Has Chesapeake Energy CEO Aubrey McClendon Turned the Corner on Rent-Seeking?

by William Yeatman on July 20, 2011

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In a previous post, I bemoaned the fact that hydraulic fracturing, the technological breakthrough in natural gas production also known as “fracking,” has spurred a frenzy of rent-seeking.

By significantly expanding America’s natural gas supply in a short duration, fracking has ushered in a period of low prices. This makes natural gas more competitive relative to other energy sources. As a result, the industry is in a great position to add market share in the electricity sector. Now that $3+ gasoline is the new normal, the natural gas industry also is well-situated to gain a foothold in the transportation fuel sector. The opportunity is there, but major gas producers have been unwilling to rely on their price advantage to better compete. Instead, they’ve been trying to secure political favors. As I noted in the aforementioned blog post,

Consider, for example, Chesapeake Energy CEO Aubrey McClendon, who is leading a nationwide charge to force Americans to use more gas for electricity. As I’ve explained, McClendon has been traveling around the country trying to convince eco-friendly governors to switch from “dirty” coal to “clean” gas. So far, he’s scored one major success. In Colorado, Governor Bill Ritter pushed through a law requiring fuel switching from coal to gas for almost 1,000 megawatts of electricity. If McClendon gets his druthers, other states will follow suit. As I understand it, McClendon’s next targets are Texas and Arkansas.

Then there’s natural gas mogul T. Boone Pickens. He’s trying to get the Congress to enact H.R. 1380, a.k.a. the “Pickens Your Pocket Boondoggle Bill” or the “T. Boone Pickens Earmark Plan,” which would have taxpayers finance the use of natural gas as a transportation fuel, in particular for the trucking industry.

While Mr. Pickens remains wedded to a business plan predicated on government mandates and subsidies, Mr. McClendon seems to be moving in a positive direction. This past Sunday, on Platts Energy Week with Bill Lovelace, Mr. McClendon announced that Chesapeake Energy has formed a venture capital fund that will spend $1 billion to create a national infrastructure of natural gas fueling stations for trucks. Mr. McClendon guaranteed that at least 150 fueling stations will be built. I watched the interview, and when he said that “the private sector is going to take the lead here,” I was thrilled.

Other parts of the interview were disappointing. Unfortunately, Mr. McClendon voiced his support for H.R. 1380 (a.k.a., the “Pickens Your Pocket Boondoggle Bill” or the “T. Boone Pickens Earmark Plan”), which, he claimed, is a “compatible initiative.” He is mistaken. For starters, his company’s investment in natural gas fueling stations proves that H.R. 1380 is unnecessary. The opportunities for the gas industry afforded by low prices are sufficient to prod the private sector into “taking the lead.” Mr. McClendon put it best when he said, “The guy who is the first guy who can say to his customers, ‘I can save you 50% on fuel,’ is going to be a pretty popular guy, and he’s going to sell a lot of other things alongside the cheaper fuel.” That’s a great pitch! With a selling point like that, there’s no need for taxpayer handouts.

By interfering, the state would only muck things up. For example, I’m confident that Chesapeake Energy and its venture capital partners were strategic when they chose where to site the 150 natural gas fueling stations that they’ve promised to build. There is a billion dollars of private money at stake, and it stands to reason that they wanted to make the most efficient use of their investment. Would the Congress have been as efficient in its decision making? I doubt it. History suggests that lawmakers would do their best to ensure that the fuel-station subsidies would flow to their constituents, regardless whether it made economic sense. Contrary to what was claimed by Mr. McClendon, H.R. 1380 is in fact “incompatible” with Chesapeake Energy’s excellent initiative.

[N.B. Below is a transcript of the portion of Chesapeake CEO Aubrey McClendon’s interview that addressed his company’s plan to expand into the transportation fuel market using private funds.]

Platts Energy Week Host Bill Lovelace: What makes you think you can do it [make natural gas a viable transportation fuel] without government aid?

Chesapeake CEO Aubrey McClendon: Well, we know we can do it because the money we’ve invested in Clean Energy, which is a company that T. Boone [Pickens] is a shareholder of, has committed to building the stations. So I can guarantee you that at least 150 of these stations will be built. We believe that it takes about a thousand stations to have a reliable, national grid that would crisscross all the interstate corridors. And when you get to that point, then we believe that we can make a full transition away from diesel made from imported oil and towards a domestic resource like natural gas.

Platts Energy Week host Bill Lovelace: Do recommend that the Congressmen supporting the natural gas bill (the NAT GAS Act) take it off the table?

Chesapeake Energy CEO Aubrey McClendon: Absolutely not. These are compatible initiatives. The private sector is going to take the lead here. I’ve hoped for the last three years that the government would take the lead, but for various reasons, they’ve decided not to. So, if the government does come in and passes the NAT GAS Act, which I think they should, then it would simply accelerate what we are attempting to do. Remember, the NAT GAS Act itself, most of it provides incentives for consumers, mainly trucking firms, to go buy new trucks, that would use a cleaner, cheaper fuel made in America, rather than something imported from overseas. Our initiative is directed more towards putting infrastructure in place. We’ve always had a chicken-and-egg thing here with natural gas as a transportation fuel. Do you build the vehicles first, or do you build the infrastructure first? So Boone’s focus is trying to get the government more proactive in incentivizing that the vehicles get built. But we think that the most important thing right now is to get the infrastructure in place.

Platts Energy Week hist Bill Lovelace: How do you get to 1,000 [fueling stations]? Who else is going to invest in it?

Chesapeake Energy CEO Aubrey McClendon: Well, I think anyone who owns a truck stop across America is considering this. If you think for a second, “Who would like to be the first station at an intersection that can say, ‘I’m going to be the first to sell $2 fuel?,’” whether or not it’s on an interstate, or on an inner-city street corner. The guy who is the first guy who can say to his customers, ‘I can save you 50% on fuel,’ is going to be a pretty popular guy, and he’s going to sell a lot of other things along side the cheaper fuel. So, we think that all it needs, like a lot of other things in life, it needs someone to take the lead, and we’re going to do that. I think other producers will join us; I thing truck-stop owners will join us; I think convenience store owners will join us; and Clean Fuels itself has other sources of capital it will bring to the table.

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