The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (28 page)

“It was kind of a shot to the gut,” according to McClendon. “While I thought it might happen someday, I didn’t think it would happen that day.”
¹⁰

A day or so later, however, McClendon snapped back, his natural optimism overwhelming any feelings of disappointment. He quickly began to focus on which executives to elevate to replace Ward and how he would run the company on his own.

Saturday morning, the day after he quit Chesapeake, Ward awoke with an unfamiliar feeling. He had nothing to do. He had generally sat with his drilling team and conducted a weekly meeting on Saturday mornings. This week he got up early, as usual, but had nowhere to go. He was devastated and confused.

What do I do now?
he thought.

The melancholy feeling didn’t lift for weeks. Ward no longer received many e-mails, and he didn’t like it. It was as if he had been forgotten. He joked to Sch’ree that “the only thing worse than getting three hundred e-mails a day is getting three.” The decision to quit had been an abrupt move, one that was very unusual for the deliberate executive. Now he didn’t know how to deal with it.

“What am I going to do with the rest of my life?” he asked his wife.

•   •   •

H
arold Hamm’s mood was sky high as he set his sights on oil in the Bakken formation in North Dakota. Just a cursory understanding of the region’s history would have brought him down to earth, however. Past oil booms had been fun but the busts quite painful, especially for locals, who had to stick around when roughnecks and others hightailed it from the region.

North Dakota’s first producing well was discovered on April 4, 1951, when Andrew Davidson, the drilling superintendent on a well operated by Amerada east of the city of Williston, set a rag on fire and threw it in the air. Davidson watched as it met an invisible stream of natural gas flowing from the ground and shot thirty feet in the air. By nightfall, legend has it that the rag was still in the sky, a full ten miles away, proof to Davidson and others that energy was below the surface just trying to get out.
¹¹

News spread, prospectors crisscrossed the state, Davidson became a local hero, and
Time
magazine put the breakthrough on its cover.
¹²
New formations were uncovered and wealth created. Over the years, however, the state’s energy production never quite lived up to the heady expectations, leading to dashed hopes and dreams.

Hamm’s friend Mike Armstrong, for example, had 500,000 acres in North Dakota in 1989 but he let the leases run out. “I didn’t have enough to buy a used Volkswagen,” he recalls. “I was pretty jaded.”

The region long had disappointed drillers. In the mid-1990s, majors including Royal Dutch Shell, Gulf Oil, and Texaco shut down operations in Montana’s high plains, abandoned hundreds of nonproducing wells, and let leases to mineral rights expire.

The Bakken layers, in particular, were a perennial tease. The formation, created over 360 million years ago, was discovered in 1953 and named after a farmer, Henry Bakken of Tioga, North Dakota, whose property sat on an outcrop of the rock.

At one point in the 1960s, George Mitchell became a Bakken enthusiast and his company leased hundreds of thousands of acres for as little as four dollars an acre. Mitchell Energy saw promising early results but he too raised the white flag. “We couldn’t get the damn thing to work, we failed, I don’t know why,” Mitchell recalls. “So we gave up on it, we just let the acreage go.”

In 1999, a geochemist named Leigh Price in the Denver office of the U.S. Geological Survey took a good look at over one hundred old wells in North Dakota. He estimated that 413 billion barrels of high-quality crude were packed between the two layers of the Bakken shale, a huge amount of crude that should have excited the country.

Some in the industry considered Price, an avid weightlifter who wore his hair in a ponytail, off his rocker. Before his study was peer-reviewed or published, he died of a heart attack in 2000. That year, Montana’s Board of Oil and Gas Conservation predicted the state’s oil production would decline to zero.

“I thought my job was going to be turning out the lights,” Jim Halvorson, a geologist for the state, told the
Wall Street Journal
.
¹³

In the 1990s, companies like Burlington Resources did some drilling in the formation. But things got so bad late in that decade that Richard Findley, the son of an accountant for a chain of grocery stores, was making just $45,000 a year as a wildcatter. Unsure how long he could last, Findley and his wife sat down at their kitchen table to figure out what to do.

“We always came to the same conclusion,” Findley later said. Geology “is what I know. This is what I love. So we just kept going.”

Findley was able to convince some geologists that huge amounts of oil were stored in the middle layer of the Bakken, the dolomite section. But most drillers viewed the Bakken as a “bailout zone,” or an area to extract a bit of oil if lower regions proved failures and a driller wanted to salvage a bit of oil from their time and expense. It just seemed too expensive to try to get more than that trickle of crude from the Bakken layers, at least with the vertical drilling everyone did at the time.

“The Bakken became a four-letter word,” Findley says. “No one wanted to hear about it.”

As horizontal drilling was perfected, Findley teamed up with Lyco to lease over 100,000 acres in Montana and target the Middle Bakken layer. They used computer-controlled directional drilling motors to bore laterally. By the early 2000s, they found surprising success in the Elm Coulee field stimulating the rock with hydraulic fracturing.

Findley and Lyco were meeting success in Montana, but Findley remained skeptical of the Bakken in North Dakota. “I could never see a trend as good as Elm Coulee in North Dakota,” says Findley, who retired from working the region a few years later, though he later focused on the top of the formation, in Canada. “I thought [promising acreage] stopped at the border.”

Hamm and Continental were out to prove North Dakota could be just as successful as Montana, if not more so.

•   •   •

O
n a cold, clear March morning in 2004, as snow piled so high that Continental’s crew couldn’t make out nearby fenceposts, they began to horizontally drill and then fracture their first well in North Dakota.

To save the still tiny company money, Hoffman had located a well called the Robert Heuer 1-17 in Divide County, which had been drilled, plugged, and abandoned twenty-three years earlier. Using a preexisting well meant Continental wouldn’t have to incur the expense of drilling vertically into the ground; they’d only have to extend the existing well horizontally and then pump it with fracking liquid a month or so later.

The Continental team did have to stop periodically to chase away spies from rival companies watching to see how they made out, but that didn’t cause the Continental men too much of a delay.

They were drilling along the Nesson Anticline, a subterranean ridge stretching 150 miles. Hoffman and his colleagues figured oil might have accumulated along this bump. “Maybe we can get some help from Mother Nature,” Hoffman told Hamm before they started drilling.

Hamm remained wary of spending a huge amount on speculative drilling in rock so dense that it looked like concrete, so he reached out to some friends to chip in and become partners in their effort.

He needn’t have worried so much. The first well was another Bakken winner, and Hamm quickly ordered his landmen to lease even more acreage in North Dakota. It seemed the state was going to generate more oil than Montana, just as Hoffman and Stark had predicted.

But in 2005, after another well was drilled, the oil turned into a bare trickle and water flooded the wellbore. The same disappointing results were seen from additional wells. Their first North Dakota well had been a fluke.

“We knew there was something there but we couldn’t get it to work,” Hoffman says.

It turned out Bakken rock in North Dakota was very different from Bakken rock in Montana. When they tried putting a wellbore in the top layer of the shale, the rock caved in and collapsed. It was so brittle it crumbled in the hands of roughnecks in the field.

“We were shocked,” Jack Stark recalls.

The way the men fractured the rock wasn’t working. Their liquid concoction went anywhere and everywhere. Sometimes it even exited the Bakken formation, where it was useless or even opened up fractures in a water-producing zone. The results were frustrating because they wanted oil, not water, from their fracking efforts. Those manning the wells began calling them “Hail Mary fracks” because the odds of success were so low. It was like they were taking a sledgehammer to a surface and creating cracks all over the formation, including where they didn’t want them.

The cost of all the leasing, drilling, and fracking began to add up to millions of dollars, and Continental made just $2 million in 2003. The company was producing around two hundred barrels a day in the area, and oil prices were zooming past sixty dollars a barrel, but each well cost about $6 million and the company had little to show for the huge expense.

In 2004, Continental ran out of cash for its Bakken project in North Dakota and Hamm decided to shut it down. He had to stop throwing good money after bad or he’d jeopardize his company. The decision caused grumbling from Hoffman and the rest of the staff in the area who believed in the rock’s potential, but they knew Hamm had no choice.

“It was pretty frustrating,” Hamm recalls.

At the same time, Hamm was dealing with growing troubles in his personal life. In 2000, a routine health screening showed that he had type 2 diabetes. He began to research the disease, eat more grains, vegetables, and salads, and donate money for research and prevention, aware the disease was a local scourge.

“It [is] a very pervasive disease, particularly in Oklahoma,” according to Hamm. “All of us probably have Native American blood; there are thirty-nine tribes here. And it seemed to be more prevalent among [them].”
¹⁴

Things got worse for Hamm in 2003 when his wife, Sue Ann, left their home in Enid and moved to Oklahoma City, a hundred miles away, with their two daughters. Friends said Sue Ann wanted to put her girls in private school in the bigger city. Harold would follow his wife to Oklahoma City, but their problems seemed to grow. Sue Ann filed for divorce in October 2005, though the case was dismissed two months later, according to court records.

Later, Hamm would say the couple separated in the fall of 2005, leading separate lives, according to court documents, though that would be disputed by Sue Ann. That year, Sue Ann began relying on electronic surveillance to monitor her husband’s activities in their home, according to court documents, seemingly convinced he was having an affair, or a series of them.
¹⁵

Hamm’s personal life was in turmoil, he had run out of money for North Dakota’s Bakken, and he risked losing his unhappy men to competitors as the energy industry sprung to life. He had to come up with a solution.

He swallowed hard and decided to sell half of his North Dakota position. He didn’t like the idea but he figured he’d at least get enough money to enable his men to keep searching for a solution in the Bakken.

Continental hired an investment bank and reached out to twenty-five oil companies. Big companies, medium-sized companies, and smaller ones all were offered the Bakken holdings. Hess, Burlington, and others pored over the results Hamm’s team had achieved. But no one cared and no one made them an offer.

Hamm lit into his bankers, convinced they were failing on the job. Why else wouldn’t rivals be interested in this choice land? The bankers redoubled their efforts but everyone kept passing on Continental’s acreage.

“They didn’t believe in it,” Jeff Hume says.

•   •   •

T
here was one spot in North Dakota that the Continental team ignored. It was an 800,000-acre block in Mountrail County, near the town of Parshall and east of Continental’s acreage. There were good reasons to dismiss the area.

In the late 1980s, Marathon Oil, a major company, had drilled at least five wells in the region but decided it was a loser. Barely anyone ventured there over the following decade. But in 2003, a seventy-seven-year-old geologist named Michael Johnson decided the time was ripe to give the spot a new look.

Johnson shared a similar family history with George Mitchell—they both were sons of poor Greek immigrants who had changed their names shortly after arriving in America. (Johnson’s father, Efstathios Giannakopoulos, had adopted the name Sam Johnson.)

Michael Johnson was well aware that Mountrail County was considered the dregs of the Bakken. But the septuagenarian also knew horizontal drilling was helping all kinds of ugly fields become beauties. To Johnson, the area was a lookalike to the Elm Coulee field in northeastern Montana that was working so well for Continental and others.

In 2005, at the age of seventy-nine, Johnson, along with his partners, Henry Gordon and Bob Berry, leased forty thousand acres around the Parshall area. They paid as little as three dollars an acre, reflecting how worthless most judged this land to be. In one auction, they were the only ones even bidding.

The trio of energy-patch veterans didn’t have enough money to drill all their land, which they called the Parshall Prospect, so they offered it to a dozen companies, including one called EOG Resources, run by Mark Papa, which had become active in the area. They hoped EOG would buy it from them and agree to give Johnson and his partners a small, retained interest.

Six years earlier, EOG had been a division of Houston-based power giant Enron that was called Enron Oil and Gas Company. As Enron grew, its executives became disdainful of Papa’s unit, which was putting effort into searching for oil and gas rather than just trading it, which Enron viewed as a sexier and more lucrative business.

In the summer of 1999, Enron spun the unit off in what Papa calls “a very ugly divorce.” After gaining its independence, EOG had a tough time earning respect from investors. By then, Enron was the hottest company in the country. If EOG was being discarded by Enron it must mean it wasn’t worth owning, Wall Street figured.