The Friday Cover
The Friday Cover is POLITICO Magazine's email of the week's best, delivered to your inbox every Friday morning.
The Billionaires' Gambit
How daring drillers re-wrote America's energy future.
By GREGORY ZUCKERMAN
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.
"The charismatic scion of an Oklahoma energy family," Aubrey McClendon was "determined to leave his own mark in the business and create enough wealth to make his family proud." | Sean Gardner/Reuters
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.
More from POLITICO Magazine
LETTER FROM GREENVILLE
More on Magazine
POLITICO Magazine Links
POLITICO Home
Blogs, Columns & Cartoons
Morning Agriculture
Morning Cybersecurity
Morning Defense
Morning Education
Morning eHealth
Morning Energy
Morning Media
Morning Score
Morning Shift
Morning Tax
Morning Tech
Morning Trade
Morning Transportation
Prescription Pulse