Boomtown Dilemma
‘The greatest trick the Devil ever pulled was convincing the world he didn’t exist.’ -Charles Baudelaire
Oil booms bring an opportunity for riches to be made and fortunes to be sold or lost as the cycles of the industry can make or break a person and in those times of booms there is a rush of individuals to the regions that often bring unsavory characters. The history of Oil and Gas in the US is littered with stories of quite literally the wild west where thieves find incentive to profit off the massive capital flowing in and out of the region brought by the spike in prices of a commodity that runs the world. Tactics range from financial crimes where funds are raised on false hopes of riches, equipment and vehicle theft, or even the physical theft of crude are rampant in times of both boom and bust through high risk and high reward. Yet many new to the industry blissfully ignore the fact that advantage is taken through fraud, theft, and destruction; with that ignorance allows the Devil to come knocking.
Boomtown Murders
The small Eastland County town of Ranger was the site of an old frontier camp that boomed with the discovery of oil in the 1920s prompted the Texas Rangers to be stationed in the area due to an influx of crime, a situation that would need to be repeated throughout the 20’s and 30’s across many small boomtowns. West Texas has a vast number of small towns that at times flourished with an influx of people chasing black gold and in the case of Odessa, TX makes it a hotbed for crime including murder as it gains and loses the number one spot as the most dangerous city in Texas with the rise and fall of the local economy. Odessa has a crime rate of 63.62 per 1,000 residents, with 1 in 16 residents being a victim of a crime and a much higher than average rate of violent crimes including murder, rape, robbery, and assault. The neighboring city of Midland, TX, who decided the nickname Tall City was the best fit, ranked number one in highest income per capita according to the Bureau of Economic Analysis. Even though these two towns have basically grown together and in some cases Odessa city limits has been annexed into Midland County, the local school district in Odessa shows that over 60% of the 33,500 kids in their schools live in homes under the national poverty line. This type of population and economic disparity sets up the region that is considered the heart of Oil and Gas in the United States for a very specific and diverse set of beliefs and mindsets that when tested typically don’t result good fortunes.
With the boom and bust cycles that flow through the area of Midland and Odessa, give rise to transient workers and population looking for work in the high paying oilfields and with that population moving in and out has given way for those seeking to shed blood and attempt to leave without a trace. Samuel Little one of the biggest serial killers in US history confessed to more than 90 murders was charged with the 1994 murder of Denise Christie Brothers by strangulation in Odessa, Texas. Between October 1968 and June 1971, a series of sadistic murders terrorized the female population of Odessa, Texas, and surrounding towns where the serial killer Johnny J.E. Meadows committed at least 4 murders in the area. Michael Eugene Sharp born in Eastland, TX nearly thirty years after the Texas Rangers patrolled the town during oil booms is another serial killer in Odessa who abducted and killed two women and one girl in West Texas in 1982. The police also suspected that he might have been involved in the disappearance of 18-year-old Blanca Isela Arreola Guerrero in May, a pregnant food store employee who was last seen boarding a truck similar to Sharp's.
Oil Thieves
Organized crime in US oilfields are sometime as simple as a few individuals moving black market oil in the darkness of night to top officials in an organization colluding through embezzlement and fraud. It’s not a small task to steal physical oil and transport it into a legitimate system but it happens every day. Sometimes the process starts with the truck driver transporting oil through crude haulers or even water trucks not designed for this activity. One such water transport company is Eagle Ford Shale, transported crude without a license and eventually charged with two counts of theft from interstate shipment, sixty-nine counts of wire fraud and fifty-eight counts of money laundering. Oil thieves can average about $10 a barrel in today’s market or 15-25 percent of how much crude oil costs in the open market and depending on the size of the tanker this nets the hauler $1,200-1,800 a load. Once the crude is blended into the system it becomes almost impossible to track its origins leaving little recourse unless caught in the act of transporting without proper license or equipment.
Texas Ranger Dick Johnson and Railroad Commission(RRC) employee Nick Nichols were investigating oil field theft in Hardeman and Wilbarger Counties spurred by a whistleblower that Oscar Gray, an oil transport truck driver, was stealing oil for PB Oil Company. The company only had two assets that were shut-in wells that hadn’t produced in the past two years but against science and all odds produced $1.2 million dollars worth of oil in 4 years. Through flow tests the RRC employee was able to determine the potential of these wells and verify that crude was being transported from other leases into PB Oil’s system through a gather where at the time of the investigation a 180 barrel transport was worth $15,000. Eventually the investigators were able to catch the perpetrators during a transport where tank batteries were being monitored for levels to prove the origins of the oil transported were falsified. This ultimately resulted in a plea of guilty to theft over $200,000 with a 10-year cap on his prison sentence for Randy Hinsley and Frank Ackerman was convicted and sentenced to 7.5 years in prison.
Transportation of black market crude through pipe is also a possibility as the gather of the oil and gas into the system can be incentivized by parties to alter reports for varying reasons such as royalty and working interests of the parties organizing the theft. Oil and Gas leases can share many mineral holders that essentially profit off the production of the hydrocarbons into the system where an operator may shift volumes reported to more lucrative leases they operate to help maximize their bottom line based on their contracts or working interest. This isn’t as simple as an accounting trick on paper where metering of the liquids and gas coming from the wells should be tracked throughout the cycle from wellhead to tanks, separators, and eventually pipe but much like the transport by truck in the pervious story, and can involve shell companies through gathers or payoffs of legitimate ones to help message the accounting. One such instance from someone who wishes to remain anonymous, spoke with Energy Crisis about management above approaching them to alter reports in a way that could not be accurate for the volumes already processed and metering logged and refused through deflection by asking the manager to send them an email detailing the changes to create a log of the conversation and hold ownership of the request on that other individual and as was expected that email request never came. It’s easy to question if that manager moved onto another employee down the line willing to take orders without question and setting themselves up as the fall guy. With the consolidation of leases purchased near each other and ownership of surface by many operators becoming common it can be difficult to track this type of theft as the complexity of gathering stations positioned across surface commingling leases and pipe with large gaps in metering allow skimming of oil and gas to go unnoticed. Much like the story above a whistleblower usually ignites the initial investigation into this type of fraud but once identified is much easier to back date the long term theft through manual metering readings, flow tests, and past production reporting. In 2015 Texas Legislature sought to give law enforcement officials more tools to address this problem with House bill 3291 that sailed through both chambers but was vetoed by Greg Abbott in a surprise move.
The book The Great Texas Oil Heist by Robert Cargill Jr outlines 20 million barrels from East Texas stolen in a post World War II era of the oilfield called the Slant-Hole scandal. Millions worth of illegal oil money found its way into bank accounts and no one knew exactly how many millions, some suggest more than a billion dollars, but the piracy had been going on for a long period that are hard to pin down to exact dates. The drama of the missing barrels took time to play out where some even hired private investigators to check the validity of the rumors of slant holes, dummy wells, and operators growing their riches off illegal oil. In 1960 a Shell Oil Company well on the west side of the field began pumping fresh drilling mud but old wells don’t have new mud. A drilling rig a thousand feet away was spotted nearby and the mud belonged to the drill stem of that well. The mud wouldn’t have made it into the Shell hole unless they had drilled straight into the wellbore with intent to blatantly steal Shell oil attempting to hit the formation of oil deposited underground the unlucky thief accidently hit the two inch pipe instead. Eventually this resulted in more than 550 wells being shut-in that utilized slanted shafts to steal oil to the tune of an estimated 3 million barrels a year at its peak. The fraud of the area even involved accusations of the District Judge of the county who eventually was found not guilty but it seems that the district attorney owned a little working interest in an oil well shared with these individuals. In this great oilfield piracy of the 1960s many were tried, sued, faced a jury, and prosecutors condemned them as thieves, crooks and pirates but no one went to prison.
Raise and Praise
There’s oil in them hills? Opportunity in the form of financial investments bolstering of a great discovery in a new undeveloped region or a technology to unlock barrels to the market at a high return on investment are common but sometimes based on a fairytale sold to create wealth for a handful of executives or insiders. A small case the SEC enforcement office brought on 7S Oil and Gas where defendants raised almost $7 million from at least 70 investors nationwide. The pump was promoted on YouTube videos including one in which CEO William Sewell claimed that "for sure you will get some type of return because there's no such thing as a dry hole," and another video depicting oil gushing out of a well with the comment "you got black gold coming out of that well." Ultimately the company applied only 57% the capital raised towards operating wells but the CEO did find $90k in the coffers of the company to go towards tuition for his children, entertainment expenses, and other personal items.
"Richard Richman" who’s real name was Richard Dale Sterritt, Jr raised more than $16 million from more than 300 investors through an unregistered private placement of the common stock of Zona Energy. The company’s investors were sold on the idea of mineral rights in a West Texas cattle ranch but were caught in holding the bill through misappropriated funds to pay for luxury goods, rental apartments, a car, and to make cash payments to friends, family members, and Sterritt's girlfriends. The SEC enforcement also found the company had substantial debt owed in the millions of dollars in demand notes to various Sterritt-controlled companies. The structure of the company positioned Sterritt to remain the ‘richman’ of the story even on default of the companies’ assets as the senior note holder.
Heartland Group was charged in connection with the offerings of five fraudulent unregistered oil and gas offerings that totaled an excess of $122 million. The Heartland affiliated defendants used approximately $26 million to pay ‘interest to debt fund investors’. Most of the investor funds were not used for any oil and gas related project. In reality, the investor funds were used to purchase a helicopter, a private jet, real estate in the Bahamas, and other unrelated personal expenditures. There seems to be a theme with these companies finding ways to make investors money work best for a lifestyle unaffordable based on their actual abilities to run a quality company. Heartland eventually put out a false reserve report that reflected incorrect valuations for gas reserves and projections. FINRA in an attempt to protect investors previously barred one of the companies ‘finders’ from the securities industry but the individual participated in the sell of securities, especially speculative private placements like the Heartland Funds.
The case of Aubrey McClendon of Chesapeake Energy shows the lifestyle of some executives willing to risk it all to keep up with appearances but when it all comes crashing down they are left holding little more than a map of how they got there for the SEC to follow. In the case of McClendon, he quite literally used his antique map collection in 2008 selling it to the company he was CEO of for $12 million essentially being bailed out after a potential margin call on his Chesapeake shares due to extremely aggressive positioning and leverage. The sale of this map collection to the company in 2008 was a profit of $4 million and scrutinized heavily by many firms invested in Chesapeake at the time. Around the same time the board of Chesapeake awarded a $75 million bonus to McClendon while the stock fell 60 percent. McClendon purchased a 19% stake in an NBA team, the Oklahoma City Thunder, while his energy company signed a $36 million sponsorship deal. Later the margin call on his loans forced him to mortgage his future proceeds from the team to secure two bank loans.
Final Thoughts
Most of these stories laid out here are a sample size of an ongoing issue that has continued for over a century. The motivations to get rich quick with little effort seem to be the reasoning behind taking risks to commit these crimes and yet with every story like these there are hundreds of success stories of companies being managed correctly and with vigor to turn a profit for their investors. Bringing larger monetary punishment and extended criminal charges to these individuals to help suppress the desire to move forward with these acts that always end up hurting the unexpected. As for the crimes of theft and brutality that stem from separation of class and unbalanced equity of capital within the region of the oilfields that create these boom and bust towns, a sense of clarity from government and global markets on the future of the industry is needed to help flatten the curve of these cycles and bring stability to the towns. Through better policy and working in lock step with regions like the Permian Basin, that by most measures produce the cleanest Oil and Gas in the world, could open up economic prosperity for not only that area but the nation as a whole as the world continues to rely heavily on Oil and Gas for decades to come.