The father of fracking: Few businesspeople have done as much to change the world as George Mitchell

The father of fracking: Few businesspeople have done as much to change the world as George Mitchell

Aug 3rd 2013 |From the print edition

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THE United States has of late been in a slough of despond. The mood is reflected in a spate of books with gloomy titles such as “That Used to Be Us” (Thomas Friedman and Michael Mandelbaum) and “Time to Start Thinking: America in the Age of Descent” (Edward Luce). For the first time in decades the majority of Americans think their children will be worse off than they are. Yankee can-do optimism is in danger of congealing into European nothing-can-be-done negativism.

There are good reasons for this. The political system really is “even worse than it looks”, as another doom-laden book puts it. Middle-class living standards have stagnated. The Iraq war turned into a debacle. But the pessimists are ignoring a mighty force pushing in the opposite direction: America’s extraordinary capacity to reinvent itself. No other country produces as many world-changing new companies in such a variety of industries: not just in the new economy of computers and the internet but also in the old economy of shopping, manufacturing and energy.George Mitchell, who died on July 26th, was a one-man refutation of the declinist hypothesis. From the 1970s America’s energy industry reconciled itself to apparently inevitable decline. Analysts produced charts to show that its oil and gas were running out. The big oil firms globalised in order to survive. But Mr Mitchell was convinced that immense reserves trapped in shale rock deep beneath the surface could be freed. He spent decades perfecting techniques for unlocking them: injecting high-pressure fluids into the ground to fracture the rock and create pathways for the trapped oil and gas (fracking) and drilling down and then sideways to increase each well’s yield (horizontal drilling).

The result was a revolution. In an interview with The Economist last year Mr Mitchell said he never had any doubt that fracking might turn the American energy market upside down. But even he was surprised by the speed of the change. Shale beds now produce more than a quarter of America’s natural gas, compared with just 1% in 2000. America is on the way to becoming a net gas exporter. Traditional petro-powers such as Saudi Arabia and Russia are losing bargaining strength.

Mr Mitchell was the embodiment of the American dream. His father was a poor Greek immigrant, a goatherd who later ran a shoeshine shop in Galveston, Texas. Mr Mitchell had to work his way through university, but graduated top of his class. He left a fortune of more than $2 billion and a Texas landscape studded with examples of his philanthropy: he was particularly generous to university research departments and to Galveston.

Mr Mitchell was also the embodiment of the entrepreneurial spirit. He did not discover shale gas and oil: geological surveys had revealed them decades before he started. He did not even invent fracking: it had been in use since the 1940s. But few great entrepreneurs invent something entirely new. His greatness lay in a combination of vision and grit: he was convinced that technology could unlock the vast reserves of energy in the Barnett Shale beneath Dallas and Fort Worth, and he kept grappling with the unforgiving rock until it eventually surrendered its riches.

After studying petroleum engineering and geology Mr Mitchell served in the Army Corps of Engineers during the second world war. On returning to civvy street he displayed a mistrust of big organisations—he made a career with Texas’s scrappy independents rather than with the local giants—and a gambler’s cunning. In his early days he struck a deal with a Chicago bookmaker to buy rights to a piece of land known as “the wildcatter’s graveyard”, and quickly drilled 13 gushers.

His stubbornness was, though, his most important quality. Investors and friends scoffed, but he spent two decades poking holes in the land around Fort Worth. “I never considered giving up,” he said, “even when everyone was saying, ‘George, you’re wasting your money’.” Then, in 1998, with Mr Mitchell approaching his 80s, his team hit on the idea of substituting water for gunky drilling fluids. This drastically cut the cost of drilling and turned the Barnett Shale into a gold mine.

An unlikely environmental warrior

Yet Mr Mitchell’s story is more complicated than just a fable of hard work rewarded and a vision vindicated. It also shows how governments can help along the entrepreneurial spirit. His company counted on support from various government agencies, including those that mapped the shale reserves (demonstrating that they were plentiful) and promoted the development of technologies such as diamond-studded drill bits. Jimmy Carter’s 1980 law to tax “windfall profits” at oil firms also included a tax credit for drilling for unconventional natural gas.

Greens now protesting against fracking, in Britain and elsewhere, may be surprised to learn that Mr Mitchell was also an early believer in environmentally friendly growth. In 1974 he built a planned community, The Woodlands, in the pine forests north of Houston, in a bid to tackle the problems of urban sprawl. It contains a mix of social housing and offices as well as million-dollar villas. In his later years he also campaigned for tight government regulation of fracking: he worried that the wild men who ran the independents might discredit his technique by cutting corners and damaging the environment.

Mr Mitchell’s son, Todd, talked of “the Mitchell paradox”: he believed in population control but had ten children; he championed sustainability but never invested in renewable energy. Reconciling the tension between Mr Mitchell’s twin passions—fracking and sustainability—will be one of the great problems of the coming decades. But one thing is certain: the revolution he started by poking holes in the Texas dirt is changing the world just as surely as the algorithms being generated in Silicon Valley

An interview with George Mitchell

The industry can no longer simply focus on the benefits of shale gas

Aug 1st 2013, 22:10 by S.W.

George Mitchell, the pioneer of extracting shale gas economically, who died on July 26th, rarely talked to the press. In May 2012 The Economist conducted a written interview with him:

Fracking is an old technique, as is horizontal drilling. Geologists had long been aware of the huge reserves of shale gas. What made you decide that you could use the former to tap the latter? Had others before you tried and failed to make fracking and horizontal drilling economically viable?

Big oil companies knew the upside potential of shale gas, and many were working to economically extract the gas from the shale without much success. Many people were trying to make fracking work better, but they weren’t able to get the cells to give up the gas.

We knew there was gas in some of these shale fields. We would measure the volume of gas in the reservoir and it was very high methane (25-40% methane). You could get to the methane, but you couldn’t get it to leave the cells until you fractured it, and that was the major breakthrough.

Normally the gas is in the fracture zones or in the substrate and not in the cells. The gas in these shale fields is located in the cells, and we had to figure out how to get it to break down and get it to come into the atmosphere. So getting it to flow out of the cells is what really was the hard part and what we were trying to do.

It’s a big breakthrough. It really is. It made some of the big companies look foolish. Why didn’t they discover this? I’m not sure why they didn’t, in fact. They just didn’t give it enough effort. We all knew the gas was in the cells, sometimes up to 40% methane, but we couldn’t get it to flow. The other companies were all working on shale gas trying to figure it out, but they weren’t working directly on how to separate the gas from the cells.

I understand that it took a lot of time and money to perfect the techniques. How long roughly did you persist? Did you ever consider giving up?

We invested approximately $6m over a ten-year period in the 1980s and 1990s to make fracturing an economically viable process. I never considered giving up, even when everyone was saying, “George, you’re wasting your money.”

What were the biggest challenges and most important breakthroughs? Was there a eureka moment or did progress come in small incremental steps?

There were no eureka moments; progress came in small, incremental steps. The biggest challenge was to get the gas, which was located in the cells, to flow. We were able to get small samples, but flow was critical. Finally getting the gas to flow from the cells was our biggest breakthrough. We experimented with a number of different processes over the years, each time making incremental progress.

When did it become apparent that your technology would turn American gas markets upside down? Did you always know what was in prospect or did the incredible impact that shale gas promises come as a surprise.

It’s not a surprise that our fracking technology has helped turn American gas markets upside down.  We were confident in its upside potential. What’s surprising is how quickly it’s happening. In 2000, shale gas represented just 1% of American natural gas supplies. Today, it is 30% and rising.

How much of a collective effort was it? How much, if at all, did other firms or the government contribute to your innovations?

Although the federal government did research about fracking, it was routine, and certainly not collaborative. Our research and development efforts and technology innovations tended to be proprietary—and it was mainly our team, with other firms contributing very little.

Are the concerns of environmentalists over fracking justified? What can the industry do to reassure the public that shale gas extraction techniques are safe?

As a concerned businessman and philanthropist, I have come to understand that the natural gas industry can no longer simply focus on the benefits of shale gas while failing to address its challenges. We know that there are significant impacts on air quality, water consumption, water contamination, and local communities.  We need to ensure that the vast renewable resources in the United States are also part of the clean energy future, especially since natural gas and renewables are such great partners to jointly fuel our power production.  Energy efficiency is also a critical part of the overall energy strategy that our nation needs to adopt.

Some in the industry have been reluctant to support common-sense regulation, and that needs to change.

Industry leaders, representing companies of all sizes, need to rally behind solutions based on hard science and technological innovation.  To find these solutions, industry leaders must lend their best engineers and scientists to a national campaign, teaming up with counterparts from government, academia, and the environmental community, to develop strong state‐by‐state regulations and effective solutions to the environmental challenges of shale gas.

We need to replace all-or-nothing arguments with a reasoned discussion that identifies a new path forward.

Most rules should be designed at the state level, starting with the 14 states that possess 85% of U.S. onshore natural gas reserves. Best regulatory practices should be shared among state regulators and similar best management practices should be shared among health, safety, and environmental affairs professionals.

A strong federal role is also necessary, starting with the Environmental Protection Agency’s new rules calling for more controls over the most dangerous air pollution associated with hydraulic fracturing.  The rules will also mitigate methane leakage during the drilling process.  This is critical, since methane is a powerful greenhouse gas pollutant, and uncontrolled leakages call into question whether natural gas is cleaner than coal from a global climate perspective.

Why did “big oil” take so long to join in the shale gas bonanza?

That’s a question that has you, me, and most everyone else stumped.

How do you respond to the sceptics who maintain that the potential for shale gas is overhyped and that rapid depletion rates and the seeming contraction of sweet spots in big shale fields mean that the gas may not flow as rapidly as predicted?

As I noted earlier, in the year 2000, shale gas represented just 1% of American natural gas supplies. Today, it’s 30% and rising. We’ll see where it goes.

How much personal pride to you take in developing a technique that have changed American and, potentially, global gas markets for good.

The hydraulic fracturing process is a critical technology, not only to this country, but also to the world.

It’s amazing to me how quickly the technology caught fire—not only in this country but also around the world. I take pride that hydraulic fracturing technology was developed by independents, and I take pride in the part I played in making this happen.

We could have patented our proprietary process and made exponentially more money. I already had enough money from the sale of Mitchell Energy & Development Corp. to Devon Energy, and I was more motivated to introduce this technology into the public domain—make it public record—so that the world could benefit from natural gas as an important energy and fuel source.

A lot of the people who worked with me to make this happen went on to work with other companies—both large and small oil and gas companies—so it has revolutionized independents as well.

Many Chinese companies and major American independents are leading this movement and making huge investments in the hydraulic fracturing technology, and the big guys are sleeping.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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