FORT WORTH, Texas--In 1997, Apple Inc. (NASDAQ: AAPL) famously introduced an ad campaign titled “Think Different” that helped the then-struggling brand regain a foothold in the computer market. Indeed, just over a decade later, the company had gone from the brink of bankruptcy to being the most valuable company in the world, thanks to that very motto that led it to entering the cell phone, digital music and nascent tablet markets.
A series of ads connected to this campaign hailed the “Crazy Ones” and focused on people such as Albert Einstein, Ted Turner, Alfred Hitchcock, Thomas Edison and Mahatma Gandhi, all of whom made major impacts on society through various means, primarily new inventions or making improvements that hadn’t previously been considered.
Today, these ads could easily include men like George Mitchell, Harold Hamm and Aubrey McClendon. These men helped revolutionize the energy industry by thinking differently. It was known for decades that the Permian and Appalachian Basins held large reserves of oil and gas, but they were considered unrecoverable due to the extreme difficulties in bringing them to the surface in a cost-effective way. Not only were these reserves considered nearly impossible to access, but their actual size was also well off target, as it turned out.
That is, until outsiders such as Mitchell, Hamm, McClendon and Bob Simpson found a way to unlock this potential and turn it into a reality that flipped the script on the world’s energy story. Similar to how Apple was not expected to be the company that would discover how to take the music industry from selling its products in strictly physical formats to a digital format, Mitchell Energy & Development Corp., Continental Resources (NYSE: CLR), Chesapeake Energy (NYSE: CHK) and XTO Energy Inc. were not expected to be the companies that would discover how to get oil and gas from shale plays in a cost-effective manner.
“The people who led the energy revolution in this country are not who you would think would have. It should have been any of the big majors, but all of the experts got it wrong and didn’t believe in shale,” Gregory Zuckerman, special reporter for The Wall Street Journal and author of The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters, said at Hart Energy’s DUG Permian Conference in Fort Worth.
“ExxonMobil was literally headquartered on top of the Barnett Shale, but they were drilling anywhere but there, and had pretty much given up on U.S. deposits. Chevron actually had a group in the late 1990s doing what they called nonconventional drilling, but they were too early and closed shop on the group,” he continued.He noted that in the late ‘90s and early 2000s, the major players were focused on plays in Africa, Asia and offshore, as all of the experts agreed that the U.S. was running out of natural gas and oil. “They didn’t believe in horizontal drilling, hydraulic fracturing or shale,” Zuckerman said.
They say necessity is the mother of invention, and that is the case with the story of shale development. While companies such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) certainly had the financial power and engineering prowess to discover the key to Barnett Shale production, the fact is that they didn’t need to.
George Mitchell is recognized as the father of shale, but only received this designation after decades of persistence trying to find a way to produce gas out of the Barnett since he had no other alternatives. Unlike the majors, Mitchell didn’t have the financial wherewithal to move production to foreign shores.
His company, Mitchell Energy, had a large contract to supply Chicago with natural gas, but the company’s wells were running dry. There was the very real possibility that unless they could develop the Barnett, they would go broke.
Instead of losing his shirt in the Barnett, Mitchell wound up selling his company for more than $3 billion to Devon Energy (NYSE: DVN) in 1998 after Mitchell Energy discovered how to produce large volumes of natural gas out of the Barnett through happenstance.
The company had been experimenting with fracking fluid that used expensive gels, as was the standard practice. Through happenstance, Nicholas Steinsberger, a Mitchell engineer, discovered slickwater fracks when testing a well in the play. Due to a mistake in mixing the gel, sand and other components, the fracking fluid used a larger composition of water.
This mistake proved to be the company’s lifeline, as it both lowered costs and increased production. “This dramatically changed the Barnett Shale and eventually the country and the world. It showed how you could get remarkable amounts of natural gas from shale,” Zuckerman said.
Horizontal drilling was becoming more of an industry standard, but the technology wasn’t used in combination with fracking and 3-D seismic mapping on a widespread basis until McClendon and Ward at Chesapeake Energy and Hamm at Continental Resources, respectively, began to combine them in shale plays.
While perseverance was a key for these men, luck did play a part in their success, as it had with Mitchell Energy’s discovery of slickwater fracking. When Chesapeake Energy acquired Canaan Energy in 2002, the deal included 7,000 acres in the Barnett as a “sweetener” used to justify the $118 million price tag. Chesapeake planned on selling this acreage and focusing on the Anadarko Basin assets that Canaan brought to the deal. Instead it was the Barnett acreage that helped give the company a foothold in its strategy to acquire assets in the key North American shale plays. “McClendon and Ward weren’t the first to bet on shale formations, but they understood their potential and moved quickly in their strategy,” Zuckerman said.
Hamm was convinced that the Bakken Shale held huge reserves of crude in its rock, but without much success to show for the capital being spent in North Dakota, he had decided to sell much of his acreage in the play by 2005.
“Once again, the experts weren’t interested in acquiring these rights. So he said, ‘If we can’t sell it, let’s conserve our cash and drill at a slower pace.’ Hamm wasn’t the first to combine horizontal drilling and state-of-the-art fracking, but he was among the first and kept working at it until they figured out how to get a lot of oil out of the Bakken,” Zuckerman said.
That decision changed Hamm’s life, as he is now one of the richest men in the country, worth $17 billion, and is the largest individual holder of oil in the U.S. “He’s so wealthy that, while he’s unfortunately going through a divorce, his wife is going to walk away with more money than Oprah Winfrey,” Zuckerman said.
Perhaps the biggest outsider that had the largest part to play in the shale revolution was Charif Souki, chairman and CEO of Cheniere Energy. A former investment banker and restaurateur (he owned the Mezzaluna restaurant in Los Angeles that was attached to the O.J. Simpson murder trial), he “knew more about fajitas than fracking” when he entered the energy business, according to Zuckerman.
The energy business required little capital to enter in the mid-‘90s and Souki had connections in the Middle East. He attempted to drill for oil and gas, but it didn’t work out. When Souki heard the pronouncements that the U.S. was running out of natural gas, he changed Cheniere’s focus from producing gas to building LNG import terminals that would make up the demand gap.
“For a while this plan worked really well with the company’s stock soaring. Then lo and behold in 2008, it dawned on the world that there was a glut of natural gas in the U.S. and the stock tumbled in 2010 to $1 per share. Under pressure from investors, he decided that if there was a glut of natural gas in the U.S. that maybe instead of importing it we could export it. It took real guts to go back to your investors that you raised billions of dollars from and reverse course,” Zuckerman said.
Cheniere became the first company to announce LNG export plans and was the first to receive government approval to do so beginning next year--and the company’s stock is once again soaring. “Now everyone loves him, including The New York Times, which has written editorials saying we need to export more LNG and he’s a geopolitical star.”
Souki, Mitchell, Hamm, McClendon and Ward are just some of the unlikely characters that helped to transform the energy story. “It took a lot of self-confidence and bravado to ignore the experts when they said shale was just source rock and a waste of time,” Zuckerman said.
He added that the tale isn’t just about unlikely heroes though: it’s also the story of American innovation and the rebirth of small-town America. “Our country gets criticized for not being innovative enough. I tell people they have to get out into the oil fields. Talk about ingenuity and innovation–that’s what the shale story really is and it’s happening in smaller towns in America.”
Although the secrets are now out, the U.S. remains likely to retain its unconventional energy production dominance. “I feel very secure about America’s future. We are better at several things than the rest of the world: making apps, making drones, rapping and fracking. No one is really close to catching up. It’s going to take years for the rest of the world to catch up,” Zuckerman said.