5 Aug 2013

George P. Mitchell: Founder of Shale Gas — here’s how he and his team did it

Written by Jim Pierobon

The memorial services this week near Houston honoring the generosity and success of energy innovator, real estate visionary and philanthropist George P. Mitchell are inspiring accolades for his role in tapping the huge potential of natural gas from shale rock formations deep underground. He passed away July 26 at the age of 94.

Mitchell — mistakenly — is being idolized in some quarters as either the ‘father of fracking’ (hydraulic fracturing) and / or horizontal drilling. Both of those techniques have proven instrumental to the natural gas boom underway but they weren’t his doing.

What George Mitchell should get credit for — in the face of persistent skeptics throughout the industry in the 1980’s and 90’s — were his belief that natural gas could be extracted from shale rock and for using those techniques to do so economically.

After reporting on Mitchell early in my career as the Chief Energy Writer for the Houston Chronicle, I’ve been told by many industry professionals that the Galveston, Texas native and father of 10 would have selflessly directed much of that credit to a team of geologists, chemists and engineers at the company he founded, Mitchell Energy & Development in The Woodlands, a sought-after community he pioneered and developed north of Houston.

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Dan Steward (standing between the white valves) led teams at Mitchell Energy & Development to produce natural gas basin deep below Fort Worth. CREDIT: Chris Quinn, The History and Making of the Barnett Shale DVD

We almost certainly would not be experiencing the unprecedented, global boom in the discovery and production of natural gas and crude oil from shale rock formations we’re it not for the expertise and perseverance of the Mitchell’s team managed and coordinated by Dan Steward (standing in the photo, right, between the two white valves) a key members of the shale gas team, including Nick Steinsberger, Kent Bowker , Mark Whitley, Lee Utley and their supporting cast.

One might think the deep pockets of Big Oil would have figured out a way to produce natural gas from shale rock formations. The fact is, not one of them had done so through the late 1990s. At least one major oil company — Chevron with a $30 million annual exploration budget — tried finding natural gas in shale rock but gave up after a management shift.

At George Mitchell’s urging, Messrs. Steward, Steinberger, Bowker and Utley, with help from corporate vice president Mark Whitley,  learned a lot about how a relatively simple mixture of sand and water directed by three-dimensional (3D) seismic test data could unleash large quantities of natural gas from shale, which is extremely tight and thus hard to penetrate.  Their discovery of the formula was something that even the formidable resources of the U.S. Department of Energy and experts at the Gas Research Institute could not made sense of.

“The science wasn’t there to assist them,” said Steward in interviews with The Energy Fix.

Amid relatively little industry knowledge and no real experience or data to work with, George Mitchell was increasingly focused throughout the 1980s and 1990s on the need to find ‘new’ sources of natural gas to replace the company’s depleting reserves of natural gas. Those reserves served as a significant cash cow enabling the company to supply Natural Gas Pipeline Co., which in turn transmitted  natural gas to utilities and other customers in and around Chicago.

These were dynamic times in the energy business because prices for natural gas were set to rise in step with the industry’s deregulation in the 1980s. Sensing the potential upside, Mitchell repeatedly asked the company’s board of directors throughout the 1990s for their approval to finance a way to get natural gas out of shale rock formations in north Texas. Each time the board turned him down.

Despite the deregulation, natural gas prices were too low at the time for the industry to make enough money considering the uncertainties, risks and expenses involved.  A lot of natural gas associated with the production of crude oil actually was burned, or flared, at drilling sites because there was no use for it.

Nevertheless, George Mitchell persevered while reminding the directors he, in effect, controlled the company. He put a team up to the task to do it his way, managed and coordinated by Dan Steward.

Kent Bowker, who could not sustain Chevon’s interest in shale gas development, quit the oil giant after 18 years there. He connected with Mitchell Energy and Dan Steward in 1998. Bowker’s specialty: using three-dimensional (3D) seismic imaging to find the richest concentrations of shale natural gas thousands of feet underground.

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Kent Bowker, who identified natural gas-rich deposits for Mitchell Energy & Development, is next to a popular larger-than-life statue of company founder George P. Mitchell in The Woodlands, north of Houston. CREDIT: Jim Pierobon

“The potential for shale gas was so big,” Bowker (photo, left) told The Energy Fix, “it made your head spin.”

One complicating factor was was Bill Stevens, whom George Mitchell hired in 1994 from Exxon Corp. as Mitchell Energy’s  new President and Chief Operating Officer.  Stevens’ job, as one manager put it, was to: “monetize the company’s assets.” In other words, streamline the company’s finances and operations for sale.

Spending a lot of money on untested drilling techniques threatened Stevens’ job. Nevertheless, George Mitchell told Steward’s team to press ahead on their own.. Focus, George Mitchell said, where the company had acreage to prospect on and a processing plant to push gas into pipelines headed for Chicago. That was the  “Barnett Shale Play” centered around Fort Worth, Texas’ original ‘cow town.’

“We were not going to be able to replace reserves on a yearly basis from existing development in North Texas,” Steward said. “The future of the company could could very well depend on finding a replacement.”

Years of work and dozens of test wells using various combinations of foams, gels and carbon dioxide (CO2) with water produced helpful new supplies of natural gas, but did not create the needed profitability under the threat of diminished natural gas prices. Still, “more natural gas reserves on the books paved the way for future development,” Steward said.

Continued drilling did little to solve the puzzle. “They threw a lot a science at this,” said Dan Jarvie, a geochemical consultant. “They worked to understand this rock. We’re not talking about a major oil company with a research and development department. We’re talking about s small independent oil and gas company that did all this work,” said Jarvie,

Then Nick Steinsberger recommended in 1997 testing a far less expensive concoction of water, sand and a gelling agent from the guar bean. It came to be called a “slick water frac” and proved to be successful in prying open tight rock formations so that natural gas could easily be pushed to the surface.

Much of this activity was below the industry’s always inquisitive ‘radar.’ A 5,700-word article in the May1998 issue of Oil & Gas Journal illustrated how the Barnett Shale Play was beginning to draw queries from the industry and trade press. But there was no rush to judgment.

Steward and his team were thankful. Bowker’s 3D seismic analyses produced estimates of recoverable natural gas that were three times the company’s original estimates. Sensing the potential, they needed to keep a ‘lid’ not only on their new-found formula but where they could apply it and make the company money, lots of money.  And that meant buying up drilling permits on their land leases before competitors and landowners caught the scent and speculation priced that work out of reach.

During fundraiser for the Oil Information Library in Fort Worth in 2000 packaged as a seminar on the Barnett shale formation, speculation began to ramp up that something promising was afoot there. The conference room was packed. Word spread that Mitchell Energy has started to make money in the Barnett Shale.

Grasping the ‘intelligence’ the company was amassing, Bill Stevens prohibited anybody from Mitchell Energy from speaking or even attending the seminar.

“Nobody knew what we were doing. We weren’t allowed to write or talk to anybody,” Bowker said.

The team proceeded to drill three horizontal wells but none of them produced the volumes of natural gas it was looking for.  True to George Mitchell’s mantra, the team planned to drill more horizontal wells; that is until Stevens ordered them to stop.  Stevens is widely remembered for declaring to several team members that he’d be dead before the company drilled another horizontal well.

“We would have hit a home run with the next horizontal,” Bowker asserted.

Stevens moved to finish packaging the company for the sale. The thinking he shared with some employees was that if more horizontal wells failed, it wouldn’t have the “carrot” to sell it.

Working with investment bankers, Stevens invited a handful of companies — EOG (for Enron Oil & Gas), Anadarko Petroleum, the Williams Companies and Devon Energy–  to a secret data room in The Woodlands. There, after signing non-disclosure and non-compete agreements, the companies and their geologists reviewed Mitchell Energy’s assets, financials and seismic images on the Barnett Shale.

Some of the bidders’ engineers remarked that Mitchell Energy and the Barnett Shale posed an “interesting” opportunity. Others wanted more data.

“Everybody looked at that  technology (Mitchell Energy) was developing of hydraulic fracturing and said it doesn’t work,” said Devon Energy’s co-founder and chief executive officer, Larry Nichols recalls in a company video here. “It’s old, it’s tired . . . there’s nothing there. Everyone knows that. Don’t waste your time.”

During 2000 and 2001, 12 landmen and as many as 85 contract brokers worked the Barnett Shale  according to Steward’s written account in 2007 entitled The Barnett Shale Play (now out of print). Leasing efforts acquired more than 180,000 acres in what eventually stretched across a four-county area.

“In proprietary areas such as Johnson County, the contract brokers were not told who they were working for,” Steward wrote. “When they got into a position of competing with one another, one team would be instructed to back off.”

Newark East Barnett Shale early production chart cropped, from K Bowker

This illustration of a portion of the Barnett Shale Play reflects how natural gas production grew exponentially from 1982 through 2001 thanks to hydraulic fracturing under the direction of Mitchell Energy & Development. CHART: courtesy of Kent Bowker

As talk of the Barnett Shale began to grow, Devon CEO Nichols was urged by a consulting engineer to take a second look at Mitchell Energy with the newly-acquired knowledge that slick water fracs could work on a very large scale.

“After a year or so (in 2002),” Nichols acknowledges, “we went down there a second time a year and half later and discovered it really did work and ”

Devon Energy acquired Mitchell Energy & Development at year-end 2002 for $3.5 billion. George Mitchell became Devon’s largest individual shareholder.

“Mitchell’s application of water fracs in my opinion proved the Barnett was a viable play. Devon’s application of horizontals moved the play into a boom,” Steward reflected.

After decades of dry wells, unproven science and risks much larger companies would not take, we can only speculate whether the U.S., and now the world, would be experiencing the natural gas boom, which now also has translated to crude oil as well.

What is know is this: without Mitchell Energy’s need for new natural gas supplies, the the flexibility accorded the team combined with the team’s instincts and expertise, the U.S. today might not be on a path to becoming a major exporter of natural gas and significantly reducing its risky reliance on imports of Mid-Eastern oil. Nor would it be regaining its manufacturing prowess powered by plentiful, inexpensive, domestic natural gas.

George Mitchell RIP. Team: you done good, real good.

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