Financial Technology

Financial Technology

July 11, 2011

Chesapeake to spend $1b on natural gas technology

NEW YORK (AP) — Now that Chesapeake Energy has helped create a glut of natural gas in the U.S., it needs to get the country to use more of it.

Chesapeake, the second largest producer of natural gas in the U.S., announced Monday that it plans to invest $1 billion over 10 years in technologies designed to spur demand for the fuel.

Its first two investments will build natural gas fueling stations along the nation's highways and develop a technology that will use natural gas and plant material to make diesel and gasoline.

"We want to be as innovative with our demand initiative as we have been with our supply initiatives," said Chesapeake CEO Aubrey McClendon in an interview Monday.

U.S. natural gas supplies have grown dramatically in recent years as drillers such as Chesapeake have learned to tap huge fields of natural gas trapped in shale formations deep under several states.

That has driven natural gas prices lower and prompted big users like utilities and chemical companies to use more of it. Natural gas demand has risen to record levels, but supplies and reserves are growing so fast that natural gas prices — and driller profits — have stayed low.

"We've overwhelmed the traditional demand categories," McClendon said.

Through much of the last decade, monthly average natural gas prices hovered above $6 per thousand cubic feet and rose above $10 on several occasions. Over the last 29 months, though, monthly prices have averaged closer to $4 and rose above $5 just three times. Prices closed Monday at $4.28 per thousand cubic feet, up 7 cents from Friday.

Chesapeake will create a fund called Chesapeake NG Ventures Corporation that will function like a venture capital fund, providing seed money to new companies or technologies designed to spur new uses for natural gas. McClendon says he will direct 1 percent to 2 percent of the company's annual drilling budget to stimulate demand for gas, instead of creating more natural gas supply.

If successful, that could drive natural gas prices higher, and boost Chesapeake's bottom line. If natural gas prices average $6 per thousand cubic feet instead of $4 in 2012, Chesapeake projects it would earn an extra $900 million in net income, an increase of 52 percent.

Chesapeake calls itself "America's Champion of Natural Gas" but low gas prices are forcing the company to reduce its investment in new natural gas wells in favor of oil wells. In a recent presentation to investors, the company laid out plans to reduce drilling of natural gas wells except those that must be drilled in order to keep the leases it holds.

By next year, only 25 percent of the company's capital expenses will go to natural gas drilling, the rest to more profitable oil drilling.

In the past, big natural gas users like chemical companies have argued against policy proposals that would increase demand for natural gas. They say higher natural gas prices lead to increased costs for materials such as plastics, carpeting and fertilizer.

McClendon said Monday that if the company's efforts to stimulate natural gas demand work, the company can shift money back to natural gas and sell it at prices that customers will still find attractive.

"Our industry has shown that there is virtually unlimited supply," McClendon said. "We have shown that supply is elastic."

The company's new investment fund will invest $150 million in Clean Energy (News - Alert) Fuels Corp., based in Seal Beach, Calif., over three years. Clean Energy was founded by T. Boone Pickens, the oil and gas magnate who has launched a public campaign to increase use natural gas as a transportation fuel as a way to wean the country from imported oil.

Chesapeake's money, issued as debt that is convertible to Clean Energy stock, will be used to help build about 150 liquefied natural gas fueling stations at truck stops along interstate highways. The hope is that the stations will entice trucking companies to switch some of their fleet to natural gas vehicles.

Chesapeake also agreed to spend $155 million for a 50 percent stake in Sundrop Fuels, Inc., based in Louisville, Colo. Sundrop uses natural gas and plant materials to create liquid fuels such as diesel or gasoline.

Chesapeake, based in Oklahoma City, is the second biggest producer of natural gas in the U.S. after ExxonMobil. It owns all or parts of 45,000 wells and 14 million acres of leases.

Jonathan Fahey can be reached at —


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