McClendon says gas to get boost from US Gulf disaster

Thursday, June 10, 2010

June 10, 2010

Houston, 10 June (Argus) — Most energy executives have shied away from trying to draw a silver lining around the very dark cloud looming over the US Gulf coast as oil continues to leak from BP's deepwater Macondo well. Not Aubrey McClendon.

Today at Bentek Energy's Benposium in Houston, Texas, the Chesapeake Energy chief executive predicted the massive spill and ensuing political fallout could prove positive, rallying the public to greater environmental consciousness and redirecting politicians toward a greater commitment to energy independence. That all means one thing to McClendon: more natural gas demand, perhaps even from a vast fleet of cars and trucks running on compressed natural gas (CNG).

McClendon cited Earth Day and the modern environmental movement, which were birthed as a direct result of the 1969 oil spill in Santa Barbara, California. More than 40 years later, McClendon said he's hoping BP's problems will result in a US refocused on cleaner-burning gas, particularly in the area of transportation, which would breathe new life into the flagging sector.

“I'm not clear what the final outcome will be – but it has clearly emboldened the environmental movement, and this will create change,” McClendon said. “We need a president, governor and/or congressman to stand up and say ‘I have a plan to move the US away from foreign energy dependence,'.”

Radical policy changes may or may not take hold, but one obvious effect that is sure to happen is cost escalation for exploration and production efforts, he said. And higher costs – stemming from new regulations – will not be limited to offshore, according to McClendon.

“This will become more and more a big boy's game,” he said, predicting that regulation and pollution risk will run smaller companies out of drilling entirely, a trend he expects to start happening within six months.

Despite the rally that natural gas could get from the Gulf disaster, McClendon was quick to point out that Chesapeake, now the second largest producer of natural gas in the US, has switched its focus to liquids-rich gas plays and oil assets within its portfolio because of the current gas-to-crude price differential.

“Today 92pc of Chesapeake production is natural gas, but by 2013 the company will be producing more oil than gas,” he said.

Most drilling in gas shales happening now is involuntary, he added, with producers doing the bare minimum required to hang on to leases. Even that action will slow down should gas prices remain suppressed, he said.

When asked about the accuracy of initial production volumes and recovery rates in gas shale plays reported by many producers – which some industry watchers claim are overstated – McClendon said: “If that was the case, wouldn't prices be higher? It's highly unlikely that an entire industry is not telling the truth.”

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