Having been part of the shale natural gas supply revolution, Chesapeake Energy Corp. wants to "kick-start the demand revolution," CEO Aubrey McClendon said Monday when the company announced a $1 billion venture capital fund -- Chesapeake NG Ventures Corp. (CNGV) -- to invest in companies and technologies to enable replacement of gasoline and diesel fuel with natural gas and gas-to-liquids (GTL) fuels.
To fund the effort, Chesapeake said it will redirect 1-2% of its forecasted annual drilling budget away from efforts to increase gas supply toward projects that will stimulate increased demand. The company said it anticipates committing at least $1 billion to CNGV initiatives over the next 10 years, and predicts a host of other companies will join the effort.
"We believe that a coast-to-coast and border-to-border build-out of CNG and LNG fueling stations will require approximately $1.5-2 billion to complete, and we believe that a combination of private-sector interests will step up to provide this capital in the next few years," McClendon said.
"We have analyzed the U.S. transportation sector during the past four years to determine how to create the best pathway to move our country away from dependence on OPEC oil and the resulting yearly transfer of more than $400 billion of American wealth to foreign countries, many of them often unfriendly to U.S. interests," McClendon said. "As a result of our analysis, Chesapeake has developed a three-pronged plan:"
Besides redirecting the portion of its drilling budget to the tune of $1 billion over the next 10 years, the company said it will accelerate the conversion of all 4,500 of its light-duty and 400 of its heavy-duty fleet vehicles to run on CNG, which will reduce company fuel costs by an estimated $15-20 million per year.
"In addition, we are converting at least 100 of our drilling rigs and all of our planned hydraulic fracturing equipment to run on LNG," Chesapeake said. "Just converting our rigs and hydraulic fracturing equipment will cut the company's diesel fuel consumption by approximately 350,000 gallons a day and save the company approximately $230 million annually, bringing our overall CNG and LNG fuel savings to approximately $250 million."
Chesapeake said it has selected the first two companies that will receive investments from CNGV. One is Clean Energy Fuels Corp. for development of LNG infrastructure. The other is Sundrop Fuels Inc. for development of "green gasoline" to be made from natural gas and cellulosic material.
The company said it will invest $150 million in newly issued convertible debt of Seal Beach, CA-based Clean Energy. The investment will be made in three $50 million tranches, the first of which has been made and the other two are planned for June 2012 and June 2013. Clean Energy will use Chesapeake's investment to accelerate its buildout of LNG fueling infrastructure for heavy-duty trucks at truck stops across interstate highways in the U.S.
"This investment alone is projected to help underwrite approximately 150 LNG truck fueling stations, increasing by more than tenfold the number of publicly accessible LNG fueling stations and providing a foundational grid for heavy-duty trucks to have ready access to cleaner and more affordable American natural gas fuel along major interstate highway corridors," McClendon said.
Chesapeake also said it will invest $155 million in a 50% ownership stake in Sundrop Fuels Inc., a privately held cellulosic biofuels company based in Louisville, CO. The investment over the next two years will fund construction of the largest nonfood biomass-based "green gasoline" plant in the world, capable of annually producing more than 40 million gallons of ultra-clean gasoline from natural gas and waste cellulosic material, the company said.
The first $35 million tranche of Chesapeake's investment has been funded and the remaining tranches of preferred equity are to be scheduled around certain funding and operational milestones to be reached over the next two years. The CNGV investment will be augmented by an additional $20 million pro rata investment by a current investor, Palo Alto, CA-based venture capital firm Oak Investment Partners, which along with Sundrop Fuels' management and Menlo Park, CA-based venture capital firm Kleiner Perkins Caufield & Byers, provided substantially all of Sundrop Fuels' capital to date.
The technology will utilize a methanol-to-gasoline process for producing tank-ready fuel, rather than the more capital intensive Fischer-Tropsch process, Chesapeake said. The company expects to break ground in early 2012 and be in full production by late 2013. Full-scale commercial plants are expected to be five-10 times the size of the initial plant, with the first such plant scheduled to break ground about one year after start-up of the commercial demonstration plant.
"We expect to make investment opportunities with CNGV available to other natural gas producers, venture capitalists, private equity players and other large-scale energy and technology investors, especially those looking for breakthroughs in scalable, green energy technologies," McClendon said. "Chesapeake believes CNG, LNG and GTL processes provide the most rapid, economic and scalable green energy investment alternatives."