Blowout Read online

  In 1978, the federal government set stratified price controls on natural gas; gas from old wells got the cheapest price, gas from new wells the highest. The idea was to try to goose producers into finding new gas, fast. But even with that new incentive, it was still blood from a stone. America just wasn’t capable of producing enough natural gas to meet our immediate energy needs. So we had to be deliberate and cautious about how to use the limited supply that we had. The decisions we made about that in the 1970s would have consequences for generations to come. “Natural gas was in such short supply that Congress passed a law in 1978 that essentially outlawed the construction of new gas-fired power plants,” noted Wall Street Journal reporter Russell Gold in his excellent 2014 book, The Boom. “By the time the law was repealed nine years later, the United States had built 81 gigawatts’ worth of power plants that burned dirty, reliable chunks of fossilized carbon—about a quarter of all coal plants that were still in use more than thirty years later.”

  Even though the country all but gave up on natural gas in the shivering late 1970s, there were a number of people who still dreamed of that bonanza deep under the ground, who couldn’t unhear the Bureau of Mines’ estimate of hundreds of trillions of cubic feet of shale gas just waiting down there. Even after the Atomic Energy Commission’s blasts-for-gas thing didn’t work out, enthusiastic experimentation in fracking continued, subsidized by money appropriated by Congress. Private actors and public-private partnerships went back to the drawing board to puzzle out how to free shale gas or tight gas in an economically viable way. They no longer had nuclear bombs at their disposal, but they tested chemical explosives, cryogenic nitrogen that was supposed to freeze the rock until it cracked, and foamed carbon dioxide. The experiments got weird and arcane as people flung basically whatever was on hand at their local deposits of natural gas locked up in shale rock. Consider one emulsion laced with the popular British toast spread Marmite. Marmite is a gooey dark brown concoction made of yeast and vegetable extract; it’s either delicious on buttered toast or the worst thing you could ever do to a perfectly fine piece of buttered toast, depending on whether you absolutely love it or absolutely hate it, which are the only two options. As for natural gas production, according to the petroleum industry trade publication GEO ExPro, the thinking was that maybe if you shot enough of the gustatorily polarizing yeasty goo underground in just the right conditions, it would fuel production of special bacteria, which in turn would excrete enough acid to break down the rock and release the natural gas. Worth a try! Marmite is today as delicious as ever—and it is still advertised as an elixir capable of improving heart health, brain health, sleep habits, and libido—but it did not work any subterranean fracking magic.

  For all the far-flung experimentation, by the mid-1990s the basic idea of fracking was pretty straightforward: inject enough fluid into the rock, at high enough pressure, to open up some narrow escape pathways for the stuff you wanted to capture. What should be in the fluid? That was the gazillion-dollar question. Recipes for fracking fluid called for a lot of thickening agents, and a good bit of sand, and a handful of toxic chemicals like hydrochloric acid, and lots of other stuff, too. The mid-1990s-era fluid tended to be gel-based and viscous, so that it could deliver the sand, which was supposed to stay behind to work as a “proppant,” that is, to keep the new micro-fractured passages in the hard shale propped open. Problem was, even after the gelatinous fluid was liquefied under intense subterranean heat, it remained gummy enough that it often stayed behind with the sand and blocked the newly cracked-open pathways so the gas couldn’t get out. Everyone knew the basic goal and the basic problems with reaching it, but as late as 1997 nobody had found a way to improve on the basic formula. You could get gas out of the ground, but not enough to make it worth it. The majors, like Exxon and Mobil and Chevron, had given up serious efforts on fracking innovation, because it looked like the money invested was never going to return enough natural gas to pay off. They were busy hunting for new oil and gas overseas, like in Africa or Eastern Europe, where they could get it cheap and easy. So the field of fracking was left wide open to the independents in general, and one very determined independent in particular: George Phydias Mitchell.

  * * *

  —

  If George Mitchell’s life proved anything, it was that a man could map his own future and make his own luck. He was born on the Gulf of Mexico, in Galveston, Texas, in 1919, son of a Greek immigrant who had herded goats at the base of the rocky escarpment of Mount Artemisio. Savvas Paraskevopoulos, who changed his name to Mike Mitchell for ease of operation in the New World, raised his four children in a two-story brick building near downtown Galveston. The top floor was the domestic realm. The bottom housed the family-run laundry and shoeshine parlor. George learned early how to work hard, and he learned early that knowledge was key to his future. He studied petroleum engineering and geology at Texas A&M and took to heart advice from his department’s most renowned academic: “If you want to go to work for a [major oil company], fine, you can drive around in a pretty good Chevrolet, but if you want to drive around in a Cadillac, you’d better go out on your own.”

  George P. Mitchell went out on his own. And one of his first big bets, as Russell Gold tells the story in The Boom, put him in that Cadillac. Mitchell had done his homework, combing through reams of drilling logs in a blueprint library in downtown Houston. He had developed a very educated “hunch” that there was a whole lot of natural gas not far beneath the surface of Wise County, northwest of Fort Worth. And he was right. His first gas well there hit. So did the next dozen. He cobbled together enough investors to lease five hundred square miles’ worth of mineral rights. In the early 1950s, Mitchell and his partners produced enough natural gas that they were able to sign a contract to supply a nice percentage of the needs of the city of Chicago on an ongoing basis. He eventually bought up mineral rights on 300,000 acres outside Fort Worth and became the number one natural gas producer in Texas, which was the number one gas-producing state in the nation.

  But for all that, Mitchell was pretty sure he was only playing at the edges of a much deeper reserve of natural gas. The gas he was sucking out of the ground was what had managed to find little escape routes and migrate up to low-pressure rock formations. The real mother lode, Mitchell was pretty certain, was in the Barnett Shale, a tight rock formation way down deep, five thousand to eight thousand feet underground. By the late 1990s, when all the major oil companies and government scientists had about given up on fracking in tight shale formations, Mitchell’s decades-long interest in finding a way to get at the trapped gas had matured into something else entirely. “He has a mind that people often refer to as persistent,” Mitchell’s son Todd told Gold. “To me it is different than persistence. It was a form of obsession. He has a theme, and he would stick with it and stick with it.”

  Mitchell kept plugging away at fracking, against the better judgment of the rest of the industry, against his company’s board of directors, and even against the company president he had hired. Because he was the majority owner of his own company, however, nobody could really stop him. And anyway, as Todd Mitchell would note, he “had a tendency to ignore obstacles.” By 1997, though, George Mitchell must have been wondering if his long run of luck was finally coming to an end. The price of oil and gas was at a low ebb. Mitchell stocks were dropping down to near $10 a share, from a recent high of $35. A second wave of layoffs had pared the company from thirteen hundred employees to eight hundred. Natural gas production was falling, and Mitchell feared the company might soon lose its ability to fulfill its decades-old contractual obligations to Chicago.

  But in the summer of 1998, a Hail Mary pass by a company engineer on the ground saved Mitchell’s bacon. It started, as so many things do in the oil and gas industry, as an attempt to cut costs. The fracking gels Mitchell drillers were shooting into the Barnett Shale formation didn’t come cheap, and company engineer Nick Steinsberger
figured it might be worth trying a frack or two with a fluid made up mostly of water. Steinsberger’s recipe for “slickwater” called for the same basic chemical additives; a hint of a lubricant used for face creams and contact lenses; a touch of gel made from the guar bean, which was grown in India; and sand. And water. Lots of water. Way more water than they had been using before. His supervisors gave him the go-ahead to try it on a handful of wells, but not much encouragement. One of them, according to Gold, “told him he would eat his diploma if the idea worked.”

  It took a few tries with the slickwater to get it right. Steinsberger learned it was necessary to add the sand slowly, most of it late in the injection process, and that it took a heck of a lot of water, like, say, 1.2 million gallons, and a heck of a lot of pressure to crack open micro-fissures in the steel-hard shale. But the results were promising. Even the most successful gel fracks hadn’t shown much staying power. Gel-fracked wells might produce a million cubic feet of gas in the first days but then drop off pretty quickly. The culprit was that gummy gel that stayed behind, clogging the sand-propped passages in the shale. But the S. H. Griffin No. 4, fracked with slickwater fluid, was still producing almost 1.5 million cubic feet of gas per day in September 1998, ninety days after the initial frack. When Steinsberger checked thirty days later, there had been no appreciable decline. Slickwater turned out to be a cheap trick but a damn effective one. “This was the aha moment for us,” Steinsberger later said. “It was our best well ever in the Barnett.” George Mitchell was thrilled. The company started using the slickwater method on all its shale wells. And it kept working.

  “The potential for shale gas was so big,” said a newly hired Mitchell geologist who had been studying the Barnett Shale for years, “it made your head spin.” That geologist, Kent Bowker, had been working at the oil giant Chevron, which at that moment was basically giving up on shale gas. Bowker later explained, “The handwriting was on the wall….I probably would have gone to West Africa.” Instead, he quit Chevron, stayed home in Houston, and went to work for George Mitchell, the one man who might appreciate the magnitude of what was possible in the shale fields. Bowker made the case to Mitchell and his management team that there was nearly 200 billion cubic feet of natural gas in each square mile of the Barnett Shale—four times what the most optimistic geologists at Mitchell had estimated. “This is huge,” George Mitchell exclaimed. “This is the biggest secret in the history of the company.” Mitchell and his management team agreed that the thing to do would be to buy the mineral rights on every square inch of land they could get at in the Barnett, but quietly, quietly, so as not to alert other companies about what they had in store.

  Other companies, though, were not picking up what Mitchell was putting down. Skepticism reigned. Why would Mitchell Energy be able to crack the code that Exxon and Chevron and the other majors could not? Eighteen months after Mitchell’s breakthrough, Devon Energy, out of Oklahoma City, passed on a chance to acquire Mitchell and its huge stockpile of mineral rights in the Barnett Shale. Devon’s technical team had sized up the Mitchell operation, and at the beginning of 2000 it reported back to the bosses that slickwater fracking wasn’t any great shakes. “We turned up our noses because we didn’t think it would work,” Devon’s CEO, Larry Nichols, remembered.

  But it was hard to ignore Mitchell’s swelling production numbers over the next few years. Devon soon suspected that it had been wrong about Mitchell Energy and what it had to offer. In 2002, Nichols and his team at Devon plunked down $3.5 billion to acquire Mitchell, and Devon’s resources and technical know-how turned out to be extraordinary value added. Devon engineers went to work and proved they could extract gas more efficiently, and more effectively, by combining Mitchell’s new technology with the relatively new and little-used technology of horizontal drilling. Horizontal drilling allowed well operators to drill straight down, make a right-angle turn at a chosen depth, and then tunnel out thousands of yards or even miles more. Drillers could frack all along the horizontal line, which increased the potential pay zone exponentially. But it also required more slickwater. A lot more slickwater. Devon often injected five times the amount of fracking fluid Steinsberger had used on his first successful well. The horizontal gambit worked—better than the company had hoped. By June 2002, the Devon Energy suits were satisfied that they would probably be drilling new wells in the Barnett Shale for the next fifteen years and expected to sextuple the number of wells in the area, to more than six thousand. Trillions of cubic feet of newly gettable gas suddenly seemed not so fanciful a prediction.

  The combination of slickwatered hydraulic fracturing and horizontal drilling was the breakthrough the oil and gas industry had been chasing for years. And it wasn’t merely an upheaval of potentially epic commercial proportions; it was a hinge on which modern history has turned. A new genie was out of the bottle. It’s hard to say, even today, if that genie is a friend. But he has had effect. Hydraulic fracking and horizontal drilling have rewritten the whole global energy equation and the future of a whole bunch of countries with it. “It is one of the most extraordinarily important, disruptive, technologically driven changes in the history of energy,” the global head of commodity research at Citigroup said of the fracking boom. “It was revolutionary for the U.S. economy and it was revolutionary geopolitically.”

  If there was anybody in Russia poised and positioned to take advantage of the new innovations in oil and gas production in the first few years of the twenty-first century, it was Mikhail Khodorkovsky. Khodorkovsky had grown a moribund little conglomeration of Soviet-era oil producers into the most successful single oil company in the Russian Federation. That company, Yukos, had grown under his leadership into a corporation worth more than $30 billion and doubled its output in just four years. By 2002, Yukos accounted for nearly 20 percent of the crude oil produced in Russia. Khodorkovsky was at that moment the most celebrated Russian businessman in the West. His company was widely regarded as the most technologically advanced corporation in his home country and stamped with the imprimatur of Western financial gurus. U.S. ratings agencies deemed Yukos the most creditworthy non-state corporation in all Russia.

  The story of Mikhail Khodorkovsky and Yukos also happens to be a spot-on barometer for the commercial and political atmosphere of Russia in the decades surrounding the collapse of the Soviet Union.

  Khodorkovsky, born in 1963, was a bright and unflappable youngster with a preternatural facility for understanding the game of life as it presented itself and for playing to the shortest odds. He saw early that the best career berths in the Soviet Union were solid government jobs, where an ambitious and careful operator could move up through the ranks, acquire a series of bigger and more ornate apartments and nicer automobiles and luxury goods, maybe scoop up an increasing cut of the loot shaken loose by the officially sanctioned graft machine of the Soviet government. The ticket to that happy life was the unbroken demonstration of fealty to the Communist Party. So this son of apolitical and undistinguished working-class engineers dedicated his boyhood and young adulthood to proving himself an enthusiastic and standout member of the Communist Youth League. And he succeeded, winning an entry-level job tending his minuscule part of the lurching Soviet machinery.

  Alas, just as his career in government was really getting under way in 1989, the Soviet Union began its slow-motion implosion. Khodorkovsky saw it happening and changed course on a dime. The boundaries of capitalism and democracy in Russia were still being chalked, the rules of the game still being written, but Khodorkovsky flew onto the field with abandon.

  “It is time to stop living according to Lenin!” Khodorkovsky wrote in an essay right around his thirtieth birthday, as quoted by the author Masha Gessen. “Our guiding light is Profit, acquired in a strictly legal way. Our Lord is His Majesty, Money, for it is only He who can lead us to wealth as the norm in life.”

  Khodorkovsky didn’t just sermonize about the pursuit of wealth; he practiced t
he life he preached, though in actual practice it wasn’t always “strictly legal” and it wasn’t always successful. He started a small café. It failed. He started a business importing personal computers. It foundered. He started a bank. That worked! He made his first millions trading international currencies and managing funds for the Russian government and kept piling them up, drafting in the exhilarating new wake of the first democratically elected president of Russia, Boris Yeltsin.

  Boris Yeltsin had done what Mikhail Gorbachev had been unwilling to even suggest; he tore up the old U.S.S.R. at its foundation. Yeltsin presided over the dissolution of the Union of Soviet Socialist Republics, recognized the independence of those states, and let loose the U.S.S.R.’s various satellites throughout Eastern Europe and Asia. Yeltsin exiled the Communist Party and seized its loot; he stripped national government apparatchiks of their control of business and industry; and for the first time in Russian history, he set free the torrential power of free-market capitalism. In the first years of his presidency, Yeltsin sang the glories of “populist capitalism,” insisting that Russian businesses needed “millions of owners, not a handful of millionaires.” His boldness and his vision made him a heroic and popular figure among his fellow citizens deep into the 1990s, until his overnight decentralization of the economy began to get somebody-forgot-the-training-wheels wobbly.