The billionaires' gambit: How daring drillers re-wrote America's energy future.
Something big was coming. Tom Ward repeated it, again and again. It was late 1999, and Ward was having breakfast in Oklahoma City with Dan Jordan, a fellow energy executive, when Ward started in on his favorite topic: natural gas prices. They were going rise, Ward predicted—and his company, Chesapeake Energy, was going to take advantage.
In the preceding months, Ward and his partner, Aubrey McClendon, had seized on a plan: If they could lock up wells producing natural gas and then employ new technologies and techniques to extract even more gas from the acreage, a historic fortune could be theirs. They decided to borrow and then spend serious cash to lease as much land as they could, all over the United States, as quickly as possible. It seemed like the opportunity of a lifetime.
For Ward, the plan offered a chance to escape a cloud that seemed to hover over him. Ward’s father and grandfather had been alcoholics in a small town in Oklahoma, and Ward himself had been unemployed and without much hope just a few years earlier. McClendon’s background was a bit different. He was the charismatic scion of an Oklahoma energy family. But he was just as determined to leave his own mark in the business and create enough wealth to make his family proud.
That morning over breakfast, however, Jordan wasn’t buying Ward’s argument about rising natural-gas prices. Ward seemed like a salesman reciting a pitch. After all, gas prices were barely above $2 per thousand cubic feet, about the same as a decade earlier. Ward went on and on, though, explaining why anemic production and rising demand would send prices higher. Soon, Jordan realized his friend wasn’t just mouthing a favorite line. He’s really starting to believe his own bullshit, Jordan thought.
Ward took his pitch up a notch. “Natural gas will be at double digits,” he said confidently, predicting that prices would soar fivefold, well past $10. Jordan almost choked on his coffee.
“Yeah, maybe when we’re 75 years old,” he told Ward dismissively. “You’re crazy.”
Ward smiled. Just watch, he seemed to be saying. His partner was just as bullish. “This is the fuel of the future. It will be in demand,” McClendon said in an internal meeting one day. “Everything will change.”
McClendon and Ward had embraced horizontal drilling—a developing technique that allowed them to tap once-unreachable reservoirs—before most competitors. Now, they closely monitored how specialists were improving hydraulic fracturing methods, enabling drillers to shatter gas-soaked rock to free natural gas. The idea of violently fracturing rock to extract oil or gas wasn’t new; drillers in the 19th century had used black powder explosives to coax oil from stubborn wells. (The method proved frustrating to an erstwhile oilman named John Wilkes Booth, who, along with business partners in Pennsylvania, destroyed their company’s well trying to speed production. Bitterly disappointed, Booth gave up the oil business, and after the South lost the Civil War, he famously shot and killed President Abraham Lincoln.) Nearly a century later, an underground machine gun became a popular way to unlock oil. At one point, the United States and the Soviet Union actually detonated nuclear devices to try to get oil and gas flowing in tight rock, though the method didn’t exactly catch on.
Techniques to hydraulically fracture, or frack, tough rock improved over the years. By the time Ward and McClendon forged their plan, a unique opportunity—maybe even a historic one—seemed within reach. Huge oil companies with talented geologists and engineers once held an insurmountable lead over small “independent” companies like Chesapeake because big organizations were best equipped to pinpoint new reservoirs and then extract oil and gas. But now, thanks to these new fracking and drilling techniques, it seemed that finding and pumping meaningful energy deposits was the easiest part of the equation.
The new challenge, McClendon and Ward decided, was to grab prime acreage before their competitors figured out that energy prices were headed higher. McClendon and Ward never took courses in geology or engineering and weren’t drilling specialists. But they knew how to lease land and thought this skill might give them an advantage over rivals. To buy up territory, as if in a game of Risk, they relied on a group of so-called landmen—brokers who negotiate with landowners to secure mineral rights under their own properties. During the industry’s good times, landmen—who usually receive little respect or limelight—find adventure and wealth. But it’s also not uncommon for a landman to find a door slammed—or a gun cocked—by a suspicious landowner. These “lease hounds” are always on the move and viewed as little more than used-car salesmen, even in their own business. Movies are made about wildcatters. Jokes are made about landmen.
Ward saw things differently. He began wooing the best and most aggressive landmen in the country, 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 to the most attractive land. These field brokers then visited individuals holding these rights and pitched them about selling to Chesapeake. Soon, the company was outbidding rivals for the nation’s best wells. In 2003, Chesapeake spent $530 million to buy natural gas assets, and it emerged as the eighth-largest natural gas producer in the country.
By 2005, McClendon and Ward’s bets began to pay off. Natural gas prices soared, moving past $10 per thousand cubic feet late in the year, just as McClendon and Ward had predicted. Investors, politicians and industry experts fretted over how the United States would find enough energy supplies to meet its seemingly inexorable demand. But McClendon and Ward, sitting pretty on vast amounts of natural gas, seemed on their way to becoming modern-day tycoons. In 2005, Ward’s 14 million shares in the company were worth more than $400 million, and McClendon’s 18 million shares, $500 million. The men soon became investors in hedge funds, started their own fund to make even more trades and began placing their own huge side-bets on natural gas futures. Ward, for one, made more than $100 million in the years that followed with his side-trading, he later acknowledged.
Over just a few years, McClendon and Ward had turned a $50,000 investment into one of the nation’s largest natural gas producing companies, one that eventually would control the mineral rights to 15 million acres, about three times the size of New Jersey. By 2008, each would be worth about $3 billion, making them among the wealthiest people in the country. They would be shocked by the results of their efforts, however. In the end, much of their wealth was squandered, and they were kicked to the curb by their own investors. These energy pioneers weren’t prepared for the fallout of their historic discoveries.
***
McClendon and Ward did more than build enormous personal fortunes, however. Together with a small cadre of likeminded wildcatters, entrepreneurs and hopeless dreamers, they helped spark a shocking surge in energy production that’s put the nation on a path toward energy independence. The turnaround has brought surprising benefits to a country desperate for some good fortune after enduring the deepest economic downturn since the Great Depression. Natural gas prices in the United States, as of this past summer, were about a third of those in Asia and less than half of those in Europe. U.S. production has grown 20 percent in five years, making the country the world’s largest energy producer. Thanks to these advancements in drilling and discovery, the United States sits on two of the world’s largest gas fields and should have enough natural gas to last generations. So many jobs have resulted, and so many Americans enjoy cheaper energy, that politicians are unlikely to halt fracking. But the debate over the impact this technique is having on the environment will likely grow more heated in the years ahead, as opponents raise a series of legitimate concerns, along with some that likely are overstated.
There are good reasons the energy revolution took place in America and not in countries with even larger supplies of oil and gas packed into shale. The United States has an enduring entrepreneurial culture and provides ample incentives for years of trial and error. The U.S. also boasts an extensive energy infrastructure—such as pipelines and elaborate databases of underground geology—deep capital markets to finance newfangled drilling, more rigs than anyone else, vast collection and storage facilities and an experienced labor force. Light population density in places like North Dakota and Texas and a legal system that gives individuals, as opposed to slow-moving governments, ownership of mineral rights have been helpful as well.
The windfall earned by the architects of the shale era is attributable to creativity, bravado and a strong desire to get really wealthy. For all the criticism that America is losing its edge in innovation, the country’s surging energy production is a reminder of the deep pools of ingenuity, risk taking and inventiveness that remain. There are still a few things the United States does better than anyone else, such as create computer apps, drones and rap stars. Time to add fracking to the list.
In the preceding months, Ward and his partner, Aubrey McClendon, had seized on a plan: If they could lock up wells producing natural gas and then employ new technologies and techniques to extract even more gas from the acreage, a historic fortune could be theirs. They decided to borrow and then spend serious cash to lease as much land as they could, all over the United States, as quickly as possible. It seemed like the opportunity of a lifetime.
For Ward, the plan offered a chance to escape a cloud that seemed to hover over him. Ward’s father and grandfather had been alcoholics in a small town in Oklahoma, and Ward himself had been unemployed and without much hope just a few years earlier. McClendon’s background was a bit different. He was the charismatic scion of an Oklahoma energy family. But he was just as determined to leave his own mark in the business and create enough wealth to make his family proud.
That morning over breakfast, however, Jordan wasn’t buying Ward’s argument about rising natural-gas prices. Ward seemed like a salesman reciting a pitch. After all, gas prices were barely above $2 per thousand cubic feet, about the same as a decade earlier. Ward went on and on, though, explaining why anemic production and rising demand would send prices higher. Soon, Jordan realized his friend wasn’t just mouthing a favorite line. He’s really starting to believe his own bullshit, Jordan thought.
Ward took his pitch up a notch. “Natural gas will be at double digits,” he said confidently, predicting that prices would soar fivefold, well past $10. Jordan almost choked on his coffee.
“Yeah, maybe when we’re 75 years old,” he told Ward dismissively. “You’re crazy.”
Ward smiled. Just watch, he seemed to be saying. His partner was just as bullish. “This is the fuel of the future. It will be in demand,” McClendon said in an internal meeting one day. “Everything will change.”
McClendon and Ward had embraced horizontal drilling—a developing technique that allowed them to tap once-unreachable reservoirs—before most competitors. Now, they closely monitored how specialists were improving hydraulic fracturing methods, enabling drillers to shatter gas-soaked rock to free natural gas. The idea of violently fracturing rock to extract oil or gas wasn’t new; drillers in the 19th century had used black powder explosives to coax oil from stubborn wells. (The method proved frustrating to an erstwhile oilman named John Wilkes Booth, who, along with business partners in Pennsylvania, destroyed their company’s well trying to speed production. Bitterly disappointed, Booth gave up the oil business, and after the South lost the Civil War, he famously shot and killed President Abraham Lincoln.) Nearly a century later, an underground machine gun became a popular way to unlock oil. At one point, the United States and the Soviet Union actually detonated nuclear devices to try to get oil and gas flowing in tight rock, though the method didn’t exactly catch on.
Techniques to hydraulically fracture, or frack, tough rock improved over the years. By the time Ward and McClendon forged their plan, a unique opportunity—maybe even a historic one—seemed within reach. Huge oil companies with talented geologists and engineers once held an insurmountable lead over small “independent” companies like Chesapeake because big organizations were best equipped to pinpoint new reservoirs and then extract oil and gas. But now, thanks to these new fracking and drilling techniques, it seemed that finding and pumping meaningful energy deposits was the easiest part of the equation.
The new challenge, McClendon and Ward decided, was to grab prime acreage before their competitors figured out that energy prices were headed higher. McClendon and Ward never took courses in geology or engineering and weren’t drilling specialists. But they knew how to lease land and thought this skill might give them an advantage over rivals. To buy up territory, as if in a game of Risk, they relied on a group of so-called landmen—brokers who negotiate with landowners to secure mineral rights under their own properties. During the industry’s good times, landmen—who usually receive little respect or limelight—find adventure and wealth. But it’s also not uncommon for a landman to find a door slammed—or a gun cocked—by a suspicious landowner. These “lease hounds” are always on the move and viewed as little more than used-car salesmen, even in their own business. Movies are made about wildcatters. Jokes are made about landmen.
Ward saw things differently. He began wooing the best and most aggressive landmen in the country, 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 to the most attractive land. These field brokers then visited individuals holding these rights and pitched them about selling to Chesapeake. Soon, the company was outbidding rivals for the nation’s best wells. In 2003, Chesapeake spent $530 million to buy natural gas assets, and it emerged as the eighth-largest natural gas producer in the country.
By 2005, McClendon and Ward’s bets began to pay off. Natural gas prices soared, moving past $10 per thousand cubic feet late in the year, just as McClendon and Ward had predicted. Investors, politicians and industry experts fretted over how the United States would find enough energy supplies to meet its seemingly inexorable demand. But McClendon and Ward, sitting pretty on vast amounts of natural gas, seemed on their way to becoming modern-day tycoons. In 2005, Ward’s 14 million shares in the company were worth more than $400 million, and McClendon’s 18 million shares, $500 million. The men soon became investors in hedge funds, started their own fund to make even more trades and began placing their own huge side-bets on natural gas futures. Ward, for one, made more than $100 million in the years that followed with his side-trading, he later acknowledged.
Over just a few years, McClendon and Ward had turned a $50,000 investment into one of the nation’s largest natural gas producing companies, one that eventually would control the mineral rights to 15 million acres, about three times the size of New Jersey. By 2008, each would be worth about $3 billion, making them among the wealthiest people in the country. They would be shocked by the results of their efforts, however. In the end, much of their wealth was squandered, and they were kicked to the curb by their own investors. These energy pioneers weren’t prepared for the fallout of their historic discoveries.
***
McClendon and Ward did more than build enormous personal fortunes, however. Together with a small cadre of likeminded wildcatters, entrepreneurs and hopeless dreamers, they helped spark a shocking surge in energy production that’s put the nation on a path toward energy independence. The turnaround has brought surprising benefits to a country desperate for some good fortune after enduring the deepest economic downturn since the Great Depression. Natural gas prices in the United States, as of this past summer, were about a third of those in Asia and less than half of those in Europe. U.S. production has grown 20 percent in five years, making the country the world’s largest energy producer. Thanks to these advancements in drilling and discovery, the United States sits on two of the world’s largest gas fields and should have enough natural gas to last generations. So many jobs have resulted, and so many Americans enjoy cheaper energy, that politicians are unlikely to halt fracking. But the debate over the impact this technique is having on the environment will likely grow more heated in the years ahead, as opponents raise a series of legitimate concerns, along with some that likely are overstated.
There are good reasons the energy revolution took place in America and not in countries with even larger supplies of oil and gas packed into shale. The United States has an enduring entrepreneurial culture and provides ample incentives for years of trial and error. The U.S. also boasts an extensive energy infrastructure—such as pipelines and elaborate databases of underground geology—deep capital markets to finance newfangled drilling, more rigs than anyone else, vast collection and storage facilities and an experienced labor force. Light population density in places like North Dakota and Texas and a legal system that gives individuals, as opposed to slow-moving governments, ownership of mineral rights have been helpful as well.
The windfall earned by the architects of the shale era is attributable to creativity, bravado and a strong desire to get really wealthy. For all the criticism that America is losing its edge in innovation, the country’s surging energy production is a reminder of the deep pools of ingenuity, risk taking and inventiveness that remain. There are still a few things the United States does better than anyone else, such as create computer apps, drones and rap stars. Time to add fracking to the list.
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