The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (24 page)

But McClendon and Ward appreciated the talents of these men and women and set out to build a land machine to profit from the natural advantage they had in this part of the business.

“Engineers look at landmen the way some people look at accountants, as necessary evils,” says Ted Jacobs, who was a landman in Oklahoma while Chesapeake expanded. “If you’re a landman, you wanted to work for someone like Aubrey McClendon. He values landmen more than engineers.”

To be sure, McClendon and Ward weren’t the first to use aggressive tactics when it came to securing land and title rights. There’s a long history of fortunes created by those focused on these kinds of deals, rather than on new oil or gas discoveries. In 1930, for example, H. L. Hunt, founder of the Hunt Oil Company, spent two days in a Dallas hotel convincing a beleaguered peer, Columbus Marion “Dad” Joiner, to sell him the title to what is now the East Texas Oil Field. After all the wooing and negotiating was over, Hunt wrote Joiner a check for just over $1 million to secure the title. The field turned out to be the biggest and best-producing oil reservoir in the United States, eventually producing over five billion barrels.

Chesapeake would lean on these hustlers as few companies ever have. Ward began searching for the best and most aggressive landmen, directing them to buy up drilling rights as quietly and efficiently as possible, so as not to tip off competitors. The team traveled to county courthouses and “abstract offices”—privately owned businesses that own summaries of ownership documents—to figure out who owned the mineral rights of the most attractive land. These field brokers then visited individuals holding these rights and pitched them about selling to Chesapeake.

The strategy led to huge growth in acreage. Soon, however, it became clear—McClendon and Ward had made a huge mistake.

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A
fter purchasing Mitchell Energy in 2002, Devon Energy extracted impressive amounts of gas from the Barnett geological formation. Skeptics who had doubted the wisdom of paying over $3 billion for George Mitchell’s company saw the success Devon was having in parts of the Barnett, including Wise and Denton counties, and acknowledged that Mitchell in fact had figured out how to extract gas from shale at a reasonable cost, the holy grail of the energy business.

Getting gas from shale in nearby Johnson County was an entirely different story, however. When the Devon team drilled down and hydraulically fractured the shale in this area, they got too much salt water from the ground, and too little natural gas. The bottom of the shale layer couldn’t contain the fracking liquid; it kept leaking into rock layers below.

Devon’s fracking fluid didn’t seem to be the problem. A growing number of energy producers were adopting versions of the radical, water-based liquid that Nick Steinsberger, the Mitchell Energy engineer, had discovered almost accidentally a few years earlier, and they were meeting with great success.

Before giving up, the Devon engineers figured they should try to change the way they were drilling. Maybe by going laterally, rather than vertically, they wouldn’t rupture that layer below the shale, the one that was causing all the water to rush into their wells. Devon already had experience with horizontal drilling and was doing it elsewhere in the Barnett.

In 1991, Mitchell Energy, together with an arm of the U.S. government, had tried combining horizontal drilling and fracking in certain Barnett fields, but it didn’t work. The Mitchell team revisited the idea a few years later but gave up once again. The company’s president, Bill Stevens, was no fan of horizontal drilling in the Barnett, and it just cost too much to combine both approaches.

By 2002, though, a number of technologies, such as three-dimensional seismic imaging, made it easier to understand the faults and other complex parts of the Barnett formation, while the advent of the diamond-studded drill bit allowed for faster drilling through the rock layer above the shale. Meanwhile, natural gas prices had climbed above four dollars per thousand cubic feet, making the added expense of combining horizontal drilling with hydraulic fracturing more palatable.

What came next was another giant leap for American drillers, who were getting more comfortable working with shale even as the rest of the world barely experimented with such challenging rock. Devon mixed the two methods—horizontal drilling and fracking—and began to see a surge of gas production in its Barnett acreage. A company called Hallwood Energy was also seeing success with the same integrated approach.

News about both companies’ activities spread throughout the industry. Drilling horizontally, and then completing the wells with hydraulic fracturing, seemed a fresh breakthrough, one that turned the Barnett into a truly world-class reservoir that was a model for shale formations around the country. In April 2004, a paper presented at a convention of the American Association of Petroleum Geologists in Dallas determined that the Barnett formation held gas that was two and a half times what the geological group thought in 1998, when only George Mitchell and his team believed in the region’s potential.

The news stunned Ward and McClendon. “What Hallwood did opened our eyes,” Ward says.

They quickly realized they were late to the shale game. Really late. The only land Chesapeake had in the Barnett was the seven thousand acres that came from buying Canaan—the land McClendon and Ward had expected to walk away from. If it was truly possible to get serious gas from shale formations, they knew they’d have to do something drastic to catch up to their rivals.

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rying to make up ground, Chesapeake in late 2004 shelled out nearly $300 million to buy Hallwood’s eighteen thousand acres in the Barnett. It wasn’t nearly enough, though. With each month, McClendon and Ward seemed to fall further behind competitors like Bob Simpson. Simpson was a hard-charging Texan who had started a Fort Worth, Texas, company, eventually called XTO Energy, with help from Robert Rubin, at one time a senior trader at Goldman Sachs and later the nation’s secretary of the treasury.

Simpson favored custom-made cowboy boots and searched for a certain type of employee. He wanted to hire those who “grew up poor and were disciplined by their parents, including corporal punishment,” he told a reporter. “The most successful people I know were disciplined as children.”
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Simpson was just as convinced as the Chesapeake executives that remarkable wealth could result from natural gas wells. In January 2005, XTO outbid Chesapeake for Antero Resources, a prominent producer in the Barnett. That year, the Energy Department determined that the Barnett held as much as thirty-nine trillion cubic feet of recoverable gas, enough to supply the entire country for almost two years, just as Kent Bowker and the Mitchell Energy crew had predicted. Despite that, McClendon and Ward couldn’t bring themselves to spend the $685 million that XTO paid for Antero, a loss that stung the Chesapeake team.

Meanwhile, Devon’s field brokers were rushing to abstract offices and county courthouses in the Barnett region, pulling files on land ownership and then racing to buy or lease mineral rights from owners. Everyone seemed a step ahead of Chesapeake.

Larry Coshow, a veteran Chesapeake landman, was eager to help McClendon and Ward make up lost ground in the Barnett Shale. Coshow knew he had his work cut out for him, so he went on a hiring spree. Soon he was directing over seven hundred brokers to blanket six counties in East Texas, checking records and buying leases, directing twice as many men in local courthouses as any other company.

Coshow told his team they were in for a brutal fight. “If you guys don’t want to do it, I’ll find someone who will do a better job,” he told one group of landmen.

Chesapeake resorted to creative methods to lock up remaining land in the region. Many landowners didn’t understand the process of selling and leasing their mineral rights, so Chesapeake began hosting town hall meetings throughout Texas. The meetings sparked a buzz and sometimes media coverage, publicity that helped send a message that Chesapeake was on its way to town and that it wanted as much land as it could get its hands on. The public efforts caused rivals to whisper to landowners that Chesapeake wasn’t to be trusted.

One day, Coshow arranged for a town hall meeting in Centerville, a town of about one thousand citizens in East Texas, midway between Dallas and Houston. Coshow found a local man who agreed to prepare a barbecue lunch for all the attendees. Coshow had his team of landmen haul computers and printers to the meeting so they could immediately sign contracts with landowners.

Soon after Coshow delivered some introductory remarks, he began to field tough questions, some of which sounded a bit rehearsed. Coshow thought he recognized a few of the faces of his new critics. He realized Chesapeake’s rivals had planted people in the audience to try to spark an ugly confrontation.

Coshow tried a friendly approach. “You guys are probably getting a lot of comments” trashing Chesapeake, he told the audience. “But I don’t have anything negative to say about our competition, I really don’t. We must be doing something right for them to talk about us, though.”

That night, Chesapeake cut a dozen or so deals, paying about $250 an acre to lease most of the land, though some got as much as $800 an acre.

Chesapeake’s landmen became frustrated by how long it took to check land ownership records to get a deal done. Many small abstract companies in the area lacked modern computers to accelerate the process. They relied on paper records that could be cumbersome to leaf through.

“What if we put all your records on computers?” Coshow asked some of the abstract specialists. “We could digitize all your records” and leave workstations for the abstract companies to keep.

The companies loved the idea, and the gift of free technology wasn’t easily forgotten. “You betcha we got the first shot at those workstations if I had landmen in those towns,” Coshow says. “The competition had to go to courthouses [for the records] and it took them two or three times as long.”

Within a year, Chesapeake had overtaken its competitors in the Barnett. The company had purchased over a million acres of land around the country, thanks to the work of over a thousand landmen crisscrossing the nation’s fields. Natural gas production was soaring. And the wells in the Barnett Shale formation that Chesapeake had received as a throw-in from Canaan—once viewed as a liability—now were Chesapeake’s greatest asset.

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cClendon, smooth and comfortable with investors, emerged as the company’s public face. He courted Wall Street analysts and top investors, persuading them of the wisdom of Chesapeake’s evolving strategy. The salesmanship was crucial because the company relied on selling new shares and bonds to raise cash for each new purchase.

Tall and rangy with unruly blond hair, McClendon was relaxed around the office, a friendly face with rimless glasses whom employees called by his first name. He usually wore dress slacks and a crisp shirt with rolled-up sleeves. He came to favor ties patterned with drilling rigs and hard hats.

With investors and bankers, McClendon really turned on the charm, donning a Hermès tie and a custom-made suit as he wowed Wall Street. He had a good grasp of the geology and technology of the business, not to mention the latest information on land buying. But he also had a sense of the industry’s history and made a compelling argument that natural gas would be the nation’s most important energy source for the next few decades. It was clean and plentiful, no matter what the skeptics said.

McClendon had a unique ability to connect with employees, investors, and industry members. When he met them, he asked at least as many questions as he answered. How’s your family? What are you working on? Where do you see the industry going? Even the most cynical, hard-bitten investors were smitten. Many compared McClendon to former president Bill Clinton for his ability to make everyone he met feel like the most special person in the room. Some said he was the most upbeat person they had ever met.

“Aubrey is larger than life, he’s energizing,” says a banker who lent Chesapeake money. “I enjoy spending time with him, he makes you feel good, he’s like the best salesman ever.”

Chatter grew on Wall Street that McClendon and Ward were at the vanguard of a new generation of energy explorers and that Chesapeake had mastered cutting-edge drilling technology that even the largest oil powers hadn’t fully embraced.

Ward, the company’s chief operating officer, remained something of an introvert. In company meetings, McClendon usually spoke and Ward took notes. He kept his own office in a separate building hundreds of yards from McClendon’s office in Chesapeake’s headquarters. They had once run separate companies and didn’t see any reason to change the way they operated. Each kept his own assistants and teams. Their office buildings were separated by a parking lot and retail offices, including an insurance company, a small law firm, and a hairdresser.

Ward and McClendon rarely even met. Instead, they spoke on the phone, faxed, or e-mailed each other hundreds of times a day, from before six in the morning until past midnight. Ward spent more time outside the office, quarterbacking the company’s efforts in the field and coordinating between Chesapeake’s geology, engineering, and land personnel.

Ward began to learn from McClendon and to become more comfortable dealing with investors and others. “I was a hick,” he recalls. “I stayed in nice hotels for the first time. Aubrey taught me how to dress, wear Hermès ties, and what type of suit to wear” to meet bankers or industry executives.

As the acquisitions multiplied and the company expanded, Ward’s workload swelled. He and his team were analyzing hundreds of wells. Most companies exaggerated their reserve numbers, so he had to examine the history of the area, the type of rock in the fields, and other data to independently verify the quality of the wells. He hardly slept and found he had less time for his three children, relying instead on his wife, Sch’ree, to run the household. He never took a vacation. The closest Ward got was bringing his family to a drilling location. He didn’t listen to much music, preferring quiet in the car, nor did he go to movies.