Behind the death of energy mogul Aubrey McClendon
Aubrey McClendon did not invent fracking — the process that unleashed widespread drilling for natural gas — but he convinced Wall Street to invest in shale gas by purchasing land leases for future drilling sites. He became the recognized leader of the “energy revolution” in the U.S.
On March 1, McClendon was charged with conspiring to rig bids to buy oil and natural gas leases in Oklahoma from 2007 to 2012. The next day, when he was due to appear in Oklahoma City federal court, McClendon’s car slammed into a bridge embankment. He died in the crash.
The Department of Justice had charged McClendon with orchestrating a scheme between two large energy companies, unnamed in the indictment. According to a DOJ statement issued March 2, the companies conspired about which one would win a bid, and then the winner would give an interest in the lease to the so-called competitor, so in effect both won.
This price rigging first came to light in 2012 when Reuters News Agency reported that Chesapeake Energy, with McClendon as CEO, agreed with Encana not to bid against one another on leases for 1 million acres of public land in Michigan’s Collingswood Shale. Already a steal at $13 an acre, these leases included water vital to the fracking process. Chesapeake eventually paid $25 million to landowners to settle the case.
The other company reportedly cited in the indictment was Sandridge Energy. Tom Ward, ex-CEO of Sandridge, co-founded Chesapeake Energy with McClendon in 1989. Less than 24 hours after McClendon’s death, the DOJ announced plans to drop the indictment. It’s uncertain if the DOJ will pursue one against Chesapeake, Ward or Sandbridge.
Big Oil: a family business
McClendon was a great-nephew of oil baron Robert S. Kerr, a former Oklahoma governor and senator. After graduation from Duke University and a short stint working for his uncle’s oil company, McClendon became a “landman” — the industry term for a negotiator of land leases for future drilling by oil and gas companies.
In a Rolling Stone magazine interview published on March 1, 2012, McClendon stated while “Geologists and engineers were the important guys — it dawned on me pretty early that all their fancy ideas aren’t worth very much if we don’t have a lease. If you’ve got the lease and I don’t, you win.” Winning was everything to McClendon.
In 1982 McClendon had formed Chesapeake Investments in partnership with Ward. They quickly recognized that fracking provided unlimited opportunities for companies with access to shale-field land. In 1989, McClendon and Ward each invested $50,000 to form Chesapeake Energy, focused primarily on shale gas. By 1993 the firm was worth $25 million.
Chesapeake’s primary goal was to lock up land leases for future drilling. Key to their success was the promise, often unfounded, of unlimited wealth from yet undrilled and untested shale gas reserves. They also benefited from a largely unregulated industry.
Chesapeake’s profits came not from drilling or selling gas, but from buying and flipping leases on land that could potentially contain natural gas. The company became the largest leaseholder in the U.S., with drilling rights to over 15 million acres. McClendon described his business model to a group of Wall Street analysts, “I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.” (Rolling Stone)
Chesapeake’s practices: a ‘Ponzi scheme’
Chesapeake often went into debt to purchase large areas of land. The company would drill a few wells to demonstrate the reserve’s potential to promote leases to bigger oil and gas companies looking to invest in shale gas.
Arthur Berman, a Texas energy consultant, called Chesapeake’s practices a “Ponzi scheme” for overhyping the promise of shale gas to cover their lease investments, reported Rolling Stone. If wells didn’t pay off, Chesapeake found ways to cover its debt through off-book accounting methods. One review of data gathered from 2003 to 2009 of over 9,000 wells found that less than 10 percent recouped their estimated costs after operating for seven years.
Like many wealthy individuals in the energy industry McClendon used his wealth to influence politics. He funded the Swift Boat attack against John Kerry and contributed money to stop same-sex marriage. In 2004 he helped launch Tom Corbett’s career with a $450,000 donation to his floundering bid for Pennsylvania attorney general. Corbett eventually became the governor who turned Pennsylvania “into the Texas of the natural-gas boom.” (Philadelphia Daily News, June 29)
Chesapeake’s business model began to unravel with heavy investments in Pennsylvania’s Marcellus Shale fields after 2007. Overproduction created a glut of natural gas that drove prices down. Simultaneous overproduction in the housing industry created the financial meltdown on Wall Street.
Meanwhile, owners of land leased to Chesapeake and other energy companies in Pennsylvania complained that chemicals and methane gas were leaking into their water wells. Reports surfaced of river and tap water, laced with methane gas, igniting in contact with flames.
Residents experienced increasing health problems from exposure to the gas and fracking chemicals. The promised wealth from lease royalties rarely materialized, while homeowners were left with property they couldn’t sell because of poisoned wells.
After being found responsible for two major Pennsylvania gas well accidents in 2010, Chesapeake Energy was eventually forced to suspend drilling operations there.
McClendon was known to have intertwined his personal finances with the company’s by investing in wells under his name and then using the investment as collateral for loans to himself. Having made serious personal investments in Marcellus Shale leases, McClendon had to sell off 94 percent of his company stock in 2008 to cover his personal losses. After the Reuters report and subsequent lawsuits in Michigan in 2012, Chesapeake’s board forced McClendon to leave the company in 2013.
Yet McClendon was undeterred. After oil prices returned to record highs in 2013, he started another company, American Energy Partners. Two years later, oil prices again collapsed, forcing many drilling companies into bankruptcy.
However, McClendon stayed in the game, again using personal assets, including his part ownership of the Oklahoma City Thunder basketball team as collateral. His recent investments included shale fields in Mexico, Australia and Argentina.
McClendon’s death may derail the federal indictment, but it will do little to put the fracking genie he unleashed back in the bottle. Overproduction of oil and natural gas is a driving force behind the recent stock market crisis that again threatens to drive the global capitalist system into its impenetrable wall.