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Watch Out for Gas Curve in Years Ahead, Says Chesapeake CEO

As U.S. producers transform their asset base exclusively from natural gas to a more balanced one that includes oil and liquids, investors "might be surprised by what happens to the gas curve in the years ahead," Chesapeake Energy Corp. CEO Aubrey McClendon said Monday.

Just wait for the time "when the gas curve has to bid for gas rigs because the rigs have moved to oil plays...I think investors fail to understand how sticky these rigs will be once they move to oil plays," McClendon said at the Independent Petroleum Association of America's Oil & Gas Investment Symposium in New York City.

"I think the point very few investors understand is that the industry is rapidly transforming its asset base exclusively from natural gas to a balanced one and we are now working on oil and liquids plays where the returns are so much higher...

"Once producers convert to drilling wells that produce $10-15/Mcfe units and finish HBP [held by production] natural gas drilling, why would they go back to drilling natural gas wells if prices increase from $4/Mcf to $5, to $6 as most analysts are forecasting?

"I believe this is the single biggest misunderstood aspect of the future bull case for natural gas."

Plenty of reasons should turn investors bullish on "intermediate and long-term" gas prices, said the CEO. Chesapeake's continuing success in obtaining foreign joint venture partners, as well as its recent Fayetteville Shale sale -- a gas play -- to Australia's BHP Billiton Ltd. for $4.75 billion in cash illustrate the point (see Daily GPI, Feb. 23).

"It's a reminder that global energy companies see things differently than most U.S. investors do," McClendon said of the Fayetteville sale. Overseas investors "are able to look through what may be a sloppy gas market in 2011 and maybe 2012..."

As Chesapeake and other onshore producers have begun to transition to more oily production, the "global industry is transforming too," McClendon noted. "The U.S. today has some of the profitable oil plays in the world, something that hasn't been true for 50 years. The global industry is bringing enormous sums of money into the U.S., which is good news for companies like ourselves..."

President Obama's recent energy speech also provided momentum for the gas market, said McClendon. The recent avalanche of news about vehicles powered by compressed natural gas (CNG) and liquefied natural gas (LNG) is among the "least important" for an "immediate impact" on the gas market, he believes.

However, Obama's speech provided a "psychological impact...When the president of the United States is talking about moving the U.S. fleet to alternatives, including CNG, it's a very big deal...that in time will be very significant."

McClendon said it was his "personal view" that the United States was "about $1 billion of infrastructure away" from building out a solid CNG platform for U.S. fleets. "If we can get most heavy trucks moved over, it would be enormously important for the country. A lot of the capital can come from industry itself...We are spending about $40 billion drilling wells. Surely we could come up with 1% of that for natural gas infrastructure..."

In addition to growing industry demand, and hence more use of low-priced gas, the CEO also sees a "continuing and accelerating shift from coal to natural gas for U.S. electrical generation." If the shift to gas from coal were to occur, "gas demand could increase 10-15 Bcf/d over the next decade," he noted.

McClendon also remains optimistic about the future of U.S. gas-to-liquids plants, as well as the future of LNG exports from the United States.

"I absolutely believe the United States will be exporting LNG by 2015," he said. "Many are sure the government won't allow us to do that, but I believe we will be able to. We export coal...we export corn, certain commodities. Why not gas?"

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