The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters
PORTFOLIO / PENGUIN
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First published by Portfolio / Penguin, a member of Penguin Group (USA) LLC, 2013
Copyright © 2013 by Gregory Zuckerman
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ISBN 978-1-101-62790-7
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To Michelle
For your support, humor, and love
CONTENTS
TITLE PAGE
COPYRIGHT
DEDICATION
CAST OF CHARACTERS
INTRODUCTION
PROLOGUE
THE BREAKTHROUGH
THE RACE
EPILOGUE
AFTERWORD
PHOTOGRAPHS
ACKNOWLEDGMENTS
NOTES
CAST OF CHARACTERS
MITCHELL ENERGY
George Mitchell Founder
Dan Steward Senior executive on the shale-drilling team
Nicholas Steinsberger Engineer focused on hydraulic fracturing
Kent Bowker Exploration geologist on the shale-drilling team
Jim Henry Veteran geologist
ORYX ENERGY
Robert Hauptfuhrer Chief executive
Kenneth Bowdon Geologist
CHESAPEAKE ENERGY
Aubrey McClendon Cofounder
Tom Ward Cofounder
Marc Rowland Chief financial officer
CONTINENTAL RESOURCES
Harold Hamm Founder
Jeff Hume Senior executive and engineer
Jack Stark Senior executive and geologist
CHENIERE ENERGY
Charif Souki Founder
Meg Gentle Head of strategic planning
EOG RESOURCES
Mark Papa Chief executive officer
Bill Thomas Senior executive
OTHERS
Sanford Dvorin Son of Newark butcher; tried to drill in the Barnett Shale
Ray Galvin Senior executive at Chevron determined to find gas in shale
Michael Johnson Septuagenarian who discovered the largest field in the Bakken
Buck Butler Cowboy in Nixon, Texas, sitting on shale
Elizabeth Irish Oregon native who moved to Williston, North Dakota, with her family
INTRODUCTION
William Butler was up nights, full of worry.
The grizzled eighty-three-year-old rancher in South Texas owed millions of dollars to various lenders, had almost nothing in the bank, and feared his two sons wouldn’t be able to manage when he was gone.
Butler had the look of someone just off the set of a John Ford movie. Tall and broad, he tended his cattle in a flannel shirt, blue jeans, and muddy boots. He went by the nickname “Buck,” spent seven days a week working with thousands of cows on his ranch, and in his old age relied on a walking stick made from the manhood of a two-thousand-pound Brahma bull.
Buck Butler was no cinema hero, however. A series of local schemers and connivers had taken advantage of him over the years. Butler compounded his problems by plowing all his free cash into nearby land, usually telling his nervous wife, Vera, about the purchases only after they had been completed.
By 2009, Butler faced growing difficulties with his business and was coping with a nervous system disorder. Vera began taking medication to calm her own nerves.
“When you owe over three million dollars you worry,” she explains.
Less than four years later, on a warm January afternoon in 2013, I bounced around the front seat of Butler’s new Dodge pickup as he told the story of how his difficult days had come to an end and a new life had begun.
Pointing to his rolling acreage like a proud parent, Butler described how one day—just over two years earlier—a representative of ConocoPhillips had come knocking on his office door to ask if the huge oil company could drill on his property. It turned out that a type of rock called shale was buried more than a mile below its surface. The rock was soaked with oil that suddenly had become accessible. Almost overnight, Butler’s land was transformed into some of the most valuable acreage in the world.
Butler parked his truck outside a Mexican restaurant in Nixon, Texas, population twenty-four hundred, and turned to me with piercing blue eyes.
“It’s goddamn unbelievable what’s happened to me in the last two years,” he said, a smile of relief forming on his rugged face. “I have to reach out and pinch myself, it’s too good to be true.”
I was a business reporter from New York on a visit to South Texas in search of a story. My crisp blue Yankees cap seemed to clash with Butler’s scuffed cowboy hat, and his honeyed Texas twang sometimes sounded like an entirely new language. I had spent a career at the Wall Street Journal writing about men and women who traded stocks and bonds, not livestock. Before I began my research, “frack” was the kind of word I’d caution my kids to avoid.
At that moment, though, I was sure my Marlboro Man’s tale, and the stories of others I had heard in places like Williston, North Dakota, New Milford, Pennsylvania, and Lexington, Oklahoma, were among the most compelling a writer could hope to find. Buck Butler and others at the heart of one of the greatest energy revolutions in history had experienced astonishing and unexpected change thanks to American oil and gas discoveries deemed unthinkable just a few years ago. The nation itself has been transformed, as has the world.
The more work I put into the topic, the clearer it became that a burst of drilling in shale and other long-overlooked rock formations had created the biggest phenomenon to hit the business world since the housing and technology booms. In some ways, the impact of the energy bonanza might be even more dramatic than the previous expansions, especially if shale drilling catches on around the globe. Surging oil and gas production likely will affect governments, companies, and individuals in remarkable ways for decades to come.
Consider the following:
As recently as 2006, business and government leaders fretted that America was running out of energy. By 2013, however, the United States was producing seven and a half million barrels of crude oil each day, up from five million in 2005. The country enjoyed its largest production increase in history in 2012 and could pump more than eleven million barrels a day by 2020, its highest figure ever and more than even Saudi Arabia currently produces.
So much oil is flowing that in a few more years, the United States may not need to import any crude, or might only rely on friends such as Canada and Mexico, ending a fifty-year addiction to oil from countries with interests that many years ago diverged from ours. In 2013, Saudi Arabia’s billionaire prince Alwaleed bin Talal said the kingdom’s oil-dependent economy had become vulnerable to rising U.S. energy production, a shocking turnaround from a few years ago when America seemed hopelessly dependent on Middle Eastern oil.
America already is the world’s largest producer of natural gas, thanks to shale drilling, and the country sits on two of the world’s largest gas fields. Gas production has soared 20 percent in five years, and the United States now should have enough gas to last generations. Soon, the nation will begin exporting gas, an unimaginable possibility just a few years ago when energy supplies looked set to run out and the construction of gas importing facilities was considered a matter of national urgency.
Rising production from dense rock has sent natural gas prices tumbling 75 percent since 2008. Because gas is used to heat and cool homes, produce electricity, grow food, power some vehicles, and make plastic, steel, and other products, the American gusher has been a boon to consumers and businesses, many of whom are still suffering from the worst economic downturn since the Great Depression. Meanwhile, growing U.S. oil production has allowed the country to enforce a boycott of crude from Iran at relatively little cost, and it could help keep a lid on global prices for years to come.
The energy boom could generate more than two million new jobs by 2020, offsetting the jobs lost in the housing market’s collapse. Hiring is on the rise in Texas, Oklahoma, and Louisiana, as well as in Ohio, Wyoming, West Virginia, and Pennsylvania, a shot in the arm for many long-struggling regions. North Dakota enjoys an unemployment rate of about 3 percent, a Walmart in the heart of the state’s oil region pays employees twenty-two dollars an hour, and some local McDonald’s outlets have resorted to offering bonuses of $300 and thirty-two-inch flat-screen televisions to lure new employees.
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Electricity and natural gas prices are so much cheaper in the United States than in most other countries that they could help usher in a new era of American economic dominance. A “reshoring” trend already is under way, as steel, chemical, fertilizer, plastics, tire, and other companies move production back to the country or expand existing factories, while foreign firms build new plants in the United States. The shift is helping to bring back some jobs once believed to have been lost forever to China and other low-cost economies. Some even see a manufacturing rebound in the making as “made in the USA” again becomes de rigueur.
All the newfound oil and gas, along with expected energy exports, could boost the value of the U.S. dollar and reduce the nation’s trade deficit. The explosion of oil also has defense specialists debating whether the United States may be able to avoid certain future military actions aimed at securing energy supplies, allowing the country to trim its bloated defense budget and perhaps cede some security responsibilities to other countries, like China, that remain dependent on Middle East oil production.
China, Russia, Argentina, and Mexico are among the countries with their own deep pockets of shale that may be tapped in the years ahead, while government officials in the United Kingdom and elsewhere have urged their countries to embrace shale drilling. In fact, global gas production could rise by 50 percent by 2035, some analysts say, helping consumers and businesses around the world.
But troubling questions have been raised about the environmental consequences of some of the production methods responsible for soaring oil and gas supplies, including hydraulic fracturing, or “fracking.” Some worry about their impact on air and water quality, while others are concerned that fracking may contribute to climate change or lead to tremors and other disturbances. Hollywood starlets, rock stars, and media moguls, including Yoko Ono, Sean Lennon, Alec Baldwin, Paul McCartney, and Scarlett Johansson, have become activists on the hot-button issue, which figures to dominate headlines for years to come. The Rolling Stones even wrote a song, “Doom and Gloom,” that disparages fracking.
Many of the environmental threats can be addressed or are overstated. But progress has been too slow, there have been damaging mishaps, and some say there’s too little regulation. While soaring natural gas production actually might help alleviate global warming by reducing demand for dirtier coal in places like China, the resurgence of fossil fuels threatens to sap interest in still cleaner alternative energy sources. The full impact of the new drilling may take years to be fully understood, and some companies continue to resist sharing full details of how they fracture rock to get all that oil and gas, adding to the unease.
• • •
The shifts that have taken place in the United States, and those on the way around the globe, are in many ways not nearly as astonishing as the story of how a small group of individuals made it all happen, against all odds. These modern-day wildcatters ignored the skepticism and derision of experts, major oil companies, and even colleagues to drill in rock they believed was packed with oil and gas miles beneath the earth’s surface. These men have altered the economic, environmental, and geopolitical course of the world while scoring some of the swiftest windfalls in history.
George Mitchell, who discovered a novel way to extract gas from shale formations, pocketed more than $2 billion. His impact eventually might even approach that of Henry Ford and Alexander Graham Bell. Aubrey McClendon and Tom Ward turned $50,000 into one of the nation’s largest natural gas producers, one that would control the mineral rights to fifteen million acres, around three times the area of New Jersey. Mark Papa built a $43 billion oil power from the discards of the disgraced Enron Corporation.
Another pioneer, Harold Hamm, amassed a fortune of more than $12 billion, making him one of America’s richest individuals. Hamm, who owns more oil in the ground than any American, has more wealth than Rupert Murdoch, Steven Cohen, Sumner Redstone, or even the estate of Steve Jobs. Hamm’s ongoing divorce likely will set a record for the costliest in history and could leave his wife with more money than Oprah Winfrey. Even Hamm’s right-hand man is worth as much as $400 million, a sign of the outsized profits racked up by innovators of the age.
Some of the architects of the “shale gale” were upended by a revolution they themselves helped create, however. They would see fortunes slip through their fingers and experience ridicule and scorn rather than wealth and admiration. And if the worst fears about the drilling are borne out, those at the forefront of the movement will be remembered for the damage they wrought rather than the blessings they bestowed.
But how did a few unlikely, ambitious, and headstrong wildcatters—some without college degrees or much background in geology or drilling—manage to tap massive energy deposits dismissed by the largest energy powers? ExxonMobil’s corporate headquarters are directly above a huge shale formation, but the oil giant disregarded the area, even as George Mitchell worked on coaxing historic amounts of gas from rock in the region.
Why did a new age of energy emerge from the depths of the Great Recession, even as Federal Reserve chairman Alan Greenspan warned of dwindling U.S. supplies, investors Warren Buffett and Henry Kravis bet on a dearth of natural gas, and Vladimir Putin predicted a Russian gas monopoly?
Why did private enterprise revitalize the nation’s energy outlook with a focus on fossil fuels, of all things, even as governments funneled $2 trillion toward cleaner, alternative energy? How did obscure energy entrepreneurs develop technologies to produce a surge of energy, even as a chorus of experts, including Peter Thiel, an original investor in Facebook, derided the country for no longer making dramatic technological advances? And why did it all happen in the United States and not in China, Russia, or other countries that boast their own enormous deposits of oil and gas in similar rock?
This book, based on over three hundred hours of interviews with more than fifty of the key players of the era, attempts to answer these questions. It also anticipates how the new age of energy might influence global financial markets, economies, military activities, and international politics. Government experts charged with developing energy policy were caught flat-footed by the dramatic recent shifts, as were environmental specialists and top oil-and-gas executives, suggesting that there is much to learn from those who managed to lead the shale revolution.
Those responsible for the remarkable period skirted danger every step of the way, risking their reputations and livelihoods for the discoveries of a century. Their saga unfolded in barren fields, in cluttered pickup trucks, and in high-pressure boardrooms. It’s one that will continue to impact the world for years to come.
PROLOGUE
The phone call came as a jolt.
It was May 2007 and Harold Hamm was enjoying dinner at the Brown Palace Hotel and Spa, an elegant hotel in downtown Denver. To Hamm’s right were two longtime colleagues from his energy company, Continental Resources. A pair of Merrill Lynch investment bankers sat to Hamm’s left. The group was two-thirds through a grueling ten-day coast-to-coast trip aimed at wooing investors ahead of a crucial initial public offering of shares of Continental.
When rock bands go on road trips, the days are slow and the nights furious; when executives take to the road to sell pieces of their companies, the opposite usually is true. Hamm and the bankers had spent a full day convincing mutual fund honchos that Continental was set to strike it big in North Dakota, a long-overlooked part of the country. Now the group relaxed over dinner and drinks, their jackets off and ties loosened, as they discussed ways to improve their pitch.
As he’d courted the investors, Hamm hadn’t dwelled on the personal challenges he had overcome, such as growing up dirt poor in rural Lexington, Oklahoma, the youngest of thirteen children. He’d also avoided mention of his more recent turbulent love life.
Instead, Hamm shared an upbeat message about his company and a promising 15,000-square-mile formation of rocks called the Bakken that was under parts of North Dakota, Montana, and Canada. Hamm believed he was at the vanguard of a revolution that would deliver new oil and gas supplies to a nation running out of energy.