George Mitchell and Unlocking the Barnett Shale Downloaded from by Guest on 02 October 2021

Home , Barnett Shale

The Seventeen-Year Overnight Wonder: George Mitchell and Unlocking the Barnett Shale Downloaded from https://academic.oup.com/jah/article/99/1/229/854861 by guest on 02 October 2021

Diana Davids Hinton

Just as the discovery of oil at Spindletop near the Texas coast in 1901 launched a new chapter in the development of the American petroleum industry, a century later the opening of massive natural gas production in north Texas from a geological formation called the Barnett Shale has begun a new era in world energy. Drilling in the Barnett Shale since 2000 touched off an urban gas boom throughout the greater Fort Worth metropolitan area. Far more significant, however, the Barnett Shale bonanza has revealed the incredible petroleum potential in shale formations throughout the United States. “Shale booms” have materialized in places as far flung as south Texas, North Dakota, and Pennsylvania, as well as overseas. Shale production could offer the United States far greater energy independence than anyone could have anticipated a decade ago, but the technology essential to it has also generated environmental apprehensions and contro- versy. As is so often true in the history of American petroleum exploration, the pioneer wildcatter to open the Barnett Shale was an independent prospector, the Houstonian George Mitchell, who spent seventeen years and millions of dollars to obtain natural gas from the formation. His story demonstrates how independent oilmen do business and why they remain important in an industry best known for its giant players. Mention the petroleum industry and most Americans are likely to think of Big Oil— the major multinational companies such as ExxonMobil—but the American oil industry has always included a majority of small participants that are not vertically integrated and are usually regionally focused. In the nineteenth century, the term independent in the oil industry referred to any firm or operator that existed outside John D. Rockefeller’s Standard Oil empire; by the 1920s it had come to stand for the smaller members of the oil and gas industry. Most domestic wildcat exploration—the search for oil and gas in areas far from existing production or in rock formations considered unlikely for commercial success—has been done by independents, perhaps because they usually do not have to justify unconventional projects to conservative boards of directors. Independent indi- vidual prospectors such as Patillo Higgins at Spindletop and Columbus Marion “Dad” Joiner in east Texas were free to challenge industry orthodoxy and brought in spectacular discoveries. Most independents, however, are not in the game to obtain giant finds. With

Diana Davids Hinton is professor of history and holds the J. Conrad Dunagan Chair of Regional and Business History at the University of Texas of the Permian Basin. She wishes to thank George Mitchell, Linda Bomke, Larry Brodgon, Dick Lowe, Marty Searcy, and Dan Steward. doi: 10.1093/jahist/jas064 © The Author 2012. Published by Oxford University Press on behalf of the Organization of American Historians. All rights reserved. For permissions, please e-mail: [email protected]. June 2012 The Journal of American History 229 230 The Journal of American History June 2012 their smaller scale operations, they can look for oil in quantities too small to interest major companies and can make a profit on modest discoveries.1 The vast majority of independents pursue exploration and production, competing with major companies for desirable locations to lease. While majors have the advantage of abundant capital, the American convention of private ownership of minerals gives independents an advantage in access to land for lease. Eager for bonus payments and

royalty checks, mineral owners will often lease small and affordable tracts of land, allow- Downloaded from https://academic.oup.com/jah/article/99/1/229/854861 by guest on 02 October 2021 ing independents to explore. The need for capital may inspire independents to create public corporations, but many function as partnerships, raising money for projects within circles of investors or through bank loans. Access to capital, of course, determines the scale of independent projects. Ironically, a great discovery often forces independents to scramble for development capital or to sell out to better-funded competitors such as the majors. Larger industry members, however, can also supply independents with buyers for their petroleum and/or provide infrastructure to get it to market. Thus the connection between small and large industry players is often as much cooperative as it is competitive.2 Independents typically develop business strategies that emphasize specific resources or projects. They may focus on gas rather than oil or undertake secondary rather than primary recovery. They may limit themselves to one or two producing regions or to types of oil fields with geological similarities. Notwithstanding the Hollywood image of the wildcatter—the hard-bitten, hard-drinking loner who prospects on hunches and pure luck—since the 1920s, independents, like the majors, have come to rely on the geosciences (geophysics, geology, and petroleum engineering) to determine how to find and produce oil and gas. Geoscience, however, is only one element of a business strategy.3 Like other businessmen, oilmen function in an economic arena shaped by policy makers and regulators. As Paul Sabin has provocatively argued, there never has been a perfectly free market. In the petroleum industry, as in all other industries, political real- ities impact economic outcomes. Thousands of independents, organized in groups such as the Independent Petroleum Association of America (ipaa), enjoy substantial political clout. They lobby members of Congress and state legislators, are vocal on issues affecting them, and make hefty contributions to political campaigns. They command the attention of state regulators, particularly when the regulators are elected. They are able to capitalize on not being Big Oil; thus in the early 1970s when the oil depletion allowance (which allowed oilmen a tax reduction based on production of diminishing reserves) was removed by Congress, independents retained the tax break that the repeal stripped from the major companies. Some policies, of course, challenge independents and majors alike. In the 1960s, for example, independents such as George Mitchell had to adjust project planning to interstate natural gas prices kept at artificially low levels by the Federal Power Commission (fpc). Many independents responded to that policy by directing the gas that they found to intrastate markets where prices were not regulated. Locked into an interstate contract, Mitchell diversified into natural gas processing, which let him develop an

1 On independents, see Roger M. Olien and Diana Davids Hinton, Wildcatters: Texas Independent Oilmen (College Station, 2007), 1–11. 2 On the way private ownership of minerals in the United States has influenced the oil and gas industry, see Terence Daintith, Finders Keepers? How the Law of Capture Shaped the World Oil Industry (Washington, 2010), 411–38. 3 For an introduction to exploration geosciences, see Kenneth S. Deffeyes,Hubbert’s Peak: The Impending World Oil Shortage (Princeton, 2001). George Mitchell and Unlocking the Barnett Shale 231 income stream offsetting low returns from interstate sales. Response to regulatory changes affecting gas exploration and prices then led him to focus on targeting the Barnett Shale.4 Mitchell, the son of a Greek immigrant who ran a shoeshine stand in Galveston, Texas, was born in 1919. In the late 1930s he put himself through Texas A&M University, taking as many courses as he could in petroleum engineering and geology. When he graduated, he took a job with the American Oil Company (Amoco), but, as a reserve

officer in the U.S. Army, he was called to active duty in 1941 and served in the Army Downloaded from https://academic.oup.com/jah/article/99/1/229/854861 by guest on 02 October 2021 Corps of Engineers throughout World War II. After the war, Mitchell decided on a career as an independent oilman, one of many veterans who would swell the ranks of oil and gas independents during the tremendous postwar boom. Demand for petroleum was at an all-time high, projects shelved during the war were reinvigorated, and opportunity in oil seemed limitless; it was a splendid time to enter the industry.5 Mitchell and his brother Johnny partnered with the oil broker H. Merlyn Christie, opened a tiny office in downtown Houston, and started a drilling firm with one primary asset: an aging drilling rig. While Johnny and Christie put together deals, George began geological consulting, evaluating project proposals for established Houston independents such as Glenn McCarthy, Louis Pulaski and Harry Pulaski, and R. E. Smith. Through George’s consulting, the partners started to build their own circle of investors—an essential maneuver if they were to find money for their own projects. They became well positioned to participate in finding and producing natural gas.6 Long the ugly stepsister of the industry, natural gas enjoyed an unprecedented increase in national demand after World War II, to which independent oilmen were quick to respond. In the late 1940s, Houston independents and their investors bought and built extensive interstate transmission lines to ship gas from the Gulf Coast to the Midwest and Northeast. Because such lines needed an accelerating volume of gas to function, the level of gas exploration skyrocketed along the Gulf Coast and in south Texas. When independents looked for land to lease for gas drilling, they benefitted from the major companies’ focus on oil. Major company refineries had to meet an enormous demand for gasoline, so the vast capital resources of the majors prioritized leasing land that was likely to yield oil rather than gas, creating an opportunity for gas-focused independents. George Mitchell and his partners were among those ready to look for gas, and that resource would be his main focus throughout his career.7 In 1952 the deal that would give him a natural gas bonanza in north Texas reached him in a rather bizarre fashion. The investor Louis Pulaski had received a prospect from his Chicago bookie and brought it to Mitchell for evaluation: the drilling contractor Ellison Miles and the geologist John Jackson were looking for investors in their project to lease

4 Paul Sabin, Crude Politics: The California Oil Market, 1900–1940 (Berkeley, 2005), xv. On federal regulation of natural gas, see Richard H. K. Vietor, Energy Policy in America since 1945: A Study of Business-Government Relations (Cambridge, Eng., 1987), 272–311; and Arlon R. Tussing and Bob Tippee, The Natural Gas Industry: Evolution, Structure, and Economics (Tulsa, 1995). 5 Joseph W. Kutchin, How Mitchell Energy & Development Corp. Got Its Start and How It Grew: An Oral History and Narrative Overview (Boca Raton, 1998), 183–89. 6 Ibid., 226–27. 7 George Mitchell interview by Diana Davids Hinton, notes, July 7, 2010 (in Diana Davids Hinton’s possession); Kutchin, How Mitchell Energy & Development Corp. Got Its Start and How It Grew, 192. On interstate gas company growth, see Christopher J. Castaneda and Joseph A. Pratt, From Texas to the East: A Strategic History of Texas Eastern Corporation (College Station, 1993); and Christopher J. Castaneda and Clarence M. Smith, Gas Pipelines and the Emergence of America’s Regulatory State: A History of Panhandle Eastern Corporation, 1928–1993 (New York, 1996). 232 The Journal of American History June 2012 and drill on a 3000-acre tract in Wise County. In the 1910s and 1920s north Texas had been the scene of many hectic oil booms, but by 1950 the region was, for the most part, a mature producing area—a place to which majors gave low exploration priority because the majority of finds were small. Worse yet, Wise County had seen decades of wildcatting with unimpressive results, giving it a reputation as a wildcatter’s graveyard. So many potential investors had rejected the project proposal before George Mitchell was offered it

that, as he recalled, “It was pretty tattered around the ears.” Looking at Jackson’s study, Downloaded from https://academic.oup.com/jah/article/99/1/229/854861 by guest on 02 October 2021 however, he found that the geologist had identified a large stratigraphic petroleum trap, and he persuaded his partners and investors to take on the project. Their wildcat well delivered a huge initial flow of gas, prompting them to lease as much acreage as they could around their tract. They picked up over 300,000 acres in what would become the prolific Boonsville Bend Conglomerate gas field. It was the find that made George Mitchell’s fortune.8 The size of the partners’ discovery raised new problems even as it opened incredible opportunities. Finding cash for a major development program was the first challenge. Luckily, George Mitchell and his partners were able to find additional investors. Better yet, Harold Vance, one of George Mitchell’s former Texas A&M University professors, headed the energy loan department at the Bank of the Southwest, and bank loans helped the partners move forward. A bigger challenge lay in finding a buyer for the gas they produced, but they had the good fortune to make a deal with the Natural Gas Pipeline Company of America (ngpl), which needed gas for its growing Chicago market and was willing to give the partners $.13 per thousand cubic feet of gas in a twenty-year contract. ngpl, moreover, advanced $7 million (the amount to be repaid from production) to finance drilling, and it would spend up to $35 million on necessary gathering lines and pipeline infrastructure. Though Wise County gas was rich in liquids such as propane and butane, for which there was a profitable market, ngpl was not interested in natural gas processing. The way was opened for the partners to build their own processing plant at Bridgeport, Texas, and sell liquids. They did so with the help of a loan from the First National Bank of Chicago. By the end of 1957, ngpl’s infrastructure was in place, drilled wells filled it with gas, and the processing plant was ready to strip liquids. Thekey elements of a highly successful venture were in place.9 In 1958, just as Christie, Mitchell, and Mitchell and their investors were beginning to reap profits from their north Texas venture, domestic exploration and production entered what would be fifteen years of downtime. Despite a growing demand for natural gas and the rising costs of exploration and production, the fpc kept interstate natural gas prices at rock-bottom levels. Once a producer directed production to an interstate buyer such as ngpl, fpc regulations barred switching that production to the unregulated intrastate market, so the partners had to offset low returns from interstate sales. They stepped up gas processing at Bridgeport, experimented with offshore and urban drilling in Galveston, and diversified into real estate. Addressing this last money-making idea, George Mitchell began construction of a planned community, the Woodlands, north of Houston. Build- ing the Woodlands meant taking on even more debt, bringing his bankers to press him to

8 Mitchell interview; Kutchin, How Mitchell Energy & Development Corp. Got Its Start and How It Grew, 192–93, 228. 9 Kutchin, How Mitchell Energy & Development Corp. Got Its Start and How It Grew, 64–67, 193–94. Mitchell interview. George Mitchell and Unlocking the Barnett Shale 233 launch a public corporation, Mitchell Energy & Development Corporation, in 1972 to combine the partners’ various enterprises. The change was well timed: oil industry for- tunes would recover during the following year, and the corporation had access to far more capital as they did so.10 In the 1970s, the United States experienced an energy crisis, a period when shortages of both natural gas and gasoline demonstrated that the country’s energy supply should

not be taken for granted. Part of the shortage resulted from years of misguided federal Downloaded from https://academic.oup.com/jah/article/99/1/229/854861 by guest on 02 October 2021 price regulation of natural gas, and part followed from the Arab oil embargo and muscle flexing by the Organization of Petroleum Exporting Countries opec( ), but it was obvious that policy makers needed to rethink energy economics. For George Mitchell, the most important change to come out of Washington, D.C., was the Natural Gas Policy Act of 1978. The sixty-page act, which Richard H. K. Vietor has rightly called “difficult, if not impossible, to administer,” made a torturous advance toward federal deregulation of natural gas prices. It offered natural gas producers substantial price incentives to find and produce gas from riskier, more expensive exploration—looking for gas below 15,000 feet or taking it from tight sand (rock formations so impermeable that only advanced technology could prompt its flow to the wellhead). That part of the measure was geared to appeal to independents. Those willing to focus on natural gas and willing to try expensive, margin- ally profitable projects that would likely be rejected by the majors’ boards of managers finally had federal blessing to try their luck.11 Industry opinion seemed to agree that the Barnett Shale had marginal chance of commercial success. Containing a high percentage of organic material, the shale is capable of generating a tremendous volume of hydrocarbons. Even so, the mineral grains in the shale are so tightly packed that the petroleum molecules between them are effectively locked in the rock. Natural geological upheavals, however, can create rock fractures, allowing hydrocarbons to migrate from the shale to more permeable rock formations, like many of those lying above the Barnett Shale. One of Mitchell Energy’s geologists, James Henry, suggested that migration as the explanation for what had occurred throughout the Fort Worth basin: the source for north Texas oil and gas was in the Barnett Shale—which lay under Mitchell Energy’s leases.12 Henry’s theory raised the tantalizing possibility of tapping huge new reserves of natural gas—reserves in the area where George Mitchell had already invested millions of dollars in leases and infrastructure. Moreover, his gas purchaser, ngpl, had begun to voice con- cerns about the sustainability of the gas supply: Could he reasonably expect to bring in more gas from the area that had been producing for a quarter century? Thanks to the Natural Gas Policy Act, if Mitchell Energy did bring in commercially viable production from the Barnett Shale, the gas would qualify for federally mandated higher prices. George Mitchell therefore decided to try his luck in the shale, despite doubts from his staff. After all, he told them, to neglect the shale only to see someone else exploit it “would be stupid, and secondly, it’d be embarrassing, and I don’t want to be either.” In 1981 Mitchell Energy

10 Kutchin, How Mitchell Energy & Development Corp. Got Its Start and How It Grew, 7–8, 70–73; Dan B. Steward, The Barnett Shale Play: Phoenix of the Fort Worth Basin, a History (Fort Worth, 2007), 28–30; Mitchell interview. 11 Vietor, Energy Policy in America since 1945, 259, 311. For an introduction to the energy crisis, see Karen R. Merrill, The Oil Crisis of 1973–1974: A Brief History with Documents (Boston, 2007). 12 Steward, Barnett Shale Play, 32; Charles A. Martin, ed., Petroleum Geology of the Fort Worth Basin and Bend Arch Area (Dallas, 1982), 157. 234 The Journal of American History June 2012 drilled into the Barnett Shale near the Wise County hamlet of Newark. Once completed, that wildcat well (known as C.W. Slay No. 1) produced only a modest amount of gas, but it was the discovery well for the Newark East Barnett Shale gas field. George Mitchell directed his staff to ensure that the level of new gas production the company needed from the shale was reached. It was up to his geologists and engineers to make that happen.13 It is worth observing that only an independent who could make up his own mind

would attempt such a long shot. Major companies had long since decided that there were Downloaded from https://academic.oup.com/jah/article/99/1/229/854861 by guest on 02 October 2021 far better places for exploration than north Texas, but George Mitchell’s disregard for that prevailing industry opinion created daunting challenges for his staff. His geologists had to decide where to drill in a formation considered so unpromising that no one had done much to study it. His engineers had to figure out how to produce gas from a type of rock that most people thought was commercially hopeless. Thus began seventeen years of experimentation, frustration, and expense, and the reality of completing wells that cost more than their production was worth in the flat natural gas market of the 1980s and 1990s. Undeterred, George Mitchell continued on a course that most observers—some of them on his payroll—thought utterly misguided. Alone among the majors, Chevron noticed. Perhaps impressed by his dogged determination, Chevron made an attempt in 1997 to drill and produce from the shale farther south in Johnson County. When that attempt failed, Chevron told its staff there would not be a second try.14 For the staff of Mitchell Energy, the critical breakthrough to unlock the Barnett Shale came in mid-1997 by their modification of the well-completion technology known as hydraulic fracturing, or “fracking.” This technology shoots a mixture of liquids and sand under tremendous pressure from the wellbore into surrounding rock. The liquid under pressure breaks up the rock, and the sand keeps resultant rock fractures open so petroleum can move through them. Mitchell Energy’s engineers discovered that, counter to conventional wisdom, using a huge volume of water with a small amount of additives cracked the shale for big production. This technology, slick-water fracking, turned what was once a minimally productive expanse of underground rock into a gigantic gas field which, by 2009, had reserves of over 26.7 trillion cubic feet of gas and was the largest source of natural gas in the United States. The process was also cheaper than any of the other completion alternatives Mitchell Energy’s staff tried, lowering completion costs by $75,000 to $150,000 per well. The engineers also found that refracking old wells with slick water could create as much as a tenfold increase in the wells’ production. Slick-water fracking made the Barnett Shale a far more splendid source of gas than even George Mitchell had dared hope.15 Though he tried to keep his remarkable success under wraps to pick up more leases over the Barnett Shale, it was not long before other area independents began to suspect that George Mitchell had something big. Picking up information passed along the well- service-contractor grapevine, independents such as Four Sevens Exploration Company, Chief Oil and Gas, and Republic Exploration began leasing in areas adjoining Mitchell

13 Steward, Barnett Shale Play, 38–51; Dan Steward, interview by Hinton, audiotape, March 4, 2010 (in Hin- ton’s possession). 14 Kent A. Bowker, “Barnett Shale Gas Production, Fort Worth Basin: Issues and Discussion,” Bulletin of the American Association of Petroleum Geologists, 91 (April 2007), 523–33, esp. 524; Steward, Barnett Shale Play, 60, 74, 84, 121–23; Steward interview. 15 Steward, Barnett Shale Play, 112–15, 128–35; Steward interview; Jim Fuquay, “Q & A: George Mitchell, Founder of Mitchell Energy,” Fort Worth Star-Telegram, April 2, 2008. George Mitchell and Unlocking the Barnett Shale 235

Energy’s leased land. When they began leasing in Tarrant County, an urban gas boom began. The majors remained aloof: surely nothing really big could come from north Texas. Larger independents such as Devon Energy and XTO Energy entered the action, and in 2001 Devon bought out Mitchell Energy for over $3 billion. Unwilling to enter expensive town-lot leasing as exploration moved into the suburbs of Fort Worth, Mitchell sold out to a larger industry player—a familiar conclusion to a splendid independent discovery.16

George Mitchell’s unlocking of the natural gas in the Barnett Shale did much more Downloaded from https://academic.oup.com/jah/article/99/1/229/854861 by guest on 02 October 2021 than simply generate another Texas boom. By demonstrating how shale could be commercially productive at a lower cost than anyone anticipated, Mitchell opened the way to shale booms throughout the United States and the world. Oil and gas from shale has completely revised our picture of the American energy future. The enormous gas reserves now accessible may encourage the domestic petroleum industry to shift focus from oil to gas, though currently high oil prices have worked against that transition. At any rate, the United States may well become a gas exporter. A new chapter in industry history has begun, thanks to an independent’s willingness to challenge industry orthodoxy. Other independents have been quick to follow George Mitchell’s lead. It is significant that as shale production has taken off in many areas, independents still dominate shale action, greatly outnumbering and outspending major and national oil companies. The new chapter in petroleum history, however, is not without its questions and problems. Shale booms are now underway in places that are unaccustomed to intense industry activity, and residents of those places are not uniformly happy with the attendant change. In particular, the fracking technology that is making shale productive has sparked appre- hension about aquifer damage and improper wastewater disposal. In use for six decades, fracking is an established, accepted part of responsible industry operations. Any technology, however, used irresponsibly, may have appalling results, as the 2010 Macondo well blowout (which caused the Deepwater Horizon fire and spill) demonstrated. The challenge for the oil and gas industry in this new era is to ensure that unlocking shale does not also open Pandora’s box.

16 Steward, Barnett Shale Play, 154–59; Steward interview; Larry Brogdon interview by Hinton, audiotape, July 28, 2010 (in Hinton’s possession); Dick Lowe interview by Hinton, audiotape, July 27, 2010, ibid.; Marty Searcy interview by Hinton, audiotape, Feb. 20, 2009, ibid.; “Acquisition Deal Sends Mitchell Stock Soaring,” Dallas Business Journal, Aug. 17, 2001.