Despite what Capitol Hill lawmakers, regulators and energy consumers may think, natural gas producers aren't raking in the big bucks, said Chesapeake Energy CEO Aubrey McClendon last Thursday.
"While some consumers of gas are obviously upset that gas prices are no longer $2 to $3/Mcf, I'll tell you that our cost structure has at least doubled in the past five years...Based on the index prices that [were set last] week for natural gas for production in the month of October, I can tell you that the whole industry is producing at a loss today," he told a packed audience at the Natural Gas Roundtable in Washington, DC.
"As a consequence the industry today is very challenged on the price side. So while the perception is natural gas is a richly valued product and we're making a bunch of money in the industry, today in fact we're not," he said.
McClendon said he expected the index for Oklahoma and Texas gas to be set at around $5.20/Mcf for October. And at the biggest gathering point in the Rocky Mountains, if Rockies producers choose to sell their gas in October, they'll be selling it at $1.05/Mcf at the delivery point, which means they will be paying somebody to take the gas away, he noted.
McClendon believes the industry is in for low, single-digit natural gas prices for an "extended period" due to the rise in liquefied natural gas (LNG) imports and increase in production by independent producers, which he said have reversed the negative supply trends that were seen in the late 1990s and early this decade.
While supply has increased, he noted that gas consumption is declining. "We're losing a Bcf/d per year of wintertime consumption. We're losing about a Bcf/d of industrial consumption. And the only thing we have going for us right now is an increase of about a Bcf/d in power generation [demand]."
As for his "little dustup" with Connecticut Gov. Jodi Rell over her allegations that Chesapeake Energy was trying to manipulate gas prices by shutting in 200 MMcf/d of production, he said he has not been able to meet with the governor to settle the dispute (see NGI, Sept. 24). "I did e-mail the governor's chief of staff on three occasions and while he and I have had dialogue, he said the governor would not be available to visit with me," McClendon said.
"Although she called for a congressional investigation of the company that I work for, I didn't take it so much that she was after me. I just thought she was spectacularly misinformed. I felt like it was my duty to point [out] that our industry and our company specifically should be considered heroes to Connecticut citizens," he told energy executives, gas association officials and regulators.
"I've been accused of a lot of things in my life, but manipulating markets has not been one of them," he said.
In a letter to Rell, McClendon said he "gently pointed out to her that the institutions that influence gas prices today more than any other are hedge funds, and a good many of [them] are headquartered in Greenwich [and] a good many...have contributed to her campaigns in the past." He noted that it was "important [for Rell] to recognize that it's not the producer who is capable of influencing gas prices."
McClendon further pointed out that Rell is on record opposing an LNG import facility in Connecticut. "I understand all the reasons for that, but the consequences of decisions like that, of course, are higher gas prices for her constituents."
In a related development, a major producer group, in a recent letter Rell, said access restrictions on U.S. natural gas supply rather than intentional manipulation of gas prices were the primary reason for volatility in the market. It hoped the governor, armed with better information on the gas market, would withdraw her request for an immediate congressional investigation into possible manipulation of gas prices.
"Unless we address the need for additional access to the most economic supplies, additional investigations and reporting alone will not relieve the pricing pressure on the market," wrote R. Skip Horvath, president of the Natural Gas Supply Association (NGSA). "Constraints placed on domestic natural gas resources, coupled with weather swings, in fact represent the biggest driver for natural gas market volatility levels," he said.
"We are hopeful that these clarifications will enable you to withdraw your request to Congress for an investigation and, importantly, help policymakers and consumers focus on addressing long-term solutions aimed at natural gas supply and demand fundamentals in order to help alleviate pressure on natural gas prices," he told Rell.
Chesapeake Energy's McClendon is a major advocate for natural gas. It "is all about being clean, abundant, affordable and it's American." McClendon said this year and beyond will be "The Age of Natural Gas." It "will be seen as the best solution for global warming. We think it will be seen as [the] best value proposition for consumers, and we also believe it will be a key element for enhancing national security."
The Oklahoma-based company is the largest independent gas producer in the United States and the third largest overall gas producer, behind ConocoPhillips and BP. It reported that it produced 1,715 Bcf in the second quarter of this year.
"Our production since the year 2000 has increased on a compounded annual growth rate of about 30% per year," McClendon said, adding that he expects the company's production to rise by 20% this year, 14-18% in 2008 and 12-16% in 2009. "We suspect in the next couple of years we're likely to be the biggest producer of natural gas."
Chesapeake Energy is "probably the purest play in natural gas," with 92% of its production in gas, McClendon said. All of its production is onshore east of the Rockies, and the company specializes in unconventional plays. And unlike producers in the Rockies, "I don't have access issues."
The company also is one of the top gas reserve holders in the United States, with about 10 Tcf of proved reserves, according to McClendon. However, he estimated there could be as much as 80 Tcf of reserves under acreage leased by the Chesapeake Energy.
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