(Bloomberg) — Mark Siffin’s love affair with the Permian era started when he was a teenager on a surfboard in Hawaii. He was bobbing off the coast of Oahu when Diamond Head, the state’s most recognizable landmark, caught his eye. Its formation, the product of a volcanic eruption many millennia ago, fascinated him. So when Siffin got the chance some 50 years later to tap an even older rock, he dove right in.
Most Read from Bloomberg
It was an unusual origin story for an oilman. But Siffin, 71, was no ordinary wildcatter. Sitting in an office in Houston on a rainy day last year, wearing navy corduroys and red sneakers, Siffin recounted the circuitous path he had taken to become the chief executive officer of MDC Energy LLC. He had dabbled in lots of businesses, from gemstones to art, before becoming a big-time real estate developer with projects in West Hollywood and Times Square. Then, in 2018, he snagged more than $700 million in loans to drill wells in the Permian Basin, an ancient seabed stretching across West Texas that’s now the biggest oil field in the U.S.
It took just 14 months for his company and his half-century dream to implode. Siffin shelled out money he didn’t have, his lenders said, drilling wells too fast as oil prices slumped and investor interest in the shale patch waned. In November 2019, MDC plunged into bankruptcy.
“I was fascinated with Diamond Head as a geophysical formation,” said Siffin, unfazed by the court battle that ensued. “It began to make me think about the way in which the Earth was formed and the evolution of the Earth and how, through the passage of time, escarpments are created. And so I understood sort of the way in which the Permian Basin came to be.”
Siffin’s lenders and creditors, meanwhile, were fuming. They accused him of obscuring just how bad things were. He became one of the most hated men in West Texas, with the list of oil-field contractors saying he never paid them growing by the day. To make matters worse, Siffin’s other big project, a building in Times Square with a luxury Edition hotel, faced foreclosure a month later.
As he fended off creditors in court, Siffin’s wells gushed natural gas. He had gas that drillers don’t want: rich in a chemical compound that has to be treated before it can go in a pipeline. But Siffin couldn’t afford to treat it. Instead, he lit vast amounts on fire in a process known as flaring, often without the permits required to do so, state records show. Sometimes he released it straight into the air.
The orange flames dotting Siffin’s empire illuminate the dark side of the Permian fracking boom. When times were good, the money flowed. New oil companies, buoyed by private equity and cheap debt, emerged at an astonishing clip. They drilled wells that brought forth a surge of cheap natural gas—and with it pollution. Burning excess gas requires permission from the state, and in Texas it’s rarely denied. But in Reeves County, home to most of Siffin’s wells, MDC racked up more noncompliance notices for flaring without a permit than any other company. Despite those, and a handful of other state violations, MDC was never made to pay a single fine.
As drills tear into the Permian again after a pandemic-induced slump, the rise and fall of MDC offers a cautionary tale. The current revival is being led not by the publicly traded oil giants that are vowing to keep emissions in check, but by smaller, private operators that face little scrutiny. Siffin’s dip into the oil field leaves financial and environmental wreckage that long outlasts his presence in West Texas.
It was an investment banker Siffin had hired to advise MDC who suggested he agree to an interview. Siffin’s creditors were accusing him of paying himself $8.5 million in consulting fees while serving as CEO of MDC, the same company for which he was supposedly providing consulting services. The banker thought Siffin should try to clear his name.
Despite dealing with the collapse of two business ventures, Siffin was sanguine. He spoke softly and, instead of defending how he had gotten into this mess, spent much of the two-hour interview reflecting on his childhood and events of the 1970s. Twice during the interview—once while talking about poverty in Hong Kong, another time when reminiscing about his daughter—he almost cried. “The definition of genius is simplicity,” Siffin said at one point. “The most efficient way of thinking is to listen to your heart.”
To get to how Siffin, with practically no industry experience, came to lead an oil company took time and a lot of turns. Born in 1950 in Bloomington, Indiana, he spent part of his childhood in southeast Asia, where his father, a professor at Indiana University, did research on Thai politics. At 15, Siffin wanted to be a priest—until, he said, he had his first kiss with a girl in her parents’ driveway. Instead, he decided to become an artist. When that didn’t work out, he made money selling gemstones. He cashed out and bought a farm in Indiana, where he raised cattle and grew soybeans and corn. That led him to agricultural commodities, which in turn brought him to derivatives. Somewhere in the middle of all that, he was inspired to become a real estate developer with a special knack for billboards. In 1991, he founded Maefield Development, named for his daughter Mae, and now has projects in Miami, Hollywood and Manhattan.
The past that Siffin doesn’t readily divulge comes up with a quick Google search. In 2000, while developing a $300 million project in West Hollywood, Siffin was mentioned in a Nevada Supreme Court opinion about a 1978 Reno murder case. Siffin wasn’t charged, but the ruling cited a Drug Enforcement Agency report naming him as a suspected “major cocaine trafficker.” In the interview, Siffin denied those allegations and said he didn’t know about any DEA investigation. He pointed out that someone else confessed to the murder.
A few years later, when Siffin was seeking to develop properties around Miami, the city of Miami Beach hired a firm to run a due diligence report. The results returned a handful of drug-related indictments, including a 1973 charge that Siffin possessed heroin with an intent to distribute, to which he pled guilty and received three years probation. The report also contained an accusation that Siffin had bribed a public official to secure billboard advertising rights in West Hollywood.
Siffin’s lawyers at the time said those allegations were unsubstantiated and noted that the only conviction mentioned in the report was related to heroin possession three decades earlier. When asked about those incidents, Siffin brushed them aside. He doesn’t drink or smoke anymore, and none of the allegations affected his ability to get financing, he said.
In fact, he was involved in what trade publication The Real Deal described as the biggest New York real estate deal of 2018. Using a financing package led by French investment bank Natixis, Siffin bought out his partners in a project known as 20 Times Square, which at one point was valued at more than $2 billion. And as Siffin was closing that deal, he was in talks with the bank about a loan for his oil company.
Siffin had started that company with a longtime oil-field worker named John Cooper. If Siffin’s interest came from admiring a rock 3,500 miles away, Cooper brought more practical experience. He had a classic West Texas resume: He had played high school football in Odessa, the town that inspired the book, movie and TV show Friday Night Lights, followed in his father’s footsteps by becoming a rig worker and served as a drilling consultant for several producers.
In the mid-2010s, when the Permian was heating up, Siffin and Cooper scooped up some leases using a loan Siffin had gotten from Fortress Investment Group. A few years later, Apollo Global Management took over the loan from Fortress. And in the summer of 2018, Riverstone Holdings, a private equity firm with a credit arm, seemed ready to refinance the Apollo loan alongside a group of other lenders.
But just days after they all met in Midland to finalize a deal, Cooper was dead. He had taken his 16-year-old son for a ride in a fixed-wing, single-engine airplane to a ranch in New Mexico where he trained horses. About 200 feet after takeoff, the plane faltered and crashed into the ground. Both Cooper and his son were killed.
Conversations with the lenders stalled and, according to a person familiar with the talks, almost fell through altogether. A handful of the firms that attended the Midland meeting backed out, so Riverstone, as administrative agent of the proposed arrangement, was left to find new credit providers, the person said. “Without John, it was not going to make it,” said Tish Pullen, a former front-desk manager for MDC and Cooper’s sister-in-law. “And everybody knew that.”
In September 2018, less than four months after Cooper died, Siffin got his deal anyway. The Permian Basin was in its sixth year of a boom sparked by advances in horizontal drilling and hydraulic fracturing, and production was nearing that of Iran. Oil prices hovered at $70 a barrel, and Siffin’s spot in a rapidly growing corner of the shale field was hotter than ever. Even without an experienced oil-field worker at the helm, MDC looked like a good enough bet.
Things took a bad turn almost immediately. Siffin plowed money into drilling new wells, but he was going too fast and their production was “disappointing,” his lenders later said. Many of his wells produced sour gas, meaning they had a high concentration of hydrogen sulfide that required treatment with expensive chemicals. Meanwhile, oil prices were dropping. By Christmas Eve of 2018, the U.S. crude benchmark had slumped to $43 a barrel.
MDC fell behind on payments to dozens of contractors. Hoping to delay the coming implosion, Siffin flew one of them to New York, putting up the owner and his wife in a Times Square hotel. “He told me not to worry about the money—that he’d pay me every penny he owed me,” said Steve Russaw, whose trucking company, hired by Cooper in the early days of MDC, was owed about $2 million.
Siffin’s MTE Holdings, which controlled MDC, filed for bankruptcy in October 2019, a little more than a year after he signed his deal with Natixis and Riverstone. His lenders alleged that he had defaulted on more than $400 million of debt. Companies like Russaw’s filed dozens of liens, some claiming they had done millions of dollars worth of unpaid work. Natixis claimed that Siffin “grossly mismanaged” his oil company and “ultimately appears to be looking out for his own self-interests.” Riverstone alleged full-blown fraud.
That didn’t bother Siffin, who saw the accusation as little more than courtroom drama. “I think you just have issues of technical defaults,” he said in the Houston interview. He said he intended to pay back all the oil-field companies he owed, and insisted that his lenders would make out just fine. “Attorneys often say things to, you know, make impactful statements.”
Siffin also claimed to be on the brink of an idea that would transform the industry. It involved transporting the brackish water that comes up with oil so it could be treated and disposed of. This venture, he said, would be the “Model T” of fracking. Siffin would be its Henry Ford.
The frackwater idea, similar to systems operated by other companies at the time, was also the reason Siffin had paid himself $8.5 million in consulting fees. He said the payment was justified considering the value he was about to create. When he filed the bankruptcy petition, he checked a box that said his assets were worth between $10 billion and $50 billion—a valuation at the high end that would dwarf almost every other independent oil producer in the Permian.
While Siffin was battling with creditors, his employees were dealing with another problem: MDC couldn’t pay to treat the unwanted byproducts that come up with its oil. The company was required by its pipeline operator to get the hydrogen sulfide content below 4 parts per million. A few of MDC’s wells produced gas with a concentration of 2,000 parts or higher, state records show.
Instead, MDC burned it off. Javier Morin, a former completions consultant for the company, remembers driving from the trailer where he slept to the well pad and seeing either side of Interstate 20 lit up by MDC flares. “At one point it looked like a little town,” said Morin.
In November 2019, the same month MDC filed for bankruptcy, the company’s flaring doubled from the previous month, according to production reports filed with the state, while its gas output grew just 1.4%. By the end of that year, MDC was flaring more than 12% of all the natural gas it produced. That rate continued in 2020, making MDC the second-worst Permian operator for flaring in a list of 45 companies compiled by consulting firm Rystad Energy.
Data derived from satellite imagery show that MDC’s flaring may have been even greater—roughly twice as much in 2020 as what it reported to regulators, according to Bloomberg News analysis of data from the Earth Observation Group at the Colorado School of Mines. At that rate, MDC would have been burning off about a quarter of all the gas it produced.
Flaring is meant to convert methane into carbon dioxide, in part because methane is at least 80 times more potent when first released into the atmosphere. But studies have shown that lots of methane still makes it through. The Environmental Defense Fund estimates that about 93% of the methane flared in the Permian is burned off, while the rest is released into the atmosphere. At that rate, the flaring MDC reported in 2020 would have the same climate impact as having 98,301 cars on the road for a year, with unburned methane the biggest contributor. The difference is that flared gas is entirely wasted energy, creating pollution without any benefit like heating homes.
The Methane MenaceRead more about the supercharged gas that could turn the tide of global warming.
Across the Permian, flaring was at a record at the end of the last decade—pipelines were running at full capacity, leading oil companies to burn off enough natural gas to supply as many as 7 million homes for a year. From space, satellites that can detect plumes of methane showed a giant blob over the Permian, where 2.9 million metric tons of the greenhouse gas lingered.It’s methane’s outsize impact on the climate that makes it a focal point of efforts to slow global warming. At an international climate summit earlier this month, leaders from around the world signed a pact to slash emissions of the greenhouse gas 30% by 2030. Key to achieving that goal will be managing methane emissions from the oil and gas industry, which includes hundreds of private players in addition to the public and state-owned ones that get much of the attention.
MDC was in a unique predicament. It couldn’t afford to treat the gas to ship it via pipeline. It also couldn’t afford to stop producing oil, a company employee explained in a filing with the state. “At this time, to completely shut the wells in would be detrimental to operations for all stakeholders involved,” Brandon Wilson, a regulatory analyst for MDC, wrote in October 2020.
Former field workers for the company say their hands were tied as soon as the bankruptcy proceeding started. One engineer, who asked not to be named because he still works in the industry, said he and his team approached executives with concerns about the effectiveness of MDC’s flares. They were worried that methane and other pollution wasn’t getting fully burned off. But, he said, little was done about it.
MDC is far from the only oil producer that has sacrificed environmental considerations while in bankruptcy. When Nine Point Energy LLC, a private operator in North Dakota, filed for bankruptcy earlier this year, it rejected a contract with one of its pipeline providers, opting to burn off excess gas instead. By May, the company was flaring 44% of all the gas it produced. Doing so, a lawyer had explained at a bankruptcy hearing, was cheaper. Nine Point’s assets were later bought out of bankruptcy by another private oil operator.
In September 2020, as MDC’s bankruptcy case headed into its second year, an environmentalist with the nonprofit group Earthworks was on one of her usual patrols of the Permian. Sharon Wilson uses an infrared camera to spot methane plumes normally invisible to the human eye, acting as a sort of detective for emissions that frequently escape from oil-field operations without anyone noticing. When she came across MDC’s American Pharoah lease, which shares a misspelled name with the Triple Crown winner, her viewfinder showed pollution spewing from an unlit flare and out of a nearby tank.
A few days later, Wilson saw a similar scene at MDC’s Pick Pocket 21 location. This was particularly concerning because Wilson had been there before. During several visits since the previous November, she had spotted emissions escaping from a blown valve and venting from a tank.
Wilson compiled her findings in a YouTube video and filed a formal complaint with the Texas Commission on Environmental Quality, as she usually does. She had already filed four others related to the Pick Pocket 21 lease, she wrote in a letter calling on regulators to act on the “continuous intense and significant” emissions. “The gas was just blasting out of the flare with tremendous force, and the tanks, every one of them was venting,” Wilson said of one particularly bad visit. “There was egregious pollution, whether it was coming from the flare or the tanks. The tanks were always emitting. Always.”
The Texas Railroad Commission, the state’s chief energy regulator, is charged with permitting oil and gas wells and granting the exemption requests that allow operators to flare. The TCEQ distributes air and water permits necessary for oil and gas operations and tends to step in when something goes wrong at a site. Neither agency regulates methane emissions. In many cases, oil drillers and pipeline operators release unburned gas without breaking any state or federal rules.The TCEQ opened an investigation into the tank Wilson found venting gas on the American Pharoah lease. But it had nothing to do with methane. Instead, the agency dinged MDC for operating the facility for two years without a permit. In February, the TCEQ proposed enforcement actions for violations at three other MDC sites, including the Pick Pocket 21 lease, and assessed penalties that came to $17,500.
MDC even got the rare attention of the railroad commission. The company racked up 10 violation notices in Reeves County for flaring without a permit, according to the commission. That made it the recipient of 45% of all such notices in the county since the start of last year. During one inspection, MDC was found to be venting 800,000 cubic feet of gas into the air on a single day.
Even with its violations, MDC wasn’t fined by either agency. In a statement, the Texas Railroad Commission said the company corrected its violations prior to legal enforcement actions. The TCEQ cited the company’s bankruptcy as the reason “there is no payable amount due.”
In September, after an almost two-year court battle, Siffin’s Permian fling came to an anti-climactic end. Riverstone, through an affiliate called Maple Energy, won approval to buy MDC’s assets out of bankruptcy for less than 10% of the value of the original loans. Natixis, which announced last year that it would no longer do business with companies linked to fracking, and the other banks stand to recoup $17.5 million, plus distributions from a litigation trust set up to benefit creditors. Some of the service contractors Siffin owed will get a portion back under the plan. Many won’t get anything.
Russaw, the trucking company owner, closed up shop for good last year, joining a handful of local servicers who blame Siffin for their demise. Another MDC contractor, Rosie Martinez, says Siffin owes her $2.5 million. “We were hurting,” she said. “We’ve never had any problems like MDC.”
As for Siffin, his mark on the environment won’t cost him anything. As recently as June, MDC was cited but never fined for flaring more than 1.4 million cubic feet of gas a day from one of its sites that lacked a permit. Riverstone has told regulators it’s weighing how much it will have to flare from the wells it now owns and will file permit applications once it does.
Riverstone said in a statement that it became aware during the bankruptcy case “of how poorly these assets were being managed from an environmental standpoint.” The company said it is “evaluating a host of options with the goal of eliminating as much flaring as possible, as soon as possible.”On Tuesday, Riverstone and other creditors filed a lawsuit against Siffin and two business associates seeking more than $137 million in damages. The creditors allege that Siffin used his companies, including Maefield, to facilitate “fraudulent transactions.” They say that the services Siffin had claimed warranted the consulting fee were “a sham” and that the executives provided lenders with false financial statements.
Siffin didn’t respond to repeated emails after the interview with Bloomberg and said three times by phone recently that he couldn’t talk. Meanwhile, he has another crisis on his hands. Last week, a New York state court entered a judgment of foreclosure and sale on his Times Square property. The building, which includes the Edition hotel, retail space and a digital billboard, will now be auctioned.
If history offers a lesson, Siffin will be back before too long. In September, he registered an out-of-state limited liability company in Texas. Even if he doesn’t give the Permian another go, Sharon Wilson bets someone else like him will. Oil prices have picked up again, and private producers are dominating new drilling for the first time.
“Anybody can do what he did,” Wilson said in October, days after visiting an MDC lease. Her camera showed a plume coming off the flare and emissions venting from a tank. “Why wouldn’t they? There are no consequences.”
Most Read from Bloomberg Businessweek
©2021 Bloomberg L.P.
Source: finance.yahoo.com