Chesapeake Energy Corp unveils plan to transform American fuels market, reduce OPEC oil imports

July 19, 2011
Chesapeake Energy Corporation unveiled its plan for an achievable, scalable, and affordable pathway toward a transportation future that runs on America’s own abundant supplies of natural gas and oil from deep shale and other unconventional formations.

Chesapeake Energy Corporation unveiled its plan for an achievable, scalable, and affordable pathway toward a transportation future that runs on America’s own abundant supplies of natural gas and oil from deep shale and other unconventional formations.

Central to this private-sector initiative is the creation of a $1.0 billion venture capital fund, Chesapeake NG Ventures Corporation (CNGV), dedicated to identifying and investing in companies and technologies that will replace use of gasoline and diesel derived primarily from OPEC oil with domestic oil, natural gas, and natural gas-to-liquids (GTL) fuels.

To fund this effort, Chesapeake will redirect approximately 1% to 2% of its forecasted annual drilling budget away from efforts to increase natural gas supply toward projects that will stimulate increased natural gas demand. Over the next 10 years, the company anticipates committing at least $1.0 billion to CNGV initiatives. Aubrey K McClendon, Chesapeake’s Chief Executive Officer, said, “We have analyzed the US transportation sector during the past four years to determine how to create the best pathway to move our country away from dependence on OPEC oil and the resulting yearly transfer of more than $400 billion of American wealth to foreign countries, many of them often unfriendly to US interests. As a result of our analysis, Chesapeake has developed a three-pronged plan to move America toward greater energy independence and enhanced national security during the next 10 years:

•Increase existing domestic onshore oil and natural gas liquids (NGLs) production of about 8 million barrels a day by 3 million to 4 million barrels a day through acceleration of horizontal drilling and hydraulic fracturing to develop the unconventional oil and NGL resources that underlie many parts of the United States.

•Invest in enough publicly accessible compressed natural gas (CNG) and liquefied natural gas (LNG) fueling stations to reach a tipping point where original equipment manufacturers (OEMs) of all vehicular classes will have sufficient confidence to increase their production of CNG and LNG vehicles and provide American businesses and consumers access to vehicles that run on a cleaner fuel made by and for Americans that should be approximately $1.50 to $2.00 per gallon cheaper than gasoline and diesel.

•Deploy innovative and scalable GTL processes to convert natural gas into a room temperature, tank-ready, liquid transportation fuel that can be blended with existing supplies of gasoline and diesel or used as a stand-alone replacement product that is cleaner and more affordable and creates high-paying American jobs rather than foreign jobs.

McClendon said, “Chesapeake is so convinced of the economic attractiveness of this plan that we are redirecting approximately 1% to 2% of our annual drilling cap-ex over the next 10 years, or at least $1.0 billion in total, to stimulate market adoption of CNG, LNG, and GTL fuels. We also intend to take full advantage of the associated cost savings and emissions reductions by accelerating the conversion of all 4,500 of Chesapeake’s light-duty and 400 of our heavy-duty fleet vehicles to run on CNG, which will reduce our fuel costs by an estimated $15 million to $20 million per year. In addition, we are converting at least 100 of our drilling rigs and all of our planned hydraulic fracturing equipment to run on LNG. Just converting our rigs and hydraulic fracturing equipment will cut the company’s diesel fuel consumption by approximately 350,000 gallons a day and save the company approximately $230 million annually, bringing our overall CNG and LNG fuel savings to approximately $250 million.”

Investment #1: Clean Energy Fuels Corp–LNG Fueling Infrastructure:

Chesapeake has agreed to invest $150 million in newly issued convertible debt of Clean Energy Fuels Corp, based in Seal Beach CA. The investment, designed to provide a low-cost, low-carbon American alternative to diesel fuel derived from foreign oil for heavy-duty trucks, will be made in three equal $50 million tranches, the first of which has been made and the other two are planned for June 2012 and June 2013. The convertible debt carries a 7.5% interest rate and a 22.5% conversion premium. Clean Energy will use Chesapeake’s $150 million investment to accelerate its build-out of LNG fueling infrastructure for heavy-duty trucks at truck stops across US Interstate highways, thereby creating the foundation for “America’s Natural Gas Highway System.”

Investment #2: Sundrop Fuels Inc–Biobased “Green Gasoline” Made from Natural Gas and Cellulosic Material:

Chesapeake has agreed to invest $155 million in a 50% ownership stake in Sundrop Fuels, a privately held cellulosic biofuels company based in Louisville CO. The investment over the next two years will fund construction of the largest non-food biomass-based “green gasoline” plant in the world, capable of annually producing more than 40 million gallons of ultra-clean gasoline from natural gas and waste cellulosic material. The investment promises to accelerate development of an affordable, stable, room-temperature, natural gas-based fuel for immediate use in automobiles, diesel engine vehicles, and aircraft.

The first $35 million tranche of Chesapeake’s investment has been funded, and the remaining tranches of preferred equity will be scheduled around certain funding and operational milestones to be reached over the next two years. The investment gives Chesapeake 50% of Sundrop Fuels’ equity on a fully diluted basis. The CNGV investment will be augmented by an additional $20 million pro rata investment by a current investor, Palo Alto CA-based venture capital firm Oak Investment Partners, which along with Sundrop Fuels’ management and Menlo Park CA-based venture capital firm Kleiner Perkins Caufield & Byers, have provided substantially all of Sundrop Fuels’ capital to date.