geologist in disbelief. “Now we have to kill Stevens,” he said.

The company never did drill another horizontal well in the Barnett.

“It was in jest, of course,” Bowker remembers.

A year later, in an interview with the trade publication
Oil and Gas Journal,
Stevens added to the resentment when he talked about how easy it had become for the company to find gas. “I laugh and tell my exploration people, ‘I don’t need geologists. We don’t find [gas], it’s there.’”

Stevens likely meant his comment to suggest the company was an attractive acquisition candidate because its shale acreage didn’t need sophisticated geology to produce gas. But his detractors took it as yet another insult. When he read the interview with Stevens, Dan Steward, the senior member of the Barnett team, went home and told his wife he wanted to quit.

“We have four kids,” she told him. “Suck it up.”

George Mitchell began hearing complaints about Stevens. It pained him that his geologists and engineers were chafing. But he and his son Todd remained big fans of Stevens and appreciated that he had made tough decisions that George Mitchell couldn’t bring himself to make, such as the sale of The Woodlands. To the Mitchells, Bill Stevens was a perfect bad cop to George Mitchell’s good cop.

“He’s not the most warm and cuddly person, and my father’s obsession with the Barnett was clearly a point of tension,” says Todd Mitchell. “He took over a company in crisis . . . we felt he put the company on firmer ground.”

The hard feelings within the company soon didn’t matter very much, because Mitchell Energy’s gas production was surging. In the summer of 1999, when the company had tried to sell itself, it had been producing nearly 100 million cubic feet of gas each day. By the summer of 2001, however, production was approaching a remarkable 300 million cubic feet a day. It soon passed 365 million cubic feet, a stunning increase of 250 percent in two remarkable years, one of the quickest and most unlikely discoveries in energy history. And it all was thanks to the groundbreaking work of Mitchell’s small team in the Barnett, which somehow figured out how to extract gas from shale.

Around the Mitchell headquarters, even those responsible for the gusher were amazed at how their hard work was finally paying off. “Production grew like a hockey stick,” says a member of the exploration team. “It was way past theoretical.”

Word spread throughout the region and the oil and gas industry, and rivals demanded to know what was happening at Mitchell. “People began to wonder what the hell was going on” at the company, Mitchell recalls.

In late September 2000, the Oil Information Library of Fort Worth held a symposium to discuss the Barnett Shale. The library was hurting for cash after a decade of troubles in the business and was eager to raise some money. A recent tornado had severely damaged its building, another reason they hoped the meeting would be a success.

Organizers set up seats for 125 attendees, optimistic that industry members would come to pay the $195 entrance fee. On the day of the meeting, though, over 200 people stormed the library, including representatives of major oil companies. Officials had to set up speakers and monitors in the halls so the overflow crowd could hear the presentations; others were turned away. They all wanted to know how Mitchell was producing so much gas.
³

They weren’t the only ones. Larry Nichols, the chairman of Devon Energy, another independent producer with little pedigree, had turned down an opportunity to buy Mitchell a year earlier. But as Nichols read data showing how much natural gas Mitchell suddenly was producing, he was astonished. He couldn’t figure out what was happening or how Mitchell was doing it.

“I challenged our engineers as to why this was happening,” Nichols says. “Why was Mitchell’s output going up?”
⁴

Devon officials reached out to the Mitchell Energy team to better understand what they were doing in the Barnett. Over a matter of months, the Devon executives became converts to the possibilities of drilling in shale layers. Nichols and Mitchell formed a personal bond, two independent energy producers focused on the United States rather than foreign spots.

By then, Cynthia Mitchell was in the full grip of Alzheimer’s disease and George Mitchell was even more eager to sell his company, as were his children. Trying to spark a bidding war, Mitchell reached out to companies such as Anadarko Petroleum.

“If you fracture these wells you can make two to three times the gas,” Mitchell told one potential suitor. “We know what we’re doing.”

Most remained skeptical, though, figuring that drilling in shale layers was a short-term wonder. The companies still wouldn’t pay a premium above the price of Mitchell Energy shares, one more insult to George Mitchell.

“Anadarko didn’t believe we could separate the gas” from the rock, Mitchell says. “People didn’t believe what we were saying.”

Mitchell had produced a miracle, but it was as if no one believed their eyes.

“At that time,” says Nichols, “absolutely no one believed that shale drilling worked.”
⁵

In August 2001, Devon Energy agreed to pay $3.1 billion for Mitchell’s company and to assume $400 million of its debt. The price was 20 percent higher than Mitchell’s stock price at the time, just as George Mitchell had hoped.

“We convinced Devon,” Mitchell recalls. “They got it.”

Many doubted Nichols and Devon could ever justify the expensive purchase of such speculative acreage. Some close to Mitchell also seemed unconvinced the Barnett ever would truly work out. After the deal was announced, Bill Stevens, the longtime skeptic, turned to Dan Steward, saying, “Boy, we hit a home run there.”

“He said it with relief,” Steward recalls.

George Mitchell and his team had cracked the code to the Barnett and had proved that difficult rock like shale could be a gold mine. Texas’s Barnett region would become the nation’s largest onshore natural gas field, representing about 6 percent of the entire nation’s energy supply in 2013. George Mitchell, who believed natural gas in shale could quench the nation’s desperate thirst for energy, would inspire a group of wildcatters to wonder if other areas with shale could produce similar gushers.

After the deal was completed, George Mitchell was worth nearly $2 billion. He and his son Todd would go on to lease new acreage in other shale plays around the country, expanding their fortune. George remained a maverick, however, donating millions of dollars for clean energy research, among other causes, while urging a crackdown on companies that weren’t protecting the environment.

To Mitchell, an abundance of gas from fracking and drilling in shale seemed a great way to give the nation time to find dependable renewable energy sources. “We’ve got to sequester” carbon dioxide, “because it’s a serious problem,” he told the
Fort Worth Star-Telegram
in 2008. What “we need to figure out now is how we get through the gap from fossil fuels to renewables.”
⁶

Bill Stevens enjoyed his own successes after Mitchell. Two years after the sale to Devon, Stevens joined the board of EOG Resources, an up-and-coming oil and gas explorer set to do revolutionary things of its own in the nation’s energy fields.

Those responsible for the energy industry’s most important breakthrough in nearly a century didn’t fare nearly as well as Mitchell and Stevens, however. Just days before Christmas in 2001, Dan Steward, Kent Bowker’s boss, met with Devon’s executives to go over some budget items related to the newly merged company. During the conversation, Steward’s new bosses surprised him by saying he wouldn’t be needed after the merger was completed. Steward had lent crucial support to the work in the Barnett, but he was allowed only to stay a few more months at the new company before he had to vacate his office.

Nicholas Steinsberger, who had discovered the perfect mix of liquids to extract gas from shale, received a salary of just over $100,000 the year Mitchell was sold. He never received any bonus for his breakthrough, though over time he cashed in another $100,000 of stock options. Steinsberger lasted a year or so at Devon before he also left, beginning a successful career working with other energy companies. Steinsberger saw his methods copied by countless companies around the country, though he also had to field questions from his liberal-minded parents back in Indiana, who began hearing from their friends about how fracking was affecting the environment.