Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
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George Farenthold operated several oil leases in the area when Wyatt was selling roller bits; he recalls that Wyatt was hungry for any information he could get his hands on. “As soon as we’d turn our backs, Oscar would sneak into the tool house and start checking the drilling logs to see what kind of luck we were having,” Farenthold says with a grin. “Sometimes we’d have to tell him to keep his nose out of the books because we were running a tight [secret] hole, but that didn’t seem to help much.” (Farenthold and his wife—gubernatorial candidate Sissy—are the godparents of Wyatt’s eldest child.) Wyatt was doing his homework, learning where the gas was and who had it. With the formation of Coastal, he was ready to put that knowledge to use.
Coastal States was Wyatt’s entry into a very tough league. It wasn’t easy for a newcomer to break into the gas business in 1955. Unlike the oil business, which always seemed to have room for another independent, the gas industry was tightly controlled by a few large companies. There are at least three routes to wealth and power in the oil industry—production, refining, and marketing—but in the gas business in 1955 there was only one: transportation. An oil producer can ship his crude oil to a refinery by pipeline, truck, or rail; a gas producer has but a single option—gas can be transported only by pipeline. The big pipeline companies, therefore, had immense power over producers, for without a connecting pipeline, a gas well—no matter how productive—was useless.
The major pipeline companies—Tennessee Gas, Texas Eastern, United, perhaps one of two others—controlled the South Texas gas fields in the early Fifties. They would hook up with a gas field only if it had enough reserves; normally the company would build one mile of pipeline for each billion cubic feet of reserves. Because a federal court had ruled that the Texas Railroad Commission could not regulate gas production (as it did oil), the pipeline companies established their own rationing system. They handed out payments to all the owners in a field—regardless of whether they actually had wells on their property—in proportion to each owner’s share of the underground reservoir. The companies even set their own daily allowable; they would take one million cubic feet of gas each day for each eight billion cubic feet of reserves, a formula designed to insure that the field would last for twenty years. Finally, the companies respected each other’s territory, a sensible business decision which avoided duplication of expensive pipelines. It also avoided competition. Every gas field was a monopoly, a separate fiefdom subject to the absolute rule of the pipeline company.
Oscar Wyatt knew all this, of course, but he also realized that the very circumstances which gave the monopolies their power could be turned against them. Wyatt did the one thing the pipeline companies did not anticipate: he built his own pipeline network. Coastal States Oil and Gas (soon to become Coastal States Gas Producing Company) began in November 1955 with 68 miles of pipes into fields too small for the big companies to bother about. Before long Wyatt was ready to challenge their monopolies in the big fields. Wyatt signed contracts with small landowners (known in the industry as “town lot operators” because the tracts often were ten acres or less), who were effectively shut out by the big companies’ practice of paying owners in proportion to their share of the field, whether they drilled or not. Wyatt would put in a pipeline and start hauling off gas. Coastal paid less for the gas than did the big companies, but the town lot owner was incomparably better off with his own well than he was under the proportional ownership formula imposed by the big companies. Wyatt sweetened his offer still further by promising to take one million cubic feet daily for each two billion cubic feet of reserves, a rate four times as fast as that used by the big companies.
Wyatt’s tactics enraged both the larger producers and the established pipeline companies. The town lot operators were producing far more gas than lay underneath their own small tracts—much of the gas came from beneath the larger landowners in the field. True, it was all perfectly legal under the rule of capture (which declares that oil and gas are not owned until produced), but it was practically like stealing gas, or so the pipeline companies claimed.
Coastal’s tactics did not win it many friends in the industry. Competitors whispered that Coastal pilfered gas in other ways that weren’t so clearly within the law. Gas can be measured only with the aid of a complicated instrument known as an orifice meter, and even then the meter readings are subject to interpretation. Producers were always complaining about Coastal’s calculations. In its early years the company was in and out of courthouses all over South Texas, getting sued by unhappy producers who felt shortchanged. One former Coastal employee says he has no doubt Coastal “took the benefit of the doubt on meter readings.” There were other complaints about the meters as well: some producers were convinced that Coastal tampered with meters by surreptitiously changing the diameter of the orifice. They installed their own meters as a check against Coastal’s, an unusual but not unprecedented action. One San Antonio producer who is no admirer of Coastal States says he “never had double metering in his life with any pipeline company except Coastal.” (Charges of meter-tampering were buttressed considerably by the fact that Coastal occasionally reported “negative line losses” to the Railroad Commission—in other words, more gas came out of Coastal’s pipelines than went into them. On the other hand, this mysterious surplus could also be explained by reasonable ambiguities in meter-reading that Coastal resolved in favor of itself.)
Most of Coastal’s tactics weren’t new to the industry; other small operators used the town lot device, and every company interpreted meters to its own advantage. Coastal, however, refused to remain in the shadow of the major pipeline companies. Instead, it developed an entirely new concept in the gas business: the gathering company, which was neither a producer nor a major pipeline company, but rather a broker that bought and packaged gas for resale. Coastal revolutionized the gas industry in Texas; it broke the monopoly and went on to create an even larger one of its own. In the end it was not only Coastal’s methods but also its successes that aroused such resentment in its competitors.
As Coastal’s markets grew, so did its need for gas. Wyatt was already getting gas from town lot wells at low prices; now he began to outbid the big pipelines in other fields. To their consternation, the big companies now found that they actually needed Coastal. The big companies pegged all their payments to the highest prices they were paying in a field; if they started paying more for gas to any one producer, then they had to renegotiate all their contracts. So the large pipelines let Coastal outbid them, then purchased the gas from Coastal. The single purchase might be more expensive, but at least it wouldn’t trigger the price escalation clauses in all their other contracts. Coastal, meanwhile, got a handsome profit for acting as a broker.
Oscar Wyatt had pulled it off. Not only had he successfully challenged the big boys, in the process he had made his company indispensable to them. He exuded optimism; in the early days the atmosphere at Coastal States was pervaded with a sense of destiny. “We knew we were going someplace—we didn’t know how far, how fast, how big, but we did know there weren’t any limits,” says Ellis Brown, an attorney in Coastal’s land department from 1958 to 1964. Wyatt developed a talented management team even though salaries started out well below the industry average. The staff was small, young, dedicated, and overworked. Wyatt himself was only 31 when he founded Coastal. As president he set the pace—driving, pushing, calling employees in the middle of the night, working in his shirtsleeves, acting—in the words of one of his engineers—“like he was going to die if he didn’t get the next dollar.”
The tempo of life at Coastal was furious; time was precious, so important that sometimes it seemed as though time and not natural gas was Coastal’s chief commodity. “Time is the most valuable thing in the world,” Wyatt said in 1965. “When it is gone it can’t be replaced.” (His critics would add that much the same thing can be said about natural gas.) Almost 90 per cent of Coastal’s top employees had pilot training (Wyatt had his license at age sixteen), and the company transacted much of its business by air. Wyatt’s impatience with wasting time and his proclivity for taking over the controls occasionally caused complications for his passengers. Once when he was flying to Austin from Corpus Christi, Wyatt radioed the control tower for permission to land with the wind so that he wouldn’t have to spend the time circling halfway around the field. On another flight into Austin he suddenly put the plane into a steep spiral dive when he saw a hole in the thick clouds enveloping the city. His uninformed passengers thought they were doomed. Usually, however, Wyatt did little actual flying even in Coastal’s early years; he liked to take off and land, but the rest was too monotonous. It was a waste of time.
Wyatt has been described as a genius by both his critics and his admirers. His early associates remember that he could calculate in his head faster than engineers could operate a slide rule. Ellis Brown says that Wyatt could grasp a complex point of law better than any other layman and many lawyers; what’s more, Brown says, Wyatt never forgot it.
Wyatt’s creative energies matched his retentive powers. Almost everything about Coastal States during its early years was innovative: the concept of a gathering company, its method of attracting investors, and its approach to financing. Coastal paid no cash dividends—highly unusual for a company in the utility business—but was instead a growth stock. And what growth! The original stock was valued at $5 a share; by 1961 it was selling for $87.50 before splitting three-for-one. In 1963 it was first listed on the New York Stock Exchange, opening at 29. It crept upwards to 32 ¾ by mid-1965, and then began the phenomenal growth that made Coastal States Gas a darling of Wall Street: 49 ¾ in late 1967, a ten per cent stock dividend in January 1968 and a high of 69 5/8 in April of that year before splitting again, this time two-for-one. One hundred shares of stock purchased in 1955 for $500 would then have been worth $22,960.
Wyatt was equally successful in developing new forms of financing. Traditionally, pipeline companies offered their pipelines as security for bank loans. Coastal, on the other hand, made contracts to buy and sell gas, hoping to borrow money based on anticipated profits. There was some risk involved, to be sure, but Wyatt once explained his philosophy of business as “taking a reasonable risk and then working like hell to make sure it works.”
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