EVELYN, La. — The crew of workers fought off the blistering Louisiana sun, jerking their wrenches to tighten the fat hoses that would connect their cement trucks to the Chesapeake Energy drill rig one of the last two rigs the company is still using to drill for natural gas here in the Haynesville Shale.
At its peak, Chesapeake ran 38 rigs in the region. All told, it has sunk more than 1,200 wells into the Haynesville, a gas-rich vein of dense rock that straddles Louisiana and Texas. Fed by a gold-rush mentality and easy money from Wall Street, Chesapeake and its competitors have done the same in other shale fields from Oklahoma to Pennsylvania.
For most of the country, the result has been cheaper energy. The nation is awash in so much natural gas that electric utilities, which burn the fuel in many generating plants, have curbed rate increases and switched more capacity to gas from coal, a dirtier fossil fuel.
Companies and municipalities are deploying thousands of new gas-powered trucks and buses, curbing noxious diesel fumes and reducing the nations reliance on imported oil.
And companies like fertilizer- and chemical-makers, which use gas as a raw material, are suddenly finding that the United States is an attractive place to put new factories, compared with, say, Asia, where gas is four times the price.
The country has stumbled into a windfall on the backs of these entrepreneurs, said Edward Hirs, a finance professor at the University of Houston who contributed to a report that estimated that the nations economy benefited by more than $100 billion last year alone from the lower gas prices.
But while the gas rush has benefited most Americans, its been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.
The drillers punched so many holes and extracted so much gas through hydraulic fracturing that they have driven the price of natural gas to near-record lows. And because of the intricate financial deals and leasing arrangements that many of them struck during the boom, they were unable to pull their foot off the accelerator fast enough to avoid a crash in the price of natural gas, which is down more than 60 percent since the summer of 2008.
Rex W. Tillerson, the chief executive of Exxon Mobil, which spent $41 billion to buy XTO Energy, a giant natural gas company, in 2010, when gas prices were almost double what they are today, minced no words about the industrys plight during an appearance in New York this summer.
We are all losing our shirts today, Tillerson said. Were making no money. Its all in the red.
A master salesman
Aubrey K. McClendon, chief executive of Chesapeake Energy, had a secret, and he was anxious to share it.
He called Ralph Eads III, a fraternity buddy from Duke who had become his go-to banker. McClendon explained that he had quietly acquired leases on hundreds of thousands of acres somewhere in the southern United States he would not say exactly where that could become one of the worlds biggest natural gas fields.
But to develop the wells, he needed billions of dollars.
I can get the assets, McClendon told Eads, a vice chairman of Jefferies, according to three people who participated in that call, nearly five years ago. You have to get the money.
Get it he did. Eads, a pitch artist who projects the unrestrained enthusiasm of a college football coach, traveled the world, ultimately raising an extraordinary $28 billion for McClendons secret venture in the Haynesville Shale, as well as other Chesapeake drilling projects.
His tall, lanky frame and bellowing voice make him hard to miss, even in a large crowd. And his deal radar is never off, as he works the room at dinner parties and charity events.
That is how he met Jim Flores, the chief executive of Plains Exploration, who eventually invited him on a duck hunt.
After McClendons urgent request for money, Eads put in a call to Flores to see if he might be willing to finance part of Chesapeakes Haynesville project.
The type of deal he pitched, nicknamed cash and carry, was certainly aggressive and innovative. Plains would pay Chesapeake $1.7 billion to gain ownership of about one-third of the drilling rights that Chesapeake had leased in the Haynesville. Plains would also commit to paying out another $1.7 billion to cover half of Chesapeakes drilling costs, in return for part of the future profits.
Its going to be a great investment, Flores said on the day the deal was announced in July 2008.
But the deal, like others later struck by Chesapeake, benefited Eads and McClendon and their companies far more than the people writing the big checks.
Chesapeake spent an average of $7,100 an acre on the drilling sites it had leased in the Haynesville. Plains paid Chesapeake the equivalent of $30,000 an acre.
Jefferies and the other firms involved in arranging the deal made an estimated $23 million on this transaction.
Much of the money that Eads raised for U.S. gas drillers came from overseas oil and gas companies, like Total of France and CNOOC, the China National Offshore Oil Corp. He told them the U.S. shale revolution was an opportunity they simply could not afford to pass by.
He is like the bartender serving drinks for people who cant handle it, said Fadel Gheit, a managing director at Oppenheimer & Co., about Eads. And the whole gas industry has gotten a rude awakening, a hangover, with gas prices plummeting. The investment bankers were happy to help with a smile and get their cut.
A train without breaks
Quit drilling, T. Boone Pickens, the Texas oilman, barked to his fellow board members at Exco Resources, a small, independent drilling company based in Dallas that, like Chesapeake, had made a big bet in the Haynesville. Shut her down.
Pickens, 84, made billions of dollars as a hedge fund manager and wildcatter drilling for oil and gas. He borrowed heavily to build up the oil and gas reserves of Mesa Inc. in the late 1980s before losing the company during its financial difficulties a decade later, when drooping gas prices hurt its ability to repay debts and pay dividends. He wanted Exco to avoid a similar fate.
There was only one problem: Under the contracts that Exco signed, it couldnt stop drilling.
The company followed Chesapeakes lead and struck its own $1.3 billion cash-and-carry deal with the BG Group, a British gas company. BG paid Exco $655 million in cash upfront and agreed to foot 75 percent of the bill for future drilling in the Haynesville in return for a share in future profits on the gas produced.
When the arrangement was made, it seemed like a winner all around. Exco had more than 53,000 acres of leases in the Haynesville, but like Chesapeake, it lacked the money it needed to drill on all the land. BGs financing helped Exco to increase the number of rigs it had working in the Haynesville to 22 from four.
Nevertheless, the agreement, negotiated by Goldman Sachs, came with some important strings attached: Exco had to keep all 22 rigs drilling for gas, even as the price was dropping. BG wanted to reach certain targets for drilling wells and producing gas in the United States, and it was intent on sticking with the plan, even if its partner now insisted that it made no economic sense.
Pickens was furious.
We are stupid to drill these wells, he said in a recent interview.
But Exco was not alone. Many of its fellow gas companies including Chesapeake and Petrohawk had little choice through last year but to keep drilling, no matter how low the price fell or how big a glut was forming.
Use it or lose it
It wasnt just the cash-and-carry deals that were forcing them to drill.
The land that the natural gas companies had leased, in most cases, came with use it or lose it clauses that required them to start drilling within three years and begin paying royalties to the landowners or lose the leases.
Exco, Chesapeake and others initially boasted about how many acres they had managed to lock up. But after paying bonuses of up to $20,000 an acre to the landowners, the companies could not afford to lose the leases, even if the low price of natural gas meant that drilling more wells was a losing proposition.
The industry was also driven to keep drilling because of the perverse way that Wall Street values oil and gas companies. Analysts rate drillers on their so-called proven reserves, an estimate of how much oil and gas they have in the ground. Simply by drilling a single well, they could then count as part of their reserves nearby future well sites. In this case, higher reserves generally led to a higher stock price, even though some of the companies were losing money each quarter and piling up billions of dollars in debt.
The bust has certainly hit Haynesville hard. Some local landowners, having spent their initial lease bonuses, are now deeply in debt. Local restaurants and other businesses are suffering steep losses now that so many drillers have left town.
At this point were struggling, said Shelby Spurlock, co-owner of Cafe 171 in the town of Mansfield. The restaurant is decorated with wall collages of drill worker uniforms from companies that are leaving the area. Once open from 4 a.m. to 10 p.m. and employing four servers, the restaurant has cut its hours and is down to two servers.
Our very existence is in danger, she sighed.