Chesapeake Energy is not resting on its laurels as the No. 2 producer of natural gas in the US. So awash is the US with gas following the release of vast reserves from shale beds during the last decade that reserves are reckoned to have increased from 30 years to 100 years of supply, and in the process, prices have plummeted.
Good news then for energy consumers, particularly those that can switch power sources from, say, coal or oil to natural gas. Not least of which because oil and natural gas have lost their historic price linkage, putting natural gas consumers at a significant advantage to oil or oil products.
What Chesapeake Is Doing
Chesapeake recognized this early on and has spent millions converting 100 of its rigs, all its hydraulic fracturing (“fracking”) equipment and almost 5,000 of its fleet of vehicles to run on natural gas. In itself, the firm estimates that will create considerable savings — converting the company’s medium and light-duty trucks to natural gas could reduce fuel costs by up to $20 million a year. Converting drilling rigs and fracking equipment could cut diesel fuel consumption by about 350,000 gallons a day, saving the company about £230 million annually.
But as welcome as such considerable savings are, they do nothing (beyond setting an example) to grow the market for natural gas; so the company has pledged to redirect about 1-2 percent of its forecasted annual drilling budget away from efforts to increase natural gas supply towards projects to stimulate demand. Over the next 10 years, Chesapeake expects to commit $1 billion towards investments to build crucial fueling infrastructure and bring gas-to-liquids fuels to market. Such investment in technology and infrastructure could have a game-changing impact on energy consumers in the US, particularly those firms engaged in the international arena where they are in competition against energy-consuming competitors in other parts of the world, such as Europe.
US vs. UK and Europe
The EU has traditionally been a high-cost energy location, largely due to taxation but also because the region is a net energy importer. Although high hopes for a European natural gas supply renaissance have been voiced from many quarters, the market has been slow to copy the US shale gas model. Paul Stevens, senior energy research fellow at think tank Chatham House, explained why, saying huge optimism for shale gas production in the UK, and elsewhere in Europe, was “misplaced this stage.” The conditions that exist in the US are not the same on this side of the Atlantic. American landowners have every incentive to allow drilling on their property because the law gives them possession of any subsoil resources. In the UK and much of Europe, however, any shale gas would be the property of the state.
Nor does Europe have the infrastructure at present: for example, the US has 199 active rigs in the Barnett Shale Play, a single area of Texas, compared to Cuadrilla Resources, a UK-based company (and the first) with a license to explore for shale gas across 437 square miles of Lancashire, that has just one rig! However, early progress is promising and the firm is expecting considerable success. The British Geological Survey estimates the UK may have 150 bcm of recoverable reserves from shale beds while, interestingly, the US Department of Energy puts the UK’s shale resources at 560 bcm — let’s hope they are right.
Should Chesapeake’s investment in growing the gas market, particularly in developing the gas-to-liquids market, prove successful, we may see not just the fracking and extraction technology make its way over the Atlantic, but a whole downstream business model for the likes of Cuadrilla to copy in the years ahead.