The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (6 page)

He kept his hopes high, though. Government incentives had been put in place to encourage big companies to search for natural gas in formations previously believed unproductive. The incentives had helped Mitchell Energy, and they gave Dvorin encouragement that he’d eventually find a partner for the Barnett. Natural gas demand was rising and prices rose for a short while in 1996, as an industry advertising campaign touted it as the “clean energy source.” At the same time, a technical paper by the Gas Research Institute had suggested that Mitchell’s team was on its way to extracting gas in the Barnett, though it wasn’t clear how much there would be.

Dvorin continued drilling on his own, using up the last of his life savings. He even persuaded his son, Jason, a financial consultant, to join the effort.

“Nothing in the oil and gas business is a sure thing. If there was, this was it,” Dvorin said around that time.

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G
eorge Mitchell and his gang weren’t getting much of anywhere in the Barnett. But soon a few large energy companies wondered if he and early movers like Sanford Dvorin might be on the right track, at least. It was as if Mitchell had awoken some sleeping giants. Ray Galvin, a senior executive at Chevron, became determined to catch up and pass Mitchell. The odds seemed good for him and his company.

Few executives at Chevron were as popular as Galvin, a six-foot-two graduate of Texas A&M, George Mitchell’s alma mater. Friendly and approachable, Galvin was a petroleum engineer who started as a grunt in the field. He encouraged his staff to share their ideas to improve Chevron’s production, earning the respect of the company’s engineers and geologists, some of whom resented that the executive suite seemed chock-full of MBAs, some with little industry background. It helped that Galvin was an upbeat personality who always seemed to have a smile on his face. He had come to Chevron from Gulf Oil, making him one of the few Chevron executives who hadn’t spent his entire career at the company and providing him with a different perspective from the others.

By 1992, Galvin was president of Chevron’s U.S. operations, the company’s largest division. He sat on industry panels and gained an inkling of some of the progress being made in shale. That year, for the first time, the National Petroleum Council’s estimate of long-term gas supplies pointed to shale as containing some gas reserves, causing a bit of a buzz among some and giving the Mitchell crew more encouragement. Galvin sensed that a technological breakthrough might be at hand. Chevron needed to begin exploring shale and other kinds of unorthodox rock, he argued within the company.

Galvin started a group to study and then undertake this “unconventional” drilling. Within Chevron, he preached that energy companies, like other kinds of businesses, were better off betting on improved technology than on the price direction of the products they produced. This seemed like the perfect way to put the theory to the test.

At the time, most of Galvin’s colleagues in Chevron’s corporate suite, as well as executives of other oil giants, were convinced that the most exciting exploration opportunities were anywhere but in the country’s lower forty-eight states. Chevron was shifting its own focus to places like Kazakhstan, Nigeria, Newfoundland, and Angola, all but sneering at the United States.

The Barnett layer was, quite literally, in the backyard of at least one U.S. energy giant. The corporate headquarters of Exxon was in Irving, Texas—
right above
the Barnett layer. In fact, Mitchell and Dvorin were drilling just a few miles west. Executives were so focused on possible drilling spots worlds away, however, that they didn’t pay much attention to what was happening under their noses. Most other companies figured that if oil majors weren’t interested in the Barnett it couldn’t be especially promising.

Despite the distinct bias against domestic drilling, Galvin managed to shift eight of Chevron’s most talented up-and-coming stars—six engineers, one geologist, and one landman—to a new group to examine drilling for gas in tight rock like shale. Galvin segregated the unit from the rest of the organization, to try to ensure independent thinking, and he got them an annual budget of about $30 million, a sizable sum. By 1993, the group had grown to eleven pros.

“Go see if there are places where we can find an edge,” Galvin told the team in one of their early meetings, “something big enough” to matter for Chevron.

The group quickly became convinced that drilling in shale could lead to huge amounts of gas. Chevron made headway using some fracking techniques in a shale area in Michigan and began leasing prime acreage elsewhere in Texas’s Barnett Shale, hoping to succeed where George Mitchell was finding frustration.

“We knew Mitchell was trying different fracking treatments,” Galvin recalls. “I was trying to position us for places where improvements in technology would give us an advantage.”

Ray Galvin drew on the financial might of one of the largest energy companies in the world. And he had some of the industry’s best engineers and geologists at his disposal. It seemed obvious that he was the frontrunner to make history solving the mysteries of shale drilling, not George Mitchell, who was encountering growing problems in the Barnett.

The Mitchell team had tried fracking with various types of fluid, but they just couldn’t get much gas to flow. Mitchell’s geologists, surprised by how hard the shale was, found that nearly half the mineralogy of the rock was quartz, considered the fourth hardest mineral, another reason some turned more downbeat about their prospects of getting gas out of the rock.
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Some of their problems were confounding. There were a few areas of the Barnett that didn’t need to be fracked because the rock there had “natural fractures” that should have allowed gas to flow. But this rock actually proved harder to coax gas from, not easier.

Some at Mitchell Energy urged their boss to stop wasting time and money. Shale just didn’t seem porous enough to produce much gas, they told Mitchell. He appeared to be jeopardizing his company’s future. Getting blood from a stone is pretty impossible; getting gas from shale seemed nearly as difficult.

“People said if the Barnett was the best we had, then Mitchell was in deep doo-doo, though they used a different word for it,” says Steward, the Mitchell geologist.
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It wasn’t clear how long Mitchell could keep at it. Sanford Dvorin was hot on his heels, as were Ray Galvin and Chevron.

But it was an executive with a much more limited background in energy who seemed well on his way to becoming the nation’s next oil baron. His name was Robert Hauptfuhrer, and he and his company had already mastered a radical and groundbreaking drilling technique that George Mitchell, Sanford Dvorin, and Ray Galvin knew little about.

O
n November 3, 1993, Mayor Steve Bartlett rose to introduce Robert Hauptfuhrer to hundreds of members and guests of the Newcomen Society gathered in the Grand Ballroom of the Adolphus hotel in downtown Dallas.

The group, dedicated to “achievement in American business,” had come to the famed Beaux-Arts hotel, built by the founder of beer giant Anheuser-Busch, Adolphus Busch, to pay tribute to Hauptfuhrer, the head of Oryx Energy, the largest independent energy company in the United States.

“I take great pleasure in joining you this evening to honor an outstanding and well-deserved American enterprise, Oryx Energy Company,” Bartlett enthused. “Bob Hauptfuhrer is a champion and advocate of free enterprise. . . . He is a visionary.”

Hauptfuhrer strode to the dais, confidence oozing. Oryx had survived a shakeout in the energy business and its own problems and seemed on firm ground. The company was one of Dallas’s five largest employers and Hauptfuhrer was a civic leader. Its success was due to Oryx’s early embrace of a new technique called “horizontal” drilling that was showing great promise.

“Although we did not invent horizontal drilling, we’ve taken it further than most companies,” he told the audience.
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Hauptfuhrer was a new king of the oil patch. Oryx wasn’t creating fractures in rock to loosen up oil or gas and didn’t really care what the Mitchell Energy gang was up to in the Barnett. With the drilling expertise Oryx was developing, fracking didn’t seem to matter. Horizontal drilling was about to transform the energy business—and even the world—and rivals would be forced to play catch-up to the company.

What Robert Hauptfuhrer didn’t know was how short his reign atop the energy world would be.

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B
orn to an upper-middle-class Protestant family outside Philadelphia, Hauptfuhrer attended the William Penn Charter School before graduating from Princeton University’s Woodrow Wilson School of Public and International Affairs in 1953. Six foot four, Hauptfuhrer played forward for Princeton’s basketball team, was a Phi Beta Kappa member, and proved a quick study in challenging economics courses. After a stint in the navy, he received an MBA at Harvard Business School, graduating as a Baker Scholar, a distinction earned by those in the top 5 percent of the class.

Some people marry well; Bob Hauptfuhrer married very well. In 1963, he wed Barbara Dunlop, a daughter of Robert Dunlop, one of Philadelphia’s most distinguished citizens. At the time of the nuptials, Robert Dunlop also happened to have been president of the Sun Oil Company, one of the most prestigious energy producers in the world. Later, Dunlop served as the company’s chairman. Hauptfuhrer had met his future father-in-law when they both played golf for a team representing the Skytop Lodge, a resort in the Pocono Mountains that the Hauptfuhrer and Dunlop families regularly visited. Dunlop had suggested that Hauptfuhrer get in touch with his daughter, six years Hauptfuhrer’s junior, who at the time was studying at Wellesley College, the women’s college near Boston.

After finishing Harvard, Hauptfuhrer joined Sun, a perfect spot for an ambitious young man. The roots of the company, which sold gasoline under the name Sunoco, stretched back to the beginning of the modern oil industry in Pennsylvania in the late nineteenth century. That’s when Joseph Pew, a schoolteacher turned oil and gas entrepreneur, helped start the Penn Fuel Company to supply energy to the city of Pittsburgh. In 1901, after the discovery of oil in the famed Spindletop oil field near the city of Beaumont, Texas, Pew was among the first to race southwest to tap his own wells. Pew and his brother, J. Edgar, began shipping oil from Texas to New Jersey under the corporate name Sun Oil Company, the beginning of several decades near the top of the U.S. energy business.

Hauptfuhrer spent nearly two decades working his way up Sun’s ranks, excelling in various roles, including senior auditor and head of purchasing. In 1984, he took the helm of Sun’s Dallas-based oil and gas exploration and production unit after receiving what he called a “wink and a nod” that he soon would become the company’s president.

Bright and energetic, Hauptfuhrer worked with his staff to better allocate the unit’s cash. Earlier in his career, he had hired University of Pennsylvania graduates to apply mathematical techniques to improve the analysis of geological basins, an unorthodox move that quickly set him apart from industry veterans. Now he streamlined the business by selling oil properties in Texas, California, and elsewhere and by embarking on a series of layoffs.
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There was growing unhappiness about Bob Hauptfuhrer’s rapid rise at Sun, however, as his golden connections made him an easy target. Some veterans griped that he didn’t deserve such a big job helming the exploration unit and that he didn’t seem to have his heart in the business. During exploration meetings, some geologists noticed a blank stare on Hauptfuhrer’s face. They figured he didn’t care about the details of the discussion or couldn’t muster much excitement about what they were doing. Hauptfuhrer’s apparent lack of passion grated on some Sun pros.

Others resented Hauptfuhrer because he came from Sun’s finance side, not its exploration or production businesses. Those guys were the ones actually finding oil, while Hauptfuhrer sat in his plush office talking about their discoveries while pushing numbers around, many felt. Antipathy for “business guys” is rampant within energy companies, much as Hollywood stars express disdain for the “suits” who make decisions at movie studios but can’t act, write, or direct. For Hauptfuhrer, the label of “finance guy” was a stigma he couldn’t shake.

“The view was that Robert Hauptfuhrer knew nothing about geology,” says Kenneth Bowdon, who worked as a geologist in Sun’s exploration department. Bowdon agreed with the criticism. “Hauptfuhrer wouldn’t know oil if it dripped on him,” he says.

For his part, Hauptfuhrer felt his familial connections served as a form of reverse discrimination that forced him to work harder to prove his value and advance within the company.

•   •   •

I
n truth, there was less to envy about Hauptfuhrer’s position running Sun’s exploration efforts than many of his critics realized. The 1980s were an awful time in the oil business and it became especially challenging as famed oil fields in California and elsewhere hit historic peaks. A glut caused by reduced energy demand after the 1970s energy crisis sent prices tumbling for most of the decade, pressuring profits. Growing supply from the North Sea and other regions outside the United States levied further pressure on prices.

Oil prices fell from thirty-six dollars a barrel in 1981 to about fifteen dollars by 1986, based on benchmark West Texas International prices. In 2013 dollars, that’s a decimating fall from over ninety dollars to just over thirty. Some members of OPEC, the Organization of the Petroleum Exporting Countries, ramped up production, trying to offset lower prices, angering others in the cartel. The price collapse forced banks to shut down throughout America’s Southwest, resulting in over $15 billion of bailout costs for the U.S. government.

Low prices made it hard for companies like Sun, which had to take a $260 million write-down in 1988 due to the falling value of its energy assets. Production also was a challenge for the company. In the mid-1980s, Sun began to develop the 14,000-acre Pearsall oil field in southern Texas. The area was part of the Austin Chalk region, which stretched from Texas into Louisiana and included areas near Austin and San Antonio. A few years later, however, production from Sun’s wells sharply declined, causing frustration in Sun’s executive suite.

If that wasn’t enough to fray Hauptfuhrer’s nerves, Sun’s exploration and production divisions were notoriously competitive and uncooperative, causing infighting that Hauptfuhrer also had to navigate. “It was constant pressure,” he said.

The stress took its toll on Hauptfuhrer, who left his wife and high school–age son in Philadelphia to take the Dallas job. He returned home nearly every weekend, a grueling lifestyle that he says led to a condition called alopecia areata, which resulted in hair loss all over his body.

On a trip to China in 1985, after a long evening of mai tai toasts with his hosts, who were selling oil drilling concessions for the first time, Hauptfuhrer felt sudden chest pain and was rushed to a pitch-dark local hospital in the middle of the night. There, he watched workers search to find the lights and struggle to properly place electrodes from an electrocardiogram on his chest.

“If I didn’t have anxiety before, I had it then,” Hauptfuhrer recalled.

He returned to the United States and suffered a heart attack at a Philadelphia hospital, resulting in quadruple-bypass open-heart surgery. It took months for him to recover.

Even as Hauptfuhrer struggled to run the division, something amazing was happening in the oil fields of Texas. One day in 1984, an oil field contractor brought an idea to Sun’s production pros. Technology had advanced to the point where some drilling could be done in a sideways fashion, he said, rather than vertically, the traditional way wells had always been tapped. After years of experimentation, many of the kinks had been worked out and horizontal drilling now could be done in a more cost-efficient way, the contractor said.

He called this kind of drilling a “short-radius lateral.” It was just a technical term that meant a drill bit now could bore horizontally over short distances. It had nothing to do with the hydraulic fracturing of compressed rock that George Mitchell’s crew was focused on. Horizontal drilling was just an improved way to target oil and gas reservoirs below the surface.

Some horizontal drilling already was being done by a pioneering company called Union Pacific Resources, though the company could only drill about 150 feet at the time. The consultant advised Sun to give it a shot, too, adding that advances in computer imaging and improvements in seismic analysis of underground reservoirs made it a perfect time to try this horizontal approach.

For years, geologists had daydreamed of drilling long, narrow slices of rock below the surface that were thick with oil and gas, much as astronauts long to visit out-of-reach planets. The Sun production team instantly realized that horizontal drilling held the possibility of finally reaching this tantalizing rock.

They agreed to test horizontal drilling on one old, tired well in the Austin Chalk area. Almost immediately, the loser well turned into a huge winner, as production soared.

It seemed great news, at least for the first day or so. But the glee of the crew quickly turned to panic—they realized that if Sun’s rivals found out how much oil they were producing and how easily it was coming up, these competitors would do their own sideways drilling and Sun wouldn’t be able to buy nearby wells from rivals at reasonable prices. They had to do something to mask their success or they’d be known for blowing a major opportunity.

“Shut it down!” a production executive screamed to several well hands.

When the company reported its production to the state at the end of the month, the results of the well didn’t look out of the ordinary. The well produced with horizontal drilling had given up the same amount of oil that nine of Sun’s old, tired vertical wells had produced. The big difference was that the horizontal well had produced all that oil in just two days! Hardly anyone knew about their breakthrough, though, because they had shut down the well so rapidly.

There was another, more devious reason for the secrecy of the Sun gang. Sun was such a fractious place that the production crew was determined to keep their colleagues in the exploration department in the dark about this newfangled drilling, lest they emerge as the company’s new heroes.

But Bowdon, a junior geologist in Sun’s exploration group, got a tip from a friend in the production group that something big was happening. Bowdon’s job was to do the geoscience and recommend drilling locations, and he had been itching for a chance to pursue some huge wells, to make his own mark on the company. When his friend told him about the new way they were getting oil out of the ground, he immediately became energized.

“A lightbulb went off in my head,” Bowdon recalls. “I could tell this was going to be disruptive technology, just like the computer.”

The cat was out of the bag. The warring factions at the company would have to talk to each other about this new way of drilling. Bowdon’s boss, Craig Bourgeois, managed to get approval from Hauptfuhrer and others to expand Sun’s use of horizontal wells to new oil fields, not just the mature ones that had given the company fits. Bourgeois, Bowdon, and the rest of the production crew were full of hope. Even they had no clue how this drilling advance would change the course of history.

•   •   •

O
nce, it was a fairly simple thing to find petroleum—it was no more difficult than looking down. Far back into antiquity, bitumen, an oily, semisolid ooze, seeped to the surface through cracks and fissures in the earth. Bitumen was used as building mortar and is mentioned in the Bible. It was used to bind the walls of Jericho and bricks used for the Tower of Babel. Bitumen probably helped caulk Noah’s ark and Moses’s basket, according to Daniel Yergin’s
The Prize
. The substance was ubiquitous, the WD-40 of its day.

Later, petroleum was used in ancient warfare, as noted in Homer’s
Iliad,
and as an all-purpose medical remedy through the Middle Ages, especially in Europe. There, too, seepages were noted, making it relatively easy to gather petroleum. Sometimes peasants dug shafts by hand to obtain crude oil, which was turned into kerosene. A small oil industry developed in Galicia in Eastern Europe, and a pharmacist and plumber from Lvov helped invent a cheap lamp to burn the kerosene. This new kind of illumination caught on in Eastern Europe and spread through the rest of the world, Yergin notes.

Even during modern times in the United States, it wasn’t very hard to find oil. Locals in the hills of northwestern Pennsylvania skimmed oily water off the surface of springs and creeks or wrung out rags and blankets soaked in it. They called it “rock oil,” to distinguish it from vegetable oil and animal fats. The easy-to-find oil was believed to have healing powers, and was used as a cure-all for everything from headaches to deafness.
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