The Green and the Black

The Complete Story of the Shale Revolution, the Fight Over Fracking, and the Future of Energy

St. Martin's Press

Contents

1. ROBBING THE MINT

I may not have learned about the Resource Triangle on my first day in the oil business in 1995, but it couldn't have been long after. The world, I was taught before I was taught much else, operates according to clear rules: the distribution of oil and natural gas follows a triangle shape. On the top is the good stuff: the gushers, oil almost as light as gasoline, natural gas rich with methane. The triangle gets broader with a greater volume of increasingly poorer reservoirs — less permeable, in smaller fields, the oil and gas of lower quality. Like a Life in the Middle Ages Triangle or a Contemporary Novel Triangle, the distribution is straightforward: the crappier it gets, the more of it you get.

The triangle has another feature, though: the crappier it gets, the more of it you get, the more costly to extract it gets. A century and a half of oil business experience had confirmed this.

By the mid-2000s, we were still living, as we had always lived, by the iron laws of the Resource Triangle. In the best case, we were supposed to find tomorrow's oil and gas at the bottom of the triangle, in increasingly hostile and expensive places. In the worst case, we were supposed to start running out of it altogether, just about now.

For most people outside the oil business, the industry remains the same: oil guys stick holes in the ground somewhere and oil comes up somehow and then whamo, presto, gasoline ends up at a BP station, where one distracts oneself from the price by studying real demonstrations of human ingenuity like the variety of Dr Peppers available today. But the consumers' unimpressed boredom may be the boom's most conspicuous achievement.

Oil and gas today is plentiful and cheap because there has been a revolution in many of the industry's basic premises. Laughably tiny incremental adaptations led to a stampede of industrial creativity. And my first lesson, that easiest lesson involving a triangle, came almost completely undone.

* * *

When I was assigned to the oil group at Goldman Sachs in 1995, it was not the most enviable position in the equity research department. The action was in covering Intel or Seagate Technology, then dominating the cutting-edge world of disk drives. I suspect I was assigned to the backwaters because I came to the firm armed with all the stock market savvy a History degree could provide. My last summer of college had been spent researching British working-class attitudes toward imperialism, circa 1902, a topic that didn't even excite the British. Before that, I stocked nails at a hardware store. The senior Goldman Sachs analyst I worked for, I would later learn, hired me because I reminded him of his "somewhat lost" son.

The oil and gas business that year was at the end of a decade of price stagnation, except for the brief oil price spike around the first Gulf War. Nothing felt particularly new. The maturity didn't mean that there weren't new wells in new places, or innovation. After you drill into an oil or gas reservoir and bring it onto production, it can continue producing for years, sometimes decades. However, a well's daily produced volume declines every year as the reduction in the number of molecules in the reservoir (some, after all, are now powering someone's car) causes a decrease in the pressure expelling the oil or gas. While there is technical controversy over how much oil and gas production declines each year from the world's existing fields, the "observed" decline rate is an estimated 4 to 5 percent per year with the actual "natural" decline rate, if oil companies completely abandoned investing in those fields, at an estimated 8 to 9 percent per year.

Field declines force the industry to remain dynamic. To supply the exact same amount of oil and gas, the industry must constantly develop new fields to make up for the declining production from old ones. For companies that own drilling rigs and the like, this is the most wonderful feature in the natural order of the universe. (It's as if you ran a construction company and your dearest fantasy came true: 4 to 5 percent of the world's buildings disappeared every January 1, needing to be replaced.) Field declines are supportive of reasonable oil and gas prices, too: even if there is no growth in demand — and global oil demand usually grows only 1 to 2 percent per year — prices have to be stable and high enough for companies to make a profit, or hope that they can make a profit, from new wells.

At all times, the oil and gas industry needs to find new sources of hydrocarbons. In 1995, the cliché that would dominate the first dozen or so years of my career was already in use: we were at the end of the era of easy oil and gas. The easiest oil and gas, at the tip of the Resource Triangle, are the fields in which if you drill a well, the pressure of the earth spouts the oil into the sky, and 100 years later Daniel Day-Lewis wins an Oscar for being you. There are massive older fields still producing easy oil and gas today. People are still fighting over Kirkuk in Iraq, first discovered in 1927. The Ghawar field in Saudi Arabia, the biggest in history, has been in production since 1951 and still makes 5 million barrels of oil per day — about 5.3 percent of what the world needs.

But these tip-of-the-triangle fields have already been found. The last giant million-barrel-per-day-plus fields discovered were Prudhoe Bay in Alaska in 1968 and Cantarell in Mexico eight years later. While some large fields have been discovered over the last thirty years (albeit at an increasingly diminishing rate), the industry in which I learned the business was focused on developing oil and gas fields that weren't easy: ones in inconvenient locations, collected in smaller pools, trapped in complicated geology, or containing heavier oil that requires more effort to refine (such as the Canadian oil sands).

The biggest thrills in my early career were the helicopter rides to a Texaco platform in the North Sea, and to a Brazilian one off the coast of Rio, where I watched, fascinated, the fishing boats tied companionably to the platform legs. The industry's innovators, big companies like Mobil and Chevron, were doing the hard stuff: drilling in deeper waters offshore, developing fields in sketchy kleptocracies, orchestrating "pipeline politics" to get oil and gas to market, or doing triple-axel flips by developing complicated fields and international pipeline systems from places like Kazakhstan. Or in Kazakhstan itself, where the giant Kashagan field, for which the first seismic surveys were conducted in 1993, has still failed to launch. If you think that your twenty-one-year-old still living in your basement is frustrating, take comfort that at least he didn't cost $50 billion to raise.

Yes, the oil business innovated, but it was almost dutiful. Gone were the glamorous days of the 1960s and 1970s when the Sauds and Vens took operatorship of their national oil companies away from companies like Exxon and Shell, nationalizing "our" reserves and forcing the industry into new areas like Alaska and the North Sea. By 1995, even the two key recent innovations to help the industry find the harder oil and gas were already becoming routine: deepwater drilling and three-dimensional seismic surveying that let companies better map potential reservoirs underground. The oil industry then was like a star quarterback at the end of his career, still able to get the ball into the end zone but without the acrobatics or pep of his prime. And maybe the oil industry didn't need to be forever young: in 1995, the oil consumption growth rate had been only 1.4 percent per year for a decade. In 1998, oil prices collapsed from oversupply.

The ultimate sign of the industry's maturity was that it did what every industry does when business growth doesn't lead to much profit growth: it caught synergy fever. Within three years, starting in 1998, major oil companies merged, forming a class of "supermajors."

Was there any excitement in the oil and gas business? Well, Enron was the rage.

* * *

Elsewhere, IN 1995, the employees of Mitchell Energy, a midsized Texas natural gas producer, were getting fed up with the Barnett Shale, a natural gas play outside Fort Worth. (In the oil industry, a play is a geological zone or concept in a specific area.) They'd been at it for fourteen years, with little to show for their efforts. The rock in the Barnett would not give up commercial amounts of gas, no matter what they did. Nick Steinsberger, a thirty-four-year-old petroleum engineer who joined the company that year, was told, "We might drill for a couple more years and then give up." Had that surrender happened, company founder George Mitchell's eventual triumph in the Barnett Shale would not be the Concord and Lexington of the shale revolution. The near surrenders, though, help burnish Mitchell's legend. The best way to be seen as a visionary and not a crank is to be successful. But to be a visionary, and not just an average orthopedist-in-Scarsdale success, requires a decade — and preferably decades — in which people see you as a crank. And by 1995, George Mitchell was in his fourteenth year of increasing skepticism of his pursuit of the Barnett.

In hindsight, of course (and it is always of course, with hindsight), Mitchell seemed destined to become the Henry Ford of the shales. He was the son of hardworking immigrants: his Greek immigrant father had let his own name be changed to Mike Mitchell under the sensible theory that Savvas Paraskevopoulos is not easy to say. By fate or by the pedestrian fact that his father's cousin owned a shoeshine stand in Houston, George Mitchell was born in Texas. After growing up in Galveston, Mitchell studied at Texas A&M, which produces oilmen and oilwomen with only slightly less fervor than it produces football obsessives.

Mitchell majored in petroleum engineering at A&M, but after many geology courses seemed to have developed the soul of a geologist. That self-image explains a lot to us in the business. There are three basic disciplines in the American oil industry: geology, engineering, and land. (There is a fourth category of oil company workers, the finance and accounting side, but the rest of the business thinks of us as the Ringo of the enterprise: technically necessary but hardly central to the band.) We in the business think of land folks, who go by the name landmen — even, awkwardly, if they are women — as the smooth talkers of the business. Their job is to convince ranchers or farmers to let a company drill on their land. Landmen also have the less glamorous task of making sure all the leases and legal titles are in order. But acknowledging that dull reality deprives the rest of us from thinking of landmen as hustling, drunk, or likely both.

Engineers are the proud realists of the oil business, designing and managing the drilling and completing of wells, analyzing the volumes and likelihood of producing reserves in the first place, making sure wells produce as much as they can, and daily classifying (with precise formulas) every nonengineer in the business as either useless, totally useless, totally useless and counterproductive, or just insane.

The last crack is directed as often as not at geologists, the industry's dreamers, always with an idea (often a nutty one) about some massive deposit. Engineers habitually scoff that oil and gas in the ground won't do much good if you can't produce it, but geologists are right: there is a tremendous amount of oil and gas in the ground. Modern humans have lived for 200,000 years, a mere 13 seconds to the day of the 1.3 billion years there has been multicellular life on earth. The plants, animals, and fungi on earth for the 23 hours, 59 minutes, and 47 seconds before us didn't pack up their bodies and fly to Mars but died here, often in ancient seas, their living matter sometimes decomposing into molecules on sea floors. Over tens of millions of years, geological movements buried these seas — and the plant and marine organism corpses in them. Once buried, the pressure of the earth from above and the heat of the earth from below cooked the organic molecules into coal, oil, and natural gas.

Layer upon layer of varying rock types underlie every inch of the earth. People picture those layers like a Rothko painting, in calming horizons. But underground strata are jumbled, intricate, and faulted with de Kooning–style disorder, from many causes: volcanoes, the clash of continents, the erosion of gigantic mountain chains. Geologists describe the resulting "depositional environment" so vividly and excitably, as if they are describing a thousand-room palace filled with diamond curtains and chocolate furniture, that the rest of us are forced to remind them that their wonderland is underground rock.

The buried organisms have been cooked into hydrocarbons — molecules with both hydrogen and carbon in them — at various depths in that depositional environment, given how long and chaotic the earth's geological history has been. Many of the cooked hydrocarbons have remained in place, but other molecules have moved upward, in paths of least resistance, to lower-pressure areas through natural cracks and fissures in the earth. They were pushed up, effectively, from the heavy weight of the earth — the overburden — above them. You can reenact this by jumping on a wet sponge. Water even at the bottom of the sponge will shoot up into the air, which has much lower pressure than the ceiling of the apartment below. If your downstairs neighbors complain, explain that you're their overburden.

The sponge analogy is helpful in another regard. Oil and gas reservoirs are not buried tanks filled with liquids or gases that you puncture and drain. Oil and gas molecules are contained within the pore spaces of rocks. Some rare rocks have large pore spaces, more like a dried sponge. But most types of underground rocks have such low "porosity" that the pores are invisible to the naked eye — and sometimes even the average microscope.

The other key measure of a rock for petroleum geologists is permeability: how easy it is for oil and gas molecules to travel through and between the pores of the rock. If you were an oil molecule and the rock around you were a hotel, porosity is the size of your room. Permeability, measured in units called darcies (named after a French engineer, not the emotionally impermeable Mr. Darcy), is how easy it is to move through the halls and stairwells connecting the rooms and floors. Some rocks, like in the Ghawar field, have gorgeous carpeted passageways, making the journey to the surface a joy. Other rocks are like Alcatraz.

* * *

Bt the Time George Mitchell, in 1981, embarked on the project that would make him more than an ordinary oilman, his business was already flourishing. Building on initial finds from his wildcatter days in the 1950s, Mitchell ran an eponymous publicly traded company, albeit a relatively small one. Mitchell Energy's economic engine was a collection of gas fields in North Texas that supplied about 10 percent of Chicago's gas. That wasn't all that kept Mitchell busy. He had ten children. He founded The Woodlands, a real estate development — now a full-fledged community of over 100,000 people — twenty-seven miles north of downtown Houston. (ExxonMobil moved many of its workers to a complex near The Woodlands in 2014. It's as if the Yankees had decided to move their stadium to a town built by the coach of the Trenton Thunder.)

Mitchell's contract to supply gas to Chicago was a yoked ox, financially powerful but perennially dangerous, as the company was obligated to supply guaranteed volumes with gas from depleting fields. One of the strategies his company came up with was drilling in the Barnett Shale. Mitchell didn't discover the Barnett. For decades, others had drilled through it. Well logging tools, which let them know the characteristics of various strata underground, had revealed the presence of gas in the shale.

The problem was that the Barnett Shale, located 5,000 to 8,000 feet below the surface in its most productive areas, was an exceptionally low permeability source rock. Oil and gas is found at all sorts of depths and geological structures, but it's not made everywhere. It's made in the kitchen: usually deeply buried source rocks, either black shales or black limestones called marls, in which temperature and pressure cook the dead organic matter into oil and gas. This process happens continuously: "self-sourcing" rocks are still cooking oil and gas today. One of the most astonishing geological lessons of the shale revolution is that there is much more oil and gas still in place in source rocks than we had ever imagined.

As the concentration of oil or gas builds in source rocks, pressure expands within them and expels some of that oil or gas. If your room in the rock hotel started producing people, and you found yourself with all ten of George Mitchell's children on your bed, you would want to find a way to get out.

The earth has escape routes: natural fractures and faults and other permeable conduits. Oil and gas will gravitate upward as much as it can, pushed by the pressure of the overburden. Sometimes — "up through the ground come a-bubblin' crude" — it will gravitate all the way to the surface, allowing a Sumerian to seal his pots or Jed Clampett to move to Beverly Hills. The migration of a lot of oil and gas, however, is halted by what geologists call traps, impermeable seal rocks that prevent the molecules from moving any further. Imagine that your overcrowded room drove you up the floors of the hotel as you sought fresh air on the roof deck. You desperately took elevators, climbed stairs, made progress — until you found the last available stairwell was bricked up. You are in a trap.