The End of Country (29 page)

The organizers had booked a conference room one-third too small for the size of the crowd that had gathered there. Engelder himself was distracted, not by the size of the crowd—he had simply chalked that up to less than stellar planning on the part of the conference organizers—but rather by his own last-minute preparations for his talk. His pride was on the line. He had to make this one better than the lackluster performance the day before.

It was only in hindsight that he realized how riveted his audience was. A friend of his later told him that the analysts, who generally snooze through such dissertations, nearly toppled out of their chairs when Engelder first flashed onto the screen a slide from his computer showing his latest back-of-the-envelope calculations. “There was a major lean factor,” his buddy later told him. But Engelder barely noticed as he told the analysts that he had based his numbers on Chesapeake’s, Range’s, and Exco’s. And he had also factored in the surprisingly promising initial production rates at a horizontal well Cabot had drilled in Susquehanna County, an area that Engelder had once visited with a class of geology students. Engelder had always believed that the area where the shale ran thick and was highly pressured was among the most promising in the entire Marcellus. But the results from that one Cabot well exceeded even Engelder’s hopes.

In all, Engelder guessed, probably somewhere in the neighborhood of 400 trillion cubic feet of gas could be siphoned out of the shale, far more than the 50 trillion cubic feet he had initially estimated. As Engelder made his way down from the podium, a few analysts shook his hand, but most of them just stared at him in dumbstruck silence. At first he thought he had whiffed another speech.

He was wrong. Engelder hadn’t known it at the time, but virtually the minute he finished his talk, an enterprising Platts employee, understanding how desperate the oil and gas world had become for anything that might be considered good news, had posted a press release online: “Engelder ups his estimate!”

An entire industry, which had been bludgeoned into a stupor by the economic downturn, had lapped up his every word, and within hours, the latest Gospel According to Engelder had begun rocketing
around the world. By the time he made it back to his office, his email in-box was full. So was his voicemail. There were dozens of messages, some from brokers and industry analysts, some from journalists. A reporter from Pittsburgh was trying to reach him. It was urgent. A reporter from England was every bit as insistent.

Suddenly it dawned on him that he had opened a Pandora’s box, and a cold sweat started to seep down his back. “Good Lord,” he thought to himself. “What have I done?”

Almost instantaneously, the entire establishment of the energy industry and its media followers had embraced Engelder’s new numbers as revealed truth, the first glimmer of their possible redemption since late summer. And that sent Engelder into a full-fledged panic. “Those numbers weren’t even mine,” he thought. They were the drillers’ numbers.

What’s more, he hadn’t had time to check his own math. He hadn’t even had a calculator on the airplane. He had been trying to give a rough estimate, an educated guess for an educated audience, but now those numbers were being attributed entirely to him. It was his reputation, his credibility that was on the line. Investors would invest, drillers would go to their boards waving copies of news stories about Engelder’s new estimates, and if he was wrong … he shuddered to think what could happen. At least he could take some solace in the fact that he had been wise enough to take a colleague’s advice and start a consulting company, a corporate entity that would protect his personal assets if somebody taking his advice or guidance lost money and decided to sue him. “At least the house is probably safe,” he thought to himself as panic hit him. As he sat there, a notebook in front of him, his computer flashing madly beside him, his calculator taunting him, he began to take stock of the situation.

He started with the raw data. The numbers he had used had been based on sporadically reported production rates from a handful of operators. He needed more. Now, he collected data from any other companies he could find, checking their initial production rates wherever he could find them, their statements to their shareholders, anything. He plotted out probability curves and calculated how much of the gas would likely be recoverable. He was desperately trying to work in silence, trying to buy some time. But time was a commodity that was running short in the gas business in 2008.

With no secretary and no one to hold his calls, a couple of reporters got through. He almost stuttered as he tried to explain to the first that only 30 percent of the play was likely to be tappable, but even as he said it, he realized that was still a staggering amount of gas. He told the next reporter that even less gas was likely to be recovered, but that small number was jaw-dropping, too. Finally, after what seemed an eternity of frantic calculations followed by revisions followed by cooler, more sober calculations, Engelder settled on a number that he believed accurately reflected what the drillers had been finding.

He was not at all surprised to find that his estimate was off by a few trillion cubic feet. He was, however, utterly astonished when he realized just how far off his initial numbers had been. The Marcellus play was not likely to yield just enough gas to power every gas-burning device in the United States for nearly two years, as he had originally estimated. There was seven times that much recoverable gas down there—363 trillion cubic feet—enough to fuel the country for the better part of a generation, enough to make the Marcellus, according to some analysts, the third-largest natural gas field in the world.

Maybe it was a coincidence, more likely a measure of how desperate the market was for anything resembling good news, but almost the moment Engelder’s new calculations hit the street, the price of natural gas on the New York Mercantile Exchange defied expectations and the laws of supply and demand and quickly—though briefly—shot up more than a dollar per thousand cubic feet.

The more long-lasting results of his calculations would soon be obvious. Everyone in the industry took those numbers and ran with them. The way they saw it, for the first time since the development had begun, the drillers and the analysts had a scholarly vindication of their efforts, and proof that their closely guarded reports from the field were not flukes but evidence that they were all on to something bigger than anyone had imagined. In effect, Engelder’s new numbers had given the academic seal of approval to their instinctive, all-consuming need to keep drilling.

Yes, the drillers would be laying down their rigs elsewhere in the country, and yes, they’d be cutting production back to the bone in other regions. But not in the Marcellus. Over the next several months, the number of drilling rigs headed for Pennsylvania would
increase spectacularly. There were 325 wells already drilled in the Marcellus in Pennsylvania, and another 864 permits had been issued. Cabot, which would soon announce that it was selling off a big chunk of its interest in Canada to focus on the Marcellus, decided to triple the number of wells they drilled in Susquehanna County, from twenty to sixty, by the end of the year. The other major drillers all had similar plans.

In fact, Chesapeake was so eager to get its rig count up from three to fifteen on its holdings in Bradford County, and to cash in on the value of the rest of its 1.8-million-acre stake in the Marcellus, that its CEO and consummate dealmaker McClendon struck a $3.37 billion bargain with Statoil Hydro, the Norwegian energy company and Europe’s largest gas company, effectively selling the Norwegians a 32.5 percent interest in their Marcellus holdings. It was virtually the same deal McClendon had struck a few weeks earlier with British Petroleum in its Haynesville holdings in Louisiana. To some, it seemed an odd bargain for McClendon to make, especially after he had spent all that money on television commercials touting natural gas as a categorically red-white-and-blue fuel, domestically produced, domestically consumed, and free of the meddling influences of foreign powers. But to those who had been watching McClendon’s rise for the past twenty years, the deal made perfect sense. First of all, it gave Statoil a chunk of the profits—the Norwegians would get up to 18 trillion cubic feet of gas—but they’d have to sell it in North America; it wasn’t like they could ship it to their home market. The federal government had seen to that. Of the seven liquefied natural gas facilities that had been approved for construction on the East Coast, only one was designed to ship gas overseas; the rest were for import only. When they were designed, no one anticipated that there might come a time when the United States had the chance to become a gas exporter. In essence, it was as if Statoil had walked into a pizza place and ordered 18 trillion pies and been told, “Fine, but you gotta eat ’em here.”

Statoil had its own reasons for jumping into the deal. The company was attracted by the lure of big profits in the American market, and just to be sure that the Marcellus was as potentially rich as McClendon had claimed it was, Statoil even sent a couple of high-ranking emissaries to Penn State to visit with none other than Terry
Engelder to go over the numbers. They were suitably impressed. But the deal offered Statoil another potential windfall, and one that went far beyond the Marcellus. Much has been made in recent years about how America is losing its technological and competitive edge, how other established countries in Europe and Asia and even developing economies like China and India are cleaning our clock when it comes to research and development. But where drilling technologies are concerned, particularly the recently developed and rapidly advancing technologies that were being employed in the Marcellus and other shale plays, Americans have no equal. In essence, Statoil, which was looking to develop its own shale holdings in Europe, was buying good old American know-how.

On the other side of the ledger, the deal was a big win for McClendon. It called for Statoil to pony up $1.25 billion in cash up-front and to spend the remaining $2.125 billion to underwrite a quarter of the cost of drilling in the Marcellus. In essence, McClendon, the same guy who had been pilloried as a fool a few weeks earlier for making a bad bet on a margin call, had once again bounced back. He had effectively managed to find a way to get a 25 percent discount on his operations in what was now “the only game in town.” The Marcellus, which had seemed to be on life support in those last desperate months of 2008, was now poised to make a spectacular comeback.

T
HAT AFTERNOON, AS HE SAT
alone in his office, Engelder felt he had been vindicated. And then his relief morphed into something else. The geologist in Engelder saw a symmetry in the idea that the Marcellus was bigger than the economic thunderhead that lowered above it. Once upon a time, that vast and shallow inland sea that had been the birthplace of the Marcellus Shale had been big enough to make its own weather. It seemed it still was.

T
he way Ken had explained it to me, the earth didn’t tremble—at least not much more than it had been trembling since the drilling in Dimock had begun in earnest. The skies didn’t open. The truth was that although it was a larger project, with more men and more equipment, more water and more at stake, than the other wells that had been drilled in the neighborhood, the Ely 6H—the H designated a horizontal well—hadn’t seemed all that different from any of the other projects.

And then the gas came in.

It had been a massive frack job—more than a million gallons of water and chemicals by the barrel load, and within a few hours of the fracking, the water gushed back out at a furious rate. Right behind it followed the gas. It began rising slowly, like a tide, but gained in force until it was a tsunami, a great roiling torrent of gas, a massive amount, 6.3 million cubic feet—worth more than $20 million to the gas company even in that depressed market—per day. Even the most jaded drillers had to admit it was breathtaking. For all its promise, the
Marcellus had so far yielded nothing like that. There had been big wells, 3 or 4 million cubic feet per day, but this was, at that moment, the big one, and within days, the normally secretive honchos at Cabot were trumpeting their find in the press, and the world took notice. The way they put it, the Ely 6H was proof that the Marcellus was as rich as anyone had dared hope, and it was only a glimpse of the spectacular results that would no doubt follow as more and even richer wells were drilled.

The world was about to change, for the drillers, for the analysts, and especially for Ken Ely. Ken had spent a lifetime counting every dime, weighing out his hopes for the future in tons of none-too-profitable bluestone and board feet of standing timber. And now there was no longer any doubt about it. Ken was about to become a rich man.

The checks hadn’t started turning up in the mailbox yet, but they would, and when they did, Ken Ely would have more money than he had ever imagined. The Ely 6H well alone, the one they had been drilling a few months before when Ken had gotten the sudden urge to go squirrel hunting, was worth about $600,000 in royalties a year, at least for the first few years, before it would start to taper off. Cabot was now spudding a second horizontal well on his land, and that was likely to be every bit as rich.