The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (37 page)

A year or two earlier, when Chesapeake bought in a frenzied way, its competition was limited to upstarts like Bob Simpson’s XTO. Now everyone was bidding up acreage, forcing Chesapeake to pay top dollar for land. Before the 2008 financial crisis, acreage in the Haynesville Shale went for $1,000 an acre. Now the Mississippian Lime was going for $4,000 an acre. Chesapeake borrowed more money to pay for the purchases, pushing its debt load to $12.3 billion.

Gas managed to push back above $5.50 per thousand cubic feet by the end of 2009, suggesting that Chesapeake could score big profits by pumping its existing fields and also adding new oil and gas fields. Some shale formations were profitable with gas as low as four dollars per thousand cubic feet. Could anyone really expect McClendon to ignore all these juicy targets?

“Gas prices came back up and we thought we were going to be okay,” says a Chesapeake board member. “The temptation was too much.”

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S
hares of Tom Ward’s young company, SandRidge Energy, had suffered an embarrassing tumble from sixty-six dollars in July 2008 to six in January 2009.

Members of the company’s board of directors wanted to know how Ward and his management team were going to set the company on a safer course and revive investor interest. Some on the board were especially nervous. They didn’t want to have to deal with another touch-and-go situation like they had in October, when the company was hours away from running out of financing.

In board meetings, Dan Jordan, a veteran Oklahoma energy man, put up a spirited defense of Ward. Give him time, he’ll figure out a plan, Jordan insisted. “You don’t understand, Tom does his best work under pressure,” Jordan told fellow board members. “This guy will do something. . . . You don’t know him.”

Jordan, who had worked with Ward and McClendon for decades, tried to explain why they could be trusted. “These guys are adrenaline junkies, it’s calculated, they love risk. . . . They get right up to the edge of the cliff but never go off.”

In February 2009, Ward came up with a new plan, just as Jordan had predicted. McClendon and others in the business still believed in natural gas, but Ward thought they had it all wrong. There was going to be too great a supply of natural gas for months, if not years, thanks to all the money being thrown at new shale fields, just as Mark Papa and EOG were saying.

SandRidge needed to shift into oil, Ward argued. Because oil is more easily shipped around the world than natural gas, crude prices tend to be based on global supply-and-demand dynamics rather than what’s going on in the United States. American crude production seemed unlikely to have much impact on global oil supplies, especially since there wasn’t clear evidence of an imminent rise in U.S. shale oil production. It all made oil a safer bet, Ward argued.

Drilling the Bakken seemed too expensive to Ward, who had turned down the chance to enter some of the plays at the end of his tenure at Chesapeake. Instead, SandRidge would focus on more “conventional” oil plays, or those with limestone and other rock that was easier to tap than shale. Let McClendon, Hamm, and Papa go after the sexy shale drilling, we’ll make money on the boring stuff, Ward was saying.

Soon, SandRidge was selling natural gas acreage, much of which eventually would become worthless, and buying land in oil-rich formations, including in Texas’s Permian Basin and the Mississippian Lime, where land could be purchased for just $200 an acre. Later, SandRidge would spend over a billion dollars to buy a Texas oil company called Arena Resources.

SandRidge’s stock didn’t show much of a response to the strategy. A year earlier, investors were sure SandRidge was set to become the new Chesapeake. Now they weren’t convinced of Ward’s plan to turn SandRidge into an oil power.

Ward was sure he had saved his company, after being caught by surprise by the 2008 energy collapse, and he was confident that Wall Street eventually would appreciate his moves. He was about to be shocked in a new way, however.

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T
om Ward drove home one evening in mid-January 2009, exhausted from another trying day. Shares of his company were still under pressure and Ward was working hard on the company’s revamped strategy, but he instantly relaxed as he opened his front door in suburban Edmond, Oklahoma. Like most days, Ward was in time for dinner. His wife, Sch’ree, was both a good cook and the most upbeat person in his life. With markets under assault, Ward turned to her for comfort.

Before Ward could sit down, though, his youngest son, James, called out to him. The eighteen-year-old needed to speak to him about something. When Ward walked into James’s room, his son looked troubled and unsteady. James told his father that he wanted his help—he needed a doctor to get him Suboxone tablets.

Ward didn’t know what his son meant. He had never heard of Suboxone. James took a deep breath and explained that Suboxone was a drug used to treat addiction to Oxycontin, the pain medication.

“Do you think you have a problem?” Ward asked his son.

“I don’t know,” James responded.

A stunned Ward hugged his son, trying to digest what he was telling him.

Later that evening, the doorbell rang. It was Mike Harrison, who had once played lunchtime basketball games with Ward but now did odd jobs around SandRidge’s offices. As he often did, Harrison had come by to deliver SandRidge paperwork for Ward to sign.

Most evenings, Ward was businesslike when Harrison dropped by. This time, though, when Harrison found his boss in his study, he couldn’t believe his eyes. Tears were streaming down Ward’s face and he had difficulty speaking.

“My son . . . it’s bad,” Ward struggled to tell Harrison. “He’s got a bad, bad thing going on. It hurts.”

The news was less shocking to Harrison, who had seen James and some of his friends come late to Sunday church services at a SandRidge auditorium. Harrison had also glimpsed James, usually with those same friends, in grittier parts of town, smoking and hanging out.

Ward hadn’t suspected anything, though, and he was shaken. “Our family had always been like a Norman Rockwell painting,” he says.

A month later, James entered a drug treatment facility to try to get well.

The revelation brought back dark memories for Ward of the alcohol addictions his father and grandfather battled. Ward couldn’t stop thinking about what he could have done to help his son avoid his own addiction. He felt he should have been more focused on his son’s needs and that he had failed to provide James with ample warnings. “It was my fault I didn’t tell him how easy it was to become addicted in our family,” he says.

In a quiet moment, Ward told a friend, Greg Dewey, that he felt “humbled” by the shift in his fortunes. He told Dewey that he felt he had become focused on “power and money.”

“Pride crept in and he became consumed with some things that we’re all tempted with,” says Dewey, a SandRidge communications and community relations executive who doubled as the company’s in-house pastor.

Ward admired his son’s honesty and eagerness to begin the long, difficult road toward beating his horrible addiction. It gave Ward, a staunch Republican, new empathy for addicts. He learned that many former addicts can’t obtain driver’s licenses, making it hard to get a job. Ward’s company would begin a program to hire more than two dozen former drug addicts, to try to give them a second chance.

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S
uspicions were growing about the drilling in Dimock, Pennsylvania, which sat atop the Marcellus Shale formation. It was hard to tell how many locals were worried about the activity. Many were grateful for the checks they were receiving to lease their land, money that allowed some struggling landowners to stay on their farms and properties. Others, however, grew sick of the noise and dirt kicked up by the drilling, or became wary that chemicals in the fracking fluid might invade their water.

An antidrilling movement congealed among residents of both Pennsylvania and New York. Members of the media, such as Tom Wilber of the
Binghamton Press & Sun-Bulletin,
began asking tough questions of Terry Engelder and others about the radioactive components of the flowback coming up to the surface from local wells. The growing questions resulted in New York’s placing a moratorium on high-volume hydraulic fracturing in the state.

Meanwhile, a telegenic, articulate resident of Dimock named Victoria Switzer, who was frustrated by how noisy the area around her pretty wood-frame home had become, was making progress reaching out to the media and demonstrating how disruptive the drilling and fracking was.

On New Year’s Day 2009, problems erupted. That’s when an explosion in Norma Fiorentino’s backyard in Dimock shattered the pump housing her drinking well. Pennsylvania’s Department of Environmental Protection put the blame on nearby natural gas drilling by Cabot, the gas producer active in the area. After complaints, the department also determined that Cabot had polluted the drinking water of at least nine homes in the township by allowing methane to migrate.
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The explosion, and other water complaints in the area, came at a time when the nation was coming to grips with, and apportioning blame for, the housing collapse and resulting economic downturn, notes author Seamus McGraw. Some put the responsibility on reckless borrowers. But more fingered what they saw as indifferent lenders, greedy megacompanies, and complicit government officials. That helps explain why some were open to the argument that these same types of players again were conspiring to hurt innocent citizens, this time in the nation’s gas fields.

The Fiorentino well explosion brought a young film director named Josh Fox to the Dimock area to investigate what was going on. Soon, Vera Scroggins also arrived on the scene.

About eighteen years earlier, Scroggins had moved to an 1880s farmhouse nearby after working as a teacher in Long Island. A matronly woman with time on her hands, Scroggins already had experience picking fights with the local stonecutting industry.

“They put trucks on my road where I liked to walk and bicycle and that bugged me,” she says, referring to the stone cutters. “There was no zoning so they could blast away. This is America, you have to claim your rights.”

When workers told her they couldn’t help making the noise, which came with the job, Scroggins was dismissive, telling them they should find a different job that didn’t cause so much of a racket.

Scroggins made some headway getting the stone cutters to lower their volume. When a friend in Dimock told her that she had to rely on bottled water, due to the drilling mishap, she knew she had a new cause. Scroggins loved to photograph and videotape her kids and grandchildren. She decided to chronicle local gas drilling with her video camera. Soon she began reaching out to the media, attracting attention to the drilling issues in the area.

The frackers weren’t prepared for the scrutiny that would soon result.

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O
n March 3, 2009, shares of Harold Hamm’s Continental Resources traded for about fourteen dollars a share—even lower than when it went public nearly two years earlier. Oil was less than forty-two dollars a barrel, down 70 percent in eight months, and crews were pulling out of the Bakken.

Continental controlled over 600,000 acres in the Bakken, making it the largest leaseholder in the formation. The company’s production had increased 130 percent in four years, to thirty-three thousand barrels a day. But Continental’s Bakken wells still weren’t wowing anyone. They were producing less than six hundred barrels a day during their first seven days online, well below the thousand or more a day that impressive wells pumped during their “initial production” phase, before production begins to level off.

Continental had been forced to pare its expensive drilling in North Dakota because it couldn’t make money with oil prices so weak. Unless crude rose to at least fifty or sixty dollars a barrel, the company couldn’t afford to ramp up again in the area. There remained a chance that Hamm’s company would lose leases if they didn’t go back to drilling soon, because the leases required drilling within a few years or they’d revert to landowners.

“Rates of return get pretty minimal below fifty dollars,” Hamm told a
Forbes
reporter. “You wonder if we ought to be doing it or not.”
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Wall Street remained dubious that Hamm and his team could squeeze much out of the Bakken rock. “We just don’t know how much of their acreage is going to work,” Leo Mariani, an analyst at RBC Capital Markets, said. “It’s pretty early on in the Bakken and a lot of the acreage is not tested.”
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Hamm had gotten used to being seen as the hopeless dreamer in little Enid, Oklahoma. The sixty-three-year-old enjoyed steak dinners at a local Applebee’s, spending an extra buck on a double scotch to wash it down, much like his fellow patrons. But he still was worth a few billion dollars, so it was easy for him to ignore the naysayers.

The country seemed to have lost its will to drill, Hamm told the
Forbes
reporter. The Dow Jones Industrial Average had fallen over 45 percent in a year and the energy business was one of many on its back, but Hamm kept saying things would get better in the Bakken. He believed that his crew, along with others in the business, would further refine their drilling technologies and approaches.

Hamm was dealing with more pressing issues than Wall Street critics. A pipeline called the Keystone XL promised to add over 800,000 barrels of Canadian tar-sands crude each day to U.S. energy supplies, potentially lowering prices still further. “We’re going to be drowned with Canadian crude,” Mickey Thompson, the Oklahoma political veteran, told Hamm as they sat in his kitchen trying to map out a response to the pipeline.

“We’ve got to do something to stop it,” said Hamm. They decided to enlist politicians and environmentalists to try to kill the pipeline project.

Hamm also began to worry that some of those pushing natural gas as a clean, homegrown fuel, such as Aubrey McClendon and T. Boone Pickens, were becoming a bit too effective in their plans and pitches. Pickens, a longtime oilman turned hedge fund investor, was spending big money to market a proposal to have the nation make electricity from wind instead of natural gas. The freed-up gas would be used as a transportation fuel, replacing diesel for commercial trucks, siphoning demand for crude. Pickens announced that his company would spend $2 billion on wind turbines for the Texas Panhandle, to create the world’s largest wind farm.