McClendon At OGIS NY: Low Gas Prices Are Opportunity Toward Building Greater Demand

Chesapeake Energy Corp. chairman and chief executive Aubrey McClendon spent a couple of weeks abroad recently where—unlike in the U.S. and investors and consumers who don’t think natural gas can push above $4 an Mcf—people, instead, “don’t think gas prices will ever be below $10.”

There, he was much more comfortable, he quipped as analysts, investors, financiers and fellow producers exceeded capacity in a breakout room at the IPAA’s OGIS New York this morning. McClendon opened the final day of OGIS proceedings, resulting in unusually high attendance for an 8:45 a.m. session. The current low U.S. natural gas price “won’t last forever,” he said; however, he does believe the price band in the future will be between $3 and $5 in a normal-weather environment, rather than his previous estimate of $4 to $6.

On the high side, gas drilling and production will resume; on the low side, it will be suspended—such as in the Haynesville shale-gas play. In effect, as acreage-holders there have secured their leases by production—that is, they’re “held by production” or HBP—“we basically have a 250 Tcf (trillion cubic foot) storage field, the second-largest storage field in the world behind the Marcellus.”

He estimates U.S. gas producers have curtailed 1 billion cubic feet (Bcf) of supply, with Chesapeake contributing half of that curtailment alone. Also, he believes, low gas prices are creating an opportunity toward building future gas demand, such as in power generation, transportation, and petrochemical and other manufacturing. “This is a painful year for us, for our shareholders…(but) you are setting the stage for a dramatic rebound in natural gas prices.”

Power generators are switching from coal to gas. FedEx Corp., for example, is adding gas to its fuel mix. The shipping company consumes 4 billion gallons of diesel a year at a current cost of some $8 billion. Adding natural gas to the mix would reduce that bill to $4 billion a year. “Big money,” McClendon noted.

Even rail-transportation operators are considering natural gas in their fuel supply, and this particular industry is in a relatively easy position to make that transformation, McClendon added, since its rail routes are fixed and it has existing fueling terminals. “It’s easier for the railroads to change.”

As for shale-gas development in Europe, such as in Poland where efforts are most mature, McClendon believes a great hurdle will be met by the lack of indigenous services, infrastructure and other attributes necessary on his list of what makes a commercial shale-gas play. “I think it will make more sense for Europe to import gas from the U.S. than to develop an indigenous gas supply.”

Chesapeake isn’t pursuing overseas shale-gas plays because “we would make a lot more money looking for oil in the U.S. than gas in Poland or China.” There are only 48 land rigs in Europe, for example; development of shale-gas supply “won’t happen as fast as here (in the U.S.).”

Cheniere Energy Inc. received FERC (Federal Energy Regulatory Commission) approval yesterday to proceed with construction of a natural gas liquefaction and LNG export facility at its existing LNG import terminal at Sabine Pass, Louisiana. Also, Sempra Energy plans to build liquefaction capacity at its Louisiana LNG import terminal. Meanwhile, petrochemical company Williams Olefins and others are awarding construction contracts to build ethane-cracker capacity.

McClendon began his remarks with a copy of the new issue of Fortune magazine and its cover-story title “The United States of Natural Gas.” He said, “We’re well set for what lies ahead, which is probably another tough year of natural gas prices…Is it time to get bullish?...The die is cast for gas prices to be better…the market will cure itself…as the demand revolution kicks in….

“The good news is natural gas prices will stop going down at some point.”

Other highlights:

--Chesapeake’s Permian Basin assets that are on the market currently “will likely be one of the largest positions ever sold in the Permian.” His overseas travels included describing the asset package, such as in Asia, he adds.

--With such great supply of U.S. natural gas—both in pipelines and working-storage capacity, and ready to be drilled in fields such as the Haynesville—“the days of hurricanes sending gas prices to $12 and $13 are over.”

--In the Utica play’s western oil window, “we haven’t cracked the code yet …(but) the prize is big if you can do that.” Both Chesapeake and others with acreage in that fairway are working on it. “I think the oil side will work or parts of it will work.”

--As for the IPO of Chesapeake’s oilfield-service company, for which an S-1 was filed on Monday, he couldn’t disclose much more than what was filed. “I can confirm that we have a service company,” he quipped, and that it’s No. 1 or in the Top 5 in drilling rigs, pressure-pumping and other segments. It’s one of the business units within Chesapeake to which the stock market doesn’t give Chesapeake share value. “So, there’s a lot of free stuff in our stock price.”

-- Its Chesapeake Natural Gas (NG) Ventures Corp. or CNGV business unit is investing in Clean Energy Fuels Corp., Sundrop Fuels Inc. and other businesses that are working toward greater use of natural gas in U.S. transportation and other uses. “We are the only capital provider to it…(In time), we might have outside investors come in.”

--“This (gas) supply revolution is for real…We can be a spark for a manufacturing renaissance in the U.S….I see a very nice price band developing (that is good for producers and consumers and there are) foreign-policy implications.”

--About the Mississippi Lime play in northern Oklahoma and southern Kansas, “I’ve heard Tom (Ward, chairman and chief executive of fellow Lime-play leader SandRidge Energy Inc.) characterize it as being as big as the Bakken. I hope he’s right.”