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Chesapeake’s boost for natural gas transport

With abundant natural gas supplies depressing prices, Chesapeake says the time is right to invest in transport fuelled by natural gas. It’s putting its money where its mouth is

IN A BID to transform the US market for natural gas as a vehicle fuel, Chesapeake Energy has outlined a “bold” plan to invest $1 billion in infrastructure and other projects aimed to stimulate demand.

In doing so, chief executive Aubrey McClendon said he hopes to break the “stranglehold” of imported oil from hostile regimes in the Middle East and help the US attain greater energy security. McClendon also took to the airwaves in an interview with CNBC to extol the benefits of cleaner burning gas and admonish countries at odds with “US interests”.

Promoting cleaner gas

Oklahoma-based Chesapeake said the US government must takes steps to increase domestic production of oil and natural gas liquids by 50%, or 3 million to 4 million barrels a day (b/d) while promoting cleaner natural gas-based fuels. North America’s largest gas producer estimated cost savings of $1.50-2.00 a gallon (USG) over gasoline and diesel. A coast-to-coast and border-to-border build-out of compressed natural gas (CNG) and liquefied natural gas (LNG) fuelling stations would require $1.5 billion to $2.0 billion to complete, it added.

McClendon further announced the creation of a $1 billion venture-capital fund, Chesapeake NG Ventures (CNGV), dedicated to investing in companies and technologies to replace petroleum with natural gas and gas-to-liquids (GTL) fuels.

To fund it, Chesapeake would redirect up to 2% of its forecast annual drilling budget toward projects designed to stimulate increased natural gas demand. To kick-start the effort, the fund also made its first portfolio additions with investments in a pair of clean-energy start-ups amounting to $300 million.

The first is $150 million in newly issued convertible debt of Nasdaq-listed Clean Energy Fuels, which will use the money to install natural-gas filling stations along US Interstates. Chesapeake said the investment will underwrite 150 LNG truck-fuelling stations to provide a “foundational grid” for heavy-duty vehicles travelling along the US’ main highway corridors.

The second will see Chesapeake pay $155 million for 50% of privately held Colorado-based Sundrop Fuels. Sundrop produces “green” transport fuel from natural gas and cellulosic materials using a proprietary GTL process, rather than the more intensive Fischer-Tropsch method. The company plans to build the largest bio-refinery in the world, capable of producing more than 40 million USG/y of ultra-clean gasoline from natural gas and waste plant material.

Challenging times

Chesapeake’s moves come at a challenging time in the North American upstream gas market. Although new drilling technology has added abundant new reserves, costs haven’t fallen as fast as prices. Despite a colder winter and hot summer, natural gas futures are barely a third of what they were two years ago and producers have been forced to look downstream for relief. Canada’s Talisman Energy, for example, is teaming up with South Africa’s Sasol to convert natural gas from its British Columbia (BC) shale-gas holdings into liquids.

The idea of using natural gas as a transport fuel isn’t new. Texas oilman T Boone Pickens has been lobbying the US Congress for almost four years with his plan to promote natural gas cars and trucks. According to the blog, the US spent $41.7 billion, or almost $1 million a minute, on imported oil in May this year.

Encana on the same hymn sheet

In Canada, efforts are also growing to replace higher-cost diesel with natural gas. Like Chesapeake, Calgary’s Encana is converting its entire operations fleet to gas – from cars and trucks to drilling rigs – in a move that could save millions of dollars in gasoline and diesel costs. The company has also joined groups such as the Canadian Natural Gas Vehicle Alliance and taken on an advocacy role for lobbying government in a bid to raise public awareness of the advantages for switching to cleaner burning gas as a way of reducing greenhouse-gas emissions.

But the market for natural gas vehicles (NGVs) in Canada is a tenth of that in the US, which is already very small by international standards. According to media relations vice-president Alan Boras, Encana is also looking at other options as part of a multi-pronged approach, including LNG exports through the proposed Kitimat LNG plant, on the BC coast, in partnership with the US’ Apache.

And while the company continues to promote “a variety of initiatives” to find new markets, many of those, including NGVs, are years away. Indeed, financial analysts said Chesapeake’s plan would have little or no effect on its near-term financial performance, which continues to be weighed down by low North American natural gas prices.

Gas market tipping point

In that sense, McClendon’s bluster might be an attempt at diverting attention from upcoming second-quarter financial results later this month. But there’s also a feeling that the longer-term gas market is nearing a tipping point where cheap, abundant supplies will eventually spark a transformational shift in thinking about how to use it, whether it’s for electricity generation, to fuel cars or provide petrochemicals feedstocks.

According to Encana’s Boras, it ultimately comes down to the end user. “At some point it’s going to happen. It’s going to take a while, but it will happen.”

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