The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (21 page)

The allure of the big strike remained for Hamm, as it had for George Mitchell. Hamm didn’t have to do much convincing to get his team on board with his plan to try to find a lot of oil somewhere else in the country besides Oklahoma.

“We can continue here, but we’re just going to tread water,” Stark told Hamm one day, echoing his boss’s sentiments.

Hamm, Hume, Stark, and Continental’s exploration executives met to decide on a plan. The company didn’t have boatloads of money, so they’d have to focus on out-of-favor areas in the country where it might be less costly to establish a foothold. Passing around a box of buttered and salted popcorn, they eyed a series of coffee- and grease-stained maps pinned to the walls. They agreed to take a look at acreage in North Dakota, hoping they might find oil overlooked by larger companies.

Hamm had done some prospecting with a friend in North Dakota and was familiar with the region. Stark also had done some work in the Williston Basin, which included parts of the state. He noted that North Dakota had always produced evidence of oil, but the region was infamous for dashing the dreams of wildcatters. Hamm figured the state’s unpopularity might enable them to buy some acreage on the cheap. He began making five-hour flights in his single-engine Piper Cub to check out the area and learned that another company, Burlington Resources, was already making progress in the region.

Burlington’s success was intriguing. Rock in the North Dakota region was dense and had very low permeability, making it hard to get much oil out, at least at a reasonable price. Dozens of companies already had failed to produce very much oil from the region by drilling vertically, making Burlington’s production surprising.

Burlington wasn’t sharing much information about its success. But Hamm knew the company would have to reveal some details when it asked the state for drilling permits.

In April 1994, Hamm and Stark sat in the back row of a hearing in Bismarck of the North Dakota Industrial Commission, listening quietly as Burlington executives addressed state officials. No one noticed Hamm, a sign of how under the radar he was at the time, at least outside his corner of Oklahoma.

At the hearing, Burlington executives described how they were producing seven hundred barrels of oil a day in the Cedar Hills field in the southern part of the state by drilling horizontally. They didn’t even need to frack the rock to get the oil to flow, it seemed.

Now Hamm was excited. Not only was Burlington managing to extract a substantial amount of oil, but it was finding success with horizontal drilling, a method that was relatively new. At the time, Chesapeake was seeing its own success using horizontal drilling in Texas’s Austin Chalk region, and companies like Oryx Energy had already made some inroads with it. Stark had just come back from a conference in Saskatchewan, Canada, where a Shell geologist talked about how much oil the company also was extracting by drilling in a lateral fashion. It was more expensive to drill horizontally, but Stark and others on Hamm’s staff were becoming convinced they had to try it.

Stark noted that Shell was producing its oil from the same Williston Basin that Continental was examining, suggesting that Continental might have similar success in North Dakota if it aped Shell’s methods.

Wow, this is a game changer,
Stark thought.

Hamm and the Continental team agreed to lease acreage in Bowman County, in the southwestern corner of the state, along North Dakota’s border with South Dakota and Montana. They mapped the region, saw a belowground anticline, or a fold made up of a sequence of rock layers, and examined what appeared to be evidence of oil in some of these rock layers.

Hume and Stark recommended that the company lease ten thousand or maybe even twenty thousand acres in the Cedar Hills field to test whether they could produce oil. When he heard the recommendation, Hamm scolded his team. They weren’t being ambitious enough. He told them to assemble 100,000 acres, though he knew the company couldn’t really afford that kind of spending.

“It was all the money we had at the time,” according to Hume.

The region was so out of favor that Continental’s landmen locked up their land within months, paying about twenty-five dollars an acre. They began drilling in one of the field’s higher rock formations, which was called the Red River B.

Until then, Hamm had resisted borrowing money or selling shares to raise cash, unlike McClendon and Ward at Chesapeake. Instead, he relied on cash coming from existing wells and from his side businesses, such as his drilling company.

“I don’t like using other people’s money, it changes you,” he says, citing the need to be a salesman. “You believe your own bull, it distorts you.”

But now he was trying to enter the big leagues. Between all the land in North Dakota and the cost of horizontal drilling, the company’s expenses dwarfed those of its wells in Oklahoma. Hamm decided to sell $150 million of debt and pay an expensive interest-rate coupon of 10.25 percent on the bonds to finance the project.

In April 1995, Continental drilled its first well in the Cedar Hills field. The first wells were immediate successes. Three years later, though, just as the field was reaching peak production of seven thousand barrels of oil a day, bad news struck as crude prices tumbled. By late 1998, oil prices were barely above eleven dollars a barrel. At one point, Continental’s North Dakota oil commanded just $4.50 a barrel, making it hard for the company to make any money. That year, the company lost $18 million.

A friend tipped Hamm off to the dramatic improvements that Mitchell’s team was making in the Barnett Shale. “Harold, you really have to get down here,” the friend told him. But Hamm didn’t have any spare money to buy acreage in the Barnett.

Adding to his pressures was that Continental hadn’t protected itself like many of its rivals by selling some of its future oil production in financial markets to lock in prices before they had plunged. And Hamm had overruled key members of his team and agreed to spend about $80 million of precious cash to buy acreage in a field in Wyoming that would prove a disappointment.

Hamm had to halt almost all of his company’s drilling and let most of his drilling pros go. By the end of 1998, Continental was operating just one oil rig, down from eight, and only had about fifty employees on staff. To avoid additional layoffs, every employee took a 15 percent pay cut.

Almost everyone in the business understood that low oil prices were due to excessive global supply and an economy that seemed less reliant on oil and gas. Hamm wasn’t like everyone else, though. He was convinced OPEC nations were dumping oil, or selling it in the United States below its cost, to drive Continental and other American producers out of business. He took it as a personal insult.

Hamm rounded up a group of small oil and gas producers to fight OPEC. The group, which they called Save Domestic Oil Inc., petitioned the Department of Commerce to impose tariffs on crude oil coming from Saudi Arabia, Mexico, Venezuela, and Iraq.

Hamm’s fellow energy producers scoffed. Exxon and other major companies were big enough to survive the price decline and they wanted to keep good relations with OPEC nations. Still others thought it was silly to blame OPEC for low oil prices.

“Everybody made fun of Harold that he would file a dumping case,” says Mickey Thompson, an Oklahoma political veteran who worked on the case for Continental. “He was viewed as a champion of lost causes.”

Hamm and the group managed to sign up thousands of tiny producers, mom-and-pops from Kansas, Arkansas, and elsewhere who were just as scared as Hamm of being crushed by low prices. But OPEC members such as Saudi Arabia and Venezuela locked up the top law firms in Washington, D.C., to fight the effort, leaving Hamm and his group with few options for legal representation.

The group’s complaint eventually was rejected, though Hamm viewed the effort as an effective warning shot at OPEC. Either way, oil and natural gas prices moved higher in the summer of 1999, providing Hamm and his company some relief, just as rising natural gas prices were giving Aubrey McClendon and Tom Ward new confidence around the same time.

Through it all, Continental’s Cedar Hills field continued pumping an impressive amount of oil. It became the seventh largest onshore field in the lower forty-eight states, and the first to be developed exclusively through so-called precision horizontal drilling.

“The majors thought it was a fluke,” Hamm says.

The Cedar Hills gusher opened Hamm’s eyes to the possibilities of drilling for oil in the region’s dense, difficult rock. He noted how many thick, long layers of rock were in the Williston Basin—a huge, shallow underground hole filled with accumulated sediment that was named after the North Dakota city of Williston and was under eastern Montana, western North Dakota, South Dakota, and Saskatchewan. Hamm began to wonder if he could tap the region’s other layers with the horizontal drilling techniques he and his team had become comfortable with.

“Where else can it work?” he demanded of Jack Stark. “I want to know where the next really big field is.”

It was up to Jim Kochick, a senior geologist on Stark’s team, to keep Hamm happy. Within months, Kochick became excited about a 200,000-square-mile formation, or series of rock layers, not far away from Cedar Hills. The formation was called the Bakken, and it encompassed three rock layers. A top layer of shale, called the Upper Bakken, was two miles below the surface. Another shale layer below that was called the Lower Bakken. And a long, thin rock layer sandwiched in between was made of a type of limestone called dolomite. Appropriately enough, this layer was called the Middle Bakken.

The Bakken formation was well known to any geologist in the area. Continental itself had drilled right through the Bakken rock layers on its way to Cedar Hills’ Red River formation below. For years, major oil companies, midsized independent producers, and small wildcatters either had ignored Bakken rock or had failed to produce much oil or gas from it. The Bakken was so hard and compact that it looked more like tombstone, just like the Barnett Shale, unlike more traditional and permeable rock.

Kochick told his boss, Jack Stark, that there was a decent chance the Bakken might be just as successful as Cedar Hills. Stark gave Kochick the green light to make his case to Hamm and the rest of Continental’s exploration group at their next meeting at the company’s Enid headquarters. Facing his colleagues, Kochick presented evidence of oil “shows” throughout the Bakken region. In other words, there were clear indications that these rock layers held oil.

Kochick acknowledged that some vertically drilled wells already getting oil from the Middle Bakken layer of rock were generating a dismal amount of crude, with some wells producing as little as five barrels a day. That shouldn’t discourage us, Kochick told the gloomy executives. Some of those wells were thirty years old, so their meager production should be viewed with respect, not disdain.

Further, those weak results were similar to those Continental had seen from vertical wells in the Cedar Hills field before the company began applying horizontal drilling to make that field a winner. Maybe horizontal drilling also could be the key to extracting oil from the Bakken’s rock, especially the long, shallow Middle Bakken layer, Kochick said. He proposed that Continental begin buying acreage in a Montana field called the Elm Coulee and drill down to the Bakken layers to see what they could find.

A few engineers at the meeting were less than enthusiastic. The Bakken just didn’t seem like a traditional reservoir eager to give up its oil. Its compressed rock had long been a big tease. They wanted to see more evidence that the Bakken was as attractive as Kochick suggested before Continental shelled out any precious cash.

Hamm turned to Stark, asking if he agreed with Kochick’s assessment. Stark said he did.

“I like it,” Hamm said, becoming excited. “How many brokers do you have?” He wanted to know how quickly they could buy up land in the eastern Montana area.

For months, Hamm couldn’t stop thinking about the possibilities of the new formation, prodding his team to move faster to develop a plan to target the area. He didn’t tell his team the Bakken was any kind of huge reservoir, and it wasn’t yet clear they had the technology to produce oil economically.

But Hamm became convinced there was a lot of oil in the Bakken that might someday be tapped. Flying on his private plane to a fishing and hunting vacation in Branson, Missouri, he kept talking about the Bakken. He wondered if there might be more oil in those rock layers than even his optimistic geologists believed. On the plane, Hamm grabbed a cocktail napkin, got the attention of an old friend, Ron Boyd, and began to draw little circles within a larger circle.

“Geologists say there’s oil under each of these,” Hamm said, pointing to a few isolated circles on the napkin.

He gave Boyd a mischievous look.

“But I think there’s oil under the whole damn thing.”

In the spring of 2000, Hamm and Continental’s executive team flew to Cambridge, Massachusetts, to take part in executive business classes at Harvard University. Hamm was preoccupied, though. He had received new information about how innovative drilling and well-completion technology was making it easier to extract oil from challenging rock. He also knew two other companies already were buying up acreage in the Bakken area, also on the Montana side of the border.

One morning, he got up early and convened a meeting of his top executives. Land pros back in Enid were on the phone, listening. “We can’t wait anymore,” Hamm said. “Boys, go and get that acreage leased,” he told his land team, referring to the Elm Coulee field in Montana.

When some of Hamm’s employees expressed doubt about the likely drilling cost, Hamm turned angry. “You didn’t hear me—go out there right now and get that acreage leased,” he responded impatiently.

Hamm was determined to find oil in rock that had bedeviled dozens of oil companies and wildcatters for years. He had no clue how hard it would prove to be.

B
y 2000, Aubrey McClendon and Tom Ward were searching the country for natural gas. Harold Hamm was set to make a huge bet that he could find massive amounts of crude in overlooked U.S. fields. Even in his retirement in Houston, George Mitchell was preparing to team up with his son Todd to do some drilling in other shale fields that might be as prolific as the Barnett.

Charif Souki was just as sure America needed new energy supplies. And he was certain he had a way to get his hands on enough natural gas to change his country’s fortunes, as well as his own. But Souki was a rank outsider to the oil patch who had no business imagining himself as any kind of energy power. He hadn’t taken a single geology or engineering course or even worked a day in an oil or gas field.

A shaggy-haired Lebanese immigrant who spoke English with a French accent, Souki had spent a full seven years in Aspen, Colorado, where he skied and bummed around, and in Los Angeles, where he ran bars and restaurants, including one involved in perhaps the most famous murder of the century. Before the late 1990s, the closest Souki had come to oil was in the salads on his menu.

The nation desperately needed help discovering natural gas, but it didn’t seem to need it from a guy like Charif Souki. Relying on Souki to find new energy supplies was like a football team, desperate for a miracle completion, asking the water boy to take over at quarterback.

Few wanted to hear it, but Souki did have an audacious plan to find energy, one only he was sure would work. It was an approach as unusual and quirky as he was.

Souki was born in Cairo in 1953, a year after a coup d’état by a group of Egyptian army officers led by Muhammad Naguib and Gamal Abdel Nasser. After seizing power, the officers received an urgent telegram from America:

Congratulations on your successful coup

The Pentagon

The message confused the officers, who didn’t speak English and weren’t experienced in the ways of international diplomacy. To make sense of it, one of them called Charif’s father, Samyr Souki, asking for his help. Samyr was the chief of
Newsweek
magazine’s Cairo bureau and earlier in his career had reported for United Press International, so he was considered a local expert on the ways of America.

An officer had a simple question for Samyr: “Who is the Pentagon?”

After explaining the telegram’s meaning and getting to know the officers, Samyr embraced the new Egyptian leadership. Soon the American administration did as well. Samyr, who had received a British education and spoke English fluently, was so optimistic about the new chapter for the nation that he took a leave of absence from
Newsweek
to work in Egypt’s embassy in Washington, D.C.

Soon after he returned to Cairo in 1954, though, relations between the United States and the Egyptian leadership soured. Samyr, a Greek Orthodox Christian, realized that his writing was being censored and that he was being tracked by members of the regime, making it hard to do his job. After a while, he began to contemplate moving his family to a new country.

When Charif was four, the Souki family left for Beirut, where Samyr and his cultured and well-educated wife, Nicole, had been born. Samyr, who also went by Sam, became
Newsweek
’s chief correspondent for the Middle East. As he covered subsequent upheavals, including the 1957 war, as well as Beirut’s growth into an intellectual, tourist, and banking center, Sam emerged as a star reporter. He had a sense of where American policy was headed and enjoyed unique access to senior officials in several countries.

It didn’t take long for Sam to become a key adviser to political and business leaders throughout the region. The young Charif sometimes sat with his father as he entertained various rulers, including King Faisal of Saudi Arabia, top United Nations officials, and a range of diplomats and businessmen, including chief executives of U.S. military contractors. Whenever they passed through Beirut, dignitaries made sure to stop by the Souki home to trade gossip, share intelligence, and pick Sam’s brain.

“Back then, there was no CNN,” Charif recalls. “You got your news from people you knew.”

As a youth, Charif had little interest in politics and business, despite his father’s unique vantage point. Tensions sometimes arose between Lebanon’s Muslim and Christian political leaders, but Charif moved easily between both communities. He had Christian and Muslim friends and sometimes played with boys from the smaller Jewish community, all of whom lived near the Souki home.

The country’s phones didn’t work well, there were no video games to play, and the Souki family didn’t own a television until Charif turned eleven. He didn’t miss much, since entertainment programming in the country amounted to little more than a couple of hours each day of imported American fare, such as
Bonanza
and
Peyton Place
.

Souki discovered other kinds of local fun. Beirut was a cosmopolitan city with spectacular beaches, and the city was just an hour from prime skiing in the Lebanese mountains. Young instructors from Austria and France came to the country to fulfill their military service, working with Charif and his friends as they became expert downhill racers.

During his teenage years, Charif began to notice street demonstrations involving various religious factions, but his family and neighbors generally shrugged off the early signs of sectarian unrest. “I was mostly interested in skiing, surfing, the beach, and girls,” Souki says.

Teenagers in Beirut didn’t have a great deal of supervision and Charif enjoyed his freedom. His grades at the International School, which was affiliated with the American University of Beirut, usually were quite good. That sometimes earned him an even longer leash from his parents.

Some days, Charif skipped out early to surf or sail. Other times, he and his friends avoided school altogether to drive to a resort in the mountains for a day of skiing. They tried to get home around the time classes let out, to avoid arousing suspicion. It didn’t always work, though.

“My parents had some nervous moments,” Charif recalls. “I didn’t have much affinity for authority.”

Charif’s father encouraged his son to attend college in America. As a teenager, Sam Souki’s own dream had been to leave Lebanon to go to a U.S. university. World War II had intervened, however, and he became a war correspondent. Sam encouraged his son to apply to American schools and was thrilled when Charif was accepted at Colgate University in Hamilton, New York.

“I was fairly restless and rambunctious, so my father thought it was a good idea” for him to go away to school, he says.

Charif had never been to the United States and he wasn’t particularly eager to leave Lebanon, where he was having so much fun. When he heard Colgate was in New York, though, he became more enthusiastic, anticipating four years of excitement.

When he arrived on Colgate’s campus in 1971, Charif was stunned. It turned out that the university was in a little hamlet over two hundred miles from New York City. Racial tensions on campus were another surprise, and even the skiing was horrible. Worst of all, there weren’t any female students to be found.

“The notion of an all-male school never even entered my mind,” Souki says. “I was in cultural shock for a few years.”

There wasn’t much point complaining to his parents back in Beirut since it was almost impossible to contact them by phone, so Souki decided to try to complete his studies as quickly as possible. He enjoyed the classes, at least, so he took extra courses in economics, history, and literature and received a bachelor’s degree in three years.

By then, Sam Souki had left
Newsweek
to start his own publishing, consulting, and public relations enterprise and to do his own investing. The shift inspired Charif to consider his own career in business. He figured a master’s in business administration might help him find a job when he returned to Lebanon, so he enrolled at Columbia University’s business school.

Columbia, in New York City, was a breath of fresh air. Friends from Beirut lived nearby and there always seemed to be something fun going on. The city was in the midst of a financial crisis, adding drama to the times. Souki even fell in love with a fellow student, Deborah Taylor, and they soon wed.

By the time Souki graduated from Columbia, a brutal civil war had broken out in Lebanon and Christians felt under siege. Souki’s parents, who had been on a visit to Paris when the fighting began, decided to stay in France.

Unable to return to Beirut, Souki began interviewing for jobs in the United States, quickly realizing he was a hot commodity. Banks were racing to various Gulf states to court wealthy businessmen and emerging oil barons looking to invest their growing piles of petrodollars. There was intense demand for young men like Souki who spoke Arabic and held a business degree from a top American school.

Souki was hired by an investment banking firm called Blyth, Eastman Dillon & Co. and began wooing Middle Eastern moneybags, trying to entice them to diversify their holdings into real estate, hotels, and other projects championed by the bank in various Western cities.

Souki had clear advantages over his rivals. For one thing, his father remained well known in the region. Many of the petroleum potentates had trekked to the Souki home to seek advice, and they proved eager to meet with Charif. Because he had been exposed to power at a young age, he wasn’t impressed or intimidated by the wealthy men he was dealing with.

Souki had grown up traveling the region, so he enjoyed jetting between New York, Paris, Athens, and various Middle East capitals. He also realized that he had an ability to differentiate between attractive deals and potential money losers, and quickly gained a following by steering clients to the winners.

“At first they received me because of my dad,” Souki says. “Later it was because of me.”

Cutting deals in the region had its fair share of challenges, however, even for Souki. For one thing, phone communication wasn’t reliable in Saudi Arabia and other countries in the Middle East, so he couldn’t even book a hotel room before getting on a flight to the area. He tried sending telex messages, but the hotels never seemed to receive them. He typically showed up in a lobby, hoping for the best. To improve his odds with hotel personnel, he became a big tipper. Soon, hotel staff members were racing to grab his suitcase and whisk him to a comfortable room.

Secretaries were rare in that part of the world, making it just as difficult to schedule an appointment with anyone of importance, and tips didn’t go nearly as far in the world of oil riches. Instead, Souki would show up at the home or business of a local baron or family patriarch and take a seat in a large waiting room next to dozens of bankers, businessmen, and well-wishers.

Souki and his competitors lounged and chatted for hours, waiting for the tycoon to arise from his midafternoon nap and convene his late-afternoon
majlis,
or daily social gathering. There, those vying for the titan’s attention would try to get invited to another, more private get-together later that evening. Souki usually was among the lucky few asked to return for these one-on-one meetings, which usually featured exotic food and drink and took place around midnight. That’s when hands were shaken, deals were cut, and checks were written.

During that period, Souki met billionaire arms dealer Adnan Khashoggi, members of the Saudi royal family, up-and-coming energy power brokers, and others. Personable and smooth, Souki managed to broker huge investments. Once, an oil magnate wrote a check for $300 million, or the equivalent of over a billion dollars in today’s money. Souki’s employer usually received a healthy commission of 1 to 5 percent of each investment, he says.

Souki spent three years wooing various moguls, emerging as a star at his bank. The job began to grate on him, though. For one thing, the lifestyle was hard on his marriage and family, which then included two small children. It wasn’t just that texts and e-mails hadn’t been invented, making it hard for him to stay in touch as he spent weeks traveling; sometimes he waited in line for three or four hours just to get access to a phone to call home. The Middle East was seven hours ahead of the U.S. East Coast, adding to the challenge. If Deborah wasn’t home, he couldn’t even leave a message for her because they didn’t have an answering machine.

Souki was meeting interesting and powerful people, and he was dealing with big sums of money, but he wasn’t doing any actual investing. He chafed at raising boatloads of money for deals he wasn’t participating in and felt he was little more than a well-paid matchmaker introducing wealthy oil barons to his bosses.

“It was ‘just go to the Middle East, bring money back, and we’ll decide what to do with it,’” he says. “The job sounded more interesting than it actually was.”

Souki quit in 1978 and began raising money for deals that he himself found. There was a refinery in Long Beach, California, a hotel in Hawaii, an office building in Paris, and more. He continued to crisscross the Middle East, but he also made inroads with wealthy investors in various European capitals.

Souki became an even more effective salesman and was thrilled to work on his own transactions. He kept a small percentage of each deal for himself, hired bankers to work for him, and began investing his own money in the most attractive opportunities. His business thrived, but the stepped-up pace put even more pressure on his marriage. Soon he and Deborah divorced.

As his reputation grew, top businessmen around the globe sought him out, asking for help raising money or requesting Souki’s advice on tricky transactions. A few of the deals were in the energy world, but Souki mostly worked on retail, apparel, and real estate transactions, making several million dollars a year for his work. In 1986, Marvin Traub, the impresario who ran Bloomingdale’s, turned to Souki, thirty-three years old at the time, when his upscale department store attracted takeover interest. Souki also spent time working with Calvin Klein, Ralph Lauren, and others in the fashion business while advising the chairman of Bidermann Industries, the largest apparel manufacturer in North America.