Chesapeake Energy 2011 Annual Report Download - page 12

Currently, world oil prices are around $120 per
barrel — that is a British Thermal Unit (BTU) equiv-
alent of about $20 per mcf. On the other hand,
U.S. natural gas prices are now $2 per mcf — that
makes natural gas one-tenth the cost of oil, yet
natural gas can do for consumers almost every-
thing that oil can do and can do it more cleanly.
How many times in the past 50 years can you
think of a situation where large-scale competing
products are so mispriced against each other?
It’s simply a matter of time before the U.S.
meaningfully shifts from transportation systems
built around consuming high-priced oil to con-
suming low-priced domes-
tic natural gas, which is also
the cleaner fuel by far. Given
the U.S. has been consuming
oil products as the foundation of its transporta-
tion system for 100 years, it may take a decade to
make the transition, despite the remarkable pres-
ent price disparity. However, many significant con-
sumers of gasoline or diesel in the U.S. are increas-
ingly focused on the likelihood of significantly
higher oil prices in the future and are beginning to
recognize how quickly our transportation system
could be converted to natural gas.
BIG NATURAL GAS DEMAND CHANGES
ON THE HORIZON
Over the past three years, Chesapeake has made
bold moves to help increase demand for natural gas
in the U.S. In addition to encouraging utilities and
public utility commissions to make the switch from
dirty coal to clean natural gas in electrical power
generation, we are working aggressively to help
create a natural gas fueling infrastructure across
the nation to speed conversion of our transporta-
tion system to natural gas. For example, we have
committed $160 million to Clean Energy Fuels, Inc.
(NYSE:CLNE) and encouraged some of our Asian
partners to invest another $240 million to help
CLNE expedite the conversion of diesel- and gas-
oline-only travel centers to outlets that also pro-
vide natural gas refueling options, primarily lique-
fied natural gas (LNG). Further, we are investing
millions of dollars to provide leading national and
regional convenience store and travel center opera-
tors with up-front capital to help them add natural
gas fueling dispensers to their stores and stations.
We have also committed $155 million to ac-
quire a 50% interest in privately held
Sundrop Fuels, Inc., which has developed
a proprietary process for combining
waste biomass and natural gas at high
temperatures to create the world’s first
truly “green gasoline.” Sundrop’s first
plant will break ground in January 2013 in
Louisiana, and we expect large-scale pro-
duction of this low-cost, environmentally
clean, all-American fuel in 2015.
Moreover, we have agreed to strategi-
cally invest $10 million alongside 3M Corporation
(NYSE:MMM) to revolutionize the design and man-
ufacturing of compressed natural gas (CNG) tanks,
today the most expensive component of a CNG
fueling system. These advanced pressure vessels
will ensure significant performance improve-
ments leading to lighter-weight designs, longer
life and more durability than traditional steel and
carbon fiber tanks. Partnering with global manu-
facturers such as 3M provides opportunities for
mass production and unit cost reduction, both
critical needs for rapid market adoption of CNG.
In addition, we have recently agreed to a
very significant collaboration with General Elec-
tric Company (NYSE:GE) to bring to market CNG
In A Box™ — preassembled kits that will enable
corporate and governmental fleet managers and
convenience store and travel center operators to
more quickly and eciently add modern natural
gas refueling options to their locations through
one-stop shopping with GE. We are also working
with the DeBartolo Corporation, one of the na-
tion’s largest real estate developers, to develop
hundreds of CNG stations across the U.S. in the
next few years in addition to our partnerships
with existing national retailers.
10 | Letter to Shareholders
Chesapeake
has made bold
moves to help
increase demand
for natural gas
in the U.S.