The Boom (48 page)

Gold, R., Daniel Gilbert, and Joann S. Lublin. “For Chesapeake’s CEO, a Complex Web of Loans.”

, April 19, 2012.

Krauss, Clifford, and Eric Lipton. “After the Boom in Natural Gas.”

, October 21, 2012.

McLean, Bethany, and Peter Elkind.

. New York: Portfolio, 2003.

Mollenkamp, Carrick. “Chesapeake’s Deepest Well: Wall Street.” Reuters, May 9, 2012.

Robinson, Rick. “The Daily Oklahoman Executive Interview Column.”

, July 21, 2002.

Shottenkirk, Jerry. “Hard Work, Luck Make Billions for Oklahoma Executive.”

(Oklahoma), August 13, 2007.

Smith, Rebecca, and John R. Emshwiller.

. New York: HarperCollins, 2003.

I had spoken to and exchanged emails with Aubrey McClendon for many years and wrote a front-page profile of him and Chesapeake for the
Wall Street Journal
in 2006, back when he was known only inside energy circles. I had scheduled a lengthy interview with him on May 1, 2012, to go over his history and the story of Chesapeake and natural gas. About ten days before the interview, Reuters reporters Anna Driver and Brian Grow first reported the existence of enormous loans to McClendon from financial firms that were buying assets from Chesapeake. Their article, “The Energy Billionaire’s Shrouded Loans,” is available online at http://graphics.thomsonreuters.com/12/04/ChesapeakeMcClendon.pdf. (Last accessed August 2013.) My follow-up story on April 19 provided some additional details and is the source of the $1.4 billion figure.

McClendon canceled my May 1 interview and subsequently declined to reschedule it. He responded to some questions I sent to him by email during the editing of this book. His responses are the source of several quotes attributed to him in Chapters 8, 9, and 11. Before April 2012, he was never shy about talking at conferences and giving interviews. I compiled all the transcripts of his talks on investor conference calls and at energy conferences, and it is not an exaggeration when I say that the file ran to nearly a thousand pages. I also relied on tapes of speeches he gave, lengthy emails we exchanged in 2006, and tape recordings of interviews he gave to other reporters.

His quote “It will be better to be a provider of energy than a consumer of energy for the next twenty years” comes from an article in the November 4, 2002, edition of the
Oil & Gas Journal,
and his pessimism about future production is from the March 24, 2003, edition of the same publication. The
OGJ
publishes an annual list of the largest oil and gas producers. I relied on these rankings to make the determination that Chesapeake was the largest driller in the country.

Jason Baihly, in a 2010 paper cited below, provides detail on how shale wells grew larger and the industry figured out how to drill them more quickly.

A quick note on company financials. The $328.8 million figure in the second quarter of 2004 is cash from operations; the $337.9 million is a broad definition of capital expenditures. These figures are derived from S&P Capital IQ, a financial data product. From that point until the end of 2012, Chesapeake reported three quarters of positive cash flow: the first quarter of 2005 and the second and third quarters of 2006. The $163 billion invested in US shale is roughly equal to the market capitalization of Coca-Cola ($167.6 billion) and Google ($165.4 billion). Those figures are from the 2012 FT Global 500 listing, published by the
Financial Times
and current as of March 30, 2012.

This chapter deals, at length, with McClendon’s loans. Details on those loans are contained in UCC filings in Oklahoma City. His ties with John Arnold’s Centaurus Advisors are in UCC filings nos. 2008011942027 and 2008013852736. See also filings nos. 20100517020492600 and 2008008596947, although this is not an exhaustive list. Chesapeake disclosed information about McClendon’s stake in the Founders Well Participation Program in a SEC DFAN14A filing on April 26, 2012. I consulted the Energy Information Administration’s
Natural Gas Monthly
reports for my assertion that McClendon’s 147 million cubic feet a day of natural was enough to supply all residential customers in Connecticut or Kentucky. See table 14 of the monthly EIA reports. For more information about Arnold, see “The Reckoning of Centaurus Billionaire John Arnold,” by Leah McGrath Goodman in the February 1, 2011, edition of
Absolute Return
.

Some of McClendon’s quotes about Chesapeake having four main inputs and the number of leasing transactions come from an interview he gave on January 5, 2012, to my
Wall Street Journal
colleagues Daniel Gilbert and Ryan Dezember.

Senator Bernie Sanders, in August 2011, released a snapshot of participants in natural gas and oil futures markets. The information was made available on his Senate website, www.sanders.senate.gov/newsroom/news/?id=e802998a-8ee2-4808-9649-0d9730b75ea4. (Last accessed August 2013.) I downloaded the data, put it into spreadsheets, and analyzed it to come up with the rankings of largest natural gas market participants. In a statement on August 25, 2011, the Futures Industry Association said it was “shocked and outraged” by the disclosure.

Details on Chesapeake’s $8 billion in gains from trading and hedging were reported by the company over time in various public disclosures. The section on the Heritage Management hedge fund is based on reporting by myself and the former
Wall Street Journal
reporter Ann Davis in 2006 and 2007 and was supplemented by the Reuters article cited below.

John Pinkerton’s quote “When Aubrey joined the party” is from an interview with the author. McClendon’s quote “I got caught up in a wildfire” is from Ben Casselman’s
Wall Street Journal
article cited below. I greatly appreciate Casselman’s insights from covering Chesapeake for the
Journal
in this time frame. The value of McClendon’s share ownership is derived from various SEC filings.

More broadly, I have benefited from many, many talks over the years with investment bankers and analysts who followed Chesapeake. I quote Dan Pickering in the chapter, but he is not alone.

Pawel Rajszel’s investor note was titled “Chesa’peak’e Leverage: It’s More Than You Think” and issued by Veritas Investment Research on April 29, 2010. McClendon’s quote that regarding VPPs as debt is “kind of nutty” is from a conference call with analysts on November 4, 2010. His appearance on
Mad Money
was archived on Chesapeake Energy’s website at www.chk.com/News/Articles/Pages/TV_20110801_AKM.aspx. (Last accessed August 2013.)

The Archie Dunham email was sent on January 29 and reviewed by the author. McClendon’s email in April 2013 was first reported by Christopher Helman in
Forbes
in an article titled “Aubrey McClendon Is Now Hiring.”

Baihly, Jason, Raphael Altman, Raj Malpani, and Fang Luo. “Shale Gas Production Decline Trend Comparison over Time and Basins.” Paper presented at SPE Annual Technical Conference and Exhibition, September 19–22, 2010, Florence, Italy.

Birol, Fatih.

. Paris: IEA Publications, 2012.

Casselman, Ben. “Margin Calls Hitting More Executive Suites.”

, October 13, 2008.

Gold, R. “Costly Liabilities Lurk for Gas Giant.”

, May 11, 2012.

Gold, R., and Daniel Gilbert. “The Many Hats of Aubrey McClendon.”

, May 8, 2012.

Schneyer, Joshua, Jeanine Prezioso, and David Sheppard. “Special Report: Inside Chesapeake, CEO Ran $200 million Hedge Fund.” Reuters, May 2, 2012.

My visit to Sullivan County was greatly enriched by the time I spent with innumerable local residents and community leaders. At the suggestion of former
Pittsburgh Post-Gazette
reporter Erich Schwartzel, I convinced Commissioner Bob Getz to give me the grand tour of the county. The tour didn’t disappoint. Many of the people I interviewed are in this chapter, but I would specifically like to thank Dick and Lois McCarthy—former farmers, neighbors of the Farm, and local leaders. And thanks to Dean Homer, who serves as both the county’s only undertaker and one of its only accountants. When it comes to death and taxes, see Dean Homer. Ralph Kisberg helped with insights and logistics. Andy Goldberg, a Harvard-trained Wall Street trader turned independent water tester in nearby Clarks Summit, helped me deepen my understanding of water. Tom Murphy, codirector of the Penn State Marcellus Center for Outreach and Research, is a state treasure.

Geological information about Sullivan County came from an old (and undated) pamphlet titled
Worlds End State Park, Geologic Features of Interest
, published by the Bureau of Topographic and Geologic Survey. Geoscientist Fred Baldassare, who has studied the commonwealth’s rocks for decades, answered my many questions.

The Reibsons’ court case is Chesapeake Appalachia LLC v. Milo K. and Betty Reibson, 4:11-cv-01321-TMB. The lawsuit was settled on November 5, 2012. On November 13 Chesapeake applied for a well permit for the Phillips Unit. The site ID in the state’s Department of Environmental Protection computer system is 739392.

My count of wells in Sullivan and nearby counties was based on the Pennsylvania Department of Environmental Protection Office of Oil and Gas Management’s
Well Inventory by County Report
, retrieved in August 2012. I counted only “unconventional wells.” Details on the Marc 1 Hub pipeline can be found in the Federal Energy Regulatory Commission Docket no. CP10-480-000. Especially helpful was the
Environmental Assessment
, filed in May 2011, and a PowerPoint presentation by Inergy, the company that built the pipeline, on June 28, 2010, and is titled “Project Introduction Meeting with FERC Staff on CNYOG’s MARC 1 Hub Line.”

Information about coal plant retirements is from the Energy Information Administration’s
Annual Energy Outlook 2012
. MIT’s
The Future of Natural Gas
report presents a concise overview of the impact of the Powerplant and Industrial Fuel Use Act of 1978. Ronald Reagan’s quote can be found here: www.presidency.ucsb.edu/ws/index.php?pid=34320#axzz1W3ISgYEl. (Last accessed August 2013.)

There have been numerous reports on the wealth generated by shale exploration. I recommend “Oil Boom in Eagle Ford Shale Brings New Wealth to South Texas” by Robert W. Gilmer, Raúl Hernandez, and Keith R. Phillips, published in the Second Quarter 2012 edition of the Federal Reserve Bank of Dallas publication
Southwest Economy
. The gas industry has paid for other reports, including
The Economic and Employment Contributions of Unconventional Gas Development in State Economies
by Mohsen Bonakdarpour and John W. Larson, IHS, published in June 2012. See also
America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy
by John W. Larson, Richard Fullenbaum, Richard Slucher, et al., IHS, October 2012.

John Pinkerton, the former CEO, and Ray Walker were both very forthcoming about both the missteps and successes of Range Resources’s early involvement in the Marcellus and the difficulties in getting any modern equipment. Walker was the befuddled consultant who made plans to go to Pittsburg, Texas. The company has talked about the Renz #1 well, as well as the number of acres it had leased, on conference calls with analysts. Chesapeake talked about its first Marcellus well in a conference call with Wall Street analysts on August 3, 2007.

I spoke with both former Pennsylvania governor Ed Rendell and Ed Cohen, former CEO of Atlas Energy, at the
Wall Street Journal
’s ECO:Nomics conference in March 2012. This is the source of Cohen’s “farmers” quote. Rendell is the source of the statistic that showed the number of well permits to drill in the Marcellus Shale skyrocketing between 2007 and 2010.

The state investigation of the June 2010 blowout of an EOG well in Clearfield County, Pennsylvania, is remarkably thorough. Bedrock Engineering, under contract, produced a
Well Control Incident Analysis
report in July 2010 that included transcripts of interviews with people involved in drilling the well.

I obtained many documents about drilling in Pennsylvania through Right to Know Law requests. This is the source of the section on Chesapeake’s admission that its wells intersected a fault. I also obtained records related to Shell’s blowout in Tioga County.

The source of McClendon’s “problem identified” quote is from the September 2011 Marcellus Shale Insights Conference. It is archived here: www.chk.com/news/articles/pages/20110911_akm.aspx. (Last accessed January 2013.)

I did not attend the Engelder-Ingraffea debate in Laporte but was able to watch it on YouTube. Here are the relevant videos, in order: www.youtube.com/watch?v=Di1JKZEbHyQ; www.youtube.com/watch?v=1u6aqXaI3s4; www.youtube.com/watch?v=kCYUdLJSav8; and www.youtube.com/watch?v=doA5-PCG530. (Last accessed August 2013.)

Bender, D. Wayne,

Laporte, PA: Sullivan County Historical Society, 1995.

Boyer, Elizabeth W., Bryan R. Swistock, James Clark, Mark Madden, and Dana E. Rizzo.

Harrisburg, PA: Center for Rural Pennsylvania, 2012, updated.

Brown, Robbie. “Gas Drillers Asked to Change Method of Waste Disposal.”