The Mildcatters

Unlike their daredevil counterparts of old, today’s energy entrepreneurs want a sure thing— or, at least, a surer thing. Which is why they’re betting on gas, not oil.

IF YOU HAVE LIVED IN Houston for a certain period of time—since the oil boom of the late seventies, say—it is nearly impossible to avoid feeling your pulse quicken whenever oil and gas prices look to be headed for an extended uptick, as they seem to be right now. The more that energy gloom and doom settles upon the world—the war in Iraq, the much-threatened collapse of the Saudi government, the success of books like Paul Roberts’s The End of Oil—the more a certain segment of Houston edges toward euphoria, even though it is supposed to remember what happened last time. A story in the Houston Chronicle’s business section on April Fools’ Day, for instance, carried the jubilant (for Houston’s oil sector) subtitle “Report raises prospect of oil reaching $100,” but it also contained an uncharacteristic concern for the dangers of a worldwide recession that might be caused by a “super spike” in prices. That conflict, in a nutshell, is Houston today: Post-bust and post-Enron, the city is trying on a brand-new mood: cautious ecstasy.

At least that’s what struck me at a meeting this spring, high atop the JP Morgan Chase Tower, which, long ago in the very good times, bore the name of Texas Commerce Tower. Houston’s new mood was represented by Keith Spickelmier, a 43-year-old natural-gas entrepreneur who was a bankruptcy lawyer during the bust. “I know what can happen,” he told me, shaking his head and taking a sharp intake of breath, as if the money lost had been his own. He was handsome, in a youthful, all-American way, his broad, open face and rosy cheeks revealing his Nebraska origins.

The old mood—unbridled optimism—belonged to a man named John Olson, who had recently put together an energy hedge fund, a private-investment vehicle that ostensibly reduces risk. The occasion for the meeting was to discover whether Spickelmier might be interested in investing. Any student of social interaction would have been able to tell at a glance that Spickelmier did not share a mutuality of interest with Olson, who, as an analyst for Merrill Lynch in the early nineties, was an early Enron critic. Spickelmier was assiduously groomed in a pin-striped suit, rep tie, Montblanc, and a very fine watch. Formality clung to him. Olson was casually dressed in an oxford shirt and khakis, as was his partner, who had added a no-stress burgundy pullover to his ensemble.

Spickelmier was polite while Olson made a pitch for his fund: “Five years ago, if you wanted another barrel of oil, you called up the Saudis,” he said. But after 9/11 in particular, the Saudis slowed production, and the promise of vast new reserves in Russia and what are now called “the Stans” hadn’t borne out. “Everyone in the world wants a stable supply of oil,” Olson continued, “but there is no stable supply. The price of oil is going to stay high for a long time.”

Everyone in the room knew what that meant: “a gigantic cascading waterfall” of money—Olson’s term for all the exploration money, drilling money, construction money ( We’re going to rebuild the Middle East!) rushing into Houston, proof that investing with him was the prudent thing to do. “The next five years will be the best in your career and my career,” he said emphatically. “It’s all here. That’s the beauty of it. I’ve been an analyst for thirty-seven years, and it’s big.”

A quarter of a century ago, this would have been the moment for someone like Spickelmier to fall all over himself trying to get in on the action. He did chuckle when someone mentioned that Wall Street investors, who didn’t know a Christmas tree from a drill stem, were desperate to get in on new oil and gas deals, and he tacitly agreed when it was suggested that the “dumb money” was flowing Houston’s way again. But he was restrained, in a way that an earlier generation of Houston oilmen were not. Spickelmier was a rich man, with several businesses of his own, including a partnership in a private equity firm. Even so, he had a nervous little laugh that telegraphed his suspicion that his success might evaporate at any time. He knew things were looking good in Houston, but he also knew that a lot of energy hedge funds had taken a beating this year. He believed he had a better, safer prospect: the Barnett Shale. Why should he pay somebody else to pursue energy riches on Wall Street when he had already formed an oil-and-gas production company called Westside Energy last year to take advantage of the hottest gas play in Texas, probably the hottest in the entire United States?

The Barnett Shale is a vast underground swath of rock that runs through Fort Worth and out into suburbia, stretching northwest of Dallas almost to Oklahoma and southwest as far as sparsely populated Erath and Bosque counties. As Spickelmier listened politely to Olson’s pitch, a subtle restlessness suggested he knew that deals in the Barnett were slipping through his hands. The price of a drilling lease had shot up from $25 an acre to as high as $8,000 in just a few short years. Potential sellers were exchanging intelligence over the Internet, attaching smiley faces to their queries. Companies from Oklahoma, Denver, Kansas, and, yes, downtown Houston were puncturing the rolling North Texas landscape in hopes of making a killing. As was he.

The Barnett was the real new thing in the energy business: a sprawling, wildly beneficent gas field, trapped deep in unyielding rock for about 320 million years, whose moment had arrived. As Morgan Stanley reported in April 2004, “Producers previously skeptical of the Barnett have recently established positions in the play.” The Barnett Shale was “viable in virtually any gas price environment.”

It was that notion of low risk and high reward that particularly appealed to Spickelmier: The Barnett was described in knowledgeable circles as an engineering play, or a mining play. Everyone knew the gas was down there,

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