Chesapeake Energy CEO sees opportunities in industry challenges

"It will be better to be a provider of energy than a consumer of energy for the next 20 years," Aubrey K. McClendon, chairman and CEO of Chesapeake Energy Corp., Oklahoma City, told fellow producers.
Oct. 30, 2002
5 min read

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 30 -- "It will be better to be a provider of energy than a consumer of energy for the next 20 years," Aubrey K. McClendon, chairman and CEO of Chesapeake Energy Corp., Oklahoma City, told fellow producers Tuesday at the 73rd annual meeting of the Independent Petroleum Association of America in Dallas.

"We haven't replaced (US oil and natural gas) production with new discoveries in 35 years," McClendon observed. Any maintenance of production levels has been primarily through revisions and adjustments to original estimates of potential production of existing fields, he said.

"Now it's time to pay the piper," said McClendon, "and I think the industry will benefit."
That's especially true of US gas production, which is expected to be "down 5% this year, if not 6%. That production has been going down for the last 4-5 years, and it's not likely to change," he said.

A look at the 10 companies with the biggest gas drilling programs shows that the same companies, majors and independents inclusive, are also among the top gas producers; Yet their combined third quarter gas production is expected to be down overall, McClendon said.

"If these guys can't hold their production level, neither will the others," he said. "To ask independents to overcome the production decline curves of ExxonMobil (Corp.) and ChevronTexaco (Corp.) is not realistic."

McClendon said, "In time, gas production will not be responsive to price." As is now the case with oil, he said, the US at some point will be producing less than half the gas its market demands.

Meanwhile, in Canada, the US's primary gas supplier, gas production per well also is in sharp decline. Although total Canadian gas production has increased steadily over the years, he said, the number of producing wells has skyrocketed, resulting in a widening gap between the number of wells and total production.

Because gas producers have little chance to increase reserves and production through the drillbit, McClendon expects another wave of mergers and acquisitions as companies attempt to grow through "serial acquisitions." The present tier of large "superindependents and small majors are too big for North America but too small for the world (of extensive international operations). They probably will compound the issue by getting bigger," he predicted.

The next wave of mergers and acquisitions will be aided by the fact that some aging corporate heads now find that "it's not as much fun or as rewarding to be a CEO," said McClendon. "I think a lot of those guys will chuck it in on the next (declining) price run."

Volatile prices for both gas and the stocks of gas producers "are here to stay," said McClendon. But unlike many other producers, he claims, "That's a good thing," because it "gives producers a chance occasionally to sell gas for more than it's worth." Price volatility also gives consumers opportunities to "buy low," as well as letting producers "sell high," said McClendon. Moreover, it "keeps new capital away from the industry, reducing supply" and discouraging new entries. That's good for the industry as a whole, although not for the individual companies impacted, he said.

McClendon is even comfortable with the fact that higher gas prices may dry up some markets. "I don't want to supply the fertilizer manufacturer who sees gas as 70% of his production costs," he said. "I want to sell to the homeowner who flips on a light switch without realizing how many of those electrons were generated by gas."

In the interim, McClendon warned, independent producers "must become more proactive" in promoting the oil and gas industry to the public and elected officials, "or the government and attorneys will take all of our money from us." Some activist attorney somewhere likely is contemplating a punitive class action suit against the oil industry for products "harmful" to consumers and their environment, similar to those filed and won against tobacco and other industries, he said.

"Independents are indistinguishable from Enron (Corp.) as an 'energy company' in most people's minds," said McClendon. "But the reality is that we are small to midsize businessmen producing a clean fuel (natural gas) that has benefited the public. We produce a 'green' fuel that will get more expensive if legislators keep denying our access to public lands," he said. "We should unite around those 'good guy' concepts."

McClendon recommended a nationwide industry public relations program similar to one mounted—and funded—by Oklahoma producers in that state. "We need to redefine our industry," he said. "The milk producers and the meat producers were able to do it, and they have less money and less brains than we do."

Meanwhile, he advised, "Stop wasting time on (attempts to gain exploration access to) ANWR (the Arctic National Wildlife Refuge). Don't even talk about. It's not going to happen."

At least, not until the next major energy crisis, said McClendon. "This country always reacts well to a national crisis," he said, "but it just can't anticipate a crisis."

Contact Sam Fletcher at [email protected]

Sign up for Oil & Gas Journal Newsletters