The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (44 page)

A
fter a year spent traveling the world searching for customers interested in buying natural gas from his not-yet-built terminal in Louisiana, Charif Souki finally convinced someone that his plan might work.

In late October 2011, Souki inked a deal with Martin Houston, a senior executive of BG Group, a huge global trader of LNG. BG Group agreed to pay Cheniere $410 million a year for twenty years for the right to use Cheniere’s terminal to convert 3.5 million tons of LNG annually. BG made plans to sell liquefied American natural gas to consumers and businesses in Europe, Asia, and elsewhere.

The deal meant that a big foreign buyer was so sure U.S. natural gas prices—then about four dollars per thousand cubic feet—would remain below global gas prices for two decades that it was willing to pay a sizable premium to get its hands on the cheap U.S. gas.

Souki wasn’t out of the woods yet. Investors still worried that he wouldn’t be able to finance the cost of retrofitting his facility. Cheniere didn’t even have approval from the Federal Energy Regulatory Commission to start construction at Sabine Pass.

Some investors gave up waiting. John Paulson’s hedge fund sold its Cheniere interest. GSO, the Blackstone hedge fund, also decided it had had enough.

“We were tired, to be honest, and they were going to spend ten billion more,” says a GSO executive. “Charif is comfortable with risk, so if you have a chance to get out you take it.”

Souki kept jetting around the world, signing three more deals with customers in early 2012. He used Cheniere’s tiny size to his advantage, reminding global gas players that his company didn’t compete with them, unlike ExxonMobil, Chevron, and other giants examining the idea of exporting gas from the United States.

Eventually, Souki found an investor willing to help finance the construction of his revamped terminal. Blackstone’s GSO fund had sold its investment, thrilled to escape with some profit after a bumpy ride with Souki. But David Foley and Sean Klimczak, executives in Blackstone’s private equity group, decided to take a chance on Souki’s idea. In February 2012, Blackstone agreed to invest $2 billion in Cheniere, enough for the company to begin work on two processing units, or “trains,” to compress, chill, and ship gas from the United States.

Souki made additional trips, courting global investors to raise the rest of the cash he needed. He discovered that a growing number had become convinced the U.S. shale gas boom was for real, and that gas exports were inevitable. In May 2012, Temasek Holdings, the huge Singapore state investment firm, teamed up with Hong Kong private equity firm RRJ Capital to invest nearly $500 million in Cheniere.

Banks and lenders kicked in the rest of the $5 billion Souki needed to complete the first two of four gas processing units at his Louisiana facility, and the company received government approval to begin construction.

It was becoming clearer that Souki’s plan was going to work. He even sent a pair of snow boots to Fadel Gheit, the stock analyst who had said it would “snow in New York in July” before any natural gas was exported from the Gulf of Mexico.

At least Cheniere “got the size right,” Gheit told the
Wall Street Journal
.
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During the first three months of 2013, Cheniere shares climbed from eighteen dollars to twenty-five, as investors became believers. Souki managed to raise an additional $5 billion, to build the other two liquefaction units, enabling even more gas to be shipped out of his terminal. By 2015, Cheniere expects to export an average of five hundred million cubic feet of gas a day.
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As Souki’s own shares became more valuable, he spent some of his newfound wealth on an old love. He paid over $14 million to buy a group of commercial buildings in downtown Aspen, the city he continued to visit, as he plotted a new venture.

Controversy erupted, however. While some environmental activists supported natural gas exports, pleased that gas would displace dirtier coal energy in places like China and India, some big American users of natural gas marshaled forces to pressure the government to prevent gas exports. Chemical companies that depend on natural gas, such as Dow Chemical, feared siphoning supplies from the country would send prices higher, raising costs for businesses and consumers.

A national debate began about the benefits of exporting natural gas. It didn’t have much impact on Souki and Cheniere, however. The company’s Sabine Pass terminal had already obtained government approvals to sell LNG, even to countries like China and India that don’t have free trade agreements with the United States. It didn’t seem likely that the government would withdraw the permission.

Cheniere was in the unique position of being the only company in the lower forty-eight states with both federal permits and supply contracts to ship gas overseas. In May 2013, the Department of Energy granted permission to Michael Smith’s Freeport LNG to export gas, but it wasn’t clear how many other companies would join Cheniere in shipping natural gas from America.

In July 2013, Cheniere shares hit thirty dollars, up 200 percent in two years. The company was on schedule to become the largest single buyer of U.S. natural gas by 2016.
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That summer, Souki took a much-needed vacation to Saint-Tropez, the French resort town. By then, he and his wife, the former
Sports Illustrated
swimsuit model, were separated, so he brought his three sons and their wives along on the trip.

Sipping iced coffee on a porch overlooking the city’s spectacular harbor, Souki saw someone he recognized. It was a hedge fund manager from New York, one of many who two years earlier was losing money on Cheniere and was fretting about how Souki was going to keep the company alive. Now the investor approached Souki to congratulate him for moving closer to exporting gas.

At that point, Souki was worth more than $300 million, ample reward for years of hustle, perseverance, and optimism, even when it wasn’t really called for.

“I feel real satisfaction,” he says, looking back on his long journey.

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E
OG Resources’ production from the Eagle Ford formation in Texas continued to grow in 2012, helping the nation produce about 2.2 million barrels of crude a day from shale and other tight rock formations, up more than 50 percent in just a year and representing about 30 percent of the nation’s oil output.

The Eagle Ford gusher helped overall U.S. daily crude production hit 6.5 million barrels in 2012, up nearly 800,000 barrels in a year, the fastest growth in U.S. history.
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“What can I say about the Eagle Ford except that it’s an 800-pound gorilla developing into a 1,000-pound gorilla?” EOG chief executive officer Mark Papa told investors.

Things got even better in 2013 for both EOG and the country. During the first three months of the year, the company completed twenty-seven “monster wells,” or those with initial production of more than twenty-five hundred barrels a day. Nine of the wells even began producing at thirty-five hundred barrels a day, on par with wells in Saudi Arabian fields. EOG estimates that it can recover 2.2 billion barrels of crude from its 639,000 Eagle Ford acres.

By the middle of 2013, the country’s overall oil output hit 7.5 million barrels a day.
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A revitalization of Texas’s Permian Basin, thanks to horizontal drilling and multistaged fracking, was partly responsible for the surge, along with continued growth in the Bakken and Eagle Ford regions.

The rush for land in the Eagle Ford was turning it into one of the fastest-growing regions in the country, just like the Bakken region in North Dakota. “It’s a madhouse,” according to J. E. Wolf III, a real estate broker in Yorktown, a city of fewer than three thousand residents in South Texas. “I’ve been selling real estate here for forty-three years and I’ve never seen it like this.”
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By the summer of 2013, EOG stock was soaring to $150 a share, giving Mark Papa’s company a market value of nearly $41 billion, or more than the combined values of Alcoa, Southwest Airlines, and Hershey.

In July, Papa, who was sixty-six years old, handed the reins of the company to Bill Thomas, his senior exploration executive and the one who had been the company’s biggest proponent of trying to get oil from shale. Papa prepared to retire at the end of 2013.

“We’re having a positive impact on the U.S. economy and reducing U.S. dependence on OPEC oil,” Papa says. “It feels great.”

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B
y 2012, George Mitchell was a revered statesman in the energy business. His determination to extract natural gas from shale in the Barnett region had paved the way for the discovery of over a dozen shale formations in the United States. Production from those fields hit record levels in 2012 and accounted for about 25 percent of the nation’s total gas production. In addition, Mitchell’s techniques were partly responsible for oil pouring out of various shale formations in the country, a surge that increased the likelihood that the United States might achieve energy independence in the years ahead.

Late in life, Mitchell continued to buck convention. He gave millions to research clean energy even as he, along with his son and Joe Greenberg, invested in a new shale formation in Canada. Wearing a black velvet sports jacket during an interview in his Houston office, Mitchell said he supported taxes on fossil fuels to help alternative energy compete. He also urged stiff regulation of drillers, some of whom had committed environmental abuses.

“Fracking can be handled if they watch and patrol the wildcat guys,” he said. “They don’t give a damn about anything; the industry has to band together to stop the isolated incidents.”

When Mitchell died in the summer of 2013 at the age of ninety-four, it was clear that few Americans could match his impact on the country and the world.

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B
y the summer of 2012, Harold Hamm reached his goal of achieving “ancient wealth.” He also had arrived on the national scene.

At one time, Hamm had been on a quixotic quest to tap oil in overlooked U.S. fields. By this time, Continental Resources held more than 900,000 net acres in the Bakken, making Hamm’s company the largest landholder in the flourishing formation. Continental was pumping more than 100,000 barrels of oil a day, double its production of 2010, making it America’s ninth largest oil producer.

“The fields keep getting better,” Hamm said that summer.

By late September 2012, Hamm, together with his wife and five children, owned an $11 billion stake in Continental, or more than three-quarters of the company’s shares. Hamm moved Continental’s headquarters from Enid to Oklahoma City, one more step to becoming a true oil baron. He settled into a plush new office with a huge cowhide on the floor, a matching cowskin chair, dark wood paneling, and a rifle by his desk.

In some ways, both Hamm and his family remained genuine and unpolished, despite their enormous wealth. While taking a visitor to lunch in Continental’s headquarters that summer, Hamm forgot his identification card and had to call several times for someone to let him into his own offices. At one point, he tried to treat his sister Fannie to a mansion, but she refused to budge from her tiny home in little Lexington, Oklahoma. Fannie did consent to let her brother remodel her bathroom.

Hamm seemed to hunger for a still higher profile. He testified before Congress about energy independence, arguing for “reasonable” environmental regulations, drilling on federal lands, and the continuation of tax policies beneficial to the exploration business.

“I am here as an American patriot that loves my country and as a person that is grateful for the opportunities I have been given by being an American,” he told Congress, while noting that America now imported less than 45 percent of its oil, down from 60 percent a few years earlier, a figure likely to drop much further.

After months of grumbling about how President Barack Obama was holding back the U.S. energy industry, Hamm gave nearly $1 million to a “Super PAC” supporting Republican presidential candidate Mitt Romney. Soon, Hamm was enlisted as Romney’s energy adviser, appearing with the candidate at a series of high-profile events.

Hamm made regular appearances on business television networks to extol the wonders of American crude and to insist that there was much more to be pumped. He and his wife, Sue Ann, smiled for the cameras at a black-tie dinner hosted by
Time
magazine when Hamm was named one of the one hundred most influential people in the world. That year, the couple hosted Romney and seven hundred Republican donors at their mansion in the exclusive Oklahoma City enclave of Nichols Hills, not far from where Aubrey McClendon lived.

It wasn’t hard to see Hamm’s impact on the nation. By 2012, North Dakota had passed California and Alaska to become the second-largest-producing state after Texas. By the end of the year, the Bakken pumped close to 700,000 barrels of crude a day, or about 10 percent of the entire nation’s production. The Bakken has a shot at producing one million barrels a day, joining only six other fields in the world ever to reach that level of production.
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Andy Rihn knew his boss wanted more. Two years earlier, Rihn, a twenty-six-year-old geologist in Continental’s Oklahoma City headquarters, thought he’d found a perfect place to drill. It was a spot in south-central Oklahoma, not terribly far from Continental’s own offices.

Wildcatters as far back as the beginning of the twentieth century had found oil in the area, and veterans of the state, including Aubrey McClendon and Tom Ward, knew it well. But Rihn and a few colleagues became convinced that horizontal drilling could enable much more oil to flow from rock in this region.

“You really believe in it?” Jeff Hume, Continental’s president, asked Rihn in a meeting one day.

“Yeah, I really do.”

“Okay, but it’s your neck, buddy,” Hume told him, only half jokingly.

The Continental team gave the spot a new moniker: Andy’s Neck.

Quietly, Continental began leasing land in the area, which included the southern section of the Woodford Shale, amassing about 200,000 acres by the fall of 2012. When the company began drilling wells, the results were better than Rihn had hoped. The rock was so full of oil it even reminded some of the Bakken.