The Boom (22 page)

Back in the early days of the Barnett, Devon was far and away the largest holder of gas exploration leases in and around Fort Worth. It wasn’t, however, the only one. There were several small companies making a modest profit on the margins of the old Boonsville Bend gas field. It was soon clear that fortune had smiled on them. They were in the right place at the right time. They held thousands of acres of drilling rights, obtained when leases could be had for a few dollars per acre and held in perpetuity by dint of an existing well that dribbled out a couple hundred cubic feet of gas a month. These lucky few became the first multimillionaires of the shale boom.

Dick Lowe, owner of a small local explorer called Four Sevens Oil, told me his business strategy was nothing more complex than to copy Devon. Under Texas rules, Devon had to file monthly statements about the wells it drilled and how much gas they produced. When Lowe saw Devon’s production figures, he followed its lead. “As soon as we saw what their horizontal wells were doing, we started drilling all of our wells horizontally,” he said. This was in 2003. Three years later, he sold the company for $845 million.

Chief Oil & Gas also rode on Devon’s Barnett coattails. One day in 2005, company owner Trevor Rees-Jones explained the secret of his success. He was a small wildcatter who stayed close to home. Until the Barnett came along, he drilled and operated a lot of wells near Fort Worth. On a tour of his Dallas office, he explained what happened by pointing to a wall near a copy machine. “I was banging my head against the wall,” he said, “and one day the wall gave in.” He soon sold the company’s Barnett holdings in a series of deals worth nearly $4 billion.

Before Devon, these companies had copied Mitchell and leased aggressively, creeping closer and closer to Fort Worth until they headed into the city itself. Sarah Fullenwider, the city attorney, began to grapple with how to zone these wells only a few months before Devon bought Mitchell. She had moved to Texas a couple years before from North Carolina, where oil and gas regulation wasn’t on the state bar exam. She called around the country searching for other cities with ordinances she could copy. Meetings on the rules continued into the fall, including on the afternoon of September 11, 2001. Everyone was in shock and thought that carrying on normal work might help keep city workers calm, Fullenwider recalled. Finally, in December, officials passed a local ordinance requiring, among other things, that companies build an eight-foot-high masonry wall around a well within six hundred feet of a school, house, or park. The new rules didn’t even merit a front-page article in the local newspaper. Fullenwider was surprised by how congenial the process was. “People were just used to it,” she said. “It’s just Texas.” Local drillers were happy with new rules. Lowe told me that nothing was off-limits. “We could drill a well in our parking lot. We could drill a well on the courthouse steps. We could drill a well in the middle of TCU [Texas Christian University] Stadium,” he said.

Neither Four Sevens nor Chief held patents that made them valuable. Neither company had any proprietary technology process, made a better widget than competitors, or had smarter engineers. They were bought for one thing and one thing only: their acreage. Four Sevens held 39,000 acres in the Barnett, locked up by existing production. New Barnett wells could be drilled on this property without difficult negotiations with the landowners. Chief held 169,000 acres. These were real estate transactions, not energy deals. The domestic energy industry was turning a corner. In the past, success came from an ability to find the biggest buried troves of oil and gas. Geologists used superstition (drill atop cemetery hills), hard work (George Mitchell poring over the squiggly lines of well logs late into the night), and, later, supercomputers processing seismic data to use sound waves bouncing off rock to find “bright spots” that indicated oil deposits. But in the Barnett, the gas was everywhere.

Some parts of the shale were better than others, held more gas, or were thicker, but wells found gas. In this new world, companies thought the key to success was speed. How quickly can you lease up thousands of acres atop a shale? This was the job of men (and a few women) rifling through files in county courthouses to research who owned the gas rights, and then knocking on doors to get leases signed. A military nomenclature emerged. Companies deployed armies of these “landmen” to capture acreage. A land war began.

Devon’s genetic makeup didn’t fit well in this new energy world order. It was too cautious. It could move fast to make a deal, but then it would become conservative when it came time to lease and drill. It preferred to spend time driving down costs. But if Devon was content to take it slow, a crosstown competitor would soon begin taking a different approach. Before Chesapeake Energy began investing billions of dollars to snap up every drillable acre it could find and kicked the shale boom into overdrive, the company needed to see this newfangled gas production firsthand. Its introduction was accidental.

A week after Devon’s 2002 presentation to Wall Street analysts, Chesapeake acquired Canaan Energy. Chesapeake CEO Aubrey McClendon had been pursuing Canaan for more than a year. When Canaan rebuffed McClendon’s initial offers, he used bare-knuckled tactics pioneered by corporate raiders in the 1980s. “We believe it is clear that management’s plan is not working,” McClendon wrote in an open letter to Wall Street after buying up 7.7 percent of the company’s stock. “If given the opportunity, most Canaan shareholders would prefer to sell their stock at a premium to us rather than waiting on management’s plan to work.” Canaan capitulated.

McClendon wanted Canaan because of its wells in western Oklahoma. The two companies’ wells were so close together that Chesapeake workers heading out to service their own wells would drive past Canaan wells. Bringing together the companies could reduce costs. Now that he owned Canaan, the brash executive needed to figure out what to do with another small Canaan asset, a minority stake in some exploratory acreage south of Fort Worth. In the Canaan deal, the Barnett position was “an afterthought,” McClendon said, and “probably a liability.” He decided not to do anything with it. Hallwood Group, a Delaware holding company with energy assets, owned the majority stake in the partnership, which meant that it got to call the shots and decide where and when to drill. Chesapeake went along for the ride, writing checks for its share of costs when Hallwood sent invoices. Hallwood was an ambitious and technically competent operator. It copied Devon’s horizontal wells and began increasing the size of fracks. It also ventured into Johnson County, slightly south of Fort Worth, where there were no rocks to keep the fracks from breaking out into the Ellenberger and creating giant saltwater wells.

Bill Marble, a Hallwood energy executive, described the challenge in heroic and somewhat grandiose terms. “The Ellenberger is still there, waiting to ruin every well with a torrent of water. But we have learned to respect it, not fear it,” he said. Johnson County was the home of “shattered dreams [and] dry holes,” Marble said. By early 2004, Marble and Hallwood had learned to tame Johnson County. In January he gave a presentation at the Fort Worth Petroleum Club. The club was up on the thirty-ninth floor of a downtown skyscraper. The windows faced north, toward the area where almost all of the Barnett Shale activity had taken place. The fifty-six geologists and engineers who attended had their backs turned on Johnson County.

Marble shared the results of Hallwood’s latest wells to the south. It had learned to conquer the Barnett, using horizontal wells, even when the rock was above the Ellenberger, he boasted. The room was flabbergasted. “Hallwood flips this data up, and the whole room just said, ‘Wow,’ ” recalled Keith Hutton, a former executive vice president of operations with XTO Energy, the largest company in Fort Worth. The message was clear: the Barnett Shale extended straight through the city and probably included several counties to the west as well. Geologists knew that the rock extended far and wide. Hallwood demonstrated that the industry could make profitable wells across many counties. XTO began to buy up companies for their acreage. Five years later, a member of XTO’s board of directors named Jack Randall called up Exxon CEO Rex Tillerson to sound him out on a deal. Randall knew Tillerson from their days together in the University of Texas marching band. Randall played trumpet; Tillerson played drums. They met in Tillerson’s office in August 2009. Randall said that XTO was looking for a buyer. “I think we’ll be interested,” said Tillerson. Three months later, Exxon agreed to buy XTO and its shale assets for $31 billion and assume $10 billion of the smaller company’s debt.

In June 2004 Hallwood drilled the Lakeview #1H overlooking Lake Pat Cleburne. It used a massive amount of water to fracture the rock, much more than typical, and produced one of the best wells ever in the Barnett. It roared to life at 6.8 million cubic feet per day. Due to its minority stake, acquired as part of the Canaan deal, Chesapeake owned a piece of this home run. News of this well made it up to Oklahoma City, where McClendon decided it was time to get in on the shale game. Wall Street was talking it up, and Chesapeake’s big competitors were acquiring stakes in and around Fort Worth. Later that year, Hallwood put some of its Johnson County acreage up for sale. Chesapeake rushed to be first into the data room and made a bid it hoped would freeze out competitors. But Hallwood thought it could get more and kept the auction going, eventually settling on another company. When that bid fell apart, Hallwood called Chesapeake in late November. The next morning, McClendon flew to Dallas and over breakfast bought the assets for $277 million.

This bite of the Barnett Shale wasn’t enough for McClendon. Within a few months, he spent another $250 million to buy more of Hallwood’s Barnett assets. If Devon was conservative, McClendon was aggressive. He wanted more of these shale assets, and that meant he needed a lot of money to finance his plans. Chesapeake ended 2004 with $3.1 billion in debt. A year later, Chesapeake’s debt rose to $5.5 billion. Then it hit $7.4 billion and $11 billion in subsequent years. As 2008 drew to a close, the company had borrowed $13.2 billion.

While Chesapeake was playing catch-up in the Barnett, other companies were testing just how unique the Barnett really was. Southwestern Energy announced that it had discovered the Fayetteville Shale in Arkansas. Its stock jumped 11 percent. Chesapeake decided to rush into this new shale as well. “Once we saw success there, we understood that the world had changed in our industry and would likely never be the same again,” said McClendon.

McClendon sensed that shale gas was a disruptive technology long before Nichols. Devon bought Mitchell, its collection of Barnett acreage, and engineers who had firsthand knowledge of modern fracking techniques, but the company failed to grasp that the shale gas had changed the US energy landscape. Only slowly did Nichols change Devon to adapt to the new world. He had taken over as chairman and chief executive of his father’s company in 2000 and didn’t want to destroy it on a gamble. McClendon had no such institutional baggage. He had built Chesapeake from scratch. Back in the early 2000s, Chesapeake was a small company with few assets that got little love from Wall Street. He was much quicker to tear down the company and rebuild it to focus on shale exploitation. He had less to lose. There wasn’t much to tear down.

Oklahoma City is in many ways a small town with outsized ambitions. Both Nichols and McClendon embody this character. For all their outward similarities, they are very different men. Nichols always seemed to be one step above McClendon. He attended the best private high school in the city; McClendon attended the second best. They both headed east for college. McClendon went to Duke, the Ivy League of the South; Nichols to the actual Ivy League. But these two prominent business leaders have had relatively few business dealings or social interactions with each other. This distance almost collapsed in 2006, when McClendon put together a group of friends and business associates to purchase the Seattle SuperSonics, later moving them to Oklahoma City. McClendon sounded out Nichols as possible partner. Tom Ward, a longtime McClendon business partner at Chesapeake, made the approach. Nichols turned them down.

I met with Nichols in April 2012 and asked if he hadn’t been too conservative and missed an opportunity to dominate shale exploration in the United States. “In hindsight, was it a mistake at the time? No, I don’t think so,” he said. He explained that no matter how good shale gas looked, he was wary of putting too large a bet on it. His vision for Devon was a balanced company, with some gas and some oil, some shale and some conventional. “There’s a simple reason,” he explained. “I’ve never met the person smart enough to know when oil and gas are going to go up and down.” The contrast with his Chesapeake counterpart couldn’t be starker. McClendon placed billion-dollar bets on the direction of natural gas prices.

For a while, both Devon’s conservative approach and Chesapeake’s more aggressive approach to the business created success. Both companies grew large and prosperous. On the north side of Oklahoma City, McClendon built a sprawling corporate campus that resembled an elite East Coast college. Downtown, Devon moved out of its boxy nineteen-story 1980s-era building. It built a new fifty-two-story metal-and-glass skyscraper that dominated the Oklahoma City skyline and filled it with Devon workers. It was the tallest building between Dallas and Chicago. The main entrance to the tower is a soaring light-filled atrium with a small brass plaque embedded in the floor in the middle. It reads “Integrity.”