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Chesapeake tries to pump up demand

4/14/2012 5:50 PM

This article was first published on April 14, 2012 by The Star-Telegram.

For more than 20 years, Chesapeake Energy has been a leader in driving up the supply of natural gas. Now it's trying to spark the demand side of the equation — a reach for any player.

In the next decade, the Oklahoma City company has pledged to invest $1 billion to increase the use of natural gas in transportation. Efforts range from creating a nationwide network of truck stops to developing home fueling kits that let people fill up in their garage. And partners include 3M and General Electric, two global heavyweights whose involvement signals the potential of this market.

The country is awash in cheap natural gas, thanks to the success of Chesapeake and others in developing shale gas nationwide, including in North Texas' Barnett Shale. Chesapeake is the second-largest producer here and has a regional office in Fort Worth.

Last week, natural gas prices fell as low as $1.91 per 1,000 cubic feet, the lowest since 1999, because of the supply glut. Nationwide, production is running 5 percent ahead of last year's pace, and after a mild winter, underground stores of natural gas are 58 percent greater than the average for the past five years.

Naturally, the gas industry wants to drive up demand, whether from power plants, industrial uses, exports or transportation. Chesapeake stands apart, because it's leading the effort in such a high-profile way.

In a recent federal filing, Chesapeake said that one of its business strategies is to "transform the U.S. transportation fuels market."

That's usually the kind of goal set by a nation, not a single company. But Chesapeake and its leader, Aubrey McClendon, have always been ambitious and audacious. Today, they have reason to feel a little desperate, too.

Chesapeake is heavily leveraged and won't generate enough cash to fund all its drilling plans if gas prices remain low. In February, Moody's cut Chesapeake's rating outlook from positive to stable, affecting $11 billion in debt.

Last week, Chesapeake announced three deals to raise $2.6 billion, selling parts of holdings in Oklahoma and West Texas. For the full year, Chesapeake hopes to raise up to $12 billion from similar sales so it can plow more money into high-priced oil.

Chesapeake is the nation's second-largest gas producer, and 90 percent of its revenue came from natural gas in 2009. This year, it aims to have 60 percent of revenue from oil and natural gas liquids, and that's an expensive transition.

It stands to benefit greatly if more vehicles convert to natural gas. The stakes are high for this region, too, because drilling has fallen sharply in the Barnett and won't pick up until prices rise.

McClendon has said the transportation push isn't only about boosting the industry. Like T. Boone Pickens, he champions national self-determination, insisting that natural gas offers a path to more energy independence. And he won't simply wait for the market to develop.

"We can guarantee a natural gas demand revolution is on the way, because we are making it happen!" the company wrote in an investor presentation this month.

About four years ago, Chesapeake started considering ways to boost demand. It later announced plans to convert its 4,500 vehicles to natural gas.

"If we didn't drive with natural gas, that would be like dairy farmers not drinking milk," said Taylor Shinn, Chesapeake's senior director of corporate development.

That announcement, along with a pledge to buy from its convenience stores, was enough to get Love's to start adding pumps for compressed natural gas at some locations. Near the Chesapeake campus in Oklahoma City, Shinn said that CNG sells for as little as $1.65 for the equivalent of 1 gallon. That's far less than half the price of regular and diesel gasoline.

Chesapeake has converted about 1,400 trucks to CNG, he said, with 500 to 1,000 more expected this year. AT&T and UPS are among the local fleets that have also converted vehicles.

Chesapeake has invested about $4 million with Love's and OnCue to build out 40 new CNG stations in Oklahoma. It has pledged $50 million to outfit about 200 existing stations elsewhere in the country.

It's putting $150 million into Clean Energy Fuels Corp., a California company founded by Pickens that plans a nationwide network for long-distance truckers. About 300 stations are getting pumps for liquefied natural gas, with a goal to add the service to 1,000 more.

Chesapeake has pledged $155 million to Sundrop Fuels, a Colorado company that plans to produce "green gasoline." It will be made from natural gas and biomass waste, and Chesapeake will have a 50 percent stake in the private company.

Chesapeake also put up $10 million for a venture with 3M. The technology company is developing lighter, stronger CNG storage tanks for trucks and cars.

And Chesapeake is collaborating with GE on natural-gas-powered locomotives and kits that enable any gasoline station to easily add the fuel. The two project that at least 250 stations will buy the kits later this year, at a likely price of $500,000 to $700,000 each.

Chesapeake is working with trucking companies (two were at its headquarters last week) and an appliance firm that wants to cut the price of a home fueling station to $1,500.

Ken Morgan, director of the Energy Institute at Texas Christian University, said he hasn't seen any companies reach out in so many directions — and make such a commitment.

Chesapeake said it plans to redirect 1 to 2 percent of its annual drilling budget to ventures that can create breakthroughs in demand.

"Chesapeake could buy a lot of land leases with $1 billion," Morgan said. "But if this leads to a more sustainable company, it'll be genius."

Maybe McClendon is early. Maybe he's tilting at windmills. But he's showing how an industry leader leads.​​

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