Sunday, May 3, 2015

Book Review: The Frackers

I really enjoyed this book.

The Frackers, by Gregory Zuckerman, is an excellent account of the short history of fracking. It's a spellbinding description of the over-sized personalities that have made the phenomenon happen.

Unlike Silicon Valley, fracking is not the preserve of youth. Indeed, most leaders were older people. The modern founder of the art was a fellow named George Mitchell (not to be confused with the clown politician from Maine), who started work on the idea in his sixties back in the 1980s. He kept doggedly at it until his dying day--at age 94 in 2013.

Mr. Mitchell was born to Greek immigrant parents. His father's name was Savvas Paraskevopoulos, whose first job in America was working on the railroad. The Irish paymaster could neither pronounce nor spell his name, declaring from now on your name is the same as mine: Mike Mitchell. Son George married another Greek immigrant, siring ten children of his own, and settling in Galveston, Texas.

He went on to build Mitchell Energy & Development, turning it into a Fortune 500 company. The development part included Houston's planned community of The Woodlands, a successful suburb. But the money came from oil and gas. For most of his career he was a classic wildcatter.

Perhaps as a retirement activity, Mr. Mitchell became obsessed with the Barnett shale, a geologic feature that underlies Dallas. It was long known that there was natural gas in shale rock, but nobody besides Mr. Mitchell thought it could be profitably extracted. In the beginning he was a minority of one, but already being a billionaire he had some cash to invest in the hobby.

There are three ingredients to fracking's success. First was the use of explosives to crack open an oil well and get the oil flowing. Mr. Zuckerman tells us this practice began during the civil war. Second, in order to successfully remove gas from tight shale, fracking fluid had to be used to open up cracks in the rock, and then to prop them open so that the gas would continue to flow. Mr. Mitchell was the man who put these two concepts together, so we can rightly consider him the father of the industry.

The third key to fracking's success, which Mr. Mitchell did not initiate, was horizontal drilling. This is a practice where a well is drilled down to the gas-bearing layer, and then horizontally drilled along the layer. Mr. Zuckerman reports that this practice originated in a government lab, probably the only positive contribution of the federal government to the industry. It was later refined to a high art by Harold Hamm, founder of Continental Resources.

A second difference between fracking and Silicon Valley is that, in the latter, most of the participants graduated or attended elite schools, Stanford and Harvard being the most prominent. That's much less evident with the frackers. Mr. Mitchell's alma mater was Texas A&M; another common choice was the University of Oklahoma.

Still, generalizations are made to be broken. Aubrey McClendon graduated from Duke University, co-founding Chesapeake Energy at age 28. He comes from a distinguished family, sharing his heritage with a former Oklahoma governor, and the founders of the Kerr-McGee Corporation. Still, as his mother often pointed out, illustriousness didn't translate into a trust fund--Mr. McClendon would have to earn his own way in the world. Despite lacking for money, he did inherit blinding charisma, capacious intelligence, and single-minded drive. He's since made and lost a fortune, and made it again. Today he's a billionaire--again.

His partner was a fellow named Tom Ward, one of 13 children of an alcoholic, hardscrabble farmer from rural Northwestern Oklahoma. He grew up in Grapes of Wrath country. Interested in oil from the beginning, he majored in petroleum land management at the University of Oklahoma. No famous pedigree there, but Mr. Ward also came with a high IQ and a prodigious work ethic.

Chesapeake Energy (founded by McClendon & Ward in 1989) was named for Mr. McClendon's pleasant vacations along Chesapeake Bay--it was always an Oklahoma company. They added horizontal drilling to the tools inherited from Mr. Mitchell. Instead of the Barnett Shale, the company branched out to other fields such as the Austin Chalk and the Bakken. Mr. McClendon raised money and leased drilling-rights acreage. It was left to Mr. Ward to turn those assets into a revenue stream by producing natural gas.

They were successful beyond their wildest dreams--too successful in fact. Mr. McClendon, suave and charming, was an ace on Wall Street and brought in money by the bucket. He used that to buy up drilling rights in odd places where nobody else expected there'd be natural gas. He got it cheap. Through the 1980s people assumed that the US was running out of oil and gas. Through the 1970s gas prices had slowly risen, reaching $2.71 in 1984 (worth $6.28 today). Mr. McClendon assumed he'd make a killing selling gas, which he did.

But Mr. Ward (along with others) was too successful. Fracking was so productive that by the late 1980s gas prices began to go down. By 2012 they reached a low of $1.89. Fracking was no longer profitable, but Mr. McClendon couldn't stop. He kept buying drilling rights and going deeper in debt. Mr. Ward, who didn't like the debt, quit. And eventually Mr. McClendon got fired (only to come back again in a different company).

A third difference between the frackers and Silicon Valley is that no women are involved. Silicon Valley supposedly excludes women, but at least there they make up 10-15% of the leadership--most famously Sheryl Sandburg. But amongst the frackers there are zero women. The men are all highly driven, single-minded, workaholic, and extraordinarily intelligent. In many respects they are all very far out on the bell curve--not just in terms of intelligence. Few women are to be found amongst those very unusual people.

Silicon Valley was and remains an important driver of technological progress. But so far in the 21st Century fracking is the most important new technology. Government played only a very small positive role (along with a somewhat larger negative one). The major oil companies (ExxonMobil, et al.) also ignored the business until it was too late--they remain bit players. This was an industry founded by wildcatters, using their own money and following their own dreams. It is a true, American success story.

Mr. Zuckerman gives a balanced and (I believe) correct account of the environmental hazards. The industry has mostly underplayed those (Mr. Mitchell being a notable exception), an attitude that now hurts them. The environmental critics, on the other hand, have hugely exaggerated the risks involved. Fracking is much better for the environment than any alternatives, especially coal. I'd argue it's cleaner than solar power given the current state of that technology.

Panic-mongering aside, fracking is here to stay. And eventually the technology will spread around the globe. The world is not running out of fossil fuels any time soon.

Further Reading:

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