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CEO Aubrey McClendon speaks at the Marcellus Shale Insights Conference in Philadelphia, Pennsylvania

9/11/2011 2:45 PM

Drilling in the Marcellus Shale is a hot topic and citizens line up to
express their views.

Keynote Address of Aubrey K. McClendon
Co-Founder, Chairman and CEO,
Chesapeake Energy Corporation
Marcellus Shale Insights Conference, Philadelphia, PA
September 7, 2011

It’s great to be in the City of Brotherly Love. From the greeting I received outside, I can see how the city earned its nickname!

And I must say it made me proud to be an American. Only in this, the freest country in the world, can people express their opinions enthusiastically and publicly. That holds for the so-called "fractivists" protesting outside and the "factivists" in this room. When I say "factivist," I mean all of you who share a commitment to use knowledge and common sense to safely and responsibly produce the natural gas our country so desperately needs.

Because we understand this industry, we also have an obligation to speak out – not just at this conference, but out in the community. The facts we convey about the safety of our operations and the benefits of our product should kindle the hopes and calm the fears of all who are fair minded.

But as we all have discovered in recent years, not everyone we meet is fair minded, or honest about their motives. In a country where freedom of speech and freedom of the press are enshrined in the Constitution, the privilege of unfettered speech can lead to unfettered fear mongering... In addition, the privilege of uncensored publishing – if not balanced by rigorous fact checking – can lead to broad distribution of half truths and outright lies.

I am reminded of the famous words of a truly great U.S. Senator from New York and an Ambassador to the United Nations, Daniel Patrick Moynihan, who observed that, "Everyone is entitled to his own opinion, but not his own facts."

So let’s talk about the facts.

FACT: The company that I lead, Chesapeake Energy, is the most active driller in the Marcellus and the most active driller in the United States, by a factor of more than two. We employ over 12,000 Americans directly and almost 100,000 indirectly. We have been horizontally drilling and hydraulically fracturing wells since I co-founded the company in 1989. Our company has performed this process 16,000 times – the most of any company in the world. And we are getting better at it with every well. Not only are we getting better economically, we’re getting better in terms of protective barriers, water management, wastewater recycling and air quality improvement.

FACT: The natural gas exploration and production industry has an excellent track record of safety and environmental integrity. Over 1.2 million wells have been fracked by our industry since 1949. Against that track record of over 1.2 million frac jobs performed by the industry, our critics can only find one or two instances of alleged groundwater pollution. And having examined those few instances ourselves, we don't agree that fracking had anything to do with the alleged groundwater contamination.

Even in the limited gas migration incidents in Pennsylvania in the past three years that have drawn so much media attention, only a couple of dozen homeowners claim to have been affected – and these incidents were not related to fracking. They were related to issues of casing design. And more importantly, the industry worked closely with Pennsylvania DEP officials to implement an updated and customized casing system that has been effective in preventing new cases of gas migration. Problem identified. Problem solved. That’s how we do it in the natural gas industry.

But looking back, was anyone hurt or was there permanent, or even temporary, environmental damage? No, no and no. Some folks were inconvenienced, for sure, and for that we’re deeply sorry. However, tens of thousands of jobs and billions of dollars of landowner wealth have been created by drilling in the area. Also, please remember these gas migration issues have only happened in northeastern Pennsylvania, nowhere else in the country has this occurred – those are the facts.

FACT: This wellhead you are looking at on screen is a $30 million factory. It’s a factory that never closes, and will employ at least a dozen people for at least the next 50 years. This factory produces federal, state and local tax revenue. It pays landowners leasing bonuses and production royalties. It supports local school districts and non-profits. It reduces the price of just about everything we buy and gives American entrepreneurs in both rural and urban communities a strong incentive to stay and build their business in the Marcellus.

According to a newly-released study of Marcellus natural gas development by Penn State University, the shale gas revolution is the biggest opportunity to hit Pennsylvania since the steel industry more than 100 years ago. And as my friend John Surma of U.S. Steel will tell you in a few minutes, we’re helping to strengthen the steel industry and other basic industries as well.

Consider these numbers:

· Marcellus natural gas development generated $11 billion in value-added regional gross domestic product last year. That number will rise to $13 billion in 2011 and reach $17 billion in 2015.

· For our part, Chesapeake has 2.4 million acres under lease in the Marcellus and has already paid almost $2 billion in lease bonus and royalties to farmers, families and townships across Pennsylvania.

· Direct and indirect employment from this economic boom has already surpassed 140,000 jobs. Chesapeake alone has about 2,100 employees in the Marcellus and about 1,700 of them were hired regionally. According to Penn State, further development of the Marcellus will support 216,000 jobs in 2015. That’s a jump of nearly 80,000 jobs in four years.

· If you think this shale discovery and development is like hitting the lottery, you are right, especially if you happen to be the budget director for Pennsylvania. State and local taxes paid will total about $1.2 billion this year and are projected to reach $1.4 billion in 2012. That’s nearly double the anticipated tax proceeds from the Lottery Fund for the 2011-2012 state budget. And it’s one reason – along with the excellent leadership of Governor Corbett – that Pennsylvania was able to close a nearly $4 billion budget deficit without raising taxes on its citizens.

· Nationally, the numbers only get bigger. Natural gas exploration and development supports about 3.5 million jobs across the country and with continued investment can easily add 500,000 more. By way of example, Chesapeake has added about 3,000 direct employees nationwide in the first eight months of 2011 alone. Our workforce now stands at 12,000 and we have openings for another 800 jobs with full benefits and average expected compensation of $75,000 annually.

But the benefits don’t stop there. Chesapeake has 1 million mineral owners in 16 states. To put that in perspective, about one in every 300 Americans has an oil and natural gas lease with Chesapeake. And they have been very well rewarded. We’ve paid out $9 billion in lease bonuses over the past 5 years, about $5 billion in royalties over the past 4 years, and another $2 billion in taxes over the past 5 years.

· And every one of those numbers is going up daily. The lives of millions rest on us getting this issue right and utilizing this American Treasure.

And remind me, what value these shale gas protestors created? What jobs have they created? You know the answer, and so do I, and it’s time that we contrast what we do for a living vs. what they do for a living.

Always remember this please: Without the advanced technologies of horizontal drilling and hydraulic fracturing, none of this would be possible. These technological breakthroughs have been the key to unleashing the natural gas from deep shale formations. This home-grown fuel has been right here below our feet in Pennsylvania for about 300 million years. It was just not technologically possible to extract it until the past few years.

Before horizontal drilling and fracking, Marcellus mineral rights had no value and the jobs and benefits now associated with it were non-existent. The truth is that unconventional development is responsible for an estimated 90% of the drilling of all new natural gas wells in the U.S. Without it, the promise of an economic "game changer" in the Marcellus would be "game over."

And lest anyone here have any delusions to the contrary, the permanent end of natural gas production is precisely what the extremists behind the "Shale Gas Outrage" rally just outside these doors are after. They carry banners demanding a stop to "dirty gas drilling." But they will tell you that there is no such thing as "clean gas drilling" - they simply want no drilling. That’s fine I suppose if you don’t like heat in your home, electricity in your office, a job to go to and food on your plate.

In fact, our favorite critic recently testified at a public hearing in NY and I quote: "The regulatory approach does not work." I invite all the regulators in the room to collectively, and publicly, call his bluff on that one.

At the same hearing, he went on to say: "The health and character of New York state will be significantly and forever compromised by this inherently unsafe and untested process."

Wow. Where to start in responding to that ridiculous claim? How about Arkansas, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, Pennsylvania, North Dakota, Texas, West Virginia and Wyoming? Oh, and how about New York, where over 14,000 gas wells are producing, most of them have been fracked, many of them by Chesapeake and our predecessor company, Columbia – I ask you, find me 14,000 "compromised" well sites in New York. In fact, I say find me one. Remember, America has 1.2 million fracked wells since 1949 – why are we just now hearing this process is "unsafe and untested"? Because our critics think we don’t need natural gas to live on, but they are wrong, and time and history is on our side – not theirs.

FACT: In the City of Fort Worth in the Barnett shale, we are producing natural gas in a highly urban environment. We’re fracking within 600 feet of schools, churches and homes. To date, more than 15,000 wells have been fracked in the Barnett, over 2,500 of them are Chesapeake operated wells. If our critics had their "facts" right, I’m guessing the City of Fort Worth – a metro area almost half the size of Philadelphia – would be a massive Superfund site or a ghost town. In reality, there are no cases of methane migration or groundwater contamination in Fort Worth after 15,000 frack jobs – go check it out for yourself.

Which brings me to the point that makes the extremists who oppose us so dangerous: Facts really don’t matter to them. Facts are inconvenient truths. Again, Senator Moynihan provided this critical insight. He said, "You are either for something, or you are for something else."

It’s not the fracking process itself that truly upsets our opponents; it’s the outcome of the fracking – clean, affordable, abundant, American natural gas. Our success has disrupted their dreams of a fantasy world of no fossil fuels.

So their game plan is not to protect water resources, per se. If it were of course, they’d be outraged by the 2 billion pounds of rock salt used by PennDot every winter that ends up in Pennsylvania waterways and then into the Delaware and Chesapeake Bays. If it were, of course they would be outraged by the billions of pounds of agricultural chemicals that run off farm lands into Pennsylvania’s waterways every year – but of course, they don’t seem to be concerned by that very real pollution because it doesn’t directly threaten their fantasyland of no fossil fuels.

The real game plan is to use political pressure to force Americans to pay exorbitant energy costs for the so-called “green” fuel sources that they prefer. To win, they have chosen to demonize the one fuel that makes their plan look economically and environmentally ridiculous – natural gas. Therefore, it’s far more productive to examine what our critics are for than to shadow-box them on what they claim to be against.

Consider, if you will, the consequences of following their lead. Our opponents are FOR shutting down all natural gas drilling. What does that reality look like?

For starters, the price of natural gas shoots through the roof. This will immediately hit consumers in the pocketbook and businesses on the bottom line. Our fears of a double dip recession will be compounded by the loss of the shale gas economic engine that has been putting our economy back on track. All those jobs I talked about earlier? Gone. And those tax receipts are not just gone, they are reverted into expenditures for unemployment benefits and other social services that are already stretched to the breaking point. Balanced state budgets? No way. The reality is that wind and solar can never be more than about 15% of our power requirements. So, 70% of American homes on natural gas heat – cold. And the 35% of American homes and businesses and factories that use electricity from natural gas – dark. All those crops that require natural gas based fertilizer – not grown.

What a great vision of the future! We’re cold, its dark and we’re hungry. I have no interest in turning the clock back to the Dark Ages as our opponents do. And I don’t think I’m alone in feeling that way. My guess is that they would have far fewer followers and much less favorable press coverage if the true consequences of their "vision" were better known and understood.

Having considered what our opponents are for, what about us? What’s our plan? I believe there is an alternative vision - a positive and uplifting alternative future for the Marcellus, for Pennsylvania and for America.

It starts with abandoning the pessimistic assumption that we as a nation have no choice but to export American wealth at the rate of nearly $1 million a minute to import foreign oil. Over the next 10 years, we are on course to export $5-7 trillion of American wealth to import foreign oil. This is unaffordable and unsustainable and unnecessary.

Imagine the mood swing in the White House and on Capitol Hill if our budget assumptions took that $5-7 trillion in foreign oil purchases and invested the money right here in America to promote U.S. security and economic growth. With shale gas and unconventional oil, America now has that option: U.S. energy needs can be supplied 100% from domestic U.S. energy resources. Production of American oil and natural gas from shale formations underlying 32 of our 50 states now provides fuel sources of historic abundance, capable of powering our electric utilities, factories, trucks and cars. Please also remember that in 2009, we passed Russia to become the world’s largest producer of natural gas – we are even more than the Saudi Arabia of natural gas these days.

This new energy supply revolution in the U.S. is so enormous that American manufacturers now enjoy natural gas costs that are the lowest in the world. Since 2008, the abundant supply of natural gas has dropped the price of natural gas by 67%, providing an economic stimulus of $250 million per day, far exceeding any benefit from government stimulus efforts that are inflationary and simply add to the debt burdens we are passing on to our children and grandchildren. This domestic energy cost advantage is already attracting industrial jobs back to the U.S.

According to a recent American Chemistry Council study, in 2010, U.S. chemical industry exports increased 17%, moving the industry from a balance of trade deficit to a $3.7 billion surplus. The study concluded that increased production of shale gas could produce nearly 400,000 new jobs in just the chemical sector and among its suppliers.

If we use natural gas as a primary transportation fuel, we can save businesses and consumers an estimated $2 on each and every gallon they consume. Chesapeake has recently led investments of $300 million to accelerate the build out of a network of compressed natural gas and liquefied natural gas stations to give corporate and municipal fleet users, truckers and other vehicle owners the confidence to buy CNG/LNG vehicles and manufacturers the confidence to build CNG/LNG cars and trucks.

So much for the "chicken and egg" problem others have used as an excuse to do nothing. We figure that it will only take about $2 billion to build a network that covers the major commercial goods distribution corridors from coast to coast and border to border. We’ve helped put up the first 15 percent and we expect others to make similar investments.

We are also investing in other breakthroughs new technologies. Chesapeake recently announced a $155 investment in Sundrop Fuels, Inc., to build the world’s largest renewable bio-based "green gasoline" production plant. The two crucial ingredients in this ultra-clean liquid fuel are non-food waste biomass and natural gas. Natural gas provides the "missing link" – added hydrogen – needed to make everything from tree bark to rice hulls capable of fueling existing cars, trucks and aircraft. Our first commercial demonstration plant will produce 40 million gallons of green gasoline annually. Future plants will be five to ten times larger and can be located near large populations and pipelines. These facilities will bring lower fuel prices for consumers and high-wage jobs for thousands of Americans.

We are so convinced of the economic attractiveness of energy independence that we are redirecting approximately 1 to 2% of Chesapeake’s annual drilling cap-ex over the next 10 years, or at least $1.0 billion in total, to stimulate market adoption of CNG, LNG and GTL fuels. Putting up a billion dollars of our own money is what I like to refer to as an All American Action Plan!

We also intend to take full advantage of the associated cost savings and emissions reductions by accelerating the conversion of all 4,500 of Chesapeake’s light duty trucks and 400 of our heavy duty trucks to run on CNG. In addition, we are converting at least 100 of our drilling rigs and all of our planned hydraulic fracturing equipment to run on LNG. The combined savings from converting to CNG and LNG fuel comes to approximately $250 million a year and that’s to say nothing of the reduction in fuel emissions of using clean-burning natural gas.

If our one company can save $250 million by changing our fuel to natural gas, think of the impact of converting millions of heavy-duty trucks and light-duty passenger vehicles to run on a cleaner fuel, at about half the cost of gasoline or diesel.

The new American oil and natural gas supply revolution I have described is not dependent on government. All it needs is a rational, science-based approach with regulatory certainty. The market will take care of the rest.

But for the people of the Marcellus and our nation, the choice is clear: we can follow a path to economic ruin built on fantasies about the viability of wind and solar and the risks of natural gas. Or we can seek to safely build on the reality of the Marcellus Shale American Gas Treasure. We can bankrupt consumers and drive our remaining manufacturers off shore. Or we can rapidly inject new vitality into our economy, create jobs for the jobless, and restore the manufacturing base of the U.S.

In the Marcellus, and in other shale plays across our great nation, lies a treasure of transformative size and power. We know how to develop it safely. We know how to use it wisely. We have a vision for game changing opportunity and prosperity that is solely based on science, technology, American innovation and entrepreneurship.

A cleaner, safer and more prosperous future awaits - if we commit to fuel our economic engine with shale energy made by Americans and for Americans.

Thank you for your interest in this magnificent American treasure called the Marcellus Shale.

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