In the following months, Koch’s series of deals accelerated. In September, Koch announced a partnership with an obscure company called Arrowhead Pipeline to move 50,000 barrels a day of crude oil out of southern Texas. This was roughly half of the entire region’s production at the time. Then, a month later, Koch announced a partnership with another little-known firm, called NuStar Energy, to reopen sixty miles of defunct pipeline, to carry 30,000 barrels of oil a day.
In November, Republicans won control of the US House of Representatives. A month later, Koch announced another deal, this one the largest yet—the company would build a brand-new sixteen-inch pipeline from remote Karnes County, Texas, to Koch’s refinery in Corpus Christi, capable of carrying 120,000 barrels of crude oil a day. The new pipeline had the potential to be expanded to carry up to 200,000 barrels a day. In February of 2011, another deal: Koch bought the Ingleside Pier in Corpus Christi, an export terminal through which Koch could ship 200,000 barrels of oil a day on barges. Two months later, Koch announced a new twenty-inch pipe running from Pettus, Texas, to Corpus Christi, capable of carrying 250,000 barrels a day.
These deals garnered very little attention. There were a few corporate press releases and small stories in local media outlets. What outsiders didn’t realize was that Koch Industries had just built a superhighway for crude oil, carrying hundreds of thousands of barrels a day from southern Texas to Koch’s refinery in Corpus Christi, with an off-ramp at the Ingleside Pier that could carry excess supplies to foreign markets.
The puzzling part about this superhighway was that it was built to carry oil supplies that didn’t seem to exist. The highway began in a region of Texas called the Eagle Ford Shale. Production there had been flat. In fact, the one accepted truth about US oil production was that it had peaked in the early 1970s and would never again increase. The Eagle Ford region was no exception. In 2007, there were fifty-one oil-drilling rigs in Eagle Ford, producing about fifty-four thousand barrels of oil a day. By late 2008, there were sixty-two oil rigs in the region, producing fifty-seven thousand barrels a day. In 2010, Eagle Ford’s production actually fell to about fifty-five thousand barrels a day.
Nonetheless, Koch was building a system to move hundreds of thousands of barrels of crude from the region. These deals were part of a strategy that Koch had been formulating for over a year. Koch saw something in Eagle Ford. It was something that others also saw, but that Koch was the first to exploit. While production was flat until early 2010, the number of drilling rigs had more than tripled in just over a year, from thirty to 104. This number was a leading indicator. The wells would start pumping, and new oil would start to flow. Koch Industries was poised for the change.
The wells being drilled into southern Texas were the face of an energy revolution that would redefine global oil markets and the American economy. They were part of a once-in-a-generation transformation that crept up quietly and then changed everything. In one short decade—from 2005 to 2015—America went from being the largest importer of refined petroleum products to the largest exporter of refined petroleum products. A country that was once the poster child for peak oil discovered that it was home to oil and natural gas deposits that were likely larger than those found in Saudi Arabia. The entire story about fossil fuels was reversed before many people even realized what was happening. These changes were every bit as cataclysmic for oil markets as the OPEC embargo had been in the 1970s. But this time, the changes accrued to America’s benefit. The cost of oil plummeted, OPEC was defanged, and America became essentially self-sufficient as an oil consumer.
The revolution was catalyzed by a suite of oil-drilling technologies that were used together in a drilling process called hydraulic fracturing, or fracking. Fracking had been around for decades, although it was fatally unprofitable. The method was kept on life support only by giant and long-lasting government subsidies and tax breaks. Fracking only became commercially viable thanks to the oil price spikes of 2007 and 2008. When fracking became widely deployed, it opened up massive fossil fuel reserves in the United States that were long considered unattainable.
This revolution, while far reaching, did not change one important element of the energy business. The revolution did not change who benefited most from the energy business (at least during its first decade). The fracking economy was new, but the primary beneficiaries were old. The companies that benefited most were the long-standing legacy players, like Koch Industries.
The fracking boom played to Koch’s advantages, and one of these key advantages was Koch’s capacity to thrive in volatile markets. The fracking boom unleashed a period of almost unprecedented volatility between 2010 and 2014. Koch Industries was built to respond to volatility, and its expertise was evident in Koch’s hidden effort to build the oil superhighway out of the Eagle Ford region.
The effort began when Koch’s commodity traders started to receive early signals that something big was about to happen in oil markets.
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The first signals emerged on the natural gas trading desks sometime around 2009. This is when the advent of the fracking boom was first detected.
The previous two years had been wildly unstable. In 2007 and 2008, crude oil prices spiked to record highs. Natural gas followed crude oil upward, as it tends to do. Energy prices crashed during the recession due to weak demand, which was predictable. But then something strange happened: oil prices started to climb again, but natural gas prices didn’t follow them upward. Instead, gas prices started to slide. Then fall. Then collapse.
The reason for this was startling. Natural gas supplies, long thought to be growing scarcer every year, had suddenly started to increase. In late 2009, the United States produced 1.65 trillion cubic feet of natural gas a month. In two short years, the supply skyrocketed by 23 percent, reaching 2.03 trillion cubic feet a month in 2011. And this wasn’t a fluke. By 2015, the supply would reach 2.3 trillion cubic feet.
This was the start of the fracking revolution. Fracking is a shorthand term that refers to a group of three technologies that, when used together, make it possible to extract natural gas deposits that were once unreachable. The first technology is called microseismic imaging, a system used to map underground gas deposits trapped in dense shale rock. Shale gas deposits were previously considered unattainable because of their weird formation: the deposits are composed of broadly diffused gas droplets trapped in rock. The deposits are shaped like a giant dinner plate—wide and shallow. Drilling into them is like punching a nail through the plate, which allows the drill to tap a tiny portion of the gas.
This is where the second technology comes in: horizontal drilling. With horizontal drilling, the nail could penetrate the dinner plate and then make a sharp right turn, traveling through the heart of the entire deposit. The final technology was a group of chemicals, known as proppants, that could be injected into the shale rock along with sand, dislodging gas and allowing it to be sucked to the surface. When gas became expensive in 2007, it finally justified the expensive process of extracting it through fracking.
The earliest waves of the fracking boom came as a surprise to Koch’s leadership team. The boom was catastrophic for gas prices, which fell roughly 85 percent between 2008 and 2012, from a peak of $12.69 per million BTUs (or British thermal units, a metric that’s widely used as the basic measurement of energy use) to a mere $1.95. As it turned out, this catastrophe played to Koch’s advantage because natural gas is the primary ingredient for nitrogen fertilizer. When prices fell, Koch was suddenly able to make its fertilizer for a fraction of the cost. It was a breathtakingly lucky break. Retail prices for fertilizer stayed high because of strong demand from farmers, who needed fertilizer more than ever to keep production high. When gas prices and production costs collapsed, Koch’s profit margins swelled. Koch was the fourth-largest fertilizer maker in the United States thanks to its purchase of Farmland’s fertilizer plants in 2003, for pennies on the dollar. Now those plants were printing cash.