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  In spite of all this help, fracking never turned a profit. It was a marginal industry populated by dreamers and wildcatters who were promising big returns, kept alive by welfare benefits.

  This changed quickly in 2009. Business and government partnerships figured out how to make the fracking process ever cheaper. Then, the price spike of 2008 made fracking competitive. After that, the industry gained steam and a self-reinforcing momentum. Banks started to give loans to frackers, from Pennsylvania to North Dakota, and these frackers turned their eye to new reservoirs of fossil fuel.

  Brad Urban and his team canvassed the industry. Koch’s traders bought oil supplies and quizzed the drillers. By doing so, they discovered the next horizon for the fracking business. It was something called tight oil. This was crude oil trapped in porous rock. Tight oil tended to be extremely “light” crude, meaning that it had low sulfur content, which differentiated it from heavy-sulfur oil of the kind that was imported from overseas.

  As it happened, Koch’s refinery in Corpus Christi specialized in refining light crude. It also happened to be that one of the biggest deposits of light, tight oil was in located in southern Texas, near Corpus Christi’s backyard. Oil drillers told Koch about an area called the Eagle Ford Shale, a crescent of land that curved from southwest Texas up through the big empty space between San Antonio and Corpus Christi.

  Koch started to gather estimates of how much oil might be retrievable through fracking in Eagle Ford. The region produced about fifty-five thousand barrels a day before the frackers arrived. It might produce as much as a hundred thousand barrels a day—maybe two hundred thousand—when new wells were installed. Before long, people were talking about five hundred thousand barrels a day.I Urban’s team hired an outside geologist to study the land and try to triangulate the truth between the boasts of various wildcat drillers. The team at Flint Hills came to believe that a flow of at least two hundred thousand barrels a day was realistic.

  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 producti
on, 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.

  * * *

  Along the Gulf Coast of Texas, the most pristine skylines were the white towers of the oil refineries. The refinery town of Port Arthur, for example, was a humble collection of crumbling stone buildings, bandaged with sheets of plywood over broken windows. The sidewalks were jagged with weeds and cracked cement. Many of the houses needed paint jobs and new roofs. But when one left town and drove along the coast, the vast, white towers of the oil refineries appeared like a mythical city. These self-contained cities behind tall fences and barbed wire were active around the clock, steam pouring from the towers during the day and lights twinkling on their crowns throughout the night. It seemed impossible to imagine how much money was made inside their perimeters.

  Nobody had built a major new oil refinery in the United States since 1977. In that year, when Jimmy Carter was president, a new refinery in Garyville, Louisiana, went into production. This marked the last time a major new competitor entered the refining market.

  The primary obstacle to building a new refinery was the Clean Air Act, which required new facilities to comply with pollution standards that existing refineries were allowed to avoid. As outlined earlier, the existing refineries exploited a provision of the Clean Air Act called the New Source Review, which allowed them to expand their old refineries in ways that skirted the onerous pollution controls applied to new refineries. The Department of Justice came close to charging the refineries with violating the Clean Air Act but instead allowed them to stay in business with more stringent controls. The legacy refineries, including Koch’s, have operated under that consent decree ever since. While the consent decree might have helped curb pollution, it did nothing to foster competition in the refinery business. The Clean Air Act froze the game board of refining competition, leaving only the incumbent players in place. They were left to divvy up the business among themselves.

  During the 1980s, ownership of the nation’s refineries consolidated into fewer and fewer hands. After the Reagan administration loosened antitrust enforcement, a wave of mergers swept through the industry. The mergers accelerated during the Clinton administration. Between 1991 and 2000, there were 338 mergers among oil refiners. The consolidation continued through the Bush administration.

  In 2002, there were 158 refineries in the United States. By 2012, there were only 115 producing fuel.II From administration to administration, Democratic to Republican, it seemed like the federal government did all it could to ensure that no new refineries entered the market. A company called Arizona Clean Fuels attempted to build a multibillion-dollar refinery, starting in 1998, to help ease tight supplies in the Southwest. The project was hindered by years of permit disputes. Even by 2009, the company was still promising to break ground. In 2011, the project seemed dead, but it was revived. By 2018, there was talk that the refinery might be built, but regulatory hurdles still remained.

  Fewer and fewer companies refined oil, and they did it at larger and larger facilities. Even without new refineries, US refining capacity increased between 2002 and 2012 from 16.5 million barrels a day to 18 million barrels a day.

  While the refiners were processing more oil, however, there was evidence that they increased production just enough to keep up with rising demand, and no more. There was no incentive to increase capacity to the point where it might bring gasoline prices lower.

  By 2004, the refining industry was already “imperfectly competitive,” according to a report from the US Government Accountability Office. The report found that refiners had tremendous market power and that “refiners essentially control gasoline sales at the wholesale level.” The GAO investigation found that the consolidation made gasoline more expensive for consumers. The increased market concentration “generally led to higher prices for conventional gasoline and for boutique fuels,” the report concluded.

  By the time the Eagle Ford tsunami arrived, US oil refineries were running full tilt, processing just enough oil to keep up with demand for gasoline. By 2016, US refineries ran at an average of 90 percent of their total capacity, compared to the global average of 83 percent. Only India ran its oil refineries at a tighter capacity. There was simply no excess capacity in the system, and no new companies willing to enter the business and pick up the slack.

  The bottleneck was severe. By 2015, even ordinary refinery outages caused catastrophic price increases for gasoline. That summer, BP partially shut down its refinery in Whiting, Indiana, to repair a set of leaky pipes. The closure caused gasoline prices in Chicago to spike by 60 cents a gallon, while gasoline prices rose throughout the surrounding region. It was the biggest such price hike since Hurricane Katrina decimated the Gulf Coast in 2005. Capacity was so tight that even routine repairs had hurricane-like effects.

  In this environment, the profitability of US refiners was breathtaking. In 2010, the average profit margin to refine a barrel of crude oil in the United States was roughly $6 a barrel, by far the highest in the world. The next-highest profit margin was in Europe, where it was about $4 a barrel. One year later, US refining profit margins had swelled to over $16 per barrel—nearly triple the next-highest rate of almost $6 a barrel in Europe. These profit margins were partly the gift of fracking, which delivered copious amounts of cheap oil to refine. In a double stroke of good luck, fracking also cut the cost of natural gas, which refiners used to power their plants. US refinery profits pulled far and above those found elsewhere in the world.

  If Koch Industries reaped the average level of profit on refining oil at Corpus Christi that year (and the company claims to be above average in this regard), and operated the refinery for 350 days of the year at 280,000 barrels per day (both conservative estimates), then the company would have earned $1.2 billion in profits from that refinery alone.

  The profit margins fell sharply after 2011, sinking to around $13 per barrel in 2012 and then $12 in 2014. But the profit margins never fell close to zero, and were always well above margins for refineries around the world.

  * * *

  Koch enhanced the profitability of its Corpus Christi refinery complexIII by using its trading desks in Houston. From their vantage point, Koch’s traders could see the reality of the US fossil fuel system, which was a fragmented network held together by aging infrastructure. There was no national, let alone global, price for oil and gasoline. There was only the constellation of opaque nodes where real oil and gasoline were bought and sold, and the tanker farms, gasoline terminals, and import piers where barges were loaded and unloaded. It wasn’t easy to get fossil fuels from one region of the country to another. Markets in California were hemmed in by the state’s clean-fuels standards, locking in high prices there. Markets on the East Coast were dependent on a single, aging pipe
line called the Colonial Pipeline, which carried gasoline from the Gulf Coast all the way to New Jersey. (Koch Industries was the majority owner of the Colonial.) This fractured market provided abundant opportunities for trading, and Koch excelled in executing on them.

  Corpus Christi became the hub for a number of trades that were, in the eyes of traders, simply elegant and beautiful. Koch bought the cheap oil that was piling up in terminals around the Eagle Ford Shale, the superlight crude that only a limited number of refineries could process. Then the traders sold refined gasoline products into markets of thriving metropolitan areas where gasoline supplies were tight, such as San Antonio and Austin, Texas. Both of those cities were growing, thanks in part to the fracking boom in Texas, and the growth locked in strong demand for gasoline. Neither city had a robust public transportation system and both of them were defined by sprawling networks of highways that conveyed motorists from far-flung suburbs to work every day.

  In this environment, the Corpus Christi refinery became a second Pine Bend, an asset that was located right in the center of a massive market dysfunction that produced supranormal profits. In the understated words of Koch’s former oil trader Wes Osbourn: “They have an asset that’s advantaged on a lot of their competitors.”

  Koch traded around Corpus Christi in other ways, maximizing the advantage that it had earned by being the first to build pipelines deep into the Eagle Ford. The wave of ultralight oil was too much even for Koch to handle. It exported what it could. Then it spent hundreds of millions of dollars to upgrade the Corpus Christi refinery with machines that processed even higher amounts of sweet crude, raising its capacity to roughly 305,000 barrels a day. In July of 2014, Koch Industries paid $2.1 billion to buy a newly built chemical plant in Houston that processed light crude oil into a chemical called propylene, used to make industrial chemicals and plastic products such as films, packages and caps. The propylene plant was another reservoir to capture the influx of light crude and provide another market in which Koch Industries could grow.