The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (25 page)

To let off steam, Ward cut out around lunchtime each day to play basketball for an hour or so with a group of local young men at the YMCA. A quick and expert ball handler, he developed a bond with Mike Harrison, an African American man in his thirties who had grown up in Oklahoma City’s poorer Eastside. Harrison had given up a potential college scholarship to work in a convenience store and help his family get by. Later, after he lost his job, Harrison would get a position working for Ward.

On the court, Ward was just as measured as in Chesapeake’s offices. The players had no clue he was one-half of the hottest drilling duo in the industry. Others talked trash, but Ward had only positive things to say, or kept quiet. One day, though, after he was teased for the umpteenth time about how rarely he drove to the basket with his left hand, he had had enough. “I’m going right and you’re not going to stop me,” he said, to the surprise of his court mates. With that, he drove to the hole for an easy layup, an indication of the fierce, underappreciated drive propelling Ward to prove the skeptics wrong, off the court and on.

•   •   •

T
he Barnett was proving such a rousing success that McClendon and Ward became converts to the idea that drilling in these once overlooked rock formations would produce a gusher of gas. Ward began reviewing other shale formations around the country. Sitting at a broker’s office in late 2004, he heard that a rival called Southwestern Energy had made a discovery in Arkansas’s Fayetteville Shale formation. Ward immediately sent hundreds of landmen across Arkansas to grab a position for Chesapeake. “If we can control the land, we can control the resource,” he told a colleague.

The approach, which became known as the “resource thesis,” won a following among investors, who cheered the land grab. They sent Chesapeake shares climbing from five dollars in the summer of 2002 past thirty dollars a share in the summer of 2005.

Most environmental groups, including the Sierra Club, also applauded the push into shale drilling, hoping natural gas might take market share away from dirtier coal and oil sources. Gas also could serve as a “bridge” fuel until the cost of wind, solar, and other renewable sources were ready to power the nation.

Throughout 2005, natural gas prices soared, moving past ten dollars per thousand cubic feet late in the year, just as McClendon and Ward had predicted. Investors, politicians, and industry experts fretted over how the nation would find enough energy supplies to meet its seemingly inexorable demand. McClendon and Ward, sitting pretty on vast amounts of natural gas, seemed on their way to becoming modern-day tycoons.

Below the surface, however, trouble was brewing.

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A
ubrey McClendon and Tom Ward weren’t the only ones excited about new shale formations in 2004. Even George Mitchell was betting on a new field. By then, Mitchell was eighty-five years old and his pace had slowed. It had been two years since he pocketed two billion dollars selling his company to Devon Energy.

The wildcatter was hungry for another home run, however. As he spoke with his son Todd about acreage in Arkansas’s Fayetteville Shale that he and his business partner were considering buying, Mitchell became convinced the new area might yield huge amounts of gas.

Thanks in part to financing from Mitchell, Alta Resources—the company Joe Greenberg and Todd Mitchell had formed—began spending nearly one hundred million dollars, emerging as the second largest land holder in the Fayetteville region. They even hired Nick Steinsberger, the geologist who had helped Mitchell Energy extract gas from the Barnett, to develop the best techniques to fracture rock in the Fayetteville. George Mitchell’s new enthusiasm was a clear sign the shale revolution was picking up pace.

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M
cClendon, Ward, and Mitchell chased natural gas, but Harold Hamm was convinced the Bakken rock formation in Montana was packed with oil, making it a more promising field than the shale gas areas. But crude prices averaged less than thirty dollars a barrel in 2000, and were a mere twenty-five dollars a barrel in 2001. Unlike a toothpaste or cereal maker, oil and gas producers are forever under the thumb of market prices that can fluctuate wildly. For Continental, which rang up losses of $20 million in 2002, weak prices for its main product meant it couldn’t afford the expensive fracking and horizontal drilling necessary to tap oil in the Bakken’s difficult rock.

Hamm began to hear rumors that two small competitors from Dallas—Tim Headington’s Headington Oil, and Lyco Energy Corp., run by Bobby Lyle, an engineer and former dean of Southern Methodist University’s business school—were scooping up acreage in Montana. When Hamm learned that Headington and Lyco somehow were producing about fifteen hundred barrels of crude a day from the region, he began to worry about falling behind.

Oil prices moved a bit higher in 2002. OPEC was reining in production, the U.S. economy was recovering from the devastating attacks of September 11, 2001, and Asian economies were rebounding from their own late-1990s slowdown. Rising global oil demand gave Hamm even more impetus to get going in the Bakken.

In late 2002 and early 2003, the company began leasing land in eastern Montana, focusing on the Elm Coulee field in the Williston Basin in Richland County. The Bakken rock layer was about ten thousand feet below the surface and just forty-five feet thick, adding to the challenge of finding oil.

Because Hamm’s competitors had already drilled wells in the heart of the formation, Continental would have to settle for surrounding positions. “They’ll have the yolk,” a geologist mapping the field told one of Continental’s landmen. “We’ll get the white of the egg.”

The Lyco team dismissed Continental’s efforts as a waste of time. “Let them have the edge,” Richard Findley, a local wildcatter advising Lyco, told the company’s geologists. “We’ll do the low-risk” portions of the Elm Coulee. “No one knew and no one cared” what Continental was up to, recalls Findley, a Bakken expert.

By August 2003, it was clear that Continental’s first well was a winner, producing about thirteen hundred barrels of crude a day. Headington and Lyco were pumping more crude from their own wells in the yolk of the field, but Continental’s production was enough to score profits. The Bakken formation was so rich with oil that even fields on its edges could generate substantial amounts of crude, it turned out.

More important, the three companies had proved that oil, not just natural gas, could be extracted from rocks with extremely low permeability. Oil molecules, which move less easily through tight rock than gas molecules, were flowing, thanks to improved horizontal drilling and hydraulic fracturing techniques.

“We need to get more rigs in here!” Hamm told members of his team, encouraging them to drill wells elsewhere in Montana.

Continental’s land brokers persuaded farmers to lease 100,000 acres in the western part of the state, paying about seventy dollars an acre, or a total of $7 million.
³
The progress in the Bakken garnered no headlines. Continental, Headington, and Lyco were small and privately held, so they had no shares to hype and no press releases to send. Besides, most major oil companies were busy crafting a series of corporate mega-mergers, and they still thought the high cost of producing oil from the Bakken would prevent any gusher of profits.

Hamm was jovial around the office. Crude prices continued to edge higher, and his Montana wells were showing impressive early production. “You guys are doing a great job, this thing is looking good,” he told them one day. “I think we’ve got a major discovery here.”

The early returns in Montana were impressive, but Brian Hoffman wondered if they could do better. At thirty-three years old, Hoffman was a junior member of the exploration team. He already had dealt with his share of troubles from the business, however.

After receiving an undergraduate degree in geology in 1994 from Oklahoma State, Hoffman couldn’t attract a single job offer, as the energy business suffered from low prices. While he waited for the industry’s fortunes to improve, he went back to school to get a master’s degree, just to do something productive with his time.

A few years later, Hoffman was thrilled to find work at Continental Resources. He was especially happy to learn that he’d be joining the effort in the Williston Basin. It wasn’t that he was inspired by Harold Hamm or convinced that any resurgence in American oil production was in the offing. Instead, he hoped his new job might give him a chance to move to Denver, the picturesque city he recalled fondly from his youth. He figured that if he worked for Hamm in the area for a few years, he might get a transfer to Colorado, at least someday.

Sure, Denver was a full seven hundred miles away from the heart of oil country in Williston, North Dakota, which was Hoffman’s area of responsibility. And Hoffman actually was based far away, in little Enid, Oklahoma. Still, a guy has to have a dream.

“I really figured I’d work for a few years and then go to Denver,” Hoffman says.

Hoffman spent the early 2000s helping Continental extract oil from a layer of rock in North Dakota called the Mission Canyon. They
tried
getting crude from this layer, anyway, which was relatively close to the surface. In reality, Continental got too little oil and too much water.

During his work on this exasperating rock, Hoffman became intrigued by the thin Bakken layers lower in the ground. Rock in the Williston Basin can be imagined as a layer cake; the Mission Canyon layer was two levels above the three Bakken layers smack in the middle of the cake.

By 2003, Hamm and Continental had their hands full in the Bakken formation in Montana. But Hoffman couldn’t stop thinking about his time in North Dakota. He remembered how competitors had drilled through the three Bakken rock layers in the state and saw evidence that it held oil, though few managed to get much of it out.

Now that Continental was managing to use horizontal drilling to get oil out of Bakken rock in Montana, Hoffman thought he’d go back and investigate the same rock over in North Dakota. “I wasn’t told to look at North Dakota. We were all focused on Montana at the time,” he recalls. “But you want to squeeze every drop of oil” out of an area.

Hoffman and his colleagues returned to North Dakota and tested the Bakken rock there. The Upper Bakken layer was composed of black shale, as was the Lower Bakken. Sandwiched in between, like the vanilla of an Oreo cookie, was the Middle Bakken. It was made of a different type of rock called dolomite that seemed easier to drill than the shale.

Hoffman visited the state’s geological library to examine its collection of cores, or cylindrical samples of rock from old wells in the region. He read how others periodically had been enticed by this rock but later gave up.

Most experts viewed the Bakken’s upper and lower tiers as “source” rock, or spots where oil originated before migrating to other layers until it reached an impermeable layer where it was trapped, preventing it from migrating farther. It was very much like how industry pros had considered the Barnett’s shale to be source rock, and not a reservoir worth drilling, until George Mitchell’s men proved the rock could produce natural gas. “In school they taught us these layers aren’t reservoirs,” Jack Stark says, referring to the Bakken’s shale.

As Hoffman and his colleagues researched the Bakken layers in North Dakota, Aubrey McClendon and Tom Ward discussed drilling their own Bakken wells. Ward eventually decided it would be too costly to get crude out from the formation, and that its fans were hyping its potential, so Chesapeake passed on North Dakota.

But the more Hoffman examined the Bakken rock, the more he thought it might hold larger amounts of energy than generally believed, especially that middle level, the vanilla in the Bakken Oreo, which seemed really thick with oil.

Maybe the experts were wrong after all.
This really seems like a reservoir,
he thought.

Hoffman approached his boss, Jack Stark, as well as Hamm, to suggest that the company extend its drilling from Montana back into North Dakota. “We need to go up and take a look” at the acreage in North Dakota’s northwest corner, he told them.

Stark was an instant convert to the idea, rejecting his earlier education. “Heck, it can’t help but get better,” he concluded after doing his own research and noting that the Middle Bakken layer seemed to be thicker in North Dakota than in Montana, and presumably more oil-rich.

The idea also made a lot of sense to Hamm. If Hoffman and his colleagues were right, rock across the state’s border might even have more oil, Hamm decided. If the Bakken proved more fruitful in North Dakota, the country itself might be impacted, Hamm insisted to Mike Armstrong, an old friend. Even energy self-sufficiency was a distinct possibility.

“He absolutely believed we could be energy independent,” Armstrong says. “I thought he was full of shit. . . . I thought he was nuts.”

Hamm directed his landmen to lease acreage in western North Dakota under an assumed name with a vaguely Canadian ring to it—Jolette Oil LLC. He didn’t want competitors to know they were on to something. That way they could lease the land cheaply.

“We wanted people to think it was a dumb Canadian company—they used limited liability companies all the time, so we thought they’d assume Jolette was Canadian,” Hamm recalls. “We hoped they’d say, ‘Oh, those crazy Canadians, there they go again.’”

He probably shouldn’t have bothered. At that point, few outside Oklahoma knew much about Hamm or his company. The odd name they chose actually piqued some interest among locals; they realized it was made up and began asking who really was leasing the land. So much for Hamm’s cloak-and-dagger tactics.

It didn’t bother the rivals too much when they heard it was Continental, though. “We were seen as a very small Oklahoma producer that probably wasn’t going to be up there very long,” says Jeff Hume, Hamm’s right-hand man.

Hamm’s landmen assembled 300,000 acres in the area in 2003 and the company began drilling. Hamm and his men were sure a new, huge discovery awaited them.