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 last week 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…”

Chesapeake last week also issued its 3Q2010 earnings report, revealing itself to be the buyer of Anschutz Exploration Co.’s 500,000 net acres in the Appalachian Basin (see related story).

Overall production in the latest quarter increased 23% from year-ago levels to 3.043 Bcfe, 90% weighted to natural gas. Production also was up 9% sequentially. Liquids production in the latest quarter rose 50% year/year to 10% of total production.

Chesapeake produced 2.748 Bcf of natural gas in 3Q2010, which was 20% higher year/year. The natural gas realized price was $5.67/Mcfe in 3Q2010, down from $6.14 sequentially and $6.44 in 3Q2009.

The Oklahoma City-based producer reported net income totaled $515 million (75 cents/share) in 3Q2010, with operating cash flow of $1.07 billion. In the year-ago period net profits totaled $186 billion (30 cents/share) and cash flow was $1.12 billion. However, adjusted earnings per share, assuming dilution, were at the same level as last year’s 3Q at 70 cents/share.

In recognition of the “value gap between oil and natural gas prices,” Chesapeake said it plans to increase its oil and natural gas liquids production through its drilling activities to more than 150,000 b/d, or 20-25% of total production, by year-end 2012 and to more than 250,000 b/d, or 25-30% of total production, through organic growth by year-end 2015.

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,” McClendon said.

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