The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (3 page)

Another satisfied investor was Robert E. Smith, a well-known independent energy producer and real estate investor in Houston. In his youth, Smith was turned down by an army recruiting officer who noticed he was missing two fingers on his right hand, the result of a hunting accident.

“I’ve still got my trigger finger and you can pick out the toughest guy in this bunch and I’ll bust his butt for you,” Smith told the officer, who quickly signed him up.
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After the army, Smith was fired twice by major oil companies for punching coworkers. With only a high school education, the young man set out to become a wildcatter, enjoying huge success drilling his own wells in the region. Later, he would help bring the Astros baseball team to Houston.

Smith agreed to take a 25 percent stake in some Mitchell wells, easing financial pressures that had built on the brothers, though adding other kinds of stress they hadn’t counted on.

“Smith would call up and raise hell about this or that,” Mitchell says, “but he was a good investor.”

George and Johnny Mitchell began claiming larger ownership stakes in their wells as they drilled in various spots in Texas, Louisiana, and New Mexico. Their company’s name may have referenced oil, but the Mitchells usually hunted for natural gas, the poor stepchild of oil in the energy family. Natural gas is a light hydrocarbon that comes from the compressed remains of plants and animals. It can be converted into liquid form by lowering its temperature, making it a bit more useful, but until the second half of the twentieth century it was generally dismissed as a useless by-product of crude oil, which is more easily stored and transported.

Oil, by contrast, is composed of heavier hydrocarbons that form as liquids. Its liquid form makes oil ideal for a range of uses, such as powering cars, jet engines, and other forms of transportation. That’s a key reason why oil became more popular than natural gas, which had its own uses, such as cooking and heating some homes.

At the time, during the early 1950s, natural gas was only selling for about seven cents per thousand cubic feet, a price so low that most large energy companies ignored gas or burned it off as waste if they captured it while drilling for oil. Vast interstate transmission systems hadn’t yet been built to easily ship gas to homes, power plants, or businesses, keeping a lid on demand.

The Mitchells found they could score profits by keeping their costs low, though, and they bet that the market for gas might grow as the country’s petrochemical industry expanded. Just as important, rivals were busy looking for oil, so the Mitchells faced limited competition.

“The majors didn’t care about gas, they just wanted oil,” George Mitchell says.

Johnny Mitchell—good-looking, well dressed, and flamboyant—dealt with the company’s investors as he drove a maroon 1946 Ford around Houston. He sometimes walked around the city in jungle shorts and a safari helmet, according to a news report at the time. Later he would write a wartime potboiler called
The Secret War of Captain Johnny Mitchell: The Lusty Wartime Reminiscences of One of Texas’s Most Colorful Oilmen
. (Much of the book describes Johnny’s wartime sexual conquests in prose that can be a bit awkward. A sample passage: “Iceland wasn’t barren of good-looking girls; in fact, some were extremely beautiful. They wore wool dresses, which were imported from Britain in exchange for fish.”)

“Johnny was a promoter, he was a positive guy who could really sell a deal,” recalls T. Boone Pickens, who started his own energy investing and drilling career in Texas in the 1950s.

George Mitchell, tall, balding, and more introspective and intense than his brother, continued to focus on finding and drilling gas wells. Married and already a parent, he lived in a modest home, employees recall. He kept an eye on the company’s expenses, as well as his own, though he sometimes drove an older, pink Cadillac, just as his college professor had anticipated.

The brothers’ distinct personalities sometimes led to conflict. George, wearing a suit with a torn pocket, once walked into a colleague’s office, interrupting a meeting he was having with Johnny.

“George, you look like crap,” Johnny told his brother. “Why don’t you buy a new suit and some new clothes?”

“If you’d pay me some of the money you owe me, I might be able to afford some new clothes,” George shot back.

One day in 1952, a bookie in Chicago shared a tip with another of George Mitchell’s investors, Louis Pulaski, about a natural gas field in north-central Texas, near Fort Worth. The bookie didn’t know much when it came to energy; he usually just took horse bets for Pulaski, the owner of a Houston junkyard. But the out-of-town bookie told Pulaski that he had spoken with contacts in the drilling business and had a hunch that a 3,000-acre spot under the Hughes Ranch in Wise County would be a winner. Figuring the bookie might have a hot tip, Pulaski called George Mitchell right away, urging him to look into the field.

Mitchell was skeptical, and not just because the tip had come from a horse bookie eight hundred miles away. The acreage the bookie and Pulaski were excited about had already been picked over by locals. It even had acquired a damning nickname among veterans in the business: “The Wildcatters’ Graveyard.”

“I don’t know, General, that field has been passed around for years,” Mitchell told Pulaski, whom he referred to as “the General” after famed general Casimir Pulaski, the soldier of fortune who saved George Washington’s life in the American Revolutionary War.

“It doesn’t have much of a chance,” Mitchell told him.

Pulaski persisted, though, and Mitchell agreed to check the field out. He got some help from a drilling contractor he had met in college, Ellison Miles, as well as another geologist who had studied the region. After some testing, Mitchell turned more enthusiastic and decided to try drilling the area.

The first well was a winner. So was the next one—and the next seven, too. Mitchell had hit a “stratigraphic trap,” a huge underground reservoir of natural gas. The bookie was on to something after all.

To take advantage of the find, Mitchell and his company acquired 300,000 acres in the area in just ninety days. They paid three dollars an acre and kept buying land until they and their investors ran out of money. Large oil companies, or “majors,” as they are known in the energy business, dismissed the acreage as worthless because it contained natural gas, not oil. But Mitchell was convinced he could tap profits. Some markets for gas, such as the Chicago region, were seeing growing demand. Natural gas prices were low—less than ten cents per thousand cubic feet, or the equivalent of about seventy cents in 2013’s money—but Mitchell thought they were high enough to make money.

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T
he Mitchell team would drill various rock layers in Wise County, including conglomerate sediment that was considered very “tight,” or compressed. In other words, the pores of these rocks were so mashed together that it was hard to get gas to flow from it. The rock had such low permeability that it provided another reason for major oil companies to avoid the area.

But George Mitchell was willing to try a relatively new drilling technique he had read about in petroleum-engineering literature that held the possibility of loosening up this compact rock and getting the gas to flow. The technique, a way of “completing” oil and gas wells, or preparing them to produce energy, was called hydraulic fracturing, or “fraccing.” It entailed fracturing the rocks, or breaking them up, by pummeling them with various liquids to free up the gas trapped in those rocks.

(Years later, hydraulic fracturing became known in the popular media as “fracking,” with a “k” replacing the “c.” From the beginning, industry members detested the word because of its closeness to the common expletive, not to mention a similarity to “fragging,” the act of attacking fellow soldiers. “Fracking” also rhymes with “hacking,” yet another word with a negative connotation. Energy veterans claim that “fracking” was coined by those with a bias against the industry. In truth, the word was first used in the late 1970s in the science fiction series
Battlestar Galactica
as a substitute for the curse word.)

The idea of violently fracturing rock to extract oil or gas traces back to an invention in the 1860s by Edward A. L. Roberts, who fought in the Civil War battle of Fredericksburg as a lieutenant colonel for the Union. During the heat of battle, Roberts noticed that when mortar shells fell into a narrow canal, a column of water shot up, sky high. It gave him an idea.

Until then, drillers had relied on black-powder explosives to coax oil out of stubborn wells, a method that often proved frustrating. John Wilkes Booth and some of his business partners once destroyed their company’s Pennsylvania oil well while using black powder to try to speed the well’s production. Booth eventually gave up on the oil business and grew angry about the South’s defeat in the Civil War. Days after General Robert E. Lee surrendered, Booth shot and killed President Abraham Lincoln.

After returning home from the war, Roberts developed a torpedo mechanism that lowered explosive nitroglycerine capsules into wells. These capsules managed to direct an explosion sideways, instead of out of the hole. That fractured oil strata around the hole much more effectively than previous attempts. The result: More oil could be extracted.

Roberts’s invention was embraced by a U.S. oil industry that had begun just a decade earlier, in 1859, with the discovery of petroleum in Titusville, Pennsylvania. Drillers paid Roberts as much as $200 each time they used his torpedo mechanism, plus one-fifteenth of the value of the increased flow of oil they experienced. The fee was so high that a black market quickly emerged involving workers willing to employ Roberts’s torpedo technique using the cover of night. Their secretive, explosive oil drilling under the stars was called “moonlighting,” a term that soon became popular in the American lexicon.

By the 1930s, men working on rigs experimented with guns and ammunition, as some men are wont to do. An underground machine gun six feet tall became a popular way to open holes in casing and unlock oil. Swiss engineer Henry Mohaupt’s bazooka projectile, invented as part of a secret U.S. Army program, also became a popular way to get oil flowing when it made its way to oil fields in the 1950s. The United States and the Soviet Union actually detonated nuclear devices to try to get oil and gas flowing in tight rock, though it wasn’t a method that caught on, for pretty obvious reasons.

The former Standard Oil of Indiana (which later became Amoco) had first used high-pressure liquid to break up underground rock formations in Grant County, Kansas, in 1947. Some say the technique may even have been employed a bit earlier.

In the early 1950s, as George Mitchell focused on the compressed rock in Wise County, Texas, many rivals resisted fracking. It wasn’t because there was any controversy attached to it. At the time it hadn’t really occurred to Mitchell or many others that this activity might have any kind of environmental risks.

Companies avoided fracking because it was expensive and added time to a drilling project. They preferred the traditional method of looking for hydrocarbons: Drill a well, like a straw into the ground, and try to hit pools of trapped oil or gas capable of flowing to the surface without the “artificial stimulation” of hydraulic fracturing. After decades of low gas prices, companies were struggling to keep costs down, not increase spending on hydraulic fracturing.

But Mitchell didn’t have much to lose, so he gave fracking a try, hoping to make the Texas fields yield oil or natural gas. Mitchell saw that fracking seemed to do a good job stimulating reservoirs that needed a little help to get going, a bit like giving the back of an old television a little bang. His company’s efforts worked, and by the late 1950s the Wise County field had become their most important source of natural gas.

George Mitchell wasn’t the nation’s first fracker. Mitchell was mighty early, though. “The majors didn’t bother with fracking, they didn’t want to fool with it,” he says. “I saw it as the new technology.”

Over time, George Mitchell assumed greater control over the company, as Johnny focused on other interests. Soon Mitchell went on an acquisition binge, confident that gas prices would rise. But gas prices remained low and the company was often strapped for cash, forcing it to hold off drilling for long stretches.

Those delays sometimes grated on homeowners who had leased Mitchell land and expected regular royalty checks. After a number of leaseholders voiced their displeasure in 1956, Mitchell decided to deal with the unhappiness publicly. He invited the entire county to a barbecue and told three thousand residents that he was prepared to spend millions to drill. They just had to be a bit more patient. Most came away from the barbecue satisfied with the promise.
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An energy price decline in 1957 brought new stress, though. Mitchell Energy also fought with a rival and had difficulties shipping gas out of the area. The company’s spending grew nonetheless, unnerving B. F. “Budd” Clark, a senior executive who was a native of New York City and a graduate of Harvard Business School. Pressure built within the executive ranks. The Mitchell staff didn’t come to collective decisions so much as fight their way to them. There was screaming in the offices, in the halls, and pretty much everywhere.

It got so bad that Joyce Gay, who began as a secretary and eventually worked in public relations for the company, had to affix soundproof taping around the doors outside Mitchell’s office so outsiders couldn’t hear all the yelling. “George and Budd would scream in the hall until Budd had arrived at the four-letter word and then George would yank them all back in the office and shut the door,” Gay recalls. “They used to joke and say it was management by decibel. . . . It was just their style, they’d scream and yell.”

In the middle of an important meeting one day, one of the company’s lead attorneys at the big Houston firm Vinson & Elkins fled Mitchell’s office, joining Gay in her nearby office, she recalls. “I’m not going back in until they quit yelling,” he told her.