The Koch team began to formulate a plan. Koch planned to capture and ship as much of the tight oil as it could get from Eagle Ford, and send it to Corpus Christi. It seemed likely that a sudden glut of supplies from Eagle Ford would create a surplus, just the kind of bottleneck that Koch had seen in the Bakken. That meant that the oil would be cheap. If that happened, Koch’s Corpus Christi refinery might suddenly turn into a second Pine Bend refinery—a facility that could buy unusually cheap supplies thanks to a local oversupply and then sell gasoline into expensive retail markets.
Koch had an advantage over other refineries in Corpus Christi due to an accident of history. A majority of the refineries around Corpus Christi processed mostly imported oil, which was heavy in sulfur. Over the years, these refineries invested millions to install equipment specialized for refining the heavy, sulfur-rich crude. Koch was an outlier in this respect. The Corpus Christi refinery processed more light oil because that’s what it used as a feedstock for its chemical plant that made paraxylene. In other words, Koch was perfectly poised to accept a new surge of light oil. Its competitors wouldn’t be able to process the new supplies.
There was a risk, however. The frackers were just starting to move into Eagle Ford, and the market was up for grabs. There was a good chance that the frackers would sell their crude to refineries in the Houston area. If Koch Industries wanted the oil to flow to Corpus Christi, the company had to move fast. Razook and Sementelli started talking to engineers to figure out how much it would cost to build a new network of pipelines between Eagle Ford and Koch’s refineries. All of the estimates came back at “plus or minus 100 percent,” meaning the cost was either going to be the estimated price or about double the estimated price. Koch, and other companies, liked to fund projects with a plus or minus 10 percent risk factor.
After months of study, Razook, Sementelli, and Urban had a plan. They wanted to build pipelines to a region where they didn’t know how much oil there might be, for a cost they couldn’t estimate. Corporate planners were accustomed to having some variables in their plan. But this was different. “Everything in this project was a variable,” Sementelli said. Nonetheless, they were ready to take the project to Charles Koch.
* * *
Koch Industries’ boardroom was still located across the hall from Charles Koch’s office. Visitors walked into a spacious lobby on the third floor of the Tower, passed by a bust of Fred Koch that sat on a pedestal, and turned left to walk into the chamber. The room had no windows and dark wood paneling that created an almost claustrophobic feel, as if the attendees inside were in a diving bell. Recessed lighting in the ceiling shined down on a large, wooden table that dominated the center of the room. The table was shaped like a ring, with a hollow center in the middle, and it was surrounded by wheeled office chairs. This is where Koch’s business leaders presented their ideas.
Razook and Sementelli pitched their plan to Charles Koch, David Robertson, and Steve Feilmeier. They explained how the Eagle Ford Shale would likely surge with new tight oil production in the coming years, and how Corpus Christi was poised to refine the cheap supplies. The parallel to Pine Bend—Koch’s cash cow for so many decades—didn’t even need to be emphasized. “They certainly understand a feedstock advantage,” as Sementelli put it.
Razook and Sementelli’s plan was uncertain, risky, and carried a dangerously vague price tag. The pipelines alone would cost hundreds of millions of dollars. Or maybe double that.
Charles Koch and his team seemed to understand the play instantly. They encouraged it. “We didn’t have to sell,” Razook recalled.
“They were just wanting to make sure we were thinking big enough,” Sementelli remembered.
They went big on the plan. They formed the partnerships, expanded the pipeline network, and they bought the export pier. Then they reached out to the oil drillers they knew in Eagle Ford and started signing contracts to buy all the oil these drillers could provide. Koch’s pitch to these drillers was enticing. Koch would provide the pipelines for transport. The company would provide the refinery to process the crude. And if the drillers didn’t want to sell the oil to Koch, Koch could provide the export terminal for drillers to sell their crude for export.
By 2011, Koch had invested hundreds of millions in pipelines and signed contracts to ship hundreds of thousands of barrels a day. This investment was entirely a gamble. If Eagle Ford was a failure, the investment would be a total loss. Koch would own miles of worthless pipeline traversing miles of desolate scrub brush.
“It was hundreds of millions [of dollars] in the logistics phase,” Sementelli said. “That was all risk. I mean, we didn’t really know a lot of the variables.”
Then the oil started to flow.
* * *
The Eagle Ford region produced 82,000 barrels of oil a day in July of 2010. At the end of the year, it was producing 139,000 barrels a day.
At the end of 2011, Eagle Ford produced 424,000 barrels a day. This turned out to be nothing.
In late 2012, Eagle Ford produced 811,000 barrels a day. This was more than fourteen times what it yielded before the frackers arrived.
At the end of 2013, production hit 1.2 million barrels a day.
At the end of 2014, it hit 1.68 million barrels a day. The oil that flowed out of Eagle Ford each day was equal to almost 20 percent of all the oil produced in the United States, even back at the peak of production in 1970. Eagle Ford’s production was equal to roughly one-third of all US production in 2008.
The fracking revolution was shocking, overwhelming, and transformative to oil markets. It created an entirely new energy economy. It wasn’t just the size of the new oil reserves that changed everything—it was the structure of the new fracking industry. Since at least the 1960s, the oil business had been controlled by large, centralized cartels, from the group of companies known as the Seven Sisters to the national oil producers in OPEC. Cartels like OPEC could more or less change oil output on command. Saudi Arabia, in particular, had the ability to turn off the spigots or ramp up production, depending on the Saudi monarchy’s wishes. But the American reserves were tapped by thousands of independent drillers. Nobody was in control. When it looked like the world was oversupplied with oil, the frackers weren’t willing to shut off their wells and wait for prices to climb. Instead, each driller hung on as long as possible and sold whatever they could into the market. A fracking well only shut down when there was no other alternative. This feature of the fracking business would depress oil prices for years. Even when the oil prices fell by half during a crash in 2014, many frackers kept pumping. And those who stopped were only waiting in the wings to get back in business. The world oil markets, once characterized by terrifying scarcity, were now dominated by stubbornly high supplies coming out of the United States.
While this was transformative, not everything in the oil business changed so dramatically. When the tidal wave of new US oil supplies finally arrived, the wave crashed into a refinery system that had not changed in fundamental ways, in more than forty years. The refinery system was a narrow bottleneck that choked off the flow of oil in unpredictable ways, delivering profits for refinery owners that beat the world average by an order of magnitude. This bottleneck was the segment of the energy industry where Koch Industries excelled, and it was critical to Koch’s play in Eagle Ford.