The Boom (47 page)

I also pored through numerous SEC filings from both Mitchell Energy and Devon Energy to better understand the companies. The form S-4 (filed by Devon on August 30, 2001) and later amendments to the original provide information about the merger, which was fleshed out by my interviews with participants. Devon’s description of the Barnett as “unique” can be found in its 10-K filed in March 2003.

At Devon, Jeff Hall was particularly helpful, as were Vince White and Chip Minty, who helped me line up interviews with Larry Nichols, Brad Foster, Tony Vaughn, and Jeff Agosta. I tracked down others, including Chance Jackson and Jay Ewing, on my own. Jay keeps several years of his work calendars and helped me pinpoint the date that I first toured the Barnett. Sarah Fullenwider and Fort Worth’s approach to regulation come through interviews with her and other city officials.

While working for the
Wall Street Journal
, I obtained (and thankfully filed away) the June 2002 Devon presentation “Mid-Year Operations Update & Barnett Shale School.” My interviews with Dick Lowe, Trevor Rees-Jones, and others were conducted for a story I reported several years ago. Information about Hallwood Group and Bill Marble’s quote about learning to respect, not fear, the Ellenberger formation is from a presentation he made to the Ellison Miles Geotechnology Institute, and details of his speech to the Fort Worth Geological Society are in the group’s January 2004 newsletter. Keith Hutton’s reaction is from a 2005 interview with the author.

I reviewed information about Devon’s Veale Ranch #1H and Graham Shoop #6 wells, API no. 42-439-3041200 and no. 42-121-3168500, through the Texas Railroad Commission website. I also consulted records for the Lakeview #1H, the well that opened Aubrey McClendon’s eyes to the potential of the Barnett Shale. His spoke about this well on a December 1, 2004, conference call and again at an energy conference on June 1, 2009.

Professor Mark Zoback, at Stanford, relayed the story about the informal survey of engineers and provided me with the results of the survey.

The story of former University of Texas bandmates Jack Randall and Rex Tillerson making a deal was reported in Brian O’Keefe’s April 2012 article in
Fortune
magazine’s “Exxon’s Big Bet on Shale Gas.” Further details, including Tillerson’s quote, come from chapter 27 in Steve Coll’s book on Exxon Mobil, cited below.

Details of Chesapeake’s entry into the Barnett come from various sources, including its SEC filings (10-K in March 2002, as well as 8-Ks on March 12 and 18, 2002.) Hallwood’s large wells in Johnson County were alluded to in a Morgan Stanley investor report by Lloyd Byrne on April 16, 2004. He refers to an unnamed private operator, but the details he provided match Hallwood wells in state records. The enthusiasm—and skullduggery—of the early Barnett days comes through in the
Noel v. Rees-Jones
lawsuit in state district court in Harris County (Houston, Texas.)

Nichols’s decision not to join the Oklahoma City group that bought the Seattle SuperSonics can be found in a 2008 deposition given by McClendon as part of the federal court case
City of Seattle v. The Professional Basketball Club LLC
(2:07-cv-01620-MJP, Western District of Washington).

Burke, Bob.

Oklahoma City: Oklahoma Heritage Association, 2004.

Coll, Steve.

. New York: Penguin Press, 2012.

Donnelly, John. “Q&A: J. Larry Nichols, CEO, Devon Energy.”

58, no. 7 (July 2006): 30–31.

Ford, Charles, and Bob Burke.

Oklahoma City: Oklahoma Heritage Association, 2011.

Gold, R. “Boom Town: Drilling for Natural Gas Faces a Sizable Hurdle: Fort Worth—The U.S.’s Largest Field Lies Under 1.6 Million People; Not Everyone Will Benefit—Avoiding Baseball Diamonds.”

, April 29, 2005.

Nichols, J. Larry.

Exton, PA: Newcomen Society of the United States, 1996.

Siebrits, E., J. L. Elbel, R. S. Hoover, et al. “Refracture Reorientation Enhances Gas Production in Barnett Shale Tight Gas Wells.” Paper presented at SPE Annual Technical Conference and Exhibition, Dallas, October 1–4, 2000.

Williams, Peggy. “Barnett Wonderland.”

, April 29, 2005.

I attended the 2012 Chesapeake shareholders’ meeting, and quotes and details of that day are from my notebooks. An overview of the Sarbanes-Oxley Act, as it relates to audit committee, can be found in online guidelines,
Standards Relating to Listed Company Audit Committees
, on the US Securities and Exchange Commission website at www.sec.gov/rules/final/33-8220.htm. (Last accessed August 2013.) The historically low vote tally for directors is from Institutional Shareholder Services, a consulting firm. Ed Crooks, the
Financial Times
’s energy reporter in the United States, sat behind me in the reporter’s quarantine at the meeting and deserves credit for noticing the Billie Holiday song that played after the meeting wrapped up. The steep $3 billion loan I mentioned was disclosed by the company in a May 11 press release. The “Yes, it’s a crisis” quote is from Jon Wolff’s note to investors, “Pricey $3B Loan Averts Liquidity Crisis,” on May 14, 2012. He works for financial advisory firm International Strategy & Investment.

Nominal oil prices hit $39 a barrel in February 1981, equal to $103 in 2013 dollars. The source for this is the Energy Information Administration’s “Real Prices Viewer” in the Short-Term Energy Outlook available here: www.eia.gov/forecasts/steo/realprices. (Last accessed August 2013.) The Robert Kerr campaign quote is from an exhibit at the University of Oklahoma’s Carl Albert Center (http://web.archive.org/web/20070806164902/http://ou.edu/special/albertctr/archives/kerr/KERRPN3.HTM). (Last accessed August 2013.) Consultant WTRG Economics offers a useful guide to historical oil prices here: www.wtrg.com/prices.htm. (Last accessed August 2013.)

I have spoken with Ralph Eads, Tom Ward, and Aubrey McClendon many times over the past few years, as well as others at Randall & Dewey and at Jefferies. I have also interviewed Blair Thomas at EIG, Floyd Wilson, formerly of Petrohawk Energy, and various Chesapeake board members. The overwhelming majority of my interviews were on the record. On a few occasions, people wanted to speak without attribution. I agreed to this very warily, because I do not want to give people the ability to tell their story unless they are willing to attach their names. I have used these off-the-record interviews very sparingly. Jefferies’s
U.S. Shale/Resource Play Overview
, a two-volume pitch book used to interest large foreign and institutional investors, was a helpful resource as well. The book changed over time, and the version I consulted was from April 2012.

If you want to learn more about the collapse of the Penn Square Bank, consult two sources: Mark Singer’s
Funny Money
and part II, chapter 3 of
Managing the Crisis: The FDIC and RTC Experience 1980–1994
, published by the Federal Deposit Insurance Corporation in August 1998. Jerry Shottenkirk’s profile of McClendon, cited below, is the source of McClendon’s quote about spending time with his father “looking at dirty bathrooms in gas stations.” Details of his time at Jaytex and Duke come from several sources, including interviews and McClendon’s deposition in the
City of Seattle v. The Professional Basketball Club LLC,
as well as from Rick Robinson’s 2002 profile, cited below.

Details about the early days of Chesapeake come from many sources, most notably a lengthy author interview with Tom Ward. McClendon has told parts of this story several times in hometown newspaper interviews. Please see Chapter 9 notes for more information about the sources of McClendon quotes. The “We clearly could not outthink a geologist or an engineer” quote comes from an industry conference on April 21, 2009. I pulled the court file from the Plotner lawsuit out of storage and read through the voluminous transcripts, depositions, and arguments. The case is no. 81896,
Tom L. Ward, TLW Investments, Aubrey McClendon, Chesapeake Investments and Chesapeake Operating Inc. v. Ralph E. Plotner Oil & Gas Investments Inc.,
and includes records from the jury trial. The quotes from Megan Hann, the court findings and related materials all come from the case file. McClendon contended that he and Ward were “100 percent” innocent, but did not provide any information to dispute the contemporary court record.

The S-1 form that Chesapeake filed with the SEC on February 4, 1993, is a fascinating document and details the birth of the Founders Well Participation Program. It also is where I found that Arthur Andersen had resigned as the company’s independent accounting firm. The S-1 form is a lengthy form that all companies must file before selling stock to the public for the first time. It provided information about Ward’s and McClendon’s salaries ($175,000). The company reported capital expenditures of $37.6 million in its 1994 fiscal year. I calculated what 2.5 percent of that would be ($940,000). This is the source of my contention that McClendon needed to pay several times his annual salary. McClendon, during a talk with investors on November 16, 2004, remarked that Chesapeake’s IPO was the worst performer of the year. The company’s 1993 annual report is the source of the quote that Chesapeake “believes a financing arrangement of this type is unprecedented in the industry.” While digging through Oklahoma Uniform Commercial Code (UCC) filings related to debt and sales, I discovered that four of the original board members lent McClendon and Ward $1.65 million. The key document was filed on August 24, 1993, and assigned no. 00111395 and was recorded in book 6,478, pages 0184–0199. My thanks to Theo Francis—an SEC filings investigative maven who ran his own consulting and research outfit, Disclosure Matters—for helping me decipher what Chesapeake was saying.

The source of Eads’s quote about American Energy Operations comes from a 1986
Wall Street Journal
article, “New Wildcatters: Oil-Patch ‘Bargains’ Lure Some Plungers Hoping to Get Rich,” by Steve Frazier and James Tanner. My claim that there is one oil operator for every 1,200 Oklahomans—twice the rate of Texas—comes from dividing the state’s population by the number of active operators in May 2012 reported by the Oklahoma Corporation Commission. I did the same with Texas Railroad Commission records. Thanks to Ken Zimmerman, a longtime employee of the Oklahoma Corporation Commission, for his insights on the nature of the Oklahoma wildcatter. David Fleischaker, the state’s energy secretary from 2003 to 2008, also shared his recollections. I first reported some details of Chesapeake’s near-death experience in the Austin Chalk and meeting with Calpine in a 2006 front-page article in the
Wall Street Journal
, and fleshed out details for the book by looking through news articles and corporate filings.

Getting to the bottom of the California energy crisis and El Paso’s and Ralph Eads’s role required a lot of reading and digging through Federal Energy Regulatory Commission dockets. Some of the most interesting documents have been made public only in recent years and were not available to reporters covering the story as it unfolded. The March 2003 FERC final report, cited below, is the best overview document. El Paso fought to keep the Eads memo to Bill Wise confidential, but it was eventually made public and can be found in slides 19–21 of the December 13, 2002, filing in
Public Utilities Commission of the State of California, et al., v. El Paso Natural Gas Company, et al.,
FERC Docket no. RP00-241-006. Also informative was Administrative Law Judge Curtis Wagner’s initial decision, issued on September 23, 2002, and part of the above docket. For details on power and gas prices, see
Public Utilities Commission of the State of California v. El Paso Natural Gas Company, et al.,
FERC Docket no. RP00-241-000. California’s initial brief, filed on August 24, 2001, is particularly instructive. The “cashed in big-time . . .” quote is from a transcript of a FERC hearing on December 2, 2002, and was spoken by Harvey Morris. He, Wagner, and Frank Lindh, an attorney for Pacific Gas and Electric Company, all shared their recollections of the clash in the Washington courtroom. I also relied on coverage in the
Wall Street Journal
and the
Houston Chronicle
for details of the El Paso settlement and investigation of price reporting. El Paso reported the restatement of its earnings in an 8-K (August 23, 2004) and a 10-K (September 30, 2004) filed with the SEC. FERC’s settlement order was issued on November 14, 2003, and is filed in Dockets nos. RP00-241-000 and RP00-241-006. Details of El Paso’s internal investigation into index price reporting is in FERC’s final report, cited below.

Driver, Anna, and Brian Grow. “The Energy Billionaire’s Shrouded Loans.” Reuters, April 18, 2012.

Federal Energy Regulatory Commission.

,

Washington, DC: Federal Energy Regulatory Commission, March 2003.

Gold, R. “Investment Forecast: On a Roller Coaster, One Energy Firm Tries Hedging Bets; Natural-Gas Giant Chesapeake Has Expanded Rapidly by Locking In Its Revenue; Dangers of Guessing Wrong.”

, November 6, 2006.

Gold, R., and Daniel Gilbert. “Chesapeake Directors Spurned: Two Board Members Fall Far Short of Voting Majority in Rebuke to Gas Driller.”

, June 9, 2012.