Book Review – The Frackers

Written by Gregory Zuckerman
Published by the Penguin Group
November 5, 2013

The Frackers is perhaps the first real attempt at telling the human side of America’s energy boom. The book from longtime Wall Street Journal reporter Gregory Zuckerman is billed as the “outrageous inside story” of the wildcatters who made the boom happen. I am not sure the book lives up to that billing, but does a great job of putting a face to the small group of independent oil and gas men who unexpectedly changed the face of world energy markets.

Zuckerman admits he had little background in energy when the idea for this book struck him in during a chat with a South Texas rancher in January 2013. By November 2013, Zuckerman’s story was on bookshelves and he has become a leading voice on the energy revolution.

Hydraulic fracturing, or fracking, is the breakthrough that he credits for the energy boom. Fracking has a long history. As Zuckerman explains, many early drillers used black powder to violently fracture the rock in their wells and improve flows of oil and gas. In the 1960s, a Union soldier named Edward Roberts began doing the same thing with nitroglycerine capsules loaded into a torpedo. Over the years other drillers tried underground machine guns, bazooka projectiles, and even nuclear devices. Standard Oil of Indiana gets credit for being the first to use high-pressure liquid to break up underground rock formations.

The Frackers weaves the energy boom’s story around its key players. Nobody is more important than George Mitchell. George grew up poor in Galveston, Texas. He earned a petroleum engineering degree from Texas A&M and escaped WWII combat by enlisting in the U.S. Army Corps of Engineers. After the war, he took to consulting on oil wells around Houston and eventually started a company with his brother Johnny. In their early days, George would identify promising fields while Johnny would find local businessmen willing to invest in oil drilling. After building a reputation for success, money came pouring in from around the country.

The Mitchell brothers called their company Oil Drilling, Inc., but they were actually searching primarily for natural gas. Pipeline infrastructure was limited, and as a result, the hard-to-transport natural gas was not considered very valuable. The Mitchells saw opportunity in this limited competition. In 1952 they made a huge natural gas find in Wise County, based on a tip from an investor’s bookie. They began fracking wells in the area to improve the gas flow at a time when few others were using the expensive technology.

The Mitchell’s focus on natural gas paid off in 1957 when they signed a long-term contract to deliver natural gas to Chicago. George Mitchell made his millions, eventually taking full control of the company and renaming it Mitchell Energy & Development. He dabbled in side projects, like building a master-planned community called The Woodlands. All the while he searched for a field to replace the dwindling production from his holdings in Wise County. In 1981, one of Mitchell’s geologists, Jim Henry, submitted a paper saying there was extractable gas in the Barnett Shale layer far below Wise County. The idea intrigued Mitchell.

Shale was not a new discovery. The dense layer of rock is the “source rock” for oil and gas reserves. For most of the industry’s history, drillers have searched for areas where oil and gas has percolated up from shale rock and collected into a reservoir. Many had speculated about the possibility extracting oil and gas directly from shale, but it was considered fools gold. Mitchell was boxed in, though, and he felt like fracking the Barnett Shale was a better bet than anything else he had going on. He maintained the effort even in the company’s lean times.

By 1992, Mitchell found that the Barnett Shale was his only chance to keep filling the Chicago contract. He poured resources into the effort and pushed his experienced group of frackers to succeed over objections from other leaders within the company. Other companies were close on Mitchell’s tail. Sanford Dvorin, another wildcatter, tried to frack shale in the same area. Ultimately, however, he would up with nothing. Ray Galvin, an executive at Chevron, also pushed his company into the fray. Galvin and his team came close to success with shale, but the Chevron scuttled the effort when Galvin hit the mandatory retirement age. Mitchell then hired key talent from Chevron’s disbanded shale team.

By 1996, Mitchell’s situation was grim. He lost the Chicago contract and was stuck selling his depleted production at low market rates. Leaders within his company grew more opposed to the quest for shale gas. To skeptics, the company was wasting its precious remaining funds shooting all kinds of things into shale with no success.

Mitchell’s tight finances led to The Fracker’s eureka moment. One day Mitchell engineer Nick Steinberger saw a drilling contractor botch the fracking fluid mixture. Rather than the creating the thick gel everyone thought was required for fracking, the contractor fracked a shale well with a watery fracking fluid. The well turned out just fine, and Steinsberger decided to frack more wells with what he came to call a “slick water” fluid.

Slick-water fracturing provided good results. The water-based fluid reduced costs from $300,000 to $85,000 per well and immediate production remained comparable to the more expensive gel fracks. Over time, those results went from good to great. Steinsberger noticed that slick-water wells were performing steadily where gel-fracked wells usually showed sharp production declines. In other words, the cheaper slick-water wells were now out producing more expensive wells. Mitchell Energy switched to relying entirely on slick-water fracking and the resulting boom in production allowed George to sell the company for $3.1 billion to Devon Energy in 2001.

I often hear that the shale revolution was made possible through the combination of two technologies, hydraulic fracturing and horizontal drilling. But Zuckerman does not seem to give horizontal drilling that much credit. He notes that Mitchell Energy made only limited use of horizontal drilling. Most early progress in horizontal drilling was made by the Sun Oil Company, which later spun off its exploration and production unit as the Oryx Energy, Co. The new company went bust and the technology was not used much on the leading edge of the shale boom, though it is important today.

Zuckerburg’s book has two main chapters. It spends 98 pages on “The Breakthrough” that made shale production possible and then 248 pages on “The Race” to get unconventional gas to market. The focus on financial aspects is perhaps unsurprising from an author with a background in finance, but I think he missed some opportunities to add to the national energy conversation.

Most disappointingly, The Frackers fails to offer much insight on the government’s role in the shale boom. This issue is sharply debated in policy circles. Renewable energy advocates call the shale boom a government success, while industry often denies that the government made a difference. The Frackers is chock full of mentions of government intervention: a Department of Energy program split costs on some expensive frack jobs and funded some horizontal gas wells, the DOE’s Eastern Gas Shales Project located shale gas in several basins, federal tax incentives encouraged fracking, and “massive frack” techniques were developed by government research. But Zuckerburg offers little insight on the actual impact of these programs.

We meet a charming cast of characters in the two-thirds of the book dedicated to the race to market shale gas. Aubrey McClendon and Tom Ward, the two land men behind Oklahoma’s Chesapeake Energy, picked up on Mitchell’s breakthroughs. They spent big money locking up land across the country and made millions, primarily in natural gas. But low natural gas prices in 1999 left them in a lurch. Rather than change course, they doubled down. They believed that the low gas prices would rebound as industry increased its use of the cheap gas. They were right, and Chesapeake soared to new heights.

The Frackers also introduces us to Charif Souki of Cheniere Energy. Souki was the son of a Newsweek’s chief Middle East Correspondent, and grew up mostly in Lebanon. He came to America for school and used his Middle East connections to develop into a well-known investment banker. He lost most of his fortune in a restaurant deal, and in 1996 was looking to recoup his wealth. He found his way into oil and gas, but he struggled. Like McClendon and Ward, he felt that natural gas demand was going up. He felt, however, that the U.S. did not have the resources to meet that demand. So he was determined to import the gas America would need. He built a costly import terminal, but the boom in U.S. gas turned the market on his head. Undeterred, he is now building the one of America’s first liquefied natural gas export terminals.

This book is not all about natural gas, of course. We meet Harold Hamm, who grew up poor in Oklahoma but went on make billions in the oil business. He took over a one-truck business at age 20 and used his earnings to begin exploring for oil and gas. His company, now called Continental Resources, was successful and continued to grow. Eventually he heard about success that a company called Burlington Resources was having with horizontal drilling in the Williston Basin of North Dakota, home to the Bakken shale formation. He invested heavily in the region, and at the end of the book Hamm was worth over $12 billion.

I would say that fracking is a good news story that is just getting started. Zuckerman, however, seems bent on telling a sad story. Hamm, he tells us, is facing perhaps the world’s most expensive divorce. Both Ward and McClendon were fired from their jobs in 2013 following a drop in natural gas prices. McClendon was fired directly from Chesapeake, while Ward was fired from SandRidge Energy, a company he formed in 2006 after leaving Chesapeake. Souki is poised to build his LNG export terminal, but has yet to realize his dreams. Perhaps the only truly happy ending was for EOG Resources, formerly Enron Oil and Gas, a company that struck oil in the Eagle Ford formation in Texas.

Zuckerman opens the book with a line from the ever-quotable oil tycoon J. Paul Getty, saying “[t]he meek shall inherit the earth, but not its mineral rights.” That tone is perfect for the book’s stories about those who did not strike it rich. In my view, they were some of the book’s most interesting anecdotes. Dvorin, who once gave George Mitchell a run for his money, lost his company and lives an average lifestyle. Steinsberger, the engineer credited with inventing techniques worth billions of dollars, earned about $100,000 per year when he left Mitchell’s successor, Devon Energy. Kent Bowker, the Mitchell geologist who recognized the size of the Barnett’s shale deposits, made about $120,000 per year when he left. It appears neither received a large share of the wealth they unlocked.

Beyond those anecdotes, the book comes up a bit short in showing the impact of the energy boom on the middle class. He tells the story of Texas farmer William Butler, who was struggling to get by until fracking raised the value of his land to $40 million. We also hear the story of Liz Irish, a banker from Oregon who lost her job in 2008. She moved to North Dakota with her children and truck-driver husband to find work. Both Liz and her husband immediately found lucrative work in Williston. Her husband, Matt, more than quadrupled his salary. They stayed for a couple years before moving back to Oregon. But Zuckerman again focuses on the negative. His parade of horribles for Williston, North Dakota, includes: expensive housing, horrible weather, confused GPS systems, prostitutes, shootings, and cursing. I wish Zuckerman had painted a more balanced picture. Liz seems to recognize she is not the best spokesperson for Williston’s working class when she says, “if you’re young and not attached, it’s a great place to make some money.”

Zuckerman offers some of his own perspective in an afterward. He is fair to the environmental concerns, noting that most issues are tangential to the hydraulic fracturing, like noise, traffic, and disturbance. He concludes that it is simply not realistic to expect the U.S. to turn down the opportunities that flow from fracking. Rather, oil and gas producers should be pressured to improve their behavior. He also touches on the potential for unconventional oil and gas production worldwide.

I highly recommend The Frackers, an intriguing read that reminds us of, as Zuckerman puts it, America’s “deep pools of ingenuity, risk taking, and entrepreneurship.”