by Russell Gold
When Chesapeake released details of the EIG deal, it spelled out a mind-numbingly complex financial transaction. What it didn’t disclose was that a couple weeks after McClendon sold off a chunk of Chesapeake’s hottest new acquisition to EIG, he was arranging a personal $500 million loan from EIG. (The Reuters news agency disclosed this in an April 2012 story that walloped Chesapeake’s stock price.) The loan helped McClendon continue buying his 2.5 percent share in Chesapeake wells. And he was using his ownership in these wells as collateral. Henry Hood, Chesapeake’s general counsel and another Duke classmate of McClendon’s, told investors that everything was aboveboard. “The board of directors is fully aware of the existence of Mr. McClendon’s financing transactions,” he said.
This assurance did nothing to squelch investor discontent. The loans turned out to have been substantial: up to $1.4 billion to cover several years of participation in the perk. In 2011 McClendon had to come up with about $450 million to participate in the all-or-nothing program. The federal government opened two separate inquiries into whether the company had disclosed enough information—and whether McClendon had reported his income appropriately. Chesapeake took the unusual step of recanting Hood’s statement that the board was in the loop, eight days after it was issued. As it turned out, the board didn’t know about the loans. It “did not review, approve or have knowledge of the specific transactions,” according to a press release. By the end of the year, Chesapeake demoted Hood. The board, pushed into exerting its influence, negotiated an early end to the Founders Well Participation Program. Amid calls for better oversight, Chesapeake announced on May 1, 2012 that McClendon would step down as chairman but kept his chief executive role.
Large shareholders, however, were not placated, and McClendon appeared to dislike his diminished role. In late January 2013 Chesapeake’s new board of directors issued a two-page statement. McClendon was stepping down as CEO and leaving the company he had cofounded and steered for more than two decades. A couple days later, it clarified that he had been terminated. Former Conoco chief executive Archie Dunham, who had taken over as chairman the previous June, assured employees in an email that Chesapeake and the unique culture that McClendon created wouldn’t go away. The fitness center would remain. And the gourmet company cafeterias would not be sold to a food-services company. Within a few months, however, Dunham was steering Chesapeake in a new direction that was significantly less aggressive than it had been in the past. It was nothing less than a repudiation of the strategy McClendon had pursued.
McClendon left Chesapeake on April 1, 2013. Less than a month later, he sent an email to industry contacts. He was starting a new company called American Energy Partners. “I am interested in being contacted regarding onshore US assets,” he wrote. “In particular, I will be looking for deals with a lot of drilling left on them and will also consider undeveloped acreage deals—plus, I am not scared of natural gas.”
In 2003 McClendon had said there was “no way” to build an economy that consumed thirty trillion cubic feet of natural gas by 2010. But a couple years later, the United States was producing thirty trillion cubic feet a year. Companies vented some of it into the atmosphere and used some of it to power the machinery of fracking. It was still too much. America was consuming only twenty-five trillion cubic feet.
McClendon remains an unrepentant gas enthusiast and optimist. Asked if he had any regrets about his tenure at Chesapeake and whether he would do anything differently, he replied: “Nothing, I loved every minute of it.” After 2008, prices remained low enough, he contended, to stimulate more people and companies to commit to using natural gas. Now that demand is catching up with supply, it is again a good time to drill wells and produce natural gas. With a typical mix of boldness and far-reaching rhetoric, he said: “The future will once again belong to producers over the next twenty to fifty years.”
10
CELESTIA
Fracking is changing the world, but some places are shouldering more of this change than others. To understand better what Aubrey McClendon and Chesapeake have created, I returned to the Farm for a week to spend time traveling around Sullivan County. Chesapeake had leased thousands of acres and drilled nearly one hundred wells, including one on my parents’ property.
The debate over fracking here isn’t abstract. US energy security and climate change don’t come up that often in conversation. When residents of Sullivan County talk about fracking, they talk about their water and land as well as the trucks on the roads. What I learned—and would have realized long ago if I had thought about it—was that my parents’ approach to the land was out of step with their neighbors’. They planned to keep the land untouched and wild. Many of their neighbors worked the land for their livelihood. Over the years, my parents had inched toward the local way of thinking. They allowed a local timber company to harvest some of the trees. They posted No Hunting signs on the property, but within a few years relented and let neighbors come in during white-tailed deer season.
There are people opposed to fracking in Sullivan, but they seem to be recent arrivals. As I spent time talking to a variety of residents, I came to believe that the longer a family has lived in the county, the more it was willing to allow gas drilling. As I talked to locals, I began to realize that the county was gripped in a form of seller’s remorse. They had agreed to lease, but now had second thoughts about their decision. The sheer magnitude of the change was what worried most people. Nearly everyone had signed leases and turned over the future of the county to outsiders.
Not long after I arrived, I sat on the porch of a house near the Farm, drinking lemonade with a couple who had lived there for decades. I had bumped into the husband, Wylie Norton, at the courthouse that day. When he found out my parents’ cabin was a mile down the road, he invited me over. Wylie is a county commissioner, and his wife, Melanie, worked at the county’s small historical museum. As a cat tried to leap into my lap, Melanie relayed a piece of the county’s history that I had never heard, but it had odd parallels to my parents’ story and the gas boom unfolding around us. “Have you ever heard of Celestia?” she asked, between drags on a cigarette. When I replied I had not, she told me to stop by the two-room museum.
Many parts of the United States boast they are God’s country, but only Sullivan County has the legal paperwork to back up the claim. The roots of a most unusual real estate transaction began in 1850, when a husband and wife from Philadelphia named Peter and Hannah Armstrong bought land in the middle of the county. Like my parents a century later, the Armstrongs were lured by Sullivan County’s cheap real estate and the promise of escape from the hustle and bustle of the city. The similarities end there.
Peter Armstrong was a divine communist and a messianist who believed that Jesus Christ would soon return to earth. Following the book of Isaiah, which says the “Lord’s house shall be established in the top of the mountains,” the Armstrongs bought several hundred acres atop one of the county’s mountains and began to build the city of Celestia, a community that would be pure of sins and follow divine, not human, law. They planned a city of thousands centered around a vast four-story temple with a pyramid atop it that reached toward heaven. This grand vision was never realized, but a handful of Philadelphians followed them and built homes.
Celestia might have disappeared—a footnote in the history of nineteenth-century religious revivalism—if not for a curious incident that unfolded in 1864. During the Civil War, one of Armstrong’s followers sought a religious exemption from conscription into the Union army. Armstrong wrote President Abraham Lincoln a letter and received a speedy reply, approving the request. Building on this success, he decided to seek exemption from property taxes also. The matter was referred to a local board, which devised a clever response. If Armstrong claimed that his faith led him to seek separation from earthly affairs in the wilderness, then surely holding a deed to the property was inconsistent with his faith. The board gave Armstrong a choice. He could either give up his faith and k
eep his property or relinquish his property and keep his faith.
Armstrong, however, was more than up to the challenge. His response is recorded in the Sullivan County Courthouse, in a deed dated June 14, 1864. He transferred Celestia, about six hundred acres of land and, incidentally, the attached mineral rights as well, to God. “We do, by these presents, deed, grant and convey to Almighty God, who inhabiteth Eternity, and to His heirs in Jesus Messiah, to the intent that it shall be subject to bargain and sale by man’s cupidity no more forever, all our rights and title (by human law) and claim of any nature soever in or to, of that certain tract of land,” the one-page document notes. He likely drew inspiration from another portion of the Old Testament that states, “The land shall not be sold for ever: for the land is mine.”
It was an elegant solution. The six hundred acres were no longer owned by people of this earth. Celestia remained put. But there was one problem; God was a tax delinquent. Armstrong and his followers may have been trying to build in the wilderness a new city that glorified God, but local officials held a different view of real estate. They believed that Sullivan County was there to be worked. Small subsistence farmers were settling all over the county, clearing out the hemlock forest to harvest the bark, which was used in nearby tanneries. Soon railroads would enter the county, to transport its coal north and blocks of ice south. The United States was in the midst of an energy transition; coal would soon displace wood as America’s primary fuel and fire the nation’s industrialization. Pennsylvania embraced its role as a resource provider and became a leading producer of coal, iron, steel, timber, and petroleum. Sullivan County required tax revenue to build roads and supply services to its population, which increased by nearly half between 1860 and 1880.
By 1876, the Sullivan County treasurer had begun to demand Celestia’s back taxes, but Armstrong refused to pay. There are two stories of how the showdown ended. One is fanciful and the other probably true. The first is that the sheriff went to Celestia to take its sheep as payment for taxes owed. Armstrong gathered his followers to witness a miracle. The sheep, he said, wouldn’t follow the sheriff. But they did follow him, and soon most of Armstrong’s human flock departed as well. The other version of events is that the treasurer sold 350 acres at a sheriff’s land sale. The buyer was Armstrong’s son, who paid $33.72, an amount that covered the tax bill.
Whichever version is correct, within a few years, Celestia was in terminal decline. The Armstrongs’ bid to sever the land’s earthly ties from commerce and government had failed. Their son sold the land to a lumber company, and the forest was cut down for its bark. The Armstrongs couldn’t break free from nineteenth-century trade and taxation. My parents also found they couldn’t escape from twenty-first-century energy exploration, and neither could their neighbors. Even the holdouts are now surrounded by pads, rigs, and pipelines. The rumble of trucks is too ubiquitous to escape, the lure of jobs servicing this new industry too great to ignore.
The energy industry juggernaut has rolled through Sullivan County. The only real question left is what the county will look like after the gas industry has come and gone. Sullivan County was nearly denuded in the nineteenth century as its old-growth hemlocks were felled, but the forest returned. Today a lush canopy of second-growth pine, ash, and oak trees covers the mountains. The coal mine is, for the most part, gone too. A strip mine was filled in and reclaimed. Both the tanneries and the coal mine dumped toxins into streams, but most of the rivers run with clear, drinkable water. Still, the arrival of the gas industry has left some locals wondering whether the land and water will recover this time. “Our forests were not harvested correctly and our coal was not harvested correctly; left us with acid runoff. We can’t do that three times in a row,” said Erick Coolidge, a dairy farmer and supporter of gas drilling. “Where is our plan? If we don’t do this right, what the hell have we done?”
Sullivan County is the second smallest of Pennsylvania’s counties, with 6,100 residents. It is set amid the Endless Mountains, part of the Appalachian Mountains chain. Deer outnumber year-round residents, and black bear sightings are common. At the beginning of the twentieth century, the town of Eagles Mere was a country resort for New York’s elite. The posh hotels are gone, replaced by small inns and bed-and-breakfasts. There is no McDonald’s or Wal-Mart, and you can’t get cell phone reception in large swaths of the county. There are a dwindling number of dairy farms but many remaining fields of alfalfa, corn, and hay. And there are trees—millions of hardwood cherry, maple, ash, and oak trees—that are chainsawed, cut into boards, and exported around the world to be turned into flooring, cabinets, and caskets. The local timber industry prides itself on sustainable forestry, not clear-cutting.
Below it all is the Marcellus Shale. Generations of farmers, tourists, religious seekers, and city dwellers were drawn to Sullivan’s soil, wilderness, and beauty. What was below the forest floors attracted the petroleum industry geologists beginning around 2006.
The first wave of landmen targeted the largest landowners. Betty and Milo Reibson signed a gas lease in 2006. They are one of the remaining dairy farming families. Their herd of one hundred cows is one of fourteen in the county, down from nearly three hundred at the peak. In their sixties, they remain active farmers even as they turn over more day-to-day responsibility to their son, the third generation of Reibsons to operate the farm. Their pretty two-story white house sits a few feet off the road, up the hill from the barn and two weathered gray silos. On an overcast morning, most of the cows remained in the barn. Eight heifers and cows, the pregnant members of the herd, grazed on a hill behind the house, hemmed in by an electric fence.
The landman’s first offer was $25 an acre to drill on the Reibsons’ land. The conversation didn’t go well. He came and sat at their wooden dining room table with a topographic map. When they asked to see it, he refused. Milo offered to walk the young man around the property to give him a sense of the layout of the fields. The landman, who worked for Anadarko Petroleum, said this wasn’t necessary. This refusal put the Reibsons on edge. They weren’t against gas drilling, but business wasn’t done this way in Sullivan County. The land, its contours and soil and water sources, was all that mattered. If they planned a major change on their property, they would drive down the road to their neighbors for a discussion. The out-of-state landman was operating from a different playbook.
When I arrived at the Reibsons’ house on an overcast day in July 2012, Milo greeted me in a ratty and torn blue checkered shirt. Betty descended the staircase a couple minutes later, asking my forgiveness for her lateness. Her hair was perfectly in place. She wore pressed black slacks and a white blouse. She has a direct manner and a way of looking at people that holds their attention, a political skill that served her well as she rose from being a township supervisor to county commissioner. “If I was to train people to go out and talk to people about their biggest asset and most heartfelt asset, I would train them with more sensitivity,” said Betty.
Despite the culture clash with the landman, the Reibsons didn’t dismiss the offer outright. Farmers had signed leases on and off for decades in Sullivan County. The terms were small, a couple dollars an acre, and no drilling ever took place. Farmers grew accustomed to what was basically a hassle-free stipend. The Reibsons soon realized that this time was different. The money being discussed was several times higher than in the past. As negotiations dragged on for six months, Milo talked the landman up to $85 an acre. (The lease was for 245 acres, so the sign-on bonus was more than $20,000.) With this kind of money on the table, they expected there would be a well drilled. Milo and Betty negotiated an addendum to the lease that gave them the right to consent to the location of any well on their property but required they not withhold permission “unreasonably.” The Reibsons signed a lease with Anadarko. Two years later, Anadarko sold 50 percent of its interest to Chesapeake and designated the Oklahoma City company as the operator.
Chesapeake acquired the majority of the acreage across the
northern tier of Sullivan County. The land is divided into thousands of plots, few of which resemble a shape found in grade school geometry. The property lines tend to follow what can be cultivated. Fields have been sculpted into the undulating hills, bought and sold by farmers, leaving behind a crazy quilt of real estate records. Rather than drilling on every property, Chesapeake pooled the plots into units. Each unit was about 640 acres, roughly one-third mile wide and one and a half miles long. The units are long rectangles, running on a southeast-to-northwest axis. As the units were drawn up, property owners received a share of each unit commensurate with the number of acres they owned. In early 2011 Chesapeake created the Phillips Unit. The Reibsons owned about 61 acres in the unit, entitling them to royalties on 9.5 percent of the gas in the unit. The company created an adjacent unit that contained 190 of the Reibsons’ acres. Following convention, Chesapeake named it after a landowner and called it the Milo Unit.
The way the Milo Unit was drawn up, the Reibsons’ parcel sits at the dead center. That’s where Chesapeake wanted to locate its pad: a flattened, compacted piece of earth where it could assemble the machinery needed to drill a cluster of six wells. These wells would then spread out like a spider with six long legs, with the pad as the cephalothorax. Three wells would head to the northwest, running parallel to one another; the other three to the southeast. Once each well had been fracked, the cracks would spread out from each well, covering the units and allowing it be drained of gas in a systematic, efficient manner. Little, if any, of the buried Marcellus Shale would be untouched. The layout was scientific, systematic, and thorough. It was a factory approach to exploiting the shale, the machines placed in the exact spot to maximize production and minimize costs. And it had little regard for the surface. According to Chesapeake’s logic, the pad should be located in the center of the unit. If it were placed at the top of the rectangle, three of the wells would need to be extra long and the other three short, raising costs of the entire operation.
