Finding a way to use natural gas as a mainstream transportation fuel is the "holy grail' for the industry, Chesapeake Energy Corp. Aubrey McClendon told a packed audience Wednesday at the World Shale Gas Conference & Exhibition in Grapevine, TX.

McClendon, whose company is the second largest onshore gas producer behind ExxonMobil Corp., said the U.S. gas glut "should balance itself out" by the middle of the decade. By then, he also believes that an economic method will be developed to convert gas to liquids, which would allow all types of vehicles to use compressed natural gas (CNG). The United States also could export liquefied natural gas (LNG) more economically.

"We've been working very hard in the last three years to gasify the transportation system...to encourage trucks to [move to] LNG and fleets to CNG," McClendon told the audience. "The holy grail is to get an economic gas-to-liquids technology. We think certainly by the mid-part of the decade that economic breakthroughs could be done. And it would bring U.S. gas prices closer to oil parity."

By converting "some...of the transportation fleet to CNG or LNG, the United States could establish a role where we are less dependent on foreign oil sources...Certainly, we already have upset the flows of LNG around the world. That's actually a good thing. Rather than the United States importing 10 Bcf/d, other countries can import gas, and that leads the way to a better environment down the road rather than having to rely only on coal..."

In looking at the "American experience, shales are changing the way we think about energy security, the environment...It's empowering other countries around the world that think they may no longer be limited in their choices to import oil and gas."

Until gas prices reach Chesapeake's "magic number" of $6/Mcf, gas production will be de-emphasized, while shale oil is on the fast track. The Oklahoma company took what it learned in the gas shales and applied it to oil shales beginning in 2009. "We retooled our factory to find oil rather than gas and make more money for shareholders...Until gas prices recover we'll be de-emphasizing gas and emphasizing oil."

Chesapeake now has 95 gas rigs running onshore, but that number will be falling as contracts roll off over the coming months. Reducing rigs "does not reduce our commitment to gas, but the industry is generating far more supply..." Once gas achieves more parity with oil, "we will recommit ourselves to full-scale gas development."

Under joint venture (JV) partnerships structured with financially stout producers in the Marcellus, Fayetteville, Haynesville, Barnett and Eagle Ford shales, Chesapeake, once cash-strapped, is flush again, said McClendon. Those deep-pocketed partners also gave the company some breathing room as it began its quest for shale oil.

"Our view on partners is quite simply you can never have too many rich friends in this business," said McClendon. "You must be very quick in locking down positions. If you assume that the Barnett was the first gas shale successfully developed, and once industry broadly acknowledged that in 2005, within three years all of the major gas shales had been found.

"Likewise, we see the same time period playing out in oil shales and other oil formations as well. The Bakken [shale] serves the same role as the Barnett. Gas shales were generally accepted as economic in 2008. By 2011 the great land rush for best unconventional oil plays will be over as well. We intend to be leader in that part of the business."

Chesapeake now is the No. 17 oil producer in the United States "and we expect to be in the top five in the next two or three years."

Producers are risk takers, and McClendon thinks that oil shales are a good bet.

"We're on the verge of an unconventional oil revolution," he predicted. "It is happening...Producers have begun to tap oil reserves in the domestic shale basins...and think about the enormous implications of that...We are about to experience a surge in oil production that will last at least 10 years...probably far beyond that."

If shale oil plays out like the shale gas has -- as McClendon expects -- the balance of power in the world would be forever altered.

"When you think about the implications, they are enormous," he said. When U.S. shale technology is successfully exported to other parts of the globe, including Europe, Asia, Africa and Latin America, many countries no longer would have to import their energy supplies. "Worldwide oil prices would be cheaper...there would be energy security...and the peak oil theory could be put off for a bit longer."

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