Straight-Talking McClendon Makes Case for Gas

Note: beware of best customers

American Association of Petroleum Geologists (AAPG)

Quoting a natural philosopher, Mark Twain once wrote:

“You tell me whar a man gits his corn pone, ‘en I’ll tell you what his ‘pinions is.”

Aubrey McClendon famously gets his pone from unconventional gas plays. And as chairman and chief executive officer of Chesapeake Energy Corp. in Oklahoma City, his opinions about energy use are well known.

McClendon delivered the 2010 Michel T. Halbouty Lecture, “Shale Gas and America’s Future,” to a full house of about 750 at AAPG’s annual meeting in New Orleans in April.

His message:

With an abundance of natural gas production and reserves, the United States should move toward using gas for energy as much as possible, and shift away from the use of polluting, more costly and imported energy sources.

Embracing natural gas might be an easy argument to make – but as McClendon acknowledged, it’s not an easy sell.

“I was naïve in thinking it would happen over the course of a year. It will probably take place over five years,” he said.

Also, it’s a difficult argument to make from inside the industry.

When natural gas producers promote the increased use of gas, they’re seen as expressing a corn pone opinion.

To increase public support for natural gas use, McClendon said, Chesapeake Energy helped found the group America’s Natural Gas Alliance (ANGA).

According to its promotional material, “ANGA exists to pursue a single mission: To increase appreciation for the environmental, economic and national security benefits of clean, abundant, dependable and cost-efficient American natural gas.”

The group has raised $80 million to $90 million with image advertising as its largest single expenditure, according to McClendon.

“I think we’re making progress – in the sense, it takes a long time to drill a well,” he said. “We’re building a foundation of people who are beginning to understand what we do.

“But remember,” he added, “our best customers are our worst enemies.”

Manufacturing a Cause

Large natural gas consumers in the United States have seen periods of supposed gas surplus alternate with periods of supposed scarcity, and large price moves taking place as perceived conditions change.

“One of our problems is that they say, ‘Not so fast.’ They don’t want us to find other uses for natural gas,” McClendon noted.

Andrew Liveris, chairman and CEO of Dow Chemical Co., argued against broadening the demand for unconventional natural gas production in a recent newspaper opinion piece.

“Natural gas producers have suggested that this newfound gas be used preferentially as a transportation fuel and to displace coal in electricity generation. Some even propose government policy to lock in the increased demand that would come from these new sectors.

“But we have seen this move before, and it ends with wild swings in prices and the loss of well-paying manufacturing jobs,” Liveris wrote.

“A sound energy policy that helps direct natural gas to be utilized in manufacturing, versus being legislated into less efficient uses or in uses where there are alternatives, will help stabilize U.S. industry and lead to a resurgence of American manufacturing,” he added.

Supporters of increased natural gas use promote it as a cleaner, more environmentally sound alternative to the use of coal, especially in generating electricity.

“We’ve always had a good product. Coal has had its problems. Over time, more and more people become uncomfortable defending that industry,” McClendon noted.

He said 32 of 50 states have commercial natural gas production – more than the number of states producing coal – with gas use gaining in acceptance as coal use is increasingly challenged.

“You hear a lot about companies doing research trying to gasify coal. I can promise you, nobody is trying to coalify gas,” he observed.

Despite his support for the environmental advantages of natural gas, McClendon said he does not favor a government-mandated, cap-and-trade system that would eventually limit coal use.

“We can begin to address the carbon issue by looking at it in a much more narrow focus than spreading this wet blanket of cap and trade across the entire economy,” he said.

McClendon and other gas supporters also promote the use of gas, specifically compressed natural gas (CNG), as a transportation fuel alternative. They argue that the United States imports too much crude oil, leaving it open to supply disruptions and price swings, exaggerating import expenditures and funding undesirable activities abroad.

“I think the next time we see $4.50 gasoline, we won't have the ability to fight off a recession,” McClendon said.

“It drives me crazy that every American doesn't have the chance to fill up their car at home every day with a fuel that's half the cost,” he added, “and cleaner.”

A Landman’s Approach

A history major at Duke University, McClendon began his petroleum career as a landman. He recalled thinking about possible advantages for a company just entering the oil and gas business.

“For me, that breakthrough was to recognize the potential of horizontal drilling,” he said.

He was a founder of Chesapeake Energy in 1989, when the company had 10 employees. Today it has 8,200 employees in 16 states, including 175 degreed geologists, he said.

As interest in shale gas expanded, Chesapeake took a landman’s approach, leasing huge amounts of acreage in the most promising areas of the most promising shale plays.

The company later attracted joint venture partners to help finance an extensive drilling program. Today Chesapeake operates one out of every eight drilling rigs running in the United States, McClendon said.

“It's not because I love $4 gas. It's because I have a lot of land to drill for HBP,” he explained.

The company's latest move is an expanded focus on crude oil and liquids. McClendon noted the current price imbalance between liquids and gas production, with a barrel of oil recently selling for 21 times as much as a thousand cubic feet (MCF) of gas.

“You'd be out of your mind if you didn't try to bridge that gap,” he said.

To support continued development of domestic gas reserves, McClendon thinks a price of at least $5/MCF on a NYMEX basis will be required. He called that price level “a real bright line” to generate viable rates of return.

Unconventional resource plays are now being evaluated around the world, and McClendon outlined five desirable conditions for their success:

  • Good rock. u Good commercial terms.
  • The rule of law. u Indigenous demand.
  • At least some existing transportation infrastructure. “

When you stack those five things together, the world gets smaller in a hurry,” he noted. Comes the Revolution

Another consideration is the amount of government regulation and restriction placed on the industry.

Development of shale gas resources requires large-volume hydraulic fracturing. In parts of the U.S., operators have been criticized for potential contamination from toxic chemicals used in fracturing, the spread of methane underground and the drawdown of fresh water supplies.

The U.S. Environmental Protection Agency has begun a multi-year study of the effects of hydraulic fracturing, citing potential hazards to drinking water.

“We're running into this backlash or backfire over hydraulic fracturing,” McClendon said. “I have to admit, that surprised me a little bit.”

He noted that fracturing operations already are heavily regulated by state and local agencies, that fracturing takes place thousands of feet below the levels of fresh water aquifers used for drinking water, and that any chemical used in fracturing would be a tiny percentage of the entire liquid volume.

In addition, the industry has made steady progress in reducing the effects of fracturing as it has gained experience in shale gas operations, he observed.

“In Pennsylvania, we're up to recycling almost 90 percent of our produced water,” he said.

McClendon expressed confidence that natural gas will become an energy source of choice in the United States, displacing less desirable alternatives.

He compared it to a revolution in energy use.

“Like most revolutions,” he said, “you don't understand the implications in the early days. It's only later, when things play out, that you can see it.”

Comments (0)


What Can I Do?

Add Item

Enter Notes:
* You must be logged in to name and customize your collection.
Recommend Recommend
Printable Version Printable Version Email to a friend Email to a friend