The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (30 page)

In late 2007, shale-acreage prices shot into new territory. Chesapeake began competing with an upstart company called Petrohawk run by Floyd Wilson, another energy veteran. McClendon and Wilson both relied on Wall Street for funding, and both were convinced that a field straddling northern Louisiana and eastern Texas called the Haynesville Shale would produce huge amounts of gas. They began a bidding war, fighting to lock up attractive Louisiana acreage, convinced a surge of gas production was around the bend. There was no turning back for McClendon and Chesapeake.

•   •   •

T
om Ward suffered withdrawal pains after quitting Chesapeake Energy in early 2006. He desperately missed the adrenaline rush that came from searching for energy deposits, not to mention the potential financial windfalls. Almost immediately, he decided to restart his career. He was forty-six years old, certain that overlooked gas deposits remained in the United States, and eager to prove he could build his own energy empire, without any help from Aubrey McClendon.

Ward took an office in Oklahoma City’s Valliance Bank Tower, one of the city’s few skyscrapers, and began searching for ways to invest his cash hoard. Within weeks, he reached an agreement with Malone Mitchell, an Amarillo, Texas, oilman, to spend $500 million to buy effective control of Mitchell’s company, which boasted a huge asset, the Piñon gas field in West Texas.

Ward was back in the game, but he was determined to chart a very different course from McClendon, who was chasing gas in shale. The Piñon field held a lot of gas, but it was in chert, a “conventional” kind of rock that wasn’t as challenging and costly to drill as shale. Ward renamed his company SandRidge Energy to signal that he was going after sandstone and other types of rock that had been drilled for decades. Let McClendon and Chesapeake spend all that money on shale, I’m going to find enough energy in old-fashioned rock, Ward was saying.

Several months later, Ward approached Carl Icahn, the billionaire New York investor, who had cobbled a collection of energy companies into an entity called National Energy Group. Ward asked if Icahn was interested in merging his operation with Ward’s new company.

Icahn was hesitant. He liked Ward on a personal level and thought he was bright, but Icahn was wary of all the money Ward and McClendon had spent at Chesapeake. “Their spending is just
way
too much,” Icahn had told someone in the energy business at one point.

After the lukewarm response, Ward came back to Icahn with a different idea. “Let me buy you out,” he said.

Icahn hadn’t been looking to sell his company, but Ward seemed so eager to buy his energy assets that Icahn decided to throw a huge number out and see if Ward went for it. Icahn didn’t think his assets were worth more than $1 billion, so he came up with a much larger number, to test Ward’s level of interest.

“A billion and a half,” Icahn told Ward, according to someone in the industry.

Ward didn’t flinch. “I’ll get it for you,” he told Icahn.

Eventually they agreed that Icahn would get $1.2 billion in cash and a $300 million stake in SandRidge. The price was so high, and Icahn was getting so much in cash, that he didn’t mind retaining a stake in Ward’s company, at least for a little while.

Ward had been the quiet one in Chesapeake, silently plotting the company’s strategy at various executive meetings. Now he proved outgoing, convincing, and surprisingly smooth as he sold his new company’s story to Wall Street. Investors lined up to provide the necessary financing for his deal with Icahn.

“He’s not as quiet as people think,” McClendon told a reporter for Oklahoma City’s
Journal Record
.

Soon, investment banks were knocking on the company’s door to help underwrite an initial public offering of Tom Ward’s new company. Some saw it as a way to bet on a second coming of Chesapeake. Icahn remained wary, though. He decided to sell his 20 percent stake as part of SandRidge’s IPO.

In the early fall of 2007, as Ward and his new team counted down to SandRidge’s IPO, Ward called Icahn with some news. “I want to be straight with you,” he told Icahn. “The stock is valued at eighteen dollars a share, but it’s a hot issue, I think it will open at thirty dollars.”

“That’s amazing,” Icahn responded.

Ward was going out of his way to caution Icahn that he was leaving money on the table because the billionaire planned to sell his shares at eighteen dollars in conjunction with the IPO. Icahn said he still wanted to sell, though. If he didn’t sell in the IPO, he knew securities laws barred him from getting rid of any stock for the first six months after the offering. He had no interest in taking the chance on holding SandRidge for that long. He decided to sell the stock.

Sure enough, Ward’s company debuted above thirty dollars a share, giving it a market value of about $3.5 billion. Tom Ward’s shares were worth $1.2 billion. It was clear that Ward didn’t need Chesapeake Energy or Aubrey McClendon.

•   •   •

H
arold Hamm had run out of money to drill in the Bakken. He gave up on the idea of selling portions of his acreage to raise crucial financing, and he faced growing competition from EOG, a publicly traded company.

Rather than abandon North Dakota altogether, Hamm decided to go on drilling and fracking but to do it at a much slower pace. Continental would conserve cash and only spend from extra money generated by the rest of its business.

There was little reason to expect any kind of breakthrough. By the spring of 2006, U.S. oil production had dropped to about 5.4 million barrels a day from 9.6 million barrels in 1970 and the country imported a record 60 percent of its oil. President George W. Bush set a goal of replacing 75 percent of the nation’s Mideast oil imports by 2025 with ethanol and other energy sources. Even Bush—a Texas oilman—wasn’t willing to waste his breath urging more U.S. oil production.

“America is addicted to oil,” the president warned in a major speech in 2006.

By that point, the Montana Bakken was producing forty-eight thousand barrels of crude a day from more than three hundred wells, making it the highest-producing onshore field discovered in the lower forty-eight states in more than five decades. But most major oil exploration companies saw the area as an aberration and had little interest in what was going on there or in North Dakota.

All the negativity should have discouraged Hamm. But he had studied what George Mitchell went through before his own breakthrough in the Barnett Shale, and the hurdles Mitchell had overcome inspired him. American technology had transformed dozens of industries; Hamm was convinced a breakthrough could transform the energy business, too.

“We have to go back to experimenting,” he told his men, hoping they somehow would manage to create fractures, enabling oil to flow in North Dakota.

When Mike Armstrong, Hamm’s partner on hunting and fishing expeditions as well as on some North Dakota wells, cast doubt on their drilling, Hamm told him not to give up hope. “Mike, it’s a technology play . . . the technology will catch up with this,” Hamm told him.

Armstrong didn’t buy it. He had spent more time in North Dakota than Hamm, and the disappointments had embittered him. He kept his leases but didn’t invest more money. It didn’t seem worth the expense. The failures “shattered my confidence in the area, I was chicken shit,” Armstrong says. “I was at a real low point.”

In early 2006, the
Wall Street Journal
’s John Fialka began working on a story about the Bakken production. Colleagues snickered, viewing drillers in the region as wide-eyed optimists. “The whole energy group at the
Journal
told me I was nuts,” Fialka recalls.

Fialka convinced editors to run the piece on the paper’s front page, where it appeared in April of that year. In the article, Fialka predicted that “the Bakken could eclipse Alaska’s Prudhoe Bay as the largest recent U.S. oil find.”

But the article focused on eastern Montana and the work of Richard Findley and a few smaller companies. The 2,100-word story didn’t even have a stray mention of Hamm or Continental, though it mentioned its rivals.

“What’s unusual about this boom . . . is that small companies like Headington and Lyco have most of the key acreage tied up in leases,” Fialka wrote.
⁹

Hamm’s team still couldn’t figure out how to effectively fracture the rock in the North Dakota Bakken. Each time they shot their mixture of water, sand, and chemicals into the formation they managed to cause fractures in the rock closest to the vertical part of the wellbore, just after it curved and went horizontally into the ground. But the fluid wasn’t reaching rock farther out. It was hitting the “heel” of the well, in the lingo of the drilling team, but not the “toe.” The fracking fluid shot anywhere and everywhere in the rock and didn’t make it to the end of the wellbore, resulting in too little oil flowing to the surface.

Hamm liked to mix it up with his geologists and engineers, and he loved keeping in touch with others in the business to track the latest technology being developed. One day, he told Hoffman and his colleagues about a fracking method he heard rivals like EOG and others were beginning to use in the fields. It was one that Nick Steinsberger and others in the Barnett had experimented with a few years earlier, but now a greatly improved version was catching on in the Bakken area. Instead of just drilling a horizontal well and sending fluid into the rock, hoping against hope that it created proper fractures, some drillers were using an innovation Mark Papa’s engineers at EOG had invented to seal off certain zones in the wellbore so fluid could be focused on specific areas in the rock.

Once a section was sealed, or “packed” off, with a special gasket or other material that swelled to close it off, fracking fluid was pumped in to create a concentrated liquid shot to fracture rock in a select, pressurized area. Once that was done, drillers would focus on the next section of the well, which they’d seal off with another “swell packer” that would inflate to block the fracking fluid from reaching other sections of the well, to give the new area its own pinpointed dose of fracking fluid. Then they’d move on to still another segment in the well, a few hundred feet away, and do it all over again.

The idea was to isolate a section of the horizontal wellbore, frack it, and get oil flowing. After a dozen or more “stages,” the fracking would be complete. By segmenting the well and fracking it in stages with concentrated fluid, drillers were getting impressive amounts of oil from dense rock that had proven especially stubborn, like the Bakken shale.

The new method was expensive. Drilling and fracking a North Dakota well in this new way cost about $8 million, compared with less than $4 million for a well that wasn’t fracked in stages. But Hoffman and the Continental group instantly understood how much more crude they might be able to get.

Around the same time, specialists were developing ways to drill horizontally for as much as two miles, or about twice as long as they had been doing, without losing track of the shale layer. This “long lateral” was a perfect complement for the new, multistaged fracking.

Nicholas Steinsberger and his colleagues at Mitchell Energy had developed the ideal fluid to fracture shale and other tough rock a few years earlier in the Barnett. Others, including specialists at Oryx Energy, had perfected methods to drill horizontally to get more oil and gas from shallow, wide rock formations. By combining fracking and horizontal drilling techniques, early adopters like Devon and Continental saw oil and gas production soar.

Now Continental’s pros realized that a new leg in the industry’s technological revolution had arrived: a way to get oil and gas to flow by fracturing even cementlike rock with short, concentrated blasts, thanks to EOG’s multistaged fracking innovation.

In late 2006, Continental’s engineers began to employ the new methods to stimulate the Bakken shale and limestone. From the outset, they got much more oil from the wells, encouraging the executives. They also seized on an intriguing formation directly below the Bakken called the Three Forks. It was too early to be sure, but this formation also seemed full of oil. During a meeting in a Continental conference room, a geologist wrote “New Upside!” in bright red pen on a map of the new layer, a sign of their growing excitement.

In 2006, Continental made $253 million from its oil and gas production. Less than 10 percent came from the Bakken, but it was enough for Hamm to pursue an initial public offering. Hamm knew his company would need cash down the road to drill the Bakken. Being a public company would help it get better borrowing rates, while also enabling the company to compete with EOG and others for employees. An IPO also would enable Hamm to cash in on some of his holdings in the company, a reward for four decades of hard work.

As Hamm, Hume, and Stark met with mutual funds and other investors, the executives began to field tough questions. Continental was still a small company with fewer than three hundred employees, and it needed oil prices of about fifty dollars a barrel to make its expensive Bakken drilling worthwhile. By late 2006, crude prices were above sixty dollars a barrel, but there was no telling if they’d slip again.

There was another problem with the Bakken’s oil production. There weren’t any wells flowing with 10,000 barrels of crude a day, let alone 100,000 or more, like some famous foreign and off-shore fields. A few started at around four thousand barrels a day, but that was rare. After a burst of about eight hundred barrels of light sweet crude a day during their first year of production, most Bakken wells settled at between two hundred and eight hundred barrels of crude a day. The falloff raised questions about what the wells would look like down the road.

A few pros realized the Bakken wells were steady and dependable producers, rather than gushers, much like those producing oil and gas from other tight and dense rock, like shale. Continental’s engineers expected the Bakken wells to produce more than one hundred barrels a day for many, many years. They also knew the vastness of the Bakken basin meant wells could be dotted throughout the territory, boosting the accumulation of crude.