FEBRUARY 11, 2019
ON MARCH 1, 2016, Aubrey McClendon was indicted by a federal grand jury in Oklahoma on conspiracy charges related to land deals he rigged from 2007 to at least 2012. During that period, McClendon was the CEO of Chesapeake Energy, a dominant energy company specializing in hydraulic fracturing, or as it’s more commonly known, fracking.
McClendon was one of the highest compensated executives in corporate America, raking in $112 million one year. He was a tall, athletically built man with sparkling rimless glasses and rapids of ivory hair that flowed atop his head. He owned a large stake in the Oklahoma City Thunder, OKC’s NBA franchise, and homes in Maui; Vail, Colorado; Bermuda; and elsewhere. Forbes lauded him on their cover as “America’s Most Reckless Billionaire,” which Chesapeake proudly splashed on their website’s home page. But by March 2016, McClendon’s reckless world was crumbling. Things would get much worse.
But who cares about another crooked, over-compensated CEO? Bethany McLean does. She is the co-author of the brilliant dissection of the Enron scandal The Smartest Guys in the Room, and has written a slim book called Saudi America for Columbia Global Reports. The book suggests McClendon’s life is more than just a tale of a greedy, white, male executive whirling through the upper echelon of American life. McClendon was fracking incarnate. And we need to understand fracking because it may be the cause of the next economic collapse.
McClendon was born in July 1959, near the zenith of power for American oil producers. The price of oil was controlled not by OPEC (who would form a year later), but by the Texas Railway Commission. Southern oil barons had their hands on the spigot, and they were fabulously wealthy. McClendon’s great-uncle was a governor, senator, and co-owner of Kerr-McGee, which McLean reminds us was the Exxon-Mobil of its day.
When Texas oil production declined enough that it was no longer possible to control supply, OPEC — the coalition of Saudi Arabia, Iran, Kuwait, Iraq, and Venezuela — limited supply and created an oil embargo against the United States in retaliation for America’s support of Israel. Defensive and traumatized, Congress made it illegal to export any crude oil from the United States. Anyone who found a way to produce American oil would be a national hero.
As the rush chairman for his fraternity at Duke, McClendon is a walking cliché of the 1980s American male bound to become a salesman: he liked to get drunk and wrestle; he was aggressive; he was competitive. When he graduated in 1981, oil prices seemed like they would keep going higher, but instead they imploded. Commentators said American oil was all but finished. McClendon wouldn’t make money trading oil; he would have to find another way in.
In the United States, unlike in OPEC countries, private citizens own the mineral rights that lie underneath their property. To drill for oil, you have to buy or lease land from the owner. McClendon chose to become a “land man,” a broker who buys real estate with the sole intent of leasing it to people looking to drill oil. He bought land willy-nilly across Oklahoma, but it wasn’t a profitable business. Wildcatters weren’t flocking to Oklahoma to drill for oil like they did in the 1920s. McClendon would need to find a new way to drill for oil.
Fracking is the combination of two technologies invented in the 1940s — a combination of hydraulic fracturing and horizontal drilling that releases oil and natural gas trapped in shale. Drillers fracture the rock with pressure and then pump in sand to prop the cracks open while the oil or gas leaks out. Fracking is expensive, writes McLean, because of “the costs to rent a rig, hire the crew, purchase the sand and other ingredients necessary to frack a well, and so on.” It’s like trying to make blueberry jam when the only blueberries you can find are wrapped individually in plastic. You could go about inventing an ingenious machine to open these packages for you. But is it worth it? Aren’t there alternatives?
Fracked wells quickly lose their productive capacity, often within the first five years. This forces a producer to drill again, which is a significant investment — it takes 2,500 fracked wells to produce one million barrels, whereas it would take 100 wells in Iraq to do the same thing. If crude oil sells at under $40 a barrel, the fracker often cannot make their money back. So without easy lending, fracking probably wouldn’t exist. Beginning in the 1990s, debt fueled American energy producers. And McClendon had a voracious appetite for debt. By the mid-2000s, everything he owned was mortgaged: his houses, his antique map collection, his vast wine cellar, his restaurants, his malls, his stake in the Thunder. McClendon’s life was a debt-go-round: he purchased extravagant assets and then borrowed against them.
Fracking companies, including Chesapeake, almost never made a profit. They were often valued by how much they were growing, instead of how much money they were making. McLean points out that this is reminiscent of the pre-dot-com crash days when internet companies were valued on how many “eyeballs” they attracted. The borderline fraudulence didn’t stop there. In a year when Chesapeake destroyed $30 billion in shareholder value, the board, stacked with McClendon’s friends, authorized a $75 million bonus for McClendon. Untethered from profit and loss, McClendon was effectively handed a blank check. It was the apotheosis of bad corporate governance.
In 2014, the state of Michigan accused McClendon and Chesapeake of conspiring with a Canadian energy company in 2010 to rig bids for land. McClendon had proposed splitting up the territory so the two companies wouldn’t bid up the prices too high. He once mentioned to an early rival that they “would be better off sharing,” a sentiment that is either desperate or communist. McLean’s message is that McClendon tried to fix prices because that’s the inherent nature of fracking. It’s an impossible money pit.
Why did McClendon succeed? The first reason is the availability of credit and a willingness, by banks, to tolerate complicated financial products and high levels of debt. The second reason is the misguided desire for “energy independence,” which McLean thinks is folly. Natural gas can’t be exported easily, and we can’t produce enough crude to control its price. Dumping capital on glorified confidence men like McClendon will not save us.
So is fracking drawing us toward another financial crisis? Fracking is similar to subprime mortgages. They both exist as a solution to problem, but they’re a drug that treats the symptoms instead of the underlying illness. They highlight that just because something can exist, doesn’t mean that it should. In the period after 2008, investors were desperate for any sector that appeared to be growing, and companies like Chesapeake were growing. They were buying land. Fracking exists to fulfill a dream.
On the night of McClendon’s indictment, he failed to appear at a dinner that included the former president of Mexico. In the morning, he released a statement that suggested his “track record” contradicted the grand jury’s conclusion. McClendon, who was known to drive excessive speeds while texting, was scheduled for a meeting at Pop’s, a 1950s diner, at 9:00 am. Minutes before that, his black Chevy Tahoe careened across oncoming lanes at 90 miles an hour and plowed into a concrete wall. Then it exploded. Police officer Paco Balderrama announced that McClendon drove “through a grassy area right before colliding into the embankment. There was plenty of opportunity for him to correct and get back on the roadway, and that didn’t occur.” Police ruled out suicide because he didn’t leave a note. But the question will linger.
So was McClendon stacking up debt, like Bernie Madoff, spinning toward an infinite, incomprehensible conclusion? Is fracking just a shell game? Or is it possibly something more dangerous? McClendon’s death might be a punctuation mark on an era we don’t totally understand. McLean says that “even today, it is unclear if we will look back and see fracking as the beginning of a huge and lasting shift — or if we will look back wistfully, realizing that what we thought was transformative was merely a moment in time.”