Who Killed Aubrey McClendon? [Gaille Energy Blog Issue 20]
- Posted by scottgaille
- On March 8, 2016
- 0 Comments
“I’ve always been comfortable thinking things through and doing it, more or less, my way.” – Aubrey McClendon
As the Wall Street Journal reported, “there is no denying the significance of Aubrey McClendon: He didn’t just see the energy boom coming. He helped to create it.” Yet Mr. McClendon didn’t invent hydraulic fracturing or horizontal drilling. Instead, his contributions were commercial in nature. McClendon was a master of scalability and deal execution, building the commercial structures that made shale technology profitable. One of his favorite tactics was the “land grab” – the rapid acquisition of shale leases.
Shale development requires hundreds of closely spaced wells. Before drilling can begin, companies must secure mineral rights for many thousands of acres. These leases also need to be generally contiguous to facilitate the orderly drilling of mile-long horizontal wells. To put these logistics in context, one my Eagle Ford projects executed almost 1,000 leases with individual landowners. When the dust settled, our legal documents totaled 50,000 pages. Mr. McClendon did this many times over, eventually acquiring more than 15 million acres of leases – an area bigger than West Virginia.
Not only does shale need a lot of leases, but they need to be signed quickly. If word gets out that leasing is underway, competitors soon join in. These companies seek to “free ride” on the expensive up-front technical and land work done by the first mover (to identify a prospective area). Some latecomers might want to legitimately participate in the upcoming development. Others are mere profiteers, leasing “do-nut holes” and extorting buy-outs. Mr. McClendon was skilled at minimizing these risks through a variety of tactics: deploying hundreds of brokers to simultaneously lease; signing leases under anonymous names; and joint venturing with other companies.
When landowners refused to sign his leases, there were other options. For example, drillers in Texas are allowed to seek a Rule 37 exception, which enables wells to skirt lease boundaries. Such Rule 37 wells can use hydraulic fracturing to reach beneath neighboring lands and drain their oil and gas. McClendon’s companies filed more than 1,500 Rule 37 requests. All but a handful were granted. “Not only can they take your property,” complained one resident, “but they don’t have to pay you for it.”
To some, these tactics made McClendon the real-life embodiment of Dallas’ J.R. Ewing. Charming but ruthless, Forbes magazine featured him on its cover with the headline “RECKLESS BILLIONAIRE.” The magazine noted that “the energy industry is especially susceptible” to McClendon’s personality because the industry “arguably required just such J.R. Ewing-like free spirits in the past.” After his death, one Huffington Post article even suggested the possibility of foul play: “As a result of McClendon’s aggressive and irresponsible business practices, he had many enemies and so I do believe that his death should be thoroughly investigated.”
The likely suspects are medical event, distraction, or suicide. Suicide theorists were quick to point out that McClendon wasn’t wearing his seat belt, but associates said he never wore it. What we do know is that Mr. McClendon was under extraordinary pressure from two sources at the time of his death – the oil crash and the federal government:
- The Oil Crash. Mr. McClendon already had survived one commodity bust – the collapse of natural gas prices. After being forced out of Chesapeake Energy, he founded a new firm, American Energy Partners. It raised billions to acquire shale properties. Yet, like many E&P companies, its fortunes turned when oil prices plummeted in 2014-15. Last November, an AEP affiliate tried to raise $2 billion in a securities offering. It only managed $11 million. AEP’s lead investor was John Raymond’s private equity firm The Energy and Minerals Group. One commentator reported that EMG had “refused to invest in some of Mr. McClendon’s recent projects and eventually cut ties with his firm.” As bad as AEP’s financial situation may have been, Aubrey McClendon had lived through similar challenges. Ever the visionary, he was a believer in the future of international shale and had recently inked a major deal in Argentina. “Onward and upward” was one of his favorite slogans, and he claimed that the “key to success in any walk of life is having a short memory and a thick skin.”
- U.S.Government. In addition to business woes, McClendon also was facing a new threat, unlike any he had ever known. The day before his death, Aubrey McClendon had been indicted on felony charges, alleging that he had “suppress[ed] and eliminate[d] competition by rigging bids for certain leasehold interests and producing properties.” The commercial arrangement in question involved Company B “refrain[ing] from submitting bids for these leaseholds and producing properties in order to keep prices down and in exchange for Company B receiving a share of the leaseholds and producing properties purchased by Company A.” While the indictment was slim on details, the deal sounded like an area of mutual interest (AMI). Through an AMI joint venture, two shale developers can pool their resources to lease more land faster and probably cheaper than either could do on its own.
Two years ago, Houston law firm Baker Botts warned its shale clients of potential antitrust violations due to shale joint ventures such as AMIs. Its presentation noted that the maximum prison sentence is 10 years. Even worse, 80% of defendants served time. Billionaires usually win their battles – except when the foe is the United States. Mark Cuban spent $20 million successfully defending himself on insider trading charges. He was the exception. Think about the Enron folks, Oscar Wyatt (served prison time for violations of Iraq’s oil for food program), and Steven Cohen ($1.8 billion settlement and exiled to a family office). White-collar defendants who lose at trial not only go to jail – but the U.S. government seeks criminal forfeiture of their assets. Like Enron’s Ken Lay before him, Aubrey McClendon’s death resulted in the dismissal of the charges against him and blocked a looming asset forfeiture (see Enron 15 Years Later: Where Are They Now? [Gaille Energy Blog Issue 19]).
Yet Aubrey McClendon’s contributions to the energy industry will live on. The shale boom was a fruitful marriage of technology and deal execution. Mr. McClendon once said, “You can be as creative as you want, but if you’re . . . unwilling to work on the details, to see those put into action, then creativity is just dreams, or worse, hallucinations.” In the last decade of McClendon’s life, American natural gas production surged from ~60 billion to ~90 billion cubic feet per day and oil production almost doubled. Thanks to Aubrey McClendon and others like him, the dream of shale was put into action.
About the Gaille Energy Blog. The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).