The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (38 page)

Hamm said Pickens’s plan wouldn’t work. The government would have to spend too much to upgrade the nation’s electrical transmission grid. The proposal also figured to reduce crude demand, hurting the price Continental could get for its oil.

Hamm called Pickens to try to get him to drop his idea. “Boone, your numbers are just wrong,” he said.

But Pickens kept pushing his plan, and McClendon made inroads in his own public push for natural gas. To defend crude, Hamm decided to take a more public stance in support of domestic oil. Staying out of the spotlight made it easier for Hamm to lease land, and he still didn’t relish public speaking, after years of working on his elocution, friends said.

But Hamm figured that if he could just get Americans to realize how close the nation was to energy independence, maybe they’d be more supportive of what he was doing in North Dakota, and less likely to change the tax code or enact laws to make it harder for those drilling for crude. And if he could spark some enthusiasm for domestic oil, companies and public bodies might be more willing to invest in housing, roads, pipelines, and other infrastructure in North Dakota, investments that would help Continental’s drilling in the Bakken.

At a charity event, Hamm approached Rex Tillerson, the chief executive officer of Exxon, to try to get him to join his public effort to promote U.S. oil drilling. Tillerson was lukewarm to the idea, frustrating Hamm.

Soon, Hamm’s concerns seemed less pressing. The Keystone pipeline’s operator, TransCanada Corp., agreed to carry U.S. oil along with Canadian crude, a move that gave Continental a new way to ship its oil out of the Bakken. More important, the U.S. economy showed signs of rebounding and oil prices rose. Hamm quickly moved drilling rigs back into North Dakota as his team continued to try to make its wells pump meaningful amounts of oil.

Finally, Continental’s crew figured out the last piece of the Bakken drilling puzzle. Through trial and error, they realized that fracking wells in about thirty stages helped extract huge amounts of crude. Fewer than thirty stages led to too little oil; more than thirty was too costly and not worth it. Soon, Continental’s wells were giving up over one thousand barrels a day.

“Areas that weren’t that good all of a sudden became commercial,” Jack Stark recalls. “Now we knew we had a significant play on our hands.”

Almost overnight, the Bakken went from good to great.

•   •   •

S
hares of Cheniere Energy traded for just three dollars at the start of 2009, but Charif Souki was worried things could get even worse for his company.

At an energy industry conference, Souki saw Mark Papa, the chief executive officer of EOG, and Larry Nichols, the head of Devon Energy, and thought he noticed something wrong. Each executive had optimistic things to say about how natural gas prices would bounce back.

To Souki, though, the executives seemed almost in a daze. Their upbeat words didn’t match the concern on their faces, as if Papa and Nichols knew some bad news that hadn’t come out yet. “There was something about their body language that made me feel like I was missing something,” Souki says. “They had a look in their eyes that wasn’t good.”

Back at the office, Souki told his staff to pull the results of every gas field in the country. He also discovered a Web site run by drilling company Baker Hughes that tracked the country’s rig counts. Souki realized that natural gas production was soaring, even though there were fewer rigs in operation. Drillers were becoming more accurate, and better able to reach targets horizontally, than ever before. The shale revolution was for real.

“It was astounding,” Souki says.

Now Souki understood why gas producers looked so worried—their fracking and horizontal drilling techniques in shale plays were working so well that the companies were beginning to worry that a glut of gas was going to send prices skidding.

It also made sense that investors were turning on Souki and his stock. Who needed a costly facility to import foreign gas when there was so much cheap natural gas in the United States? Expectations of an incoming wave of imported LNG seemed like folly. There were birds chirping and cows mooing near his Louisiana facility, but fewer than five LNG tankers had even arrived at the newly built terminal, and Cheniere still had unused space amounting to half of its processing capacity.

This is not working,
Souki thought to himself.

Souki strived to maintain his usual upbeat, confident mien around the office. He didn’t want employees to lose faith. He told reporters and investors that natural gas prices were bound to rebound, creating a need for imported gas, and he shared few doubts with his board of directors. If Souki told them that his company was in trouble they’d want to know what he was going to do about it. At that moment, though, he didn’t have a clue.

A bit later, Souki got a call from Aubrey McClendon, whom he knew from industry events. After some chitchat, McClendon threw out an unexpected question.

“Hey, can you guys do liquefaction at Sabine Pass?” McClendon asked. He was suggesting that Cheniere’s facility
could
turn natural gas into liquefied natural gas, so that it might be exported from the country.

“We’ll take a look,” Souki replied, unconvinced that McClendon was giving him any kind of hot tip.

Souki went home and ran the numbers. They didn’t work. Natural gas was above four dollars per thousand cubic feet, and oil traded at around forty dollars a barrel. With crude that cheap, it didn’t make sense for foreign companies to pay the cost of buying U.S. gas.

McClendon’s question stuck in Souki’s mind, though. A bit later, when Davis Thames, Cheniere’s head of marketing, walked down the hall to make a cup of coffee, Souki yelled out to him from his office. “Guess who just called us? Aubrey McClendon,” he said. “You won’t believe what he just asked me—he said we should export.”

“No way!” Thames responded.

Thames and his boss had a good chuckle, and Thames was on his way back to his office. They’d just built a company to import natural gas to America. They weren’t about to throw it all away and start shipping gas out of the country.

“I thought it was ridiculous,” Thames says.

A bit later, it dawned on Thames that Souki had mentioned the conversation with McClendon to get Thames to start thinking about the notion. The thought of exporting gas from the United States had crossed Souki’s mind before McClendon’s call, but it was hard to tell where oil and gas prices were heading, so it seemed too early to think about scrapping the idea of importing energy.

A month or so later, McClendon and some fellow executives invited Souki and Meg Gentle, Cheniere’s head of strategic planning, to visit Chesapeake Energy. On the plane, Souki and Gentle laughed that they had no clue why McClendon had summoned them to Oklahoma City. A sit-down with the charismatic executive was hard to turn down, though.

As the meeting got under way, Souki updated McClendon on Cheniere’s plans to court foreign producers hoping to ship gas to America. They discussed how the LNG process works and McClendon picked Souki’s brain for details of his business.

That’s when McClendon blurted out something radical: “Why don’t you build me an export terminal?” He wanted a way to sell more of the natural gas his company was suddenly finding easier to produce, and he was eager to somehow get prices higher. He asked what it would entail to build a terminal to export gas to foreign markets.

Souki said they hadn’t run the numbers on what it would cost to reconfigure the Sabine Pass facility so it could turn natural gas into LNG for export. Until then, exporting hadn’t been in the realm of possibility.

On the flight back, Souki and Gentle couldn’t stop thinking about their meeting. Here was a huge natural gas producer saying there was so much spare gas in the country that it should be exported. For Souki and Gentle, it was confirmation that shale drilling would overwhelm the nation with cheap natural gas for the foreseeable future. That was pretty much the worst news a company trying to import gas could get.

When they got back to the office, Souki and his team decided to start looking into the idea of exporting gas—even though they already had contracts with Total and Chevron to convert their imported LNG into gas to be sold in America. If Cheniere was going to export, the company had to be the first out of the gate, the executives decided. Souki’s old partner, Michael Smith, and others working on importing gas also likely would see the logic of exporting, as natural gas supplies piled up.

At first blush, retrofitting the terminal seemed much too expensive. Yes, they had already built a plant, so they wouldn’t have to build another one to house the turbines and equipment necessary to liquefy and purify gas so it could be turned into LNG for export. And Cheniere had tanks and shipping berths available thanks to all that extra, unnecessary capacity it had built for importing. Those, too, could be used for gas exports.

But there seemed to be way too many hurdles for the idea. Could regulators be persuaded to let little Cheniere export energy from the country even though no one had been doing it? Might a company that seemed on its last breath actually raise billions of dollars for a single “train,” or a unit with the dozen gas turbines and other equipment required to create LNG? And could Cheniere stay alive during the four or so years it might take to build such an export facility?

Souki didn’t share details of the McClendon meeting with his board of directors. Nor did he tell them that his people had begun to test the export idea on officials in Washington. The thought of shipping gas from the United States seemed too preposterous. Just a year or so ago the nation was scrambling for ways to get its hands on gas, and now there was so much it was going to export it?

“I didn’t want to go to them until I knew what the costs were and that it would work,” Souki says.

By then, Cheniere’s board members weren’t thrilled with Souki and his brilliant ideas. GSO, the Blackstone unit, just wanted to get its money back, somehow, as did John Paulson’s hedge fund. They likely wouldn’t have much patience for another harebrained scheme from Souki, especially one with so few details fleshed out.

“They knew I was looking at different ideas, but my credibility with the board was suspect,” Souki says. “It wasn’t a warm and fuzzy relationship.”

In April, Souki was still reeling when he returned to Aspen and saw his old friend Geoff Tasker.

“This thing has wiped me out,” Souki said. “What really bothers me is the fact I misread it and everything turned on me.”

“How could you possibly have known” that U.S. gas production would surge? Tasker asked Souki, trying to boost his confidence.

“Yeah, but I missed it,” Souki responded glumly.

By late 2009, however, Souki’s mood had improved. Oil prices were soaring again, thanks to growing emerging-market demand, sending crude toward eighty dollars a barrel. But natural gas prices only rose a bit, to about $5.50 per thousand cubic feet.

Souki asked Bechtel Corporation, the big international construction company, to come up with a quote of how much it would cost to retool the Sabine Pass terminal for LNG exports. Souki didn’t think he could ask permission of his board for such an expensive project until he had a quote on what it would cost.

As he waited for the estimate, Souki’s natural optimism took hold and he became more confident the idea could work. Gentle, Thames, and others at the company were much more skeptical. The executives didn’t want to pour cold water on his new idea, but their body language was unmistakable.

“I knew they weren’t completely convinced,” Souki recalls. “They were loyal and supported me, but you could tell they thought I was crazy.”

In early December 2009, Cheniere’s stock fell to a mere $1.90, less than a large cup of coffee. Souki felt more heat from his board and top investors. He told Sheru Chowdhry, a senior executive at hedge fund shareholder Paulson & Co., that the whole importing-gas thing wasn’t working out. He said he thought he could find a new strategy, though, so he shouldn’t lose faith.

“You are a delusional optimist,” Chowdhry told Souki.

Everyone underestimates perseverance.

—Charif Souki

I
t was time to let the secret out.

Mark Papa, the Enron refugee who ran EOG Resources, had spent two and a half years directing a clandestine effort to lease land in South Texas. EOG’s geologists and engineers were convinced that a huge amount of oil was buried in a 400-mile-long shale formation called the Eagle Ford stretching from the Mexican border south of San Antonio to north of the city of Austin.

Until January 2009, when EOG drilled its first Eagle Ford well, Papa and his team weren’t entirely sure how fruitful their acreage would be. But that first well had initial production of almost seven hundred barrels a day, enough to cause a buzz—and more than a little relief—around the company’s Houston headquarters. In late September, another well came in. This time, almost seventeen hundred barrels of crude poured out each day, a sign they were on to something really big.

Papa and EOG’s president, Bill Thomas, put the pedal to the metal, leasing even more land. By April 2010, the company was sitting on over 500,000 acres after shelling out more than $200 million, or about $425 an acre.

Papa hardly visited EOG’s crew in the Eagle Ford. He also didn’t spend much time supervising drilling in the Bakken formation. Harold Hamm liked to fly to North Dakota to visit Continental’s sites, but Papa was content to let his Bakken and Eagle Ford groups do their thing while lending support from afar. Most days, he walked the halls of EOG’s offices in deep thought, arms folded, strategizing the company’s next move. Papa was deliberate and even-keeled, like a kind uncle. The pens in the front pocket of his dress shirt made him look like any petroleum engineer in the industry, rather than a high-powered CEO making the bet of his lifetime.

If Papa didn’t have much in common with Harold Hamm, he and his company were entirely different from Aubrey McClendon and Chesapeake Energy. EOG’s executive floor was as quiet as a library, unlike Chesapeake’s youthful and lively campus. EOG issued a single press release in 2009 unrelated to an earnings release, dividend payment, or public presentation. That year, Chesapeake’s public relations machine churned out over twenty releases touting awards it had received, new strategies it had unveiled, and even an appearance by McClendon on a business television show hosted by CNBC’s Jim Cramer.

Most industry members didn’t have a full idea why EOG was spending so much money, nor did they believe the Eagle Ford would amount to very much. Papa didn’t seem to care. On his office wall, he had framed a line from Theodore Roosevelt’s famed “Man in the Arena” speech, delivered at Paris’s Sorbonne in 1910: “It’s not the critic who counts. . . . The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood.”

By the spring of 2010, EOG had drilled ten wells in the Eagle Ford and executives knew they had to stop playing coy. It was time to level with investors and the public. “We felt the data was on the verge of becoming public,” Papa says.

On April 7, EOG hosted an “analyst day” at Houston’s Four Seasons Hotel to update Wall Street analysts and investors tuned in to a public webcast. Addressing the crowd from the podium, Papa began detailing EOG’s acreage and how pleased he was with the company’s progress. Then he dropped a bombshell on the audience. He said EOG was sitting on nine hundred million barrels of oil in the Eagle Ford formation. Papa argued that this rock was going to rival the Bakken’s.

There was tumult in the crowd. Some in the audience grabbed BlackBerry devices and other smartphones and began typing furiously. Others pulled out laptops or raced out of the room.

“You could see people making trades,” Papa says. “It was pretty dramatic.”

Papa also told the crowd that the company was getting reports that EOG’s wells in the Bakken were brimming with new oil and its Parshall field was turning into the most prolific in the lower forty-eight states. A monumental change was afoot, he said.

“Horizontal oil from unconventional rock will be a North American industry game changer,” Papa told the Four Seasons audience, or at least those who hadn’t bolted from their seats to buy the stock.

Within hours, EOG’s stock was shooting past the $100 mark. By the next day, it was at almost $107, up about 10 percent in a couple of days, putting the company’s market value at $27 billion, up 80 percent in one year.

Papa’s announcement did more than confirm EOG’s ascendance in the energy world. It was proof that the Bakken wasn’t a freak, one-off formation and fresh evidence that the country was beginning to pump enough oil and natural gas from shale to shake up the world’s energy order.

By then, the big boys of the oil and gas world had taken belated notice of the American energy revolution, one that carried the possibility of American independence, this time from foreign oil. Now the giants had to get in, before it was too late. In 2011 and 2012, London’s BP, Norway’s Statoil ASA, and France’s Total SA each spent billions of dollars for acquisitions, interests, and joint ventures in shale formations in Pennsylvania, Oklahoma, Texas, Arkansas, and elsewhere. So did the China National Offshore Oil Corporation, Italy’s Eni, and Australian energy conglomerate BHP Billiton.

American energy goliaths also headed home searching for deals, grasping that they had overlooked something special in their own backyards. It was like a college student racing home to woo an old girlfriend after hearing that foreign guys had begun to court her.

ExxonMobil—which continued to maintain its headquarters on a spot above the Barnett Shale formation—finally made a huge bet on U.S. shale formations, playing catch-up in a very big way. Exxon shelled out $31 billion to buy natural gas driller XTO Energy, the company started by Bob Simpson that had been competing with Chesapeake for shale acreage. The deal, Exxon’s biggest in a decade, made it the nation’s largest natural gas producer.

Huge energy companies often lie back and wait for new fields to be developed before swooping in. They like to be sure new fields are big enough to justify their time and money. This time, the giants were refocusing on America because they now appreciated why George Mitchell had gotten so excited two decades earlier when he zeroed in on shale.

At the same time, it was becoming more expensive to find oil and gas reservoirs abroad. The rekindled love for American rock also resulted from the slick sales efforts of bankers, including Ralph Eads, Aubrey McClendon’s old college buddy.

“This is like owning the Empire State Building,” Eads told mega oil companies to try to get them to open their checkbooks for shale deals, he later recalled. “It’s not going to be repeated. You miss the boat, you miss the boat.”

There was some bluster in the salesmanship, Eads acknowledged. “Typically, we represent sellers, so I want to persuade buyers that gas prices are going to be as high as possible,” he said. “The buyers are big boys—they are giant companies with thousands of gas economists who know way more than I know. Caveat emptor.”
¹

The winners in this buying frenzy included those running exploration companies that had been early drillers in shale formations, such as Bob Simpson of XTO and Tim Headington of Headington Oil, both of whom sold out to mega oil companies.

Sometimes the windfalls were astonishing. Until 2004 or so, Terrence Pegula, who was born to a coal-mining family in Carbondale, Pennsylvania, and had borrowed $7,500 from friends and family members to start an exploration company called East Resources, was grinding out a living drilling vertically in conventional Pennsylvania rock layers. Pegula’s acreage was atop the Marcellus layer, but no one thought there was much gas in that rock, so Pegula didn’t do anything with it. Locals thought Pegula was a solid producer, but nothing special.

When it became clear that the Marcellus layer was filled with more gas than anyone imagined, Pegula quickly expanded his acreage. As the smart money zeroed in on the area in 2009, Pegula sold about one-third of his company to leveraged-buyout giant KKR, pocketing a hefty $350 million. A year later, Pegula and KKR flipped the entire company to Royal Dutch Shell for an even heftier $4.7 billion, turning heads in Pennsylvania.
²

George Mitchell also decided to sell in 2010. By then, he had helped finance the purchase by Alta Resources—the company run by Joe Greenberg—of forty-two thousand acres in the Marcellus. Their wells were flowing with gas, but the Williams Cos., a large natural gas company, bid over $500 million for the acreage, an offer the group couldn’t refuse. It was another remarkable score for George Mitchell, who turned ninety years old that year.

Many of those who sold out to major oil companies and became instant billionaires seemed eager to spend their money on pleasurable diversions after years of hard work in the oil patch. Pegula, for example, paid about $200 million to buy the Buffalo Sabres hockey team. Bob Simpson, the XTO chief who liked to hire employees who had once received corporal punishment from their parents, joined with a partner to pay nearly $600 million for the Texas Rangers baseball team.
³

Tim Headington, who once had competed with Harold Hamm in the Bakken in 2008, became a Hollywood player, like oil barons before him, including Marvin Davis and Howard Hughes. Headington produced movies and television shows, including Martin Scorsese’s
The Departed
and
The Aviator,
along with Academy Award winners
Hugo
and
Argo,
while continuing to search for new pockets of oil.

These executives garnered headlines, but an equally remarkable story was in the larger sums flowing to landowners in the hottest shale plays. So many farmers, ranchers, and homeowners became wealthy leasing drilling rights to their properties that a nickname was coined for them: “shale-ionaires.” The industry said it paid out $6 billion from 2008 to 2010 just in Pennsylvania, the heart of the Marcellus Shale formation.
⁴
EOG calculated that it would pay over $30 billion over the life of its Eagle Ford wells to leaseholders in the region.

The Eagle Ford became the site of particularly rabid interest after EOG’s news. By 2010, about thirty companies were chasing EOG, more than a thousand drilling permits had been issued—up from twenty-six in late 2008—and crude production had grown to seventy-one thousand barrels a day, up from virtually nothing in 2008.
⁵

For some of those benefiting from the land grab, relief came in the nick of time.

•   •   •

W
illiam Butler was born in 1926 in the tiny South Texas city of Cabeza, the son of a local farmer. While Butler was serving in the navy, his commander decided to give him a new name, one that stuck the rest of his life. “We already have a Bill Butler—you’ll be Buck,” the commander, an obvious fan of alliteration, told the young man.

After completing his service, Butler told his father that he wouldn’t be joining him in the fields. That life seemed too difficult to the young man. “I know one thing I won’t do,” Butler told his father, “that’s farm.”

Over the years, Butler worked on an oil pipeline, broke and sold horses, and served as a state cattle inspector. Eventually he purchased a “sale barn,” or a barn where local cattle were auctioned, in Nixon, Texas. The business suited the gregarious Butler, who enjoyed conversing with anyone and everyone.

“I don’t care if they’re black or brown,” he says. “I don’t give a damn.”

Some years were lucrative, others saw losses. Butler supplemented his income by tending to over a thousand cows and calves of his own, his true passion. Whenever he had spare cash, he used it to buy acreage. He didn’t invest in stocks, his home needed work, and he hardly ever took a vacation. But he kept on buying nearby land, accumulating over five thousand acres around Nixon.

Some of the acreage was for his cows to graze, but other purchases seemed to feed another need. When he drove visitors around, Butler proudly pointed to his land, noting how far it stretched. “Over there’s my country,” he told a visitor, a reflection of the enduring streak of Texan independence in the area.

“I always believed in land, I always thought land was the best place to put your money,” Butler says. “They ain’t making more land but they’re still making more babies.”

Butler usually didn’t tell his wife, Vera, about his purchases until after the deals were made, nor did he inform his kids, which sometimes was a point of frustration for them. Butler never expected rock below his land to be worth much. “My father used to say, “Oil’s in there but it’s too deep, no way they’ll ever get to it,” he recalls.

By 2009, Nixon had just about two thousand residents, an estimated household income of $28,000 dollars, and was thirty minutes from the closest movie theater. Butler’s outgoing and generous personality helped him grow his auction business. He also received support from his wife, his two sons, and a daughter-in-law, all of whom helped with the auctions or worked with Butler’s own cattle.

Butler placed his faith in too many people, however, leading to serious problems. One time, a bookkeeper who had become close to the family stole over a million dollars from the operation. Butler found $150,000 of it in a cigar box, but much of it was sent to the bookkeeper’s boyfriend, a cow buyer in Mexico, Butler says. Some of the money was repaid, but not all of it.

Another time, while Butler was recuperating in a hospital in San Antonio after doctors diagnosed him with Guillain-Barré syndrome—an autoimmune disease that left him weak—two local young men paid a sick visit. They eventually smooth-talked Butler into signing over some of his mineral rights, he recalls.

In 2009, as oil leasing began in the area, Butler was having breakfast with a local bachelor and began to feel sorry for him. He agreed to lease some of his land to him, asking only that the man make sure an oil well and a water well were drilled on the property. The local man flipped the mineral rights to ConocoPhillips, which told Butler they were never told about any agreement to drill wells on his land.